Real Estate Update and Reads

ReadingNo, we didn’t purchase a house. That would have made Ms. IS a very happy woman, but it hasn’t happened yet.  Instead we’re out boating today, enjoying a break in the rain.  A couple other developments have been progressing on the real estate front, however. First off, I’m excited to have scheduled a time to meet my Atlanta mall client next month……when we’re up that way for Ms. IS’s reunion. It’s great I can kill two birds with one stone. While the resulting efficiency makes economic sense, it is also important because I want to make sure I’m part of the next phase of the renovations and expansion. The best way to guarantee that happens comes in the form of some extra “face time” and a little extra time on site. Fingers crossed for a signed contract by Labor Day.

The other rash of real estate action comes in the form of two potential projects here in the Bay Area. Last week I kept holding off on writing a new post, in the hopes I could report on a signed contract on the townhouse project. My partner and I got the three property owners to a good place, and we basically came to terms on assembling the three parcels for $1.2m. The plan was to to put 100 town homes on 29 ac (20 acres of which are uplands). We thought the local government would love the project, because it was an infill project between middle class residential homes and the local Interstate. Turns out the local government didn’t want to have a step down in density between the Interstate and the single family homes, they want single family homes all the way up to the Interstate. Oops! Well that’s not going to happen. I broke the bad news to the property owners, and told them we’d still take the property if they rezoned it themselves……or we could do a single family project on the site if they want to drop the price to the appropriate level. As with all business negotiations, communication is the key…..and the property owners are thinking it over.

Interesting factoid: Even though a small single family lot (say 55′ x 110′) is about twice the width of a typical townhouse lot (say 20′-25′), I can’t usually squeeze half as many single family lots on a site as town homes. The shortfall is the result of the relative efficiencies of 4 and 6 unit town home buildings. Not a fun fact to explain to sellers, but it’s true!

The other project shows more promise, but isn’t nearly as far along. It involves placing 180 apartment units and 1.5 acre commercial outparcel on 11 acres of land. This project also features a bit of hidden treasure, in the form of an industrial lot nearby. That industrial lot doesn’t help our project, but it will help me lower our land basis……because I should be able to sell it for $200k once it has been cleared and grubbed. At this time I am talking down the seller’s asking price, while simultaneously working with the local government to feel them out on the project. It looks encouraging, but we have a long way to go.

One of the reason my partner and I like developing commercial property so much, is because a well selected project pays for itself and leaves you with some quality land free and clear. We were involved with several of those projects back when we worked together at a local development firm. The owners of the firm had high expenses and a higher lifestyle….(vacation mansions, private jets, etc). My partner and I just want the free cash flow. So while the firm capitalized on those situations by locking in a good ground lease (or build to suit) with a credit quality tenant and taking the property to market at a low cap rate…….our goal is just to hold on to the property and cash the checks. For that matter, we’re late enough in the business cycle now that I am even on board if someone wants to pay us well to assign them a contract. Everything has it’s price…..but in development, everything takes time. Lots of time. Hence, I don’t spend a lot of time reporting on the projects here.

Vacations

Some positive news on the positive vacation front. We’ll be meeting up with friends, and doing a little work, up in north Georgia next month. While Atlanta isn’t my choice destination for August, this trip should be a lot of fun. I also just finished registering for Denver Start Up Week, so that will be fun in September. Drop me a line if anyone wants to meet up in Denver that week. We also booked another little camping and surfing trip for August. I can’t believe it has been so long since our last one, but that’s what happens when grandpa spends as much time traveling as I do with the Little Man.

Interesting Reads

Masters in Business Interview: Ed Thorpe ~ Bloomberg

I want to lead off with MiB’s interview with the “most interesting person I’d never heard of”. Yeah, that’s Ed Thorpe. Some of you may have heard of his classic book about how to shift the gambling odds in your favor. Perhaps you’ve heard of him because of his early quant work with Renaissance Partners. I’m hear to tell you that there about about 50 other interesting things this fellow has done, and this interview is a must listen for all abstract thinkers. It was so good, that I checked out the biography at the library.

The Amazon/Sears Appliance Partnership ~ Retail Dive

Sears has been shopping around their Kenmore brand for a while now, without much interest. Beleive it or not, 20 years ago 40% of appliance sales in the US were to the Kenmore brand. That percentage is currently about 12% and sinking fast. While I remember getting 20+ years of reliable service from our 1980s washer and drying, the quality has fallen precipitously in recent decades. That being said, read this article and draw your own conclusions whether Sears is trying to outsource itself…..or sell it’s appliance brand to Amazon while it still has SOME value. Speaking of Amazon, I am currently reading The Everything Store: Jeff Bezos and the Age of Amazon (affiliate link). Haha, I thought it would be funny to have an Amazon affiliate link, to a book about Amazon. In all seriousness, it’s a pretty good book. While the work environment inside Amazon sounds torturous…..the relentless focus on the customer shines through in the book. As someone who has had plenty of free returns and a couple lost items replaced, I’ll keep shopping there.

Instore Pickup is the ‘cure for the store’ ~ Retail Dive

While we are talking about digital sales, I thought you might enjoy this article on instore pickup. I use instore pickup at times……usually when there is an extra discount or otherwise advantageous. Turns out that some stores are encouraging the methodology in order to drive foot traffic…..and avoid their own costly struggles conquering “the last mile”. That would explain why a few weeks ago my local autoparts store gave me a 20% discount if I ordered online and picked up at the store. Here’s the thing I don’t get however…..I can say with certainty that I have never gone to pick up an item instore…..and stuck around to buy anything else. Never once! So are they cannibalizing their own sales and hurting their margins……or succeeding in bringing in customers? Give me your opinion.

Subprime Auto Boom ~ Bloomberg

This last one was absolutely comical, although it eventually might cause a significant problem. Apparently low interest rates have fueled such lax underwriting standards, than some auto loans now default on the first payment! While this article centers around Fiat Chrysler NV and Banco Santander SA, the implications are industry wide. When an underwriter only verifies the income for 10% of applicants and doesn’t even follow up when employees flag particular borrowers, you know there will be some interesting stories down the road. The fact that those CDO are sliced, diced, and then sold to high yield bond investors…..makes it all the more amusing. If I were in this industry, I would be looking for the right credit default swap opportunities. Seriously, read these stories!

4 thoughts on “Real Estate Update and Reads

  1. Dividend Growth Investor

    I have been hearing Ed Thorp’s name around the blogosphere a lot. Was there anything in particular that you found interesting about him?

    As far as retail. I think that having display items in store is a competitive advantage vs Amazon. For example, if you were to buy a baby crib or a changing table (or a type of washer/drier), it is a large dollar item that you may want to touch/play in store with first, before ordering it through said store. Having a knowledgeable store sales associates to help out and provide some guidance may drive good sales.

    Competing directly with Amazon on Amazon’s turf may not be best. But competing where Amazon lacks, as in in-store displays for a wide variety of items ( but delivering things online later) may be a good differentiatior.

    On a side note, have you written about your AMZN on your site or other writings?
    Dividend Growth Investor recently posted…National Retail Properties (NNN) Dividend Stock AnalysisMy Profile

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    1. Income Surfer Post author

      Thanks for reading/commenting DGI. I hadn’t thought about Ed Thorp in a while, until the MiB interview. What makes Ed Thorp unique is the way he thinks. It’s logical/systematic, and he’s a pretty normal guy to boot. Take for example how is natural curiosity led him to find a couple actual edges he could exploit. I’m not just talking about in investing, the same could be said for other aspects of his life. You had to know the guy was unique simply because of all the fascinating people and situations he has been involved with.

      Over the last couple years I’ve written about Amazon in a variety of places. I don’t have any special insights, but I enjoy thinking about their strengths and weaknesses as they disrupt various industries. Given my consulting and development projects with commercial real estate….you can guess that I agree Amazon’s domination of all retail transactions is not inevitable. Have a great week

      -Bryan

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  2. Graham @ Reverse The Crush

    Thanks for sharing about the project and for the interesting reads!
    Although I got rid of my Walmart position, I still believe in retail and own a small position in a Canadian REIT. The Amazon verse retail fight is really interesting though. I remember seeing Kenmore and Craftsman, Sears brands, as a kid. But I haven’t been following anything about the company much since.

    Also, too bad that the project didn’t work out for you and your partner. It sounds like it was something that you were fairly interested in. Thanks for sharing on it though. Hopefully it works out or something else comes along soon. On the bright side, sounds like you have a fun month coming up in August. It’s always great to have something to look forward to. Thanks for sharing, Bryan. Hope your week is going well!
    Graham @ Reverse The Crush recently posted…Notes on blogging after 1.5 years and the June Blog ReportMy Profile

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    1. Income Surfer Post author

      Thanks for reading/commenting Graham. I’m glad you enjoyed the post and reads. Funny how some companies fail to stay relevant, while others become indispensable. August has all the makings of a great month, and we are certainly plenty busy. Thank you for the well wishes. We should also get back to trading soon. Always a fun, and usually profitable, pursuit. Have a great week
      -Bryan

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