Thinking about 2018

We’re coming to the end of deploying our current fund and, as usual, I’m considering several possible ideas for our next one.

The most likely possibility is that we will do another round of rehab deals, this time ideally with a larger fund of (slightly) cheaper equity… say, in the 5% pref range, instead of the 6-7% we offered in our last fund. By raising cheaper capital, we would be able to buy the ~6% cap deals we’re seeing (instead of waiting around the 6.5-7% ones, as we have been doing).

However, I’m also considering the possibility of building a bunch of smaller apartment buildings.

We’re building a pipeline of off-market opportunities to buy single family homes on developable lots in areas we like very much. The idea would be to buy a bunch, spend the next year or so permitting them, then either sell as entitled land or else build (construction pricing and rents permitting).

Since we rarely keep things simple around here, there’s also the possibility that we’ll end up pursuing both opportunities simultaneously.

Surprised by the south Valley

Was looking at a deal in the Valley yesterday, was surprised by the rents, and came to a realization about apartment supply.

The reason that I was surprised by the rents is that I’m used to thinking of the Valley as having considerably more supply than the city. There’s physically just a ton of land there.

So I was shocked to see 1/1s going for upwards of $2000 in the south Valley… that’s like Silver Lake.

Here is what I think is going on:

  1. While there is a lot of land in the south Valley, almost all of it is zoned R1
  2. The main places where density is permitted is along the main commercial commercial drags (Riverside, Laurel Canyon, Cahuenga, etc.)
  3. Those streets were mostly built-out in the 1960s, so the buildings are rent-controlled
  4. If you want to rip down an existing RSO building to build a new one, the new building will be rent controlled

The net result of all of this is that supply is actually highly constrained in the south Valley.

Who knew?

Growth and land-use

Love this article in today’s NY Times.

For the lazy: The article makes the case that America doesn’t have boomtowns anymore, because the cities with the most economic opportunity have put in place land0use restrictions that keep housing prices very high, blocking new workers from coming in.

Now, as a developer with a growing property portfolio, I’m obviously benefitting from these growth restrictions.

But, as an American who would love to see the economy return to the days of 3-4% / year growth instead of 1-2%, I would welcome anything that would make it easier to add housing to LA and other highly productive metro areas.

To me, the big opportunity to do so is the impending arrival of autonomous cars, which have the potential to free all of us from the tyranny of minimum parking requirements.

Simply by waiving parking requirements, LA could easily add tens of thousands of new units, which would have an amazingly positive impact on the city (each new resident is a new potential employee, consumer of goods and services, and new tax-payer).

Let’s hope our politicians are brave enough to seize this opportunity.

A difference between brokers and principals

Got a phone call today from a great pair of brokers with whom I have long-standing, mutually-profitable relationships.

They were calling to congratulate me on closing our most recent deal.

On the call, I told them again how much I appreciate their continued help (particularly on this deal, which got a little hairy).

But also I had to tell them I did not share their excitement about the closing.

Why?

Well, for a broker, the deal is done when the deal closes. At that point, the broker’s job is done and he (rightfully!) gets paid.

But, for the principal, particularly if the business model is value-add (eg where there’s a lot of work to be done to the asset), closing is just the start.

Now comes the hard 12-18 months, during which we try to take this broken-down, old building and make it beautiful again.

Wish us luck!

The broken refinancing process

We’re currently in the process of refinancing three properties, with another due to begin shortly.

Think we will end up refinancing another 8-10 during 2018.

Over time, as our portfolio grows, I expect we’ll be rolling refis constantly.

And, I have to tell you: The prospect terrifies me.

The financing process is broken.

It’s totally chaotic and opaque and, because you’re “exclusive” with one bank for ~60 days, the bank feels free to re-trade the terms (ooohhhh, yeeaaaah, about that rate we promised…).

All of the other participants (banks and loan brokers) are fine with this situation, because a fragmented / opaque market creates information asymmetries which benefit the most active participants.

As a borrower, it’s a disaster.

I would absolutely love to find a bank that has a streamlined application process, understands borrowers who syndicate equity, offers competitive terms and won’t re-trade.

That bank would get a ton of business from me and, I expect, a lot of other borrowers.