Moses Kagan on Real Estate

Grandfathered zoning

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Got to thinking over the weekend about plumbing and electric. (Bored already? Sorry.)

As you probably know, we almost always replace both systems when we renovate a building. Often, the last time the systems were replaced was sometime in the 1950s or 1960s.

I was idly considering whether anyone would ever have to replace these systems again in our buildings. After all, the new plumbing and electric ought to last for 50 years or more and many of our buildings were built in the 1920s. Is it really going to be worthwhile to replace them again sometime in the 2060s, when the buildings are 120+ years old?

The answer, baring some kind of major change in Los Angeles land use law*, is “yes”.

Why? The most important single fact about 1920s buildings is that you could not re-build them to the same designs today. Why? Because they are under-parked for today’s zoning code.

There is no way you could build, for example, 117 N Reno, a 16 unit building with 0 parking spaces. Under today’s code, you’d need ~20 spaces, which would require either subterranean parking or else much more expensive, multilevel construction.

Because today’s parking codes are so onerous, there is an incredibly strong incentive to keep those old buildings standing up (and, therefore, grandfathered in).

So, the likelihood is that some kid who will be born in the 2030s is going to spend his late 20s and 30s re-wiring / re-piping all these buildings we’ve done, because the alternative would be to scrape them and build new, and that would be insane, given how the difficulties with the code.

*Note: I can already see the glimmer of such a change, and it starts with Uber and Google’s robocar experiments. If we’re really all going to have robo-cars available on demand, perhaps that will be the things we need to jettison our antiquated parking requirements, opening up cities for massively dense in-fill development.

Written by mjkagan

07/28/2014 at 9:38 am

Posted in Development

What people want

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Have been spending a lot of time looking at both apartment and single family home listings.

In general, am absolutely appalled at both the properties on offer and the way in which they are marketed.

Here is what people want:

  • Clean, straight lines
  • Open spaces
  • Minimal detailing
  • Many / large windows
  • White walls
  • Real materials (real wood, real stone, etc.)
  • Modern conveniences like washer / dryer, dishwasher, AC, etc.
  • Outdoor space with access via sliders

Do you know why people want those things? Because they allow people to project their own fantasies onto the space, rather than having to accept someone else’s (awful) idea of style.

The amazing thing is that the above is not that difficult to deliver. And the premium you get in rent / sale price very often makes it worth doing the work to give people what they want.

Written by mjkagan

07/25/2014 at 10:56 am

Posted in Development

A reminder

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Sometimes I get wrapped up in thinking about buildings as financial abstractions. I think about the cost of buying and renovating them, the rents we can achieve, the likely operating costs, the expected yield, the value on exit, the transaction costs and the profit.

I have the luxury of doing this because our very able team takes over the buildings shortly after I handle the buy and then I don’t really have anything to do with them until just before lease-up begins.

So, just to kind of remind myself that we’re talking about real buildings, real apartments, real neighborhoods, etc., I periodically stop by one or more of our construction sites.

If, like I sometimes am, you’re in danger of thinking about buildings in terms of numbers on a spreadsheet, here’s a useful reminder that we’re in the business of transforming tangible things:

IMG_20140724_092311 (1)

Written by mjkagan

07/24/2014 at 1:22 pm

Posted in Development

How to get the best out of your buy-side agent

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Be responsive.

What do I mean? Well, at any time, my agents are working with a handful of active buyers, plus some more “passive” types who have expressed interest in doing something but aren’t motivated.

So, how do the agents decide whom to focus on?

Simple: The more responsive and engaged buyers get the lion’s share of the attention, because the agent naturally expects those buyers to be more likely to actually write offers and close deals.

So, if you want our best, here’s what you have to do:

  • Have reasonable expectations (so, no, you can’t buy a 9% cap in LA… that was impossible in 2009, let alone now)
  • Clearly define for us what you’re looking for
  • Respond promptly when we send you deals that we think make sense based on the criteria you have expressed
  • Forward along other deals that you see that we may have missed (we’re good, but sometimes stuff does slip through the cracks)
  • Trust us, at least as far as writing an offer (later you can come up with all of the reasons not to buy the building)

On the other hand, here is how to ensure you don’t get our best:

  • Expect miracles in terms of returns
  • Waffle about what type of property you want (today it’s buy and hold, tomorrow it’s a renovation project, then you want to build small lot, whatever…)
  • Take more than 24 hours to respond to ideas we send (in fact, if you wait 12 hours, that’s a bad sign… when something good comes along, you want to MOVE)
  • Get involved in long philosophical conversations when it’s time to write the offer, rather than just writing (there’s little-to-no risk in writing; you can back out before sending your EMD if that’s what you decide you want to do)

Just remember: All the agents have to sell is their time. They’re going to be pretty ruthless about allocating it to the buyers who demonstrate real willingness to act when a good opportunity presents itself.

Written by mjkagan

07/23/2014 at 3:26 pm

Posted in Brokerage

The deal size problem

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Here’s something true about real estate: It is much easier to find highly profitable small deals than highly profitable large deals.

Why is this true? Well, the smaller the deal, the more likely it is that the owner and /or listing broker are inexperienced / inept. Those kinds of decision-makers frequent screw up the management and sale of assets, creating opportunities for large profits.

On the other hand, larger assets tend to be controlled by sophisticated players who do a good job extracting close to maximum value, whether from on-going operations or from sale processes.

My business is all about deploying capital into profitable opportunities. Can you see the problem I face?

I am constantly tempted to reach down into smaller opportunities where I can see the potential for out-sized profits, at least on a percentage basis.

And yet it is extremely inefficient to deploy capital in such small chunks… you need to do a ton of deals to equal the capital deployed in one big one.

So, I constantly look for big deals to do and face some pressure to try to live with worse numbers, because doing big deals is very efficient from a capital allocation perspective.

What’s the solution? There isn’t one. I will continue to try to grab the absolute best smaller opportunities while getting involved in only those larger deals where the numbers work (even if they don’t work as well as the numbers on the smaller ones).

That kind of discipline is, I think, what separates someone who wants to have a long career doing this from someone who wants to make some very large heads-I-win-tails-my-investors-lose bets, cross his fingers, and pray.

Written by mjkagan

07/21/2014 at 10:20 am

The brokerage is beginning to hit its stride

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One of the things I wrestle with is how much time to devote to our brokerage operation.

As many of you know, I supervise six agents who help investors buy and sell investment property in gentrifying parts of LA.

Compared to our fund management business and our fee-for-service development business, the brokerage is tiny. To give you a sense for how tiny: We generate more revenue from one decent fee-for-service deal than we will from the entire brokerage this year.

That’s not to say that the agents aren’t active; they are. It’s just that the economics of the business are such that the agents (appropriately!) receive the vast majority of the commission income from their deals. And since the deals they are doing are generally not huge (mostly in the $500-1.5MM range), the amount of revenue we collect on a given deal is pretty small. Even with pretty active agents, the numbers don’t really get that interesting.

So, why do I bother with the brokerage?

1. We derive a lot of market intelligence from the agents, who are all smart, diligent people constantly looking for interesting deals to sell to their clients. They’ve often brokered deals for us (in other words, represented our fund entities in acquisitions).

2. At scale, the brokerage economics improve. Six agents, particularly agents towards the beginning of their careers, don’t generate a ton of revenue. But, depending on productivity, 20 agents absolutely would. We’re not actively recruiting, because we wouldn’t accept most applicants, anyway. But, over time, I continue to run across talented people who I think we do well in real estate and I bring those people in and train them. Over time, we’ll probably get to the point where the brokerage is an interesting business.

3. It’s gratifying to teach people how to make real estate deals. There’s a big part of me that would have been pretty satisfied with being a highschool teacher (except I’m greedier than that!). So it’s nice to get to spend part of each week teaching something I love, even if it may not be strictly economically rational for me to do so.

I keep the brokerage going / growing for all of the reasons above. So it’s quite gratifying for me personally to stretches like the one we’re in now, where one of my agents just closed a deal yesterday and has another (big one) closing next week and where another agent just closed a very difficult deal today and has another one closing early next week.

The brokerage appears to be hitting its stride!

Written by mjkagan

07/18/2014 at 10:46 am

On being aggressive

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I spend a lot of time on this blog talking about preventing bad things from happening on deals.

That’s what due diligence is all about: Trying to identify all of the things that could potentially go wrong on a deal and then either ensuring they do not or else planning to mitigate the negative consequences.

But sometimes deals surprise on the upside.

What do I mean by that? Sometimes you inspect and find out the units have more potential than you thought. Sometimes you find that rent controlled units you thought were occupied are, in fact, vacant. Sometimes the electrical was upgraded with permits, saving you from having to do it yourself. And so on.

The thing is, you never get to benefit from these positive surprises if you don’t make offers, get into escrow and see.

Now, I’m not advocating tying up deals that are way off working in hopes that something amazing will come to light that will save you. That’s unrealistic, because the likelihood of a material upside surprise is pretty low.

But, if a deal is on the margin, there is often something to be gained by being aggressive and getting control of the deal.

Sometimes, you find out that what was marginal is actually pretty sweet.


Written by mjkagan

07/16/2014 at 1:57 pm

Posted in Buying

A terrifying Craigslist post

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Just ran across this while checking up on the competition on Craigslist:

Screen Shot 2014-07-14 at 10.47.28 AM


We obviously run all our applicants’ credit checks ourselves, so we’re not particularly vulnerable to this kind of behavior. But many landlords will take a credit check form provided by the tenant and that’s definitely unwise, given the above.

With rent control and the sorry state of the LA eviction courts, letting some psycho into your unit can be an incredibly costly mistake. You’re looking at some combination of 2-3 months of unpaid rent, a few thousand dollars in legal expenses, potential damage to the unit, and, most importantly, a lot of your precious time.

For what it’s worth, credit check companies ought to provide a service where the credit is checked once (or periodically) and then the person whose credit is being checked should have the right to designate landlords to see the report, possibly at a low, per-viewing price. That way, the tenant is spared the negative effect (and cost) of a ton of credit checks, while the landlord can be confident that the report is legitimate.

Written by mjkagan

07/14/2014 at 10:58 am

Posted in Due Diligence

Our business, in one photo

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Can you see what’s screwed up about this picture:


What kind of an idiot doesn’t make that railing continuous?

Here, in a nutshell, is our whole business: Everyone we hire to do things wants to do whatever is expedient and cheap. Even our clients often want to do what is expedient and cheap.

But someone needs to be the advocate for the project. Someone needs to be enough of a hard-ass to go tell the metal guy to fix that railing.


Written by mjkagan

07/11/2014 at 2:57 pm

Posted in Development

An unsolicited political endorsement

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I don’t know him personally, but I really like Councilman Jose Huizar of Council District 14.

Here are some relevant, recent positions:

1. He’s trying to lift the insane ban on bars / restaurants that opened on Colorado in Eagle Rock after 1992 staying open past 9PM. If we’re going to be a real city, we need to get rid of these kinds of anti-urban regulations. It’s Colorado Blvd., the main commercial street in Eagle Rock… surely you ought to be able to get a beer at 10PM on a Saturday night.

2. He’s the main motivating force behind Bringing Back Broadway, an initiative aimed at returning Broadway to life downtown. Prior to this initiative, Broadway was a crummy, street-level retail market with very high vacancy rates in the office space in the floors above street level. Now, through a combination of street improvements, a street car and regulatory changes, Broadway is one of the hottest areas of the city for new retail and residential development.

3. Huizar helped Geoff Palmer get a skybridge approved connecting his monstrous developments along Temple downtown. Now, I’m no fan of Palmer’s work… I think those buildings are anti-human fortresses which basically raise a gigantic middle finger to street life in their area. That said, Palmer’s request for a skybridge was self-evidently reasonable – once you allow a guy to build two fortresses, it seems kind of petty to force the residents to go out onto a blighted part of Temple to access amenities.

Taken together, you can see a councilman who is pro-development and interested in seeing LA turn from a sprawling collection of loosely-linked suburbs into a real, global city. Seems like my kind of guy.

Written by mjkagan

07/08/2014 at 10:53 am

Posted in Development