Moses Kagan on Real Estate

Archive for the ‘Development’ Category

Why we don’t announce closings

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If you’re at all active in real estate, your email account is spammed daily by brokers announcing the closings of their latest deals.

Why do they do this?

Because doing so:

  1. Shows everyone in the market how active the broker is
  2. Keeps the brokers’ name in front of potential clients, increasing the chances potential clients call them when it’s time to buy or sell

Seems reasonable, right? So why doesn’t Adaptive send out these kinds of emails?

It’s pretty simple, really. We are primarily in the business of placing capital in specific neighborhoods. In order to do this effectively, we spend a ton of time thinking about acquisition prices, rehab prices, and achievable rents. When we find a neighborhood that works, we and our clients want to buy as much fairly-priced product in that neighborhood as possible.

If we sent out emails every time we closed deals, anyone with a brain could figure out what neighborhoods we like and then just piggy-back on our hard work / insight to compete with us.

So, yes, Adaptive closed a bunch of deals last week. But no, we won’t announce the addresses or deal sizes. Because we don’t want you to compete with us / our clients.

Written by mjkagan

10/01/2014 at 4:50 am

Posted in Buying, Development, How to

What I do all day

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Mostly, it’s underwriting deals.

Here’s what happens:

  • Either I find a deal on the MLS, Loopnet, etc. or else a broker or client sends it to me
  • I get my hands on the rent roll (surprisingly hard, sometimes)
  • I look at the property on google maps to get a sense for the location and, critically, the style of building
  • I look at the property on ZIMAS to get the square footage and unit mix
  • Based on our experience renovating about a million deals, I concoct a plan for the property which seeks to maximize the yield post-renovation; everything is on the table, from moving walls to expanding to outdoor space… you name it
  • I make a little model that looks at the cost of buying, the cost of rehabbing, the estimated rents, and the estimate expenses to get at an expected yield
  • I speak with my partner Jon to confirm / fix my assumptions
  • If the deal meets our target yield, we write an offer

Sounds pretty simple, right? The reason is works is that we do so many deals that we (1) know pretty quickly what the optimal plan for the building will be; (2) how much it will cost / how long it will take; and (3) what the rents and expenses will be.

It’s not that we are never wrong; there are surprises in every business, ours included. It’s just that we’re wrong very, very rarely.

Written by mjkagan

09/29/2014 at 9:28 am

Posted in Development

Good news about our new Highland Park apartment project… and bad news

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In our business, you get surprised all the time in ways both great and terrible.

Take this new project we’re doing in Highland Park…

It turns out there’s a two inch layer of concrete under the floor, meaning we can experiment with doing polished concrete for less than it would cost us to do hardwood.

concrete, apartment, rehab

The bad news is that a few of the previous tenants decided it would be a good idea to use cement to attach awful tiles to the underlying concrete… meaning we somehow need to deal with this:

concrete, floor, Highland Park

Someone is going to spend a lot of time in this apartment with a grinder of some sort…

Written by mjkagan

09/24/2014 at 10:39 am

Posted in Development

Sorry, Westlake, I was wrong

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In February of 2012, I wrote a piece confidently predicting that Westlake, the neighborhood roughly south of Silver Lake and Echo Park and west of Downtown, would never gentrify. Here is my piece in all its glory.

To lazy to click the link? Here’s my (flawed) argument in a nutshell:

  • The housing stock is incredibly dense, lacks parking and is rent controlled, making it very difficult to renovate buildings and achieve sufficiently high rents to make the investment pay-off
  • The crime rate remains quite high and, without wholesale change in the apartment buildings that comprise the neighborhood (which ain’t happening; see above), it’s unlikely that will change any time soon

[Side note: The language in the original piece, including the unfortunate use of the phrase "by force", is pretty awful. Needless to say, it predates the explosion over Boyle Heights, when I became a bit more sensitive about my choice of words on this site. I left the original post alone because it seems dishonest to change it in retrospect.]

Now, it turns out that Westlake is starting to see the glimmers of improvement, including some new bars and creative office tenants and also some buildings in the early stages of renovation / revitalization.

Why was I so wrong?

It turns out that proximity to the western edge of Downtown, with its rapidly expanding set of amenities (bars, restaurants, clubs, etc.) and high rents ($2000 for a studio?!), is enough to tempt some more adventurous tenants to jump west across the 110.

It’s early enough that the numbers don’t work for my kind of deals. But, depending on what happens over the next few years Downtown, we may all look back on my 2012 Westlake piece as one of the dumber things I’ve ever written on this blog.

Written by mjkagan

09/15/2014 at 10:11 am

Posted in Development


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Sometimes clients ask me why we’re so focused on Northeast LA (Silver Lake, Echo Park, Highland Park, etc.). After all, LA is a big place and there are plenty of other places to buy apartment buildings. So why the focus on the hipster areas?

Hint: It ain’t because we love asymmetrical haircuts, beards and artisanal pickles.

Regular readers know I would do deals on the moon if the numbers made sense.

The reason we focus on those key areas of NELA is because that’s where the money is!

There are still plenty of owners who have run-down buildings which they stopped maintaining years ago.

When those owners get sick of running slum buildings or pass away and leave them to their children, we have the opportunity to buy them, fix them up (a lot!), and charge rents sufficiently high to make the whole thing worthwhile.

I’m constantly on the lookout for more areas where our model works (using this equation), but for right now, NELA is where it’s at.

Written by mjkagan

09/10/2014 at 10:15 am

Posted in Buying, Development

Do we compete with our brokerage clients?

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In a word, “No”.


Because we’re not interested in buying the properties our brokerage clients want to buy.

Our typical brokerage assignment is to help someone buy:

  • 2-4 units
  • $500k-1MM
  • 20-25% down (so, looking to put out $100-250k in capital)
  • 70-75% LTV mortgage
  • Minimal renovation required
  • Cashflowing (eg priced at 12x GRM or less)

The deal outlined above is perfect for a non-professional investor, who will generate a decent yield with a 30 year fixed mortgage while using a reasonable amount of cash and keeping headaches to a minimum.

But that kind of deal doesn’t work for us, because we can’t use that kind of leverage and we’re willing to go through major hassle in order to generate far above-market returns.

What we want to buy for our funds:

  • 4+ units
  • $500k up to $2-3MM
  • All cash
  • Massive renovation required
  • $200 / sq ft or less
  • Don’t care about the yield (eg willing to pay a functionally unlimited multiple of the rents)

As you can see, the deals we want are complicated and capital-intensive. In short, they are not the kind of deals that our typical clients are equipped to do.

Written by mjkagan

09/09/2014 at 10:35 am

How a fund manager gets paid

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Do you ever wonder how, exactly, Adaptive makes money? Figured I’d break it down for you.

Today, let’s talk about our investment funds. These are discretionary investment vehicles. That means a group of people with capital to deploy commit a certain amount of money (say, $100-250k) to the entity. Then, we, as managers of the entity, take the money committed by all of the investors (typically in the $2-5MM range) and use it to buy, renovate, lease-up and (eventually) sell apartment buildings.

So, how exactly do we, Adaptive, make money from these investment funds? Here’s how:

  • Asset management – Like most money managers, we generally take 1% of the capital committed to the fund as an annual fee. The purpose of this fee is to help offset the cost of running our operation (bookkeeping / accounting / investor relations / acquisitions staff / etc.);
  • Brokerage – If we find the deal, generally Adaptive Realty, Inc. acts as the broker on behalf of the buying entity and therefore collects a 2-3% buy-side commission. Of course, if it’s an off-market deal that comes to us via another broker, that broker takes the commission;
  • Acquisition fee – Whether we broker the deal or not, we typically take a 1.5% acquisition fee to compensate us for the work that goes into finding the deal, negotiating the terms, and undertaking the due diligence necessary to ensure it’s a good fit for the fund;
  • Construction oversight – There is an unbelievable amount of design, purchasing, and construction project management that goes into one of our projects. We therefore charge the fund a construction oversight fee, of 10-15% of the construction budget to off-set the cost to our organization of providing these services; and
  • Property management – For better or worse, we do almost all of our own property management, for which we are paid 5-6% of the annual rents on completed buildings. I almost forgot to add this fee in, because property management is a terrible, loss-making business and neither Jon nor I see a dime of this money.
  • Exit brokerage – When it comes time to sell a deal, we typically act as listing broker under standard industry terms (5-6%), earning ourselves a brokerage commission which we split with the broker representing the buyer.
  • Promote – This is our share of the profits. This comes only after investors have received all their money back and also (usually) a pre-negotiated “preferred” return on their money. The split varies depending on the deal and how high the pref is.

Does the above sound complicated? It is. But we’re providing an incredibly valuable service to investors, one which requires an awful lot of effort and experience, and we obviously need to get paid for it.

Tomorrow, we’ll talk about the brokerage and property management business.

Note: This blog post is not a solicitation for investment or an offer to sell any securities.

Written by mjkagan

09/04/2014 at 4:18 am

Why our infrastructure is falling apart

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The NY Times had an interesting piece over the weekend about LA’s failing infrastructure. It focused, as all these pieces do, on the age of our pipes, sidewalks, etc., plus on CA’s general tax-aversion.

What it left out was any discussion of the role our zoning code plays.

Here’s the deal: If, as a city, you make it difficult to build dense multifamily, you do two things, both of which are awful:

  1. You force people to spread out. This means that you need to maintain more road miles per person, more sewer pipe miles, more water pipe miles, etc. So your costs are higher; and
  2. You limit the value of your land and therefore artificially reduce your tax base. There’s a reason developers want to build more units on every given plot of land… the land is worth more if you can fit more people on it (either via rent or condo sale proceeds). Property taxes (imperfectly, due to Prop 13) reflect the value of the land, so less density equals less tax revenue.

So that’s why we’re in the position we’re in: An expensive to maintain infrastructure with limited revenue to pay for it.

Unfortunately, we can’t go back and change the way LA developed. We’re stuck with, for example, maintaining absurd one lane roads up in the hills, the utilities that service the homes up there, and the fire department required to prevent them from burning down.

But we can change the zoning code, right now, to prevent further sprawl and begin to densify core neighborhoods of the city. Changing the zoning code to allow for much denser development wouldn’t cost anything and would dramatically increase property values in the affected neighborhoods, leading to happy owners and a city with sufficient resources to re-invest in a world-class infrastructure.

Written by mjkagan

09/03/2014 at 10:23 am

Posted in Development

Lyft, Uber and America

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Regular readers know I’m a major fan of ride-sharing companies. They’ve totally changed the way that I, and many other Angelos, get around our city. And, as I’ve written before, I think the changes are sufficiently profound to eventually reshape the built environment here, too.

But today I want to focus on what I regard as a side benefit of using these services: The opportunity to speak with the drivers.

I speak with every driver, because I’m naturally curious. And, so far, particularly on Uber, the drivers tend to be immigrants. They are all studying, learning English, working multiple jobs, and looking out for opportunities to start businesses.

Every time I have one of those conversations, I’m reminded what an amazing country we have. Because we’ve set up a free economy where people can get ahead by working hard, we attract the hustlers from everywhere, the ones who are willing to forsake the places they were born to follow a dream.

Not all of them will succeed; indeed, many will probably end up going back where they came from. But, from among that group of hungry, energetic risk-takers, you know that businesses are getting created, jobs are getting created, and capital is being formed.

I find it almost impossible to be discouraged about the future of our country, no matter our problems. As long as the hustlers choose us, we’re going to be just fine.

Written by mjkagan

09/02/2014 at 10:19 am

Posted in Development

Highland Park gentrification response

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Hat-tip to Curbed for linking to this really fascinating piece on Highland Park gentrification.

Before I get into my problem with the article, I want to congratulate the author on what I think is a fair, reasonable account of the changes taking place in Highland Park.

Now, to the problem. Here’s the money quote:

These [renter] residents have reason to be anxious about what gentrification may bring to Highland Park…[w]hile rising property values allow homeowners to cash out, there’s no economic upside to gentrification for renters, many of whom are likely already stretched financially…”

Can you tell what’s wrong with the above paragraph? Read it again.

Give up? Here’s the problem: It’s like the author has never heard of rent control.

It’s true that Highland Park has a large number of non-rent control apartment buildings plus plenty of single family rentals (which are non-rent control by definition). So there are definitely residents who are getting pushed out by the more affluent tenants moving into the area.

But there are also tons of pre-1978 apartment buildings which are covered by rent control, which limits rent increases for existing tenants to 3% per year. And, because much of HP is covered by a huge Historic Preservation Overlay Zone, most of those buildings can never be torn down, so matter how high market rents get.

What does it mean to be a rent-control tenant in a gentrifying area?

The market rent is the price put by the market on consuming a particular unit in a particular building. The price is determined in part by characteristics intrinsic to the unit (number of bedrooms, baths, condition, etc.). But it is also determined by extrinsic factors, principally how desirable the neighborhood is.

Rents in Highland Park are running up way faster than 3% / year, in large part because the neighborhood is gentrifying (better food, booze, retail, etc.). And legacy tenants get to patronize those new restaurants and coffee shops alongside the newbies.

So, one way (not the only way) to interpret the above facts is this: As a rent control tenant in Highland Park, you’re getting a better and better deal with each passing year (as your rent falls further and further below the market price for your unit).

Written by mjkagan

08/29/2014 at 11:22 am

Posted in Development