A ridiculous idea from the city council

There’s a simple concept in economics regarding taxation: Tax what you want less of.

So, we tax gas, smoking, booze, (increasingly) marijuana, etc.

In light of the above, can someone please explain the city council’s decision to tax housing in the middle of what everyone agrees is a massive housing shortage?

Too lazy to click? Basically, the city council is tacking on a $5,000 / unit charge for new developments in order to better fund parks and recreation.

Obviously parks are a good thing and we all want more of them.*

But throwing a big tax bill on new construction projects will absolutely mean we have fewer units built.

Here’s an example of the how the math works: We have a piece of land in a very housing constrained area on which we can squeeze 17 new units, two of which will be affordable to people on very low incomes (with rents of like $250 / month or something).

The total cost of the project is in the range of $3MM, on which we expect to earn an unlevered yield of 7%, or $210k / year.

If you add $5k / door (excluding the affordable units, as the law allows), you’re adding $75k to the total project cost. That’s only 2.5%, right? Not a big deal?

Wrong, because we basically have a hard floor of a 7% unlevered yield and the extra $75k takes us from a 7% to a 6.8%. So now I’m looking at other alternatives, including building a smaller building without the affordable housing component.

*Want to fund parks? How about parcel taxes for the areas around the parks? That way, all of the local users pay, rather than just new resident!

More deals, more complexity

Jon and I have, so far, built a career on building and renovating sub-institutional scale assets. (By this, I mean apartment properties with 4-27 units.)

The upside is that the returns are better than anything I think you can achieve in LA with larger multifamily properties.

The downside is that we have a ton of balls to juggle.

For example, right now, I’m in the process of refinancing four (soon to be six) buildings we bought last year.

The numbers on the deals are awesome. The pain is going to come from having to push four different loan applications through, attend four different appraisals, etc.

I’m personally pretty adept at keeping multiple threads going in my head at once. But I can see how, if we keep doing this particular business for decades, things are going to get pretty damn complicated around here!

An appreciation

Spent the long weekend in Jackson, WY at the wedding of one of my best friends from highschool. For the sake of this story, let’s call him “H”.

H’s a super-successful dude. He started a hedge fund in his late 20s that did amazingly well, then provided all of the capital for my second through thirteenth deals.

I’ve known for a long time that I owe my career to H… if it weren’t for him, I’d probably be on deal 15 now instead of deal 55. Or maybe pushing papers at some law firm; who knows?


What I hadn’t realized is that H did pretty much exactly for several other people in other industries.

I have no idea whether, across his whole portfolio of friend-vestments, H’s up or down. But I know he’s got a bunch of close friends whose lives he set on fundamentally different, better courses through his generosity.

And if there’s anything better you can do for another human being, I don’t know what it is.

Two contradictory traits make a successful acquirer

Being an effective acquirer of real estate involves two contradictory skills:

  1. Pattern matching. By this I mean: The ability to rapidly compare a new potential deal to others you have done and identify commonalities with the successful ones. For example: If you show me a picture of a building and a price, I can very often tell you if we want to buy it, even without seeing the square footage, rents, etc.
  2. Open-mindedness. This is kind of the opposite of pattern matching. Often, good deals aren’t obvious, in large part because they don’t look like the good deals you’ve done before. Keeping an open mind and working through the various ways you can (re-)develop a pice of land will often lead to surprising conclusions.

Between the two of the above, I’m far better at pattern matching than I am at keeping an open mind. The practical implication is that the deals we do look very much alike, both in terms of the buildings themselves and also the metrics underlying the deals.

The upside to this is practice. Because we do the same things over and over again, we have got very good at it.

The downside is that we very often miss out on highly profitable opportunities.

What kind of returns do we generate?

“I’m looking for a 15-20% IRR… can you guys get me that?”


And not because our projects are incapable of delivering returns like that. Under absolutely optimal conditions (like we’ve had over the past couple of years), we can.

But I’m categorically unwilling to quote IRR numbers to anyone.


Because doing so requires forecasting the price at which the property will sell. And I won’t do that.



  1. Anyone who tells you she can predict where interest rates (which are highly determinitive of pricing) will be in, say, 18-24 months, is full of it;
  2. Anyone who tells you where investor sentiment  (another critical factor in pricing) will be in 18-24 months is full of it.

I pride myself on not telling investors things I don’t know to be true. Since I don’t know where pricing will be when we’re done with a project, I’m not quoting a sale price. And since I’m not quoting a sale price, I’m not quoting an IRR.

Here’s what I’ll say, for every one of our projects:

  1. We will minimize risk
  2. We will return 75-100% of capital invested within 24 months (hopefully in less time and definitely without borrowing so much that the property is in danger of default if the rents dip)
  3. Depending on how everything works out, thereafter the yield on whatever capital remains in the deal will be very attractive, somewhere between 10% / year and infinite

We work with investors who can get their minds around that story.

Note: IRR is internal rate of return; it’s a measure of how much money a project makes, weighted by how long it takes to make it.