Keystone Development Advisors, LLC

Amendment 4

2010-10-05T08:00:00.000-07:00

As I write this editorial the November 2nd election is just over 4 weeks away. Amendment 4 aka "Hometown Democracy" is really not about development. If the amendment passes development will still take place and construction of homes and businesses will continue seemingly undeterred. What will grind to a halt are Comprehensive Land Use changes. Some very vocal people claim the problem in Florida is there are too many changes in land use and inappropriate uses of land being approved. It would be wonderful if everyone knew exactly how much land we would need for every conceivable use but the fact is we just cannot see that far into the future.

Amendment 4 is really about taking land use decision making from our elected officials and sharing it with the voters, let's be honest here, campaign managers and public relation firms. Yes I know there are a few people that feel the public is disenfranchised from deciding what is developed near their homes. An election is not a very good way of controlling or deciding what happens in your neighborhood. If you are unhappy with a land use decision by your elected official(s) you can vote them out of office. If you are unhappy with an election result, well you are stuck with it and as far as I can tell there is no way to appeal the election result.

I am in favor of neighborhood meetings where the elected official must attend to hear the concerns of the affected residents and see the reaction to the project outside of a public hearing.
Many times I have witnessed a neighborhood cry foul when any land use change is proposed nearby. I have seen firsthand how neighbors distort the reality of "unintended consequences" if the use is approved. If the amendment is passed regular citizens will lose their voice and effectiveness in shaping a land use change. Instead, a public war will erupt with ads, signs and commercials culminating in a municipal wide popularity contest.

Does that sound like democracy? If you think it is bad having 5-9 elected officials vote on a change near you wait until 150,000 vote to have the landfill in your backyard.

This IS the new normal.

2010-06-21T12:51:00.000-07:00

I have seen the future and the future is here. Welcome to uncertainty! In my travels I hear various expert speakers as well as friends and neighbors talk about "when things get back to normal". I have to admit I used to think along these lines too but I have come to the realization that we are living in the new version of what we will look back on as normal. Normal is all about expectations.

When I look back over the last decade I see historically low unemployment, low interest rates and a zooming real estate industry. Was that really what we should expect as normal going forward? There will always be pockets and places with local distinctions that deviate from the majority. What is normal for these isolated places is not what we collectively know as normal.
In the 70's Alaska had the pipeline and jobs were plentiful when most of the lower 48 did not experience such abundance.

The point here is not to sound gloomy and say this is as good as it is going to get. The point is rather to understand there is no point in waiting to be happy. The future is here and we must learn to live with it. While unemployment is higher than I can ever remember there is still opportunity, we just need to keep our eyes open so that we recognize it when it appears. Most everywhere I look real estate is experiencing a price "reset" that will shape the future. An overpriced retail center near where I live was recently sold at a price where it can be rented at rates a start-up business can afford. While the reset for the previous owner was no doubt a terrible experience, the flip side is now there is opportunity to rent the commercial space at affordable rates to sustainable businesses.

In an ideal market system there would be no losers, just winners and future winners. In a balanced market there would be a winner for every loser. In our current market, it appears as though we have multiple losers for every winner. The borrower loses, the lender loses and maybe even the new owner loses if they have not done their homework or are just plain not lucky enough to time the market just right. I get that. And that part is not what we have come to know as normal, but it is the new normal for the next few years. Part of what is so annoying about this time we are living in is the uncertainty of what tomorrow will bring. When you are stuck in a rut at least you know that tomorrow will be pretty much the same as today. What is so scary right now is we don't know if tomorrow will be better or worse than today.

In my business I work very hard to be good at what I do and give the best advice to my clients. I am grateful for the work I have but I will be honest with you, we could do so much more. I like to control my own destiny but in today's environment I have zero control. I cannot make someone want to use our services. The only thing I can control is me. While we are adjusting to this new period of normal, let's all try to keep the important things in mind namely our family and friends. We will all get through this together. Just maybe together we can create a new normal over time that gives us the predictability we crave so much.

Happy Memorial Day

2010-05-28T11:10:00.000-07:00

And they who for their country die shall fill an honored grave, for glory lights the soldier's tomb, and beauty weeps the brave. ~Joseph Drake

On Memorial Day we salute all those who have given their lives in defense of this nation. Without their sacrifices we would not be free to ask questions, to challenge our political leaders and to take an active role in our system of government. To them we owe an unrepayable debt

A Clash of Cliches - "The Rules Have Changed", but "This Time It's Different"

2010-04-19T08:01:00.000-07:00

Have you heard the saying "The Rules Have Changed" when discussing real estate development and investment? Have you heard what got us in to this mess of a recession is the thinking "This Time It's Different"? While the words are different, from my point of view, they really are saying the same thing. Both sayings are always true when taken out of context of the situation being referenced. It is true - the rules have changed in terms of development if you are talking about financing and investment expectations. It is also true that it is different "this" time in the context of the "last time" we have done anything. Every time I kiss my wife it is different.

Ahh, but the fundamentals really have not changed, just our perception of them. True, it is much harder to get a loan today, so that much has changed...since 2005. The pendulum had swung so far to the easy side of getting a loan that it had to swing in the other direction for a while. That does not mean there has been some cataclysmic change that will forever wipe out lending on commercial real estate and development loans. What it does mean is once banking capital has normalized, in terms of the ratio of deposits to performing loans, lending will return. More cash will be needed from borrowers. Shorter terms will prevail for a while. Rates will most certainly be higher. These changes are merely going to be a return to the norm and not a significant departure from standard lending practices 10-15 years ago.

Also true is there is little need for new commercial development for next few years. Vacancy rates in many parts of America are approaching or exceeding 20%. The retail and office vacancy trend will continue until job growth returns. There will always be special circumstances requiring new development (before vacancies are lower) and that is no reason to get excited when a new building or project goes up in your area. This is still America and we like new things.

What has not changed, in a meaningful way, is people. Specifically, investors have not changed as they still want to make money with their capital. There is not much of an appetite for a real estate investment that will yield less than 8% these days. If an investor can get a 10% return on the investment with some degree of continuity then they will generally take the risk of owning a property. Ten years ago, the rule of thumb for non-institutional investors was a target cap rate of 10%. From a 2005 buyer's perspective the world must look like it is crashing all around them with rental rates down and vacancies increasing especially when you consider a 2005 buyer was willing to live with a 6% cap rate. In real terms a cash buyer in 2005 has watched their investment decrease in value by at least half while at the same time had their cash flow also cut in half. For these people, the rules have most definitely changed! What is different this time is they are now broke.

As baby boomers and insurance companies need to put money to "work" and create a predictable cash flow, real estate investment and subsequently development of real estate will come back to sustainable levels. Land will be developed, buildings will be erected and investors will look for yield. The rules really have not changed and it really is not different this time when looking back over the last 50 years. I have a final cliche for you, the more things change the more they remain the same. That my friends, you can bank on.

Honoring our Veterans

2009-11-10T08:23:00.000-08:00

Thank you for your service to our country. We join the rest of the nation on Veterans Day, November 11, in remembering the sacrifices of America's 25 million veterans and expressing our appreciation for your service. We thank you for our freedom.

12-step program for banks

2009-11-02T12:07:00.000-08:00

Check out this link before you read my blog below http://www.msnbc.msn.com/id/29619236/ns/business-us_business/

Do you have a friend or family member that has had trouble with addiction? Have you heard about "12-Step" programs to get "clean" so to speak?

I have this friend, for the purposes of this article, I will call "Bank" and his problem/addiction if you will is credit. "Bank" has had a tough road for the past 6-7 years. First he was living it up on cheap credit, then he became a dealer and started to consume massive amounts of even cheaper credit. When he ran out of credit he did what any addict does and found other people help fund his problem. In "Bank's" case, it was clear, those funding his problem were not concerned about too much of a good thing. It was kind of funny to watch. "Bank" would go out, lend some money, get a huge fee and a nice buzz as well. "Bank" never failed to find money to lend, as long as there was a fee to be made. "Bank" thought the party was going to go on forever.

One day, "Bank" got a call from one of his suppliers of the cheap credit. After years of providing money without asking too many questions, the suppliers started to notice they were not being paid back. Eventually "Bank" started to notice even he was not getting paid back on the cheap credit he sold. This was not good, for if "Bank" could not use his cheap credit he would lose his fees, maybe even his job. Sniff. Instead of "Bank" realizing he has a problem, he wants to pretend one does not exist. "Bank" is so addicted to large fees and cheap credit he does whatever he can to put his problem off to another day far, far in the future.

What "Bank" needs is a 12-Step Program. There are three things to know about addiction; the treatment is not fast, the treatment is not easy and the cure begins with an admission that you have a problem and your life is unmanageable. American banks are in trouble. The banks lent more than a ton of money on projects, investments and pure speculation. The problem now is that the bank's problem is our problem. Since banks do not want to admit there is a problem, troubled loans stay on the books. The longer these loans stay on the books the less money there is to loan. A side effect of these troubled loans is that the assets remain on the books at inflated valuations.

Here is an example to illustrate the problem: There is a 4,000 sf office condominium where a bank lent almost $600,000 and the owner defaulted. The bank took about a year to foreclose by dragging their feet and today they are trying to sell the asset for $400,000. At first blush that sounds pretty good, only 66% of the original loan amount. The trouble is the condo is in such disrepair and there is so much competing newer space on the market that the value is probably closer to $80,000. The "funny" thing is the bank probably could have sold the asset for $200,000 when it first started the foreclosure. But due to the bank's own delay it is worth only about a third of that today... and tomorrow does not look any better. The longer the bank holds on to this property it will continue to decline into dis-repair and there will be even more space on the market tomorrow. The inaction by this bank and many other banks is hurting commercial property owners. Sure it would hurt the values of all commercial property if the banks had a huge liquidation sale but then the healing process could begin.

By pretending there is not a problem and not admitting first, there is a problem and second their books have become unmanageable, the cure, the rehabilitation cannot begin. The FDIC said a few months ago they wanted the banks to stop playing "Delay and Pray" with their loans and assets. What the banks need is for the FDIC to require all banks to acknowledge say 20% of their troubled loans each year for the next 5 years. Otherwise we risk going the way of Japan where banks made loans that became troubled loans and instead of facing the music they held the loans at face value and have continued to pretend for the last 20 years that values will eventually catch up with the loans and everything will be okay. By not admitting they had a problem Japan's banks have dragged down their economy for two decades with still no cure in sight. What we need is for banks to admit there is a problem, take action to make their books manageable and liquidate the assets so we can all get on with our lives.

Florida Development News has a new home on the web

2009-08-19T05:30:00.000-07:00

I was talking with my assistant on Monday and she had some very good news for me. The new website (www.FloridaDevelopmentNews.com) we informally launched two weeks ago had 40 unique hits last week and the average time spent on the site was over 20 minutes per visitor. I have to say, I am aiming for much larger numbers in the future but for right now I am pleased as punch thank you very much.

We plan to formally launch the website next week and many more "unique visitors" I hope will find the site and value the content. The newsletter is not doing to shabby either with over 200 subscribers added in the last month. If you would like to subscribe, email editor@FloridaDevelopmentNews.com and put subscribe in the subject line.

I am working with a new group of authors/writers for our next publishing date on October 1st. I have to say the topics and depth of knowledge of the writers is truly outstanding and I think readers will be very pleased. As always, we are also on the hunt for new ideas both for the website and newsletter. Topic ideas from our readers are also valued and sought. The new site has every article published in the newsletter and links to development specific articles in papers around Florida and the New York Times. We also have an article originally published in an Urban Land Institute magazine on the future trends of the development industry. There is a link on the front page and I encourage you to check it out.

2009-08-03T05:47:00.000-07:00

Florida Land Development Newsletter

I was driving to a meeting about two months ago and I was thinking about some of the issues that face the development community today. As I started to research Senate Bill 360 and new water quality rules being considered by FDEP I found very little in term of news I could use. Then I thought "I wish there was a source for the development community to turn when it wanted to know more about a certain issue". About 30 seconds later it hit me - I should call on my developer friends, bankers, consultants and planners to see if I could pull together a handful of articles that would be informative and useful. So I emailed and called a few friends with specific industry knowledge and asked them to write something.

The end result is the new Florida Land Development Newsletter. The purpose of the newsletter is to inform, not to sell anything or anyone. My original intent was to publish it about once per year or as issues presented themselves. We put out a press release informing the public of the newsletter and I was just about run over with requests to send out copies. I was equally surprised when several professionals asked if they could submit content on issues they were dealing with in their work. It was not to much after the emails started pouring in that I thought maybe we needed a website to support the newsletter and publish headlines from around the state on a regular basis.

The new website is www.FloridaDevelopmentNews.com and we are still working on the content and structure. Our goal is to have enough writers/contributors that we can publish at least one new 800 word article per week. Since a decent article may take a week or two to research and develop copy it will take a while before we can publish at that rate. Regardless, I keep an eye out for headlines around the state that impact development and we plan to keep those fresh every other day or so.

It has taken a lot of work to get from that idea on my way to a meeting to a tangible newsletter and website. If you would like to subscribe, have an idea or want to know more a topic, email me at editor@FloridaDevelopmentNews.com and I will see what we can do. If you would like to download a copy of this quarter's newsletter, just go to the website and there is a link in the center of the page.

Green Shoots in My Lawn

2009-06-30T10:54:00.000-07:00

I have been reading a lot about green shoots in the economy lately. Just like Bigfoot, there are those that have "seen" it/them and there are others that insist it/they do not exist. I think this is one of those glass half empty, glass half full debates. The truth is it depends upon your point of view and context. My business is up 300% over last year (really). Is that a green shoot? What about the new restaurant that opened down the street from my office. Is that a green shoot?

In each case above it depends on how you look at the numbers. I had two project reviews "walk in the door" in April yet I had been working on getting that work since last year. So in that case, I would not call it a sign of the economy picking up. The new restaurant down the street (which has excellent mexican food by the way) is a good sign, however, there are three existing restaurants that have gone out of business since January 2009. I am honestly not trying to spin the numbers or convince you of something where I am "right" and you are "wrong".

Personally, I will see and believe in green shoots when I start to see new non-construction jobs opening up. Don't get me wrong, construction is a great field and traditionally pays very well. But, when the job is finished, so are you. Honestly, I am just as confused as anyone when it comes to our economy. I see the stock market up while on the same day unemployment reaches a 26 year high. I hear the credit crunch is behinds us yet I cannot refinance a land loan that I have. I see great sales in the Sunday paper but few consumers actually buying. The canary in the coal mine is JOBS. Anything else I see on the positive side is a result of the economic stimulus package or temporary construction work. The stimulus package is really fertilizer designed to give us a quick boost. When the "food" is gone we may find a very brown lawn.
We are in an economic winter here. It will be a while before the spring is here and green shoots appear in my economic lawn. Rest assured they (green shoots) will come and we will probably miss the first few signs of new real growth.

On the positive side, I am seeing a lot of assets re-priced and being liquidated in the market place. While it is painful to be the one selling your investments at steep discounts it does put money in to the hand of people that will generally spend it in the economy (versus saving it). The last thing I want to leave you with is many segments of our society are in flux and some say we need to adjust to the "new normal".

While I agree some thing's have changed forever (very easy credit to name one) life will go on. This is also an excellent opportunity for most of us that have spent much of the last 30 years taking advice from "experts" that really knew what was going on. The playing field has been leveled and you and I now have a chance to learn in real-time along with these former experts about what the new normal will look like. I know, not much to brag about but it is nice for the little guy to know just as much as the big boys for a change even if what we collectively know is "not much".

Repost: Gold Up, Dollar Down, Inflation out the Wazoo!

2009-06-15T12:36:00.001-07:00

I was speaking with a friend recently and a blog that I wrote back in January of 2008 came up in conversation. I decided to re-post it since it is quite relevant to what is happening currently.

What the heck is the Fed Chair thinking? I know, I know, keep the country out of a recession. Yeah, right, like that is going to happen. The good news is my gold stock is way up. The bad news is so is my Canadian bacon.

This country is in so much trouble from the Cheap Credit Party that the only real solution is to turn on the printing presses and print our way out of "real" debt. I knew the hang-over (from that credit party) was going to hurt but man! Now to add insult to injury my savings is worth a lot less this year than it was in just 2005.Thanks Federal Reserve Geniuses. I appreciate being penalized for actually (shock and awe) having a savings account instead of being 10 bazillion in debt.

Don't get me wrong I have a mortgage just like everyone else but I did not go out and buy 10 Miami condos on margin to rack up my debt. The only silver lining is our real estate is now comparatively cheap to foreign investors and tourists.Inflation is now getting ready to leave the earth's orbit ala 1970's style. I can't wait to order my first $100 cup of coffee. Okay, enough complaining and feeling sorry for my country, now on to what are we going to do from here.

The only way I know how to preserve buying power (wealth) is to own hard assets such as gold, real estate or some other object that does not deteriorate over time. Gold is sky high because the dollar is in the toilet not because it has "gone up in value". The price of gold has gone up, not the value. If you don't believe me check out the price of gold in Euros. Sure it is higher now than a few years ago in terms of euros but in dollars, it has tripled!I think the best investment is real estate! With that said, I don't think everyone should go out and buy a house or office building but referring back to a blog entry this summer "When it Pays to Buy, Buy" there is a time and place to buy real estate.

I have a personal example to share with you. I just love the beach. I have always wanted a place at the beach where my family can spend holidays and lazy weekends. Here in SW Florida, there are some tremendous deals on beachfront condos. Many of these condos demand high rental rates from December through April. If you find the right deal the rent from this period of time may cover you entire ownership costs. So while inflation is rampant and your banker is only paying you 2.5% for your money why not invest in something that pays for itself and you enjoy.

Another example is rental property. While we are in this huge housing slump it is a good time to hunt for bargains where the rent will cover your carry costs. Office space is another option however, one must be particularly careful when considering office and industrial property as the economy is slowing down and many small business will go under and potentially a lot of vacant space may emerge driving down rental rates.My favorite asset type is either bulk lots from builders or complete developments where the developer is in hot water for one reason or another. The key to these deals though is CASH! The reason why investors and companies are in trouble is DEBT! Don't get me wrong, debt is a wonderful tool but it is analogues to a sledge hammer; hit the right spot and mountains will move, hit the wrong spot and you lose your left foot. If investors and companies did not have debt on their books they could afford to hold their assets forever without fear of bankruptcy. Of course the way to make money is to turn your assets over and over making profits along the way. Obviously no sales equal no profits. So if you are long on cash and short on investment real estate, take another look around you for opportunity.

I was just offered bulk lots by one developer for 33% of the development costs. I was sharing this with a friend of mine yesterday and he asked how I know that particular deal is worth going after. My answer was simply, when you can buy something for less, or in this case a lot less, than what it costs to build you will be way ahead of your future competition. I can turn around and sell these bulk lots to another investor a year to two from now for 50% of the cost to build and still make a 50% profit on my investment. Not too shabby when you consider the alternative is a 2% or 3% money market rate.I am always taking questions so feel free to email me dave@keystonellc.net.

A Video on Government Spending

2009-06-15T06:56:00.000-07:00

http://www.youtube..com/watch?v=P5yxFtTwDcc

I am working on an article about Water Quality permitting in Florida as well as update on SB360, which I hope to publish here soon. Until then enjoy the link above.

Panel Discussion

2009-05-30T07:55:00.000-07:00

Today I am in Davie participating on a panel for a Land Use Permitting and Entitlement Course at the Huizenga School of Business and Entrepreneurship at Nova Southeastern.

The class consists of MBA students that are getting a specialization in Real Estate. The focus of this class is the entitlement and permitting process, as well as a better understanding of the roles and relationships between permitting agencies, consultants, the public, and implementing law.

An expert for every market

2009-05-26T07:10:00.000-07:00

I spend most of my days working on real estate deals in one form or another. Sometimes it is a loan being sold to investors, sometimes it is the liquidation of a developer's inventory and on a rare occasion it is a good old fashioned traditional real estate transaction. I want to share one of my secret weapons with you; his name is Mike Timmerman.

Mike and I have known each other for over 10 years and he consistently delivers recommendations based on hard data versus other "experts" that go with the current trend. If you are a regular reader then you know I like Mike and have written about his great talent for making sense of all those real estate numbers. Mike and I have not had a chance to work together much over the last few years but we did have an opportunity last week and that is what I want to tell you about today.

I have a client that needed to know precisely what the market decline rate has been since 2005 for a specific market. I had my own ideas and my client had his own ideas about the market for this type of product. Mike quickly dove into the data and delivered an analysis that, after extensive review, was right on the money. I will say Mike did not give us the answer we were looking for but his insight and mountains of data backing his conclusions were absolutely spot on.

Today it seems as though everyone with a computer is an "expert" analyst and nobody thinks twice about manipulating the data to reach a preconceived conclusion. Fortunately, Mike never got that memo and he works like he has for the last 30 years - letting the data reach the conclusion. That is not to say Mike does not have instinct. In late 2005 Mike presented his analysis at an Urban Land Institute program in Naples where he announced the party was over. Now if he had just looked at sales or permits issued he would not have come to his gloomy conclusion. Mike took it a step further and looked at affordability and a survey of where people closing real estate contracts lived. He found the market had priced most real buyers out of the market place the previous years appreciation rates had reached unsustainable heights. He also found most buyers were from up north, namely Ohio and Michigan. In hind sight Mike called as he saw it and he was correct.

If you have a need for hardcore data analysis and someone to make sense of market you are in, I suggest you contact Mike at mtimmerman@fishkind.com, oh yeah, tell him Dave sent you.

Just in case you are wondering, Mike did not ask me or pay me to write this blog. I cannot help that I am a cheerleader for those I respect and admire.

Unconventional Wisdom

2009-05-20T13:08:00.000-07:00

I had lunch with an investor friend of mine on May 18 and we had a very interesting discussion about the economy in general, real estate prices/values and the stock market. First let me say if a man is measured by his friends then I am the richest guy in the world. Not only are my friends smart but they are generous with their time and allow me to probe their thoughts on what is happening but also why it is happening (in their opinion).

My friend sees the general economy as sluggish and thinks it will continue to be flat for some time. He sees much trouble ahead for the commercial real estate market. It may be because there is too much space and not enough tenants or consumers may not be spending enough to keep the tenants in place. Regardless, he sees cap rates heading back to the historic mean of 10%. In english that means retail/strip centers may fall as much as 40% in value from 2006 prices. Compounding the situation is many centers are not stable as in they are not 90% full and most are losing tenants such as Circuit City, Linens & Things and other bygone companies.

On top of that, rents are still falling in centers across America to entice tenants to move from one center to another. Plain and simple, the commercial market IS ugly and will get worse. I have to say I agree with my friend. With that said, I also have friends in areas that are not overbuilt and their centers are staying full and rents are stable but these are in less populated areas.

As for the stock market, I keep reading about how much cash is sitting on the sidelines ready to invest in anything that makes sense. I was talking to my friend about a graph someone sent me that showed money market deposits as a ratio of the S&P and it showed a monster amount of available cash. My friend pointed out how the graph misrepresented the actual amount of available cash because the S&P index is down by almost 50% since a year ago. Therefore there is not twice as much cash as a year ago as the graph indicated, it is more of a reflection of how the S&P is down. My friend really likes SRS (Super Short Real Estate Index) and I will tell you I am also a fan of SRS and I own it as part of my own holdings. All of my investor friends believe the stock market is over bought and we are in a secular Bear Market that just happens to be in a rally.

Back to real estate in general. One thing my friend has been saying for some time now is do not buy (for investment purposes) anything for a year or so. He believes the prices will be the same if not lower a year from now and the chance of further decline is just not worth the risk of marginal returns (rents) and carry costs such as taxes and insurance. In general I agree with him but there are always exceptions and one should keep their eyes peeled for those exceptions (i.e. some distressed bank own property for example). It also depends on why you are buying too. If you are buying to use for your own purposes, then there is no risk of lost expected rental income and you will pay taxes and insurance wherever you live or run your business.

In closing I hope everyone has a great Memorial Day weekend. Stay safe.

Racing for Charity

2009-05-11T11:42:00.000-07:00

This past weekend I participated in the " 33rd Annual Great Dock Canoe Race" at Crayton Cove in Naples, Florida. I have been attending this event since 1990 and this year was my first time competing!

The Annual Great Dock Canoe Race is arguably Naples' most popular event. Contestants and spectators travel from throughout the country to race and watch, and thousands of people, from young children to grandparents, celebrate the Race on land, dock and bay. The Theme for the event changes each year, and the costumes and headgear of the participants and spectators are as much a part of the day as the paddling.

My partner in the race, Kent Skrivan of Garlick, Stetler & Skrivan is a very strong rower and is generally responsible for our 5th place finish in the VIP race with a respectable time of 4:26.

At the races, over $7,000 was raised for CHS Healthcare a private, not-for-profit “safety net” health care provider with 12 health care facilities located throughout Collier County which includes the Ronald McDonald Care Mobile. They offer basic primary and preventative medical and dental health care services. In calendar year 2008, they provided services to over 46,700 patients (over 31,000 of which were children) for a total of nearly 186,000 patient visits! You can visit their website at http://www.collier.org/

In the pictures, I am the one in the front wearing an orange Gator hat.

Getting a loan

2009-05-04T06:00:00.000-07:00

I know the media is pretty good about reporting how bad the economy is doing and "no one" is lending.

I have worked on over 17MM in loans this month and find the banks willing to lend...just not at the same crazy standards they were using in 2005 (got a pulse - great you are approved!). I am seeing LTV's in 60-75% range with the key being what exactly is the value today. This is where my company helps by assisting lenders review specific assets for a specific loan. In many cases it is not pretty. The fact is there is not much a bank or anyone can do when the borrower owes or wants to borrow 10MM for a 2MM asset - which is all too common these days. That is how I see things from where I sit.

If you have a question about lending, asset valuation or development in general, drop me an email dave@keystonellc.net

Finally...someone gets it!!

2009-05-01T08:16:00.000-07:00

I was reading the paper last Sunday (as I do most Sundays) when I saw an ad by a local developer touting their project as a great place to live. Now this type of ad is generally not too shocking since every developer says the same thing about their respective projects.

What caught my eye was the marketing blatantly touted the fact the community did not have a Community Development District (CDD), a tool large developers use to finance the development of their property through bonds where the residents of that community pay the bonds back. It is a slick deal for developers. They pass the development costs on to the end user while at the same time charging as much as every other development for their land (yes CDD's are real - I am not making it up).

As I was saying, a local development known as the Vineyards has something few developments in this area can say NO DEBT. That means when you buy a new or existing house in their project you do not have to pay additional CDD fees to live there. What a novel concept!

There are many developments in Florida and elsewhere in the country where the residents are saddled with $10-20 thousand (or more!) in debt the day they close on their house. In my less than humble opinion, the CDD tool is over used and does not save the consumer any money. Too many MBA's and CPA's with little regard for future buyers appetite to pay more fees long after closing were driving the development bus.

So Kudos goes to the Vineyards and the "in hind sight" brightest developers in the land. They have an attractive community with all of the amenities one could ask for with ZERO add-on fees for the buyers. As their ad says "This Developer Gets It!". I agree.

RLSA program will actually mean less development

2009-04-08T12:05:00.000-07:00

My Guest Editorial debut in the Naples Daily News. Enjoy.

http://www.naplesnews.com/news/2009/apr/04/guest-commentary-rlsa-program-will-actually-mean-l/

Much has been said and written about Collier County’s Rural Land Stewardship Area (RLSA) program since its inception and then adoption in 2002. There are at least three sides to this issue; the owners of the rural land, the environmental community and the residents of Collier County.

From the landowners perspective the issue is pretty simple; they own the land, they pay taxes on the land and their land has inherent development rights of one home for every five acres they own. The environmental community also has a straightforward point of view, protect endangered species, their habitats and sensitive wetland ecosystems. The residents of Collier County have probably the most nebulous job and that is to decide what is best for our current and future residents for many generations to come.

The RLSA overlay is about 200,000 acres surrounding Immokalee. The landowners have the right to convert their land to 5 acre lots similar to what exists today as Golden Gate Estates. If this form of development was to occur it would mean about 40,000 homes could be built in the rural area. If you look at a typical 5-acre lot with a home in Golden Gate Estates you will notice one acre or more of the lot has been cleared and developed from its natural state. When the local street network necessary to serve these hypothetical 5-acre lots is contemplated, another 9,000 acres would need to be developed. Without the RLSA program, Collier County could have had 49,000 acres of development in the rural area. That is assuming a maximum of one acre would be cleared per lot.

The rural area is rich in ecological diversity and contiguousness. In other words, the RLSA has large connected areas of uplands, wetlands and serves as habitats for many species including endangered species such as the Florida Panther and the Florida Black Bear. Both the panther and bear populations reportedly need large open areas to forage, mate and raise their young. In some areas, the wetland ecosystems are used as habitat by these two species but they also need considerable upland area to survive. The point here is even if you did not allow development in the wetland areas of the RLSA there still would not be enough area for the panther and black bear.

Collier County needs to decide how to balance resident’s future needs, the landowner’s ability to use their land and the needs of the environment in the RLSA. The RLSA 5-Year Review Committee has spent the last eighteen months studying the existing RLSA program and taking testimony from experts of almost every field. One of the committee’s recommendations is a maximum development area of 45,000 acres thereby perpetually preserving over 150,000 acres of rural land. This 150,000 acres will be preserved in its present condition or in a restored condition if there has been significant disturbance. Some believe a 45,000 acre maximum development footprint is too much development especially in a rural area. Some also believe there will be too many people living on those 45,000 acres especially since before only one home was allowed on a 5-acre lot and the RLSA program is forecast to have about 2.5 homes per acre. However, today 43,000 acres of the 200,000 are anticipated to be developed as part of the existing RLSA program. While this existing condition is less than the proposed 45,000 acre cap, it leaves 47,000 acres of land available for development at one home per five acres.

Before the RLSA program existed, a future theoretical build-out of Collier County’s rural area would have resulted in 49,000 acres of developed land. Keep in mind that does not include any development for government type services such as EMS, fire, government administration, schools and administration, hospitals/emergency care and necessary commercial services to serve the residents of the rural area, collectively called Public Benefit Uses. The RLSA as it exists today requires all development participating in the program to provide for most of the above services within their development area. The proposed 45,000 acre development cap proposed by the 5-Year Review Committee is inclusive of Public Benefit uses.

Without taking sides on what is right and what is wrong with the proposed cap let’s take a look at the build-out numbers over the next 50 years. If the RLSA program did not exist there could be about 49,000 acres of sprawling development with little or no preserved agricultural uses or protected habitat areas. With the existing RLSA program there will still be over 40,000 acres of development but this development will be concentrated in distinct towns and villages. The quality of the development within the RLSA will be vastly superior to tens of thousands of scattered five acre lots. The word “superior” in this context means well a thought-out mix of uses with dense populations capable of supporting Public Benefit Uses while minimizing sprawl. What is even more important than what is developed is what will never be developed.

Over 150,000 acres of land contiguous to millions of acres of preserved land will never be developed.
Before you make up your mind about the RLSA program including its benefits and shortcomings, take a hard look at what could have been, what is now and what could be changed for the better. We could have seen 49,000 acres of sprawling development in five acre tracts over a 200,000 acre area with no RLSA program. With no changes to the existing RLSA program there will be about 43,000 acres of development with another 47,000 acres left out of the program and subject to development with one home per five acres. If the RLSA 5-Year Review Committee recommended changes are implemented 45,000 acres may be developed and 150,000 acres will be perpetually preserved as existing agricultural uses, restored habitat areas and native forests.

What Businesses can learn from Penn and Teller

2009-04-03T08:28:00.000-07:00

Dave and Penn

I recently went to a Penn and teller show in Las Vegas. I was amazed after the show, as both Penn and Teller were very gracious and personally greeted every person that wanted an autograph, a picture of even just a handshake. Their show was unlike any comedy or magic show I have ever seen.

First of all, they broke the #1 rule of magic by telling you and showing you how they do about half of the tricks in their act. You might think that would take all of the fun out of the performance, but it only added to the mystery. I just watched them show me how to make a cigarette disappear and reappear as well as “read minds” but because of their master showmanship, I still couldn’t believe what I was seeing!

So, on to my point of writing this blog...What I learned from the Penn & Teller show is the following:

1. If you are a master of something, you can give up some of your “secrets” and have no fear of competition (I am talking skills here)

2. If you provide a public benefit (say…exposing psychics) people will appreciate what you do and be loyal to you (think Google)

3. If you do not have integrity, you don’t have squat! (Peanut Corp. of America)

4. Be humble and thank those that have and continue to help you in your business.

5. Be available to those you work for and those that work for you (i.e-shareholders and staff).

6. It is OK to be different if you are true to your core beliefs (Southwest Airlines, Apple and Google)

7. Reading minds and the future are easy if you are paying close attention to the subject (see #1)

Pretty good for just a “magic” show. Look around at all the trouble our economy and companies are in. Note: I did not say ALL companies. It is the troubled companies that I wish to focus on. Until this economic meltdown reared its ugly head, most consumers and investors believed that those in charge of corporations were doing an okay job. As it turns out, most executives were at best, just showing up for work and at worst, criminally negligent (i.e AIG, Lemon, Meril, Peanut Corp. of America, Countrywide, Circuit City, Wachovia- remember their tag-line “Uncommon Wisdom”?)

Examples of well run companies are Southwest Airlines, whose management had their eye on the ball and read the future by locking in fuel prices at half of the price of most every other airline. Another example is Toyota who also miraculously read the future (30 years ago) and provided well engineered, fuel efficient cars that folks wanted to buy.

In 2000 my wife and I purchased a Corolla for $11,000 and it got 38 miles to the gallon. Chrysler had a similar car called the Neon which cost a few thousand dollars more and got 22 miles to the gallon. Can you guess which company is going into bankruptcy?

Let’s also look at Apple-a company that not only constantly invents products that people desire, but they are constantly improving on existing ones. I am talking about the I-phone and I-Pod; both are wildly popular and have much competition, yet they dominate sales in both areas. The years ago Apple was selling for $12 per share with $10 per share socked away for a rainy day. Regretfully I did not buy the stock but I should have seen the 2000% increase coming.

Here is the point I am trying to get across to you; good business practices do not rely upon "magic", however, just like magic it takes practice and a desire to do something well to become a master of something. Funny, I thought I was going to a Penn and Teller show, I had no idea I was going to learn so much about business. I highly recomned you check out their show at the RIO next time you are in Las Vegas.

New Idea for New Economic Model

2009-03-10T09:58:00.000-07:00

I talk with other investors on a daily basis. Investors love profit but hate risk. A common question I am hearing a lot these days is "are we at the bottom or is there more downside?" My honest answer is I really do not know... I will tell you there are many stocks, bonds and real estate deals that are being sold for far less than their replacement cost. One example is a pipeline stock that I personally own that is being traded for $2.65 yet has a book value of $16 and a replacement cost of about $30 per share. I have gone out on a limb and purchased more of this company because I believe it will recover and I see little downside risk at this price.
Another example is homes are being sold for $30-$50 thousand about 30 minutes north of where I live. These homes cost at least $100 thousand to build even with today's reduced raw material costs. Could both still go down in price? You bet (no pun intended).

I was talking with an investment group out of Texas a while ago and they wanted to know about downside risk. The investor's actual question was "do you think there is more than a 20% downside?". The vanilla answer is I do not know. However, I personally think prices will not dip much lower. Then I had an idea. What if two investment groups got together where one group provided 80% of the purchase money and another group provided remaining 20%. The group that put up the 20% would take the first hit in any realized loss of value. In exchange for this risk, the 20% group would receive 60% of the any profit realized. The group that put up 80% of the money now has a hedge against losing money and yet they still have the opportunity to make a very good return on their investment.

If you are confused, let me give you an example to explain my idea. Say we have an office building that appears to have an asking price half of the replacement cost. So the asking price is $1,000,000 and my two imaginary investment groups put up their 80/20 ratio of funds. Assume our investment time horizon is 5 years. At the end of 5 years the two groups agree to put the building on the market for $2,000,000 (its replacement cost). The group that put up $800 thousand would get 40% of the $1 million profit and the group that put up $200 thousand would get 60% of the profit. The group that wanted a partner to absorb 20% of the risk still has a 50% profit ($400k/$800k) or an average of 10% profit per year. The group that essentially acted as the risk absorber was able to make a 300% profit ($600k/$200k). This idea provides risk mitigation, at a price, to those that want to invest but are worried about losing more money. The risk taker is only at risk for the initial investment and has the potential to earn handsome returns.

I know financial engineering got the world into this mess BUT how are suppose to get out of this mess without financial engineering? Just because a bridge collapses does that mean we should never engineer and build another bridge? We must analyze why the first bridge (or economic model) failed and then avoid the same mistake. The financial meltdown last fall was the result of bets in the market by insurance companies and Wall Street institutions that risked more money than they had. That was a big mistake. My idea is does not call for such outlandish risk taking. My idea rewards those that have an appetite for risk and eases the mind of wary investors that are concerned the market has not reached bottom. If you would like to be a risk mitigator (i.e. the investor that puts up the first 20% at risk), please give me a call and I can point you to investments where 80% of the money is waiting for someone to take some of the risk.

Seeing is believing

2009-03-03T12:46:00.000-08:00

I know it has been too long since I updated this blog. I write my best stuff (you can argue just how good the writing is) when I am inspired.

Yesterday I was helping a friend find a home in the $200,000 range and I was surprised by two things; first there are a lot of homes that used to sell for $300-400 thousand that are now listing in the $200,000 range and two, homes are selling like hotcakes in the low $200's. Since I do not buy homes myself on a regular basis I was caught off guard a bit by all of the activity that I witnessed. Granted, I live in Naples, Florida where it is now tourist season and there are lots of retirees with money to spend this time of year. I guess what really surprised me was the pace of the sales. I called a few brokers about their listings and before I could get more than an address out they interrupted me (politely) with "that one sold a day or two ago and we have a back-up contract". We are all the sum of our experience.

I like to use my family and friends as a benchmark for what is realistic. In other words, if my family and friends can afford something, then I think most people can. This yard stick of sorts has served me well in the past.. I was in a new development a couple of years ago and the project manager was telling me about all of the great amenities they had to offer. I asked what the HOA dues were and he told me "only $350 per month".. I not only balked but I must have looked disgusted as he followed with "you have to remember this is relative to other communities". What he was trying to say is "hey our dues are cheap!".

All I could think of was my parents who are not poor, but would never live in a place where after the home was paid-off they would still have such a large monthly payment FOREVER. Let's just say that place is not doing so hot these days.

Okay, back to our regularly scheduled blog. So in the process of showing my friend some homes we stumbled onto a NEW subdivision. I put emphasis on "new" because I have not seen a new project in years. Even here in Naples where the people with real money live. So I stopped into the sales trailer and was stunned to see a bunch of people (I am talking about a mob here) waiting to speak with a sales person. As I observed the festival atmosphere I could not help but wonder what had caused all of the excitement. Then it hit me - the asking prices for new homes ranged from $190,000 to $299,000 - these are prices my folks would pay. Hmm. Very Interesting.

My point is I think many builders, developers and flippers forgot about my parents and the MILLIONS just like them. When this foreclosure nightmare is over I can see what segment of the market is going recover first - the one that people can actually afford. I know my recent experience is local and does not reflect the rest of America or the world. But it is a ray of hope. It is one positive sign after many less than positive signs (Cliff Drop Off Ahead).

ULI Winter Institute 2009

2009-02-06T10:32:00.000-08:00

On January 29, 2008 the Urban Land Institute hosted the 2009 Winter Institute and Pathfinder Awards in Naples, Florida. As the Vice-Chair of the Southwest Florida District Council part of my duties are to produce the Winter Institute program. This year's Winter Institute was the best one I have attended in the last 12 years. We were fortunate enough to have speakers such as the Chief Economist for SunTrust Bank Mr. Greg Miller, Ron Glass founder of workout firm GlassRatner, Florida CFO Ms. Alex Sink and former mayor of Pittsburg Mr. Tom Murphy. I spoke with many that attended the program and the unanimous consensus is the content was timely, informative and useful. Below are a few pictures from the event.

A link to the presentations as well as information on upcoming events can be found at: http://swflorida.uli.org/News/Event%20Presentations.aspx

Florida CFO Alex Sink and Ron Glass of GlassRatner Capital Group

Tom Murphy, former Mayor of Pittsburgh and Dave

Dave and Florida CFO Alex Sink

Ron Glass of GlassRatner and Dave

SunTrust Economist Greg Miller gives a 2009 prediction

Dave with previous Pathfinder Award winners and 2009 winner Nancy Payton of the Florida Wildlife Federation

Attendee's at the standing room only event

SunTrust Economist Greg Miller with Dave and a WI guest

Commissioner Jim Coletta, Dave Farmer and Collier County Planning Commissioner Dave Wolfley

This blog's for you

2009-01-27T10:55:00.000-08:00

As usual I have been reading a lot about the real estate market and the stock market. I have accepted that I am a hard-core investor at heart. Part of the reason it has been a while since I have updated the blog is that every other writer seems to be writing about the same issues I would have written about. I generally sit down to write the blog when I am inspired by something. It is hard to be inspired when everything you read (books, newspapers, internet) you just shake your head up and down in agreement. It seems as though all has been said. Is there anything fresh to say? In the end, I write for you.

Locally here in SW Florida, privately owned land may be approaching a bottom. Bank owned land in many cases is still priced too high. On the housing side we have just the opposite occurring as privately owned homes are overpriced and banks are almost giving houses away. It has been reported the 825B Obama economic rescue package will focus a lot of money on infrastructure. I have even heard that Florida may get as much as 40B for infrastructure spending! I certainly think it is a better use of taxpayer money to build infrastructure than to bail out every company that has hit hard times (AIG, Citi, GM et al).

The new infrastructure plan, when fully implemented will (temporarily) create many jobs for those hit hardest by this recession - real working people. Don't get me wrong, I would love to make 40 million a year for mismanaging a company. Let's just say I am too worried by the newly unemployed CEO's that have helped to run the economy into the ground. I am very concerned about the good folks that need jobs to feed their families and make their house payments. Heck, I would hire them if I just had a project to put them on.

Alas, it is going to take more than you or I to turn the corner on this economic situation we find ourselves in. I believe we are planting the seeds today that will be our crop of success in the future. Just like any crop it will be a while before we are ready to harvest the fruit of our labor as a nation. Very few crops are able to be observed growing. From day to day, the field looks the same. As time marches on we will start to see changes that are positive. Sometimes a change is not something happening, rather it is the absence of something.

Take the nightly news. Last night it was reported that more than 30,000 layoffs were announced by a slew of companies. At some point companies will stop laying off workers; yet that will not make the news. The next notch of improvement will be companies of all sizes hiring new or laid off workers and that too will probably not make it into the news. Remember the saying; "believe nothing that you hear and only half of what you see" The saying can be applied today as well.

We hear all sorts of bad news and that makes us feel bad. But when you look around where you live, most of us are not in immediate danger of losing a job or house. One more comment on last night's news. It was reported the sale price of homes compared to a year ago was down some 15% in price. Okay, that is not exactly good news. What I think was under reported is the volume of home sales was actually up. I am sure a good reason for the volume up/price down was foreclosure selling. At least we know the buyers today actually have money to buy them (this is inferred since I do not know of many banks lending right now). Part of the problem we have right now is an enormous glut of existing homes for sale and the sooner we can get those homes sold and off of the market the better. This economy will improve. It will just take time before we see the seeds in our field sprout and even then you are going to have to look hard to see the new growth.

What is a Home Worth?

2008-12-18T13:08:00.000-08:00

As long as the moon has been circling the globe the tide has come in and gone out. When the tide comes in it raises all boats. When home prices were going up all real estate went up just like boats in a harbor. Today as the proverbial tide is heading out, the question really is "How deep is the water"? That is, as the tide heads out, have we hit bottom or is there still a ways to go? From where I am standing there is no bottom in site. At the end of the day I think a house is worth what you can do with it.

I was speaking at a ULI program recently and I made a statement there that I will repeat here; just because a home on your street was sold for $25,000 does not mean your home or all of the homes on your street are now worth $25,000. I also stated that I am seeing a correlation between 2005 selling prices (not listing prices mind you) and selling prices today. That correlation is the value today is about 1/3 of the 2005 selling prices. It is not a perfect relationship but I keep seeing it over and over again.
With that said, if you have a home with a mold issue and it cannot be lived in then that home is not worth much. If I can rent out a home for $1,000 net per month then that home is worth considerably more.

A friend of mine was driving though Georgia a few months ago and ran across a home in a remote area that appeared to have been built with expensive materials. My friend shared with me that he thought the house was a terrible waste of money. So what is the value of a remote "expensive" home? Maybe zero. Maybe some. Probably not what was spent to build it. My point is some houses will never be worth their construction cost and no minimum price exists. The bottom line is if a home has utility, it's forward value will be based on that utility.

A Couple of Cartoons

2008-12-15T12:51:00.001-08:00

I've been traveling and am currently preparing my next blog entry.

In the meantime, here are some cartoons that I found funny. I hope you enjoy them.

Happy Holidays to you and yours.

What is Land Development Consulting?

2008-11-19T13:03:00.000-08:00

Many people ask what I do for a living when I meet them as I am sure happens to you. I tell them I am a land development consultant which results in a puzzled look followed by a "huh?".

I briefly explain my background in civil engineering, planning and development to them and I tell them that I use my experience to help those less familiar with the development process. This leads to a sigh of relief from my new friend and a comment such as "oh, so you are a builder?" or "oh, so you are an engineer?".

Okay, yes, I have done both of those things but I offer so much more! More time with your family, more money in the bank and more neighbors happy to see you. Let me explain it this way; my son loves to turn all of the lights on in our house but cannot remember to turn them off. We are trying to teach him to turn lights off when you are not in the room. Much of the time he forgets to turn the lights off even though we remind him all of the time. We have implemented a new strategy in our house to help him remember to turn the lights off - we charge him a quarter for every light he leaves on! We explained to him that electricity costs money and since we are getting charged, he is going to get charged. A few nights ago we took two crisp dollar bills from his piggy bank to pay for the eight lights he had left on up stairs. To say he was upset would be an understatement. He did not want to see his money leave his bank. I am sure it will happen again since he is only six years old, but let's just say he has not left a light on since then and he has even reminded us to shape up!

The purpose of sharing a personal story with you is to convey the point that until something costs YOU money, it really is not very important. A developer will hire an attorney, an engineer and a planner and assume these professionals will tell them all they need to know for a successful project. You have to admit it makes sense. The problem is there are many ways to spend money when developing a project. There are many ways to lose money on a project. Who does it hurt in the long run? The attorney? The engineer? The planner? NO! It is the developer that pays.

What is the incentive for any of these professionals to learn how to not cost you money? A very good (and rare) professional may advise you on a subject within their specific area of expertise such as a title issue, a drainage issue or a zoning issue, but which one is going to warn you (before it is to late) the neighbors will fight the project if you do or don't do something? Which one will tell you why you should avoid asking for too much density in a rezone case? Which one will explain how the timing of a project can mean huge savings?

A land development consultant has been "there" and has spent their own money on unnecessary issues at the direction of a "professional" They have had situations where they were told "don't worry about it" and it cost months of delay at a cost of $25,000 per month. A land development consultant has watched as one professional after another has said "they have to approve this" and then seen the project denied approval.

Can you imagine a football team without a quarterback? There is a lot of talent on the field but without a leader, someone to call the shots, the talent is misused or underutilized. At worst, a land development consultant is an extra layer of review and additional costs. What is so bad about an extra layer of review from within the team? While money is always tight, is an extra $30,000 in land development consulting fees on a $12 million project significant? If that $30,000 in "extra fees" saved you three months of interest carry would it be worth it? You bet. I am here to help those in the development industry and those serving the industry such as banks and investors. Are you unsure if you need my help? Give me a call or email and tell me what you are thinking of doing and I will give you an answer on the spot - no strings attached.

Why make mistakes that can be avoided?

Back in the saddle again

2008-11-03T11:34:00.000-08:00

I just got back from the Urban Land Institute Fall Meeting in Miami Beach. It was a very informative week with just about every real estate topic covered in multiple programs.

The three items I found most interesting are:
1) The new stimulus package being talked about in congress will be different this time with no checks going to taxpayers. Instead a hundred or so billion dollars will be offered to the states to speed up the funding of new infrastructure projects. The catch is in order for states to get the money, they will have to match all or a portion of the funds. No match, no funds!

2) It does not matter who is elected President, taxes will have to go up to repay all of the spending our country has been doing since the beginning of the Iraq war.

3) The bad news is the recession will last 12-18 months. The good news is we are about a year into the recession and improvements in our economy's outlook should be clear around next fall.

This financial mess we find ourselves in will lead to structural changes in lending for any type of real estate transaction. What has not changed is our country and the world is getting older. The world is also growing in terms of population. More people means more demand for rooftops. Here in the U.S. I learned we built about 1.2 million too many homes from 2004-2007. Based upon customary absorption models, the U.S. should fill those homes with new immigrants, college graduates and other new households over the next 12-18 months. Keep in mind the absorption rate I just mentioned will be an average across the nation so in some places like Lee County, Florida there is more like a 3 or 4 year supply of vacant homes while in other places (say Texas) there is a shortage of homes.

I do agree with both presidential candidates, our best days are still in front of us. Things will get better, is just not be better by tomorrow.

So that leaves us with a real estate market that appears to be on life support. Going forward, everything old will be new again.

Remember due diligence? Hey knowing what you are buying is cool again! Fundamentals matter! It feels good to be back in the saddle again. My comfort zone is to look at a deal without rushing, crunch the numbers, lower my expected selling price and raise my carry costs then crunch the numbers again. When the analysis shows my conservative numbers still make sense I feel like I am back my horse and riding high. The bucking bull is more exciting, but also much more dangerous.

I personally prefer the old fashioned way of real estate investing where fundamentals are everything and just like a horse, if I take care of it, it will take care of me. Happy Trails to you my friend!

Repost: Recession: What it is and what it is not

2008-10-16T11:35:00.000-07:00

I decided to repost an oldie but goodie from several months ago considering our current market and my new subscribers.
Enjoy. -Dave

Recession: What it is and what it is not
Recently a reader of this blog asked me what causes a recession.
The definition is pretty easy; namely a recession is when our economic growth is negative for six consecutive months. The actual cause of a recession is, in my opinion, fear.

Many people and companies are fearful right now. They are afraid of losing their jobs, they are afraid of losing customers and they are afraid things will not get better. Deep inside, we know things are constantly changing. Why it was just yesterday things were booming and many thought that would never end too.

Something I want to point out is the word "recession" is associated with "bad" economic times; yet, the definition is simply our growth has slowed down or declined slightly. That does not sound so bad does it? Here is where I think I may be able to shed some light on why the reader asked the original question. On a personal level things do not look good right now. Many have lost jobs or have more than one friend that has lot a job. Everyday we hear about a friend or friend of a friend that has lost their house to foreclosure. Gas costs more. Food costs more. Heck almost everything costs more but we are not making more money. Budgets are squeezed and folks are learning to get by with far less than we are accustomed to having.

When 25% of our population are experiencing what I just described they stop spending on anything but the necessities (the money they used to spend is called discretionary money). When they stop spending on crazy indulgences like eating out (at McDonalds), buying clothes (at Target) and entertainment (going to the movies twice a year) our economy feels it in terms of reduced earnings on Wall Street. When that happens we start to hear on the nightly news about how our economy is slipping into a decline. The news of a decline reinforces the notion that we are in economic trouble and even more of the population cuts back on spending. This reduced spending trickles down to wait staff at restaurants, car dealerships, movie theaters and even Wal-Mart.When will it end??

It is going to take some time for people to feel better about their lives and begin spending again. As I have mentioned in a previous blog, listen to your friends and neighbors. When they are eating out again, going to the movies and buying new cars you will see light at the end of the tunnel. One important fact I left out is in order to spend more you not only have to feel better but you need more money to spend. So we do need jobs to be more plentiful and such for incomes to rise to provide the additional cash needed to spend in our economy.

Have you heard the US dollar has lost value against most foreign currencies? While that is bad for people who save (and buy oil from foreign countries) it is good in that Europeans are encouraged to visit our country and spend money as everything here is literally on sale, everything. The infusion of outside spending may be just the shot in the arm we need. On the other hand, I hate simple solutions and so that will not be the only thing needed to push our economic growth into positive territory.

If that explanation helps you understand and feel better I am very happy to be of service. If you are happy right now, you may want to stop reading.For those of you still with me, I have a confession to make; I don't think we are in a recession, but not because I think like the US government idiots who claim inflation is nil and everything is fine.

I think where I live in SW Florida, we are in a depression. And that folks, is a whole lot worse than a recession. When I was a kid (late 70's) there was talk of the country in a recession and I asked my parents what a recession was. I cannot remember the answer but I do remember my follow-up question which is what is the difference between a recession and depression.

My parents told me about two people; one guy did not get a raise and was concerned about losing his job the other guy had lost his job and was about to run out of savings. The first guy was in a recession and the second was in a depression. The funny thing is the two guys were neighbors. My point is this, forget about labels on the economy as they are meaningless. The important thing is how are YOU doing? Are you in a depression? Do whatever you have to to get by. Things will get better in time. You may have to move or change careers. But things will change

Knock Knock...is Mr. Market there?

2008-10-10T08:39:00.000-07:00

If you have been reading my blog over the last two years you know I am an investor at heart. I like real estate. I like stocks. I like to make money.

Let's be honest with each other, the last month has been full of gut wrenching twists and turns in the stock market and there is no liquidity for investors or developers to buy land or distressed assets. It seems as though even foreign money has left US investment markets.

If you watch the news all you see is everything wrong with the world, financially and otherwise. Remember September 11? Remember when the dow sank to 7600 in 2002? Remember the RTC (the predecessor to the 700B plan we have now)? No doubt about it, things look as bleak as ever.

On the other hand, we are still here right? We are still free citizens and we have our families. I would like you to realize not all is as bad as it appears.

As I write this blog on Friday morning, the dow started the day with a 500 point drop. Sounds like we are going from bad to worse...
Yet, at the same time, some banking stocks are RISING. Imagine that, some financial stocks are being purchased when EVERYONE knows the banking system is the last place you want to be right now.

Again, not everything you see and hear is as it appears. As I read what I have written I realize I do not have anything of substance to point to, other than the past 100 years, that proves things will get better. An investor named Benjamin Graham proposed a philosophy about investing that he called "Mr. Market". I want to talk about Mr. Market a bit here because I think it helps to put the stock market and the real estate market into perspective. Here is a direct link to a site that talks about Mr. Market in detail (http://www.buffettsecrets.com/mr-market.htm).

Essentially Mr. Market is a crazy fool that shows up on your doorstep every business day to make you an offer for your stocks or other investments. You can choose to listen to him or slam the door in his face. Either way, he will not be offended and will be back tomorrow to make another offer. Some of his offers are insanely high while other offers are incredibly low. Oh, I left out one important fact, Mr. Market is crazy. In fact, you would be wise not to listen to him at all!

Would you go to an insane asylum for advice on investing? Hell no! If you own a quality investment feel free to listen when Mr. Market offers a great price. However, please realize just because Mr. Market is offering you a high price does not mean your investment is worth that much. Sometimes you are better off to sell when the crazy man offers you a price that cannot be justified.

The point I am trying to get across to you is the market IS crazy. Yeah I feel like dirt too when I see one or all of my stocks being traded for less than what I paid for them. I am sure you do too. If you invested in some penny stock(s) you may never see your money back. There are many stocks, thousands of them in fact, that are down because of fear. I bought a stock for 9.30 that pays 1.87 per year in dividends. That stock is now trading at 7. I think it will be bid up in price over time (at least I hope it will) but until that day, I still get a 20% dividend every year.

Take a look yourself. There are great companies that make real money and pay real dividends for crazy (low) prices. At some point soon we will see a bounce off the lows we are seeing this week and surely into next week too. By bounce I do not mean the dow will be at 12,000 by Halloween but the market will recover. There will be some catalyst (I have no idea what it will be) causing the market to move back up.

Remember, Mr. Market is crazy and should not be consulted on value issues. Keep your chin up, try to stay positive and spend some time with you family...unless of course Mr. Market is a member of your family...

Which Way is Up?

2008-08-04T10:14:00.000-07:00

The real estate market is a funny thing. Real Estate is similar to the stock market in that you have "value" plays, "growth" plays and "momentum" plays. One big difference is in the stock market there are a lot of buyers and sellers for every stock making the "investments" easy to liquidate (convert to cash) whereas in the real estate market there is just one seller and one buyer for each property making the "investment" not very easy to liquidate.

Today, all over America, there are many sellers and few buyers. Let's face it, "Cash is King". Another saying I have heard is the Golden Rule - "those who have the gold make the rules". Home and general real estate prices will have decline until there are an equal number of buyers and sellers a point which is known as either a balanced market or market equilibrium. Everyone wants to know when this balance will occur. As you have heard before, real estate markets are local so every area will have a different answer to that question.

In Michigan with many lay-offs and still more future lay-offs there are fewer buyers than sellers and it is conceivable that imbalance will continue for years, many years. Here in sunny Florida, our job market is not too healthy either but we do have tourism going for us. While we too have fewer buyers than sellers, I think we will recover a little faster than other areas of the country.

Last week I attended an Urban Land Institute program called Market Trends where the speaker was my good friend Mike Timmerman. Mike is a smart guy. Gutsy too. Mike said in 2005 things were "pricey" but still selling. In 2006 he said things were slowing down and could even slow down a whole lot more. In 2007 Mike said in hind sight we saw a peak in 2005 and we were (in June 2007) about 18 months into a predicted 36 month cycle. There is no science to predict how long a market will take to recover other than looking at past cycles and comparing them to the features of the present cycle. I want to be clear- Mike did not give a date and time when the market would be "fully recovered". However, he did say he thought this down-turn would last longer than more recent times such as the 1991-93 market. As I said, Gutsy. Well it turns out Mike may have called it just right. We won't know for another year or so but he is looking smarter and smarter as the months click by.

So, which way is up? I think there is a lot of anxiety with most living breathing people out there. There is the pending Presidential Election, more foreclosures are hitting the market every day, homes are selling for less than it cost to build them let alone what you paid for the same house two years ago. Let's face it, there is just not a lot of good news right now. So the immediate answer to the question is DOWN. As (asking) prices fall, more buyers will enter the existing home market and remove the deeply discounted homes from the listed inventory. As inventory declines, the number of sales will eventually match demand and then we will start to see slight appreciation...eventually. While I hate to see homes on my street sell for less than it would cost to build today, at least they are selling and that is the key to prices heading up.

I have a quick story for you about someone that called to sell me a lot near my office. The lot is just beautiful and is in a great location. In 2005 the lot would have sold for $300k. Today they are asking $85k and wanted to know if I had an interest. I passed on the opportunity and the reason I gave them was sure it is a good price compared to 2005 but with so many existing homes on the market for less than replacement cost, when would someone want to buy the lot from me to build a new home AND pay me enough to make a profit? The answer is nobody knows, so I passed. At $40k I would take the risk. At $85k I just cannot. If they reduce the price I may buy it. Until then at least I get interest on my cash.

Top 10 reasons how you know it's time to buy

2008-07-25T12:20:00.000-07:00

10. Loan officers are going door to door with applications like girl scouts selling cookies

9. Your 10 year old is thinking about buying her own place and moving out

8. Houses are listed as buy one get one free

7. Poor Iraqi's are buying are buying vacation homes in the U.S.

6. Your stimulus check exceeds your 20% down payment

5. Owning a home is cheaper than living in your car

4. Your loan papers say "pay us when you have the money"

3. There are more "for sale" signs on the street than there are houses

2. You can buy a McMansion for a Happy Meal price

1. Even Ed McMahon can afford to buy

Recession: What it is and what it is not

2008-06-30T10:56:00.000-07:00

Recently a reader of this blog asked me what causes a recession. The definition is pretty easy; namely a recession is when our economic growth is negative for six consecutive months. The actual cause of a recession is, in my opinion, fear. Many people and companies are fearful right now. They are afraid of losing their jobs, they are afraid of losing customers and they are afraid things will not get better.

Deep inside, we know things are constantly changing. Why it was just yesterday things were booming and many thought that would never end too. Something I want to point out is the word "recession" is associated with "bad" economic times; yet, the definition is simply our growth has slowed down or declined slightly. That does not sound so bad does it? Here is where I think I may be able to shed some light on why the reader asked the original question.

On a personal level things do not look good right now. Many have lost jobs or have more than one friend that has lot a job. Everyday we hear about a friend or friend of a friend that has lost their house to foreclosure. Gas costs more. Food costs more. Heck almost everything costs more but we are not making more money. Budgets are squeezed and folks are learning to get by with far less than we are accustomed to having. When 25% of our population are experiencing what I just described they stop spending on anything but the necessities (the money they used to spend is called discretionary money). When they stop spending on crazy indulgences like eating out (at McDonalds), buying clothes (at Target) and entertainment (going to the movies twice a year) our economy feels it in terms of reduced earnings on Wall Street. When that happens we start to hear on the nightly news about how our economy is slipping into a decline. The news of a decline reinforces the notion that we are in economic trouble and even more of the population cuts back on spending. This reduced spending trickles down to wait staff at restaurants, car dealerships, movie theaters and even Wal-Mart.

When will it end?? It is going to take some time for people to feel better about their lives and begin spending again. As I have mentioned in a previous blog, listen to your friends and neighbors. When they are eating out again, going to the movies and buying new cars you will see light at the end of the tunnel. One important fact I left out is in order to spend more you not only have to feel better but you need more money to spend. So we do need jobs to be more plentiful and such for incomes to rise to provide the additional cash needed to spend in our economy.

Have you heard the US dollar has lost value against most foreign currencies? While that is bad for people who save (and buy oil from foreign countries) it is good in that Europeans are encouraged to visit our country and spend money as everything here is literally on sale, everything. The infusion of outside spending may be just the shot in the arm we need. On the other hand, I hate simple solutions and so that will not be the only thing needed to push our economic growth into positive territory. If that explanation helps you understand and feel better I am very happy to be of service. If you are happy right now, you may want to stop reading.

For those of you still with me, I have a confession to make; I don't think we are in a recession, but not because I think like the US government idiots who claim inflation is nil and everything is fine. I think where I live in SW Florida, we are in a depression. And that folks, is a whole lot worse than a recession. When I was a kid (late 70's) there was talk of the country in a recession and I asked my parents what a recession was. I cannot remember the answer but I do remember my follow-up question which is what is the difference between a recession and depression. My parents told me about two people; one guy did not get a raise and was concerned about losing his job the other guy had lost his job and was about to run out of savings. The first guy was in a recession and the second was in a depression. The funny thing is the two guys were neighbors.

My point is this, forget about labels on the economy as they are meaningless. The important thing is how are YOU doing? Are you in a depression? Do whatever you have to to get by. Things will get better in time. You may have to move or change careers. But things will change

Let's Make Hay While The Sun Shines

2008-06-08T18:11:00.000-07:00

Remember when everyone was making money hand over fist in the real estate market? Boy the sun was shining then. Now that it is raining cats and dogs in the real estate market, I believe the sun is shining for investors. Sorry to mix my metaphors. I will not go out on a limb and say this is the perfect time to buy because "perfect" means different things to different people. Some investors are looking for income producing properties, and others are looking for an end return on their investment.

With that caveat behind me, I will say this; it is the perfect time to look for/at whatever type of property appeals to you. The market will be flat for some time, so many will want to wait for prices to move up before they buy. I respect that. However, the best properties will be purchased and therefore off of the market first. As prices rise it will be the inferior properties that will be left to choose from. The sellers and developers I am talking to are increasingly willing to deal if you have cash and a quick close. We are emerging from the winter of real estate market cycle and headed into spring. Spring is the time to sew our seed for future harvest. As investors we take on risk, that is just part of the job. That does not mean we need to take on unlimited risk. We can measure risk and take steps to mitigate for present or future risk. If you are concerned that you may buy something too soon, then you may want to take on one or more partners to share that risk with you. Another way to mitigate risk is to only buy when the investment pays for itself in terms of cashflow. The way to make money going forward is to NOT take large risks but a lot of calculated risks.

The market of 2005 is gone forever. It was too good to last and was therefore destined to end. There is nothing wrong with assets that do not double in value every year or two. While the stock market has been trading sideways for the last 6 months I have been buying stocks and selling options against those stocks to lock in a 25% return. In some cases I made 25% and in others I only made 25% while the stock doubled. My point is this; if you protect your principal with risk mitigation, there is nothing wrong with double digit gains. So, while it is raining cats and dogs, let's make hay while the sun shines. I am telling you the future is so bright we will need to wear shades.

Friends, Romans and Countrymen, Lend Me Your Ears...

2008-05-01T07:40:00.000-07:00

Dear reader, I have started a new company called Keystone Development Advisors, LLC to share and provide access to our development expertise for investors and lenders.

We have started a new blog at this address
http://keystonellc.blogspot.com/. This will be my last entry at http://keystonecompaniesllc.blogspot.com/.

I look forward to serving the investment and lending community with integrity and expertise. While there are presently a multitude of consultants available with varying degrees of expertise, few can offer the personal experience I have making my own money and getting beat-up in public hearings.

Some may ask, "well then, why don't you just do your own (investing) thing if you are so good at it". To that I say I do invest. However, unlike the Easter Bunny I do not like to put all of my eggs in one basket, a lot but not all. Some of the deals I come across are in the 20 million to 300 million dollar range. Those have always been "big" deals but especially now with tight lending standards and an uncertain economy. Many consultants also are very specialized. They only focus on finances or construction or getting a certain type of permit. I have done all of the above with my own money at risk. I know how every "unexpected" zig and zag in the entitlement, permitting and development affects the bottom line. I am a risk taker yet conservative. I believe risk can be measured and mitigated or a deal is not worth doing. I am educated yet have street smarts. I know the fastest way to double your money is to fold it over and put it back in your pocket. How many "consultants" match that?

This cartoon says it all...

2008-04-11T07:35:00.000-07:00

I have been traveling and will publish a new blog soon.

David Farmer to Host Program for Urban Land Institute

2008-03-19T09:20:00.001-07:00

On Friday March 14, 2008 I hosted a program for ULI called Deal or No Deal. The purpose of the program was to inform the standing room only crowd about land development potential and how to identify troubled properties before spending money on them. I began the program with some background on legal cases that give weight to planning concepts such as compatibility, concurrency and environmental planning. After covering these principles, we went over the importance of compatible development and how to minimize externalizing impacts to surrounding properties. I offered specific suggestions on how to work with surrounding property owners and what can be done to facilitate a responsible development. Then we discussed concurrency and I used Disney World as an example of this legal requirement. Can you imagine driving to WDW, parking and seeing the wonderful attractions in the distance yet not having a way to get from the parking lot to park itself? I know the example is absurd from a business point of view but it is a good illustration of why it is so important to have infrastructure in place when there is demand for it. Following concurrency I covered environmental issues related to development such as endangered species mitigation, wetland mitigation and water quality requirements for SW Florida.At the end of the program there were many questions so I spent over 30 minutes answering them. It was so much fun talking about what I know and do best. It was also nice to see people with light bulbs over their heads as I covered a subject and it "clicked" with them. I am looking forward to another program as soon as I can find a way to get the word out

Hope for the best, Plan for the worst

2008-02-29T07:40:00.000-08:00

It seems every news report I watch on TV, hear on NPR or read on-line conflicts with the one before. Last night I was listening to a report that said a survey of the nations economists expected our GDP to be revised upward (as in our economic growth was better than expected) while a survey of everyday folks like you and me felt the numbers would be revised downward. I recently heard an economist representing a large bank stating we were not in a recession and we were not headed for a a recession. Then the next day Fed Chief Bernanke says it looks like we are most certainly headed into a recession. Then this morning I see Bernanke is predicting certain failure for some banks before this economic "lull" (my word not his) is over. Well, shock and awe and bake me a biscuit.

What I hate about economic news is it hardly matches what is going on locally. You know how USA Today has the nations weather each day? It is a good general guide..."cold in the north and hot in the south", but it does not say much about where you are or I am does it? Well I am not an economist so I do not pretend to know what is going on nationally. From where I am sitting things look bad and they are going to get worse before they get better. Let me narrow that down a bit for you. Here in SW Florida we have about 1000 foreclosures on the books with another 10,000 or so in the pipeline ready to hit the market by August. Miami has a 39 months supply of condos listed with another 19,000 to be completed and added to the saturated market this year!! So things are going to get worse before they get better. How much worse and for how long? I don't believe in silver bullets or magic cures but as bad as things are in the economy and real estate market they will get better, they always do. On the bright side, this is a fantastic time to buy that second home you always wanted (assuming you still have that job you have always wanted to quit).Instead of trying to predict a date or number of months when thing will turn around lets focus on what has to happen to bring about a change economically both locally (where ever you are) and nationally. First, many, many people have to look at real estate prices and go "wow, I better buy now while the selection is good and prices are low". Next, people have to feel good about where they are going in life. Listen to your friends and try to figure out how they feel about their future. As people feel better, they will begin to spend and invest again. This will lead to growth and consumption. This will spur a slight increase in demand for housing. Eventually the supply will be short and new homes will have to be built. I know I am not going to win a Nobel Prize for that logic but I like it better than a random date in the future based upon some absurd calculation. My investor (stocks and real estate) friends tell me a bottom is near after multiple waves of drastic price cutting has happened (the consensus is 3 waves of said discounting) and sales prices are a lot less than replacement costs. I am not even sure if we are through the first wave yet. Prices still seem to be too high, that is, higher than replacement costs. With that said, often the proverbial baby is thrown out with the bathwater and great "too good to be true" deals arrive on the market out of fear or some other need for immediate liquidation. It takes guts but these are the gems that must be mined in turbulent times. I hope for the best for our country and my local communtiy. As of now I am planning for the worst and keeping my eyes peeled for that gem deal that got thrown out with the trash

Wild, Wild West

2008-02-11T07:41:00.000-08:00

The real estate market is uneven and unpredictable at best (in my opinion). I was astonished to learn the NAHB "suggests" the bottom of the housing glut will be here this summer. I am not saying I disagree with them in general terms, I just think when you make a statement like that you need to qualify what market you are talking about. I think they mean the "average" market. I don't know about you but I don't give a darn about anyone else's market except the one's that I am investing in! Where I live in Naples, Florida, I agree and believe the worst will be behind us by the end of summer. But just a stone's throw from here, namely Fort Myers, their bottom is a year or two off in my humble opinion. The Fort Myers market has about 3 years of supply at current buying rates. Maybe the Fed's new interest cut and the Govt's tax rebate will shorten that time but I doubt it. Speaking of the Fed and my Wild Wild West title, the reduction in interest rates should lubricate the real estate market much like alcohol in a saloon on Friday night. I am not predicting a return to those heady days (daze) of '04 and '05 where things were completely out of whack in terms of real value versus prices paid. Let's face it, cheep money (for qualified credit risks) will aid (as in speed up) in the absorption of homes for sale. Since this is my column, I will get away from "just the facts mam" and insert my biased opinions for a moment; cheap money is not what this country needs right now as inflation is rampant and cheap money today will only delay the pain we must go through until later...plus interest of course. Heck, the "party" has not even started and I am dreading the hang-over. Okay, enough of my Saloon analogy.Lately, I am being invited to many meetings with developers and investors that have "deals" to pitch/sell to me or investors I know. There are so many "deals" out there it can be quite a challenge to keep them all strait. Of course one man's deal is another man's curse. The main keys to most of these deals is; how much cash do you have and how long can you hang on. The answer to these two questions is the difference between making money and losing money. The difference between making money and making a lot of money is duration of the holding period. What I am trying to do is sift through the deals as they are presented and try to determine the quality of the land in terms of location and proximity to essential services. Just in case I seem to be rambling on with out making sense, what I am trying to say is one acre in town is worth more than a hundred acres in the Everglades both in terms of value and in terms of demand for the property.Deals in good, and I mean really good, locations that have flexibility of use and something unique about them will return your money the fastest. Poor quality land, as in way out there, and the allowable uses are just like everyone else's will take a long time for you to see a profit. So in these days of reminiscent of the Wild Wild West try to look at each deal for quality and not on some else's "projected profit". As always, quality deals are hard to find and they often may not look like a deal, in terms of price, at first glance. If you are not sure about the price, look back to 2002 prices and use that as a rough guide to determine value, keeping in mind that you may need to compare the subject property to a better location to get make up for growth that has improved the quality of many properties since 2002.Keep your powder dry and your eyes peeled. Bang-Bang.

Gold Up, Dollar Down, Inflation out the Wazoo

2008-01-16T07:42:00.000-08:00

What the heck is the Fed Chair thinking? I know, I know, keep the country out of a recession. Yeah, right, like that is going to happen. The good news is my gold stock is way up. The bad news is so is my Canadian bacon. This country is in so much trouble from the Cheap Credit Party that the only real solution is to turn on the printing presses and print our way out of "real" debt. I knew the hang-over (from that credit party) was going to hurt but man, now to add insult to injury my savings is worth a lot less this year than it was in just 2005.Thanks Federal Reserve Geniuses. I appreciate being penalized for actually (shock and awe) having a savings account instead of being 10 bazillion in debt. Don't get me wrong I have a mortgage just like everyone else but I did not go out and buy 10 Miami condos on margin to rack up my debt. The only silver lining is our real estate is now comparatively cheap to foreign investors and tourists.Inflation is now getting ready to leave the earth's orbit ala 1970's style. I can't wait to order my first $100 cup of coffee. Okay, enough complaining and feeling sorry for my country, now on to what are we going to do from here.The only way I know how to preserve buying power (wealth) is to own hard assets such as gold, real estate or some other object that does not deteriorate over time. Gold is sky high because the dollar is in the toilet not because it has "gone up in value". The price of gold has gone up, not the value. If you don't believe me check out the price of gold in Euros. Sure it is higher now than a few years ago in terms of euros but in dollars, it has tripled!I think the best investment is real estate! With that said, I don't think everyone should go out and buy a house or office building but referring back to a blog entry this summer "When it Pays to Buy, Buy" there is a time and place to buy real estate. I have a personal example to share with you. I just love the beach. I have always wanted a place at the beach where my family can spend holidays and lazy weekends. Here in SW Florida, there are some tremendous deals on beachfront condos. Many of these condos demand high rental rates from December through April. If you find the right deal the rent from this period of time may cover you entire ownership costs. So while inflation is rampant and your banker is only paying you 2.5% for your money why not invest in something that pays for itself and you enjoy.Another example is rental property. While we are in this huge housing slump it is a good time to hunt for bargains where the rent will cover your carry costs. Office space is another option however, one must be particularly careful when considering office and industrial property as the economy is slowing down and many small business will go under and potentially a lot of vacant space may emerge driving down rental rates.My favorite asset type is either bulk lots from builders or complete developments where the developer is in hot water for one reason or another. The key to these deals though is CASH! The reason why investors and companies are in trouble is DEBT! Don't get me wrong, debt is a wonderful tool but it is analogues to a sledge hammer; hit the right spot and mountains will move, hit the wrong spot and you lose your left foot. If investors and companies did not have debt on their books they could afford to hold their assets forever without fear of bankruptcy. Of course the way to make money is to turn your assets over and over making profits along the way. Obviously no sales equal no profits. So if you are long on cash and short on investment real estate, take another look around you for opportunity.I was just offered bulk lots by one developer for 33% of the development costs. I was sharing this with a friend of mine yesterday and he asked how I know that particular deal is worth going after. My answer was simply, when you can buy something for less, or in this case a lot less, than what it costs to build you will be way ahead of your future competition. I can turn around and sell these bulk lots to another investor a year to two from now for 50% of the cost to build and still make a 50% profit on my investment. Not too shaby when you consider the alternative is a 2% or 3% money market rate.I am still taking questions so feel free to email me.

Investing WIthout Training Wheels

2008-01-07T07:43:00.000-08:00

I hope you had a good holiday break! I spent a lot of time with my 6-year old son while he was out of school. My wife and I had talked about teaching him to ride his bike without his training wheels over his winter vacation. I understand the fear of crashing can be overwhelming when learning to ride a bike but I was not prepared for what my son had to say when I talked with him about taking off his training wheels. He said "Daddy, I like my training wheels!" and then he said "I don't want to learn how to ride without them and I don't want to crash!" Something about his tone and sincerity got me thinking not only about his training wheels but about how we as investors can get comfortable with our own version of the training wheels, namely guaranteed returns (i.e. CD's and money market accounts). I like CD's too but when they are paying 4.5% and real inflation is north of that it is time to venture into other areas for real return on our investment dollars.Training wheels are great for teaching the basics, how to move forward, how to stop and how to steer. Just like my son enjoys riding his bike with the training wheels we investors can get a little too comfortable with super "safe" investments. My son does not yet understand that his mobility will greatly increase allowing him to change direction more quickly and take corners faster. Of course his fear of falling is natural and real (it is great to know that his sense of self preservation is intact). I am sure he will skin his knees a few times and it will hurt, but he will learn and as he gains skill he will fall much less often until he does not fall at all. Back to investing without training wheels. Sure you can buy REIT stocks as a form of investing in real estate but that is like watching someone else ride the bike.If you have the courage to learn about real estate investing it can be just as rewarding as the free feeling of riding a bike without training wheels. While the risks are higher in real estate than in CD's, the mobility, maneuver ability and real return on investment can also be greater. The best way to protect yourself with real estate is to not have all of your investment capital in real estate! If you are unsure about how much to invest in real estate, start with 10% of your cash reserves. Since some of my real estate investments are raw land, I hold a significant amount of my reserves in CD's to balance the increased risk of my investment strategy.One of the best ways to mitigate risk in the real estate market is to align yourself with a knowledgeable partner and learn from them. This could be from a commercial real estate broker, a developer looking for partners or just other like minded people with investment objectives similar to your own. You may skin your knees on your first few investments but once you learn how to invest and what types of investments work for you then you will be well on your way to making real returns on your investments.I know the real estate market is looking pretty rough right now. A little fear is healthy (remember we have that sense of self preservation for a reason). Too much fear and you will have to find a way to live with less money than when you started.While I am trying to build a regular base of readers, you can email me with questions or even challenges. Happy New Year. Things will be great in 2008!

I have a dream...

2007-12-13T07:44:00.000-08:00

I have a dream to set up and run a fund specifically to take advantage of the current and unfolding real estate market. Three hundred million would be a nice start but a billion would be better. I know of a defunct project in a great location that can be had for 30 cents on the dollar. The problem is that is still about 100 million dollars. I know of a company ripe for a takeover but it would take 300 million dollars to do so. Some would say this is a pipe dream and maybe it is but my head is consumed with these potential deals. Some of them have a 300% return (again potentially) in the next 5 years. WCI (not one that I am going after) is a perfect example. Not to pick on them (WCI) but they have made some poor choices and too many people with too much money have been running the company. WCI is just the poster child, there are many more out there. Some can be nursed back to health and sold for nice margins or kept for nice dividends. If I were you I would ask, "why not put your money where you mouth is?" and the answer is I have and I do. I just don't have 100 million sitting around. I have made money and I will make money. Sometimes a guy just needs a little help. In my case I just need a few people to sit down with me and listen to the details about specific targets. I believe a reasonable person will like what I have to show them. Unlike a typical broker or agent that many times does not care about what happens after the deal is done, I want to run these deals. While commissions are great to pay bills and keep my office open, the real money will be in how the assets are managed and enhanced. Also unlike most "investment advisors" I will risk my own money to show I will put my money where my mouth is. I have a dream of making the right people a lot of money. I have a dream that luck is when opportunity meets preparation. I am prepared I just need opportunity. Feeling lucky?

The Way to Make Money

2007-11-29T07:45:00.000-08:00

I found a quote by JD Rockefeller a couple of years ago that may have some application today. He said "The way to make money is to buy when blood is running in the streets." I have been working with a number of builders and developers that are willing to sell portions or all of their land holdings to reduce their expenses. One developer let me know they would sell finished residential lots for 46% of their cost. If you apply standard metrics for the ratio of lot price to home price you get a finished home and lot price of $220,000. If you apply the standard mortgage to income ratio of 28% the minimum income necessary to purchase the home is $60k (assuming 30 years at 6.5%). What I like about the previous calculation is it shows prices are starting to reach affordable levels for most people. The problem is there are many homes in the area of the afore mentioned subdivision that are being listed for $150k. Until those homes get off the market the ones for $220k will be at a significant disadvantage. I consume a lot of financial information during a typical week. This blog's content is a reflection of my constant search for information. I am seeing some signs indicating this summer (2008 that is) could be the apex of the "blood running in the streets". Only time will tell, and I have been wrong before. I know this is going to sound corny but a lot of my investment decisions are based at least in part on my gut feeling. My gut feeling is directly related to the information I consume over the previous 6 months or so. What I am getting at is my gut does not tell me to jump in with both feet yet. I feel cautious. A lot of people do. With that said, I remember when you could buy lots here in SW Florida for 5-10k just a few years ago. The prices were depressed because everyone thought "who would want one of those?". A broker once told me to avoid lots in a "bad" neighborhood even though the lots were selling for $500. This may not be sound investing advice but anytime you can buy something as tangible as lot for less than a used car you should at least ask yourself "why not?". Just because it looks like no one is buying or there is a lot of something does not mean it is not worth consideration. There are only two downsides I see to buying a cheap lot and they are opportunity cost (what else could I invest in that would provide a better return) and the carry costs such as taxes and interest payments. That is it for now. I hope all that read this blog had a good Thanksgiving. I will write again soon. If you have any questions, feel free to email me or post it on the board. Dave

A Dose of Fear

2007-11-08T07:45:00.000-08:00

That was the subtitle to an Urban Land Institute Emerging Trends program I attended in Las Vegas at the ULI national conference. As I was headed into the office this morning I was listening to a story on NPR about the DJIA almost 400 point dive yesterday. The big talk in the story was about Morgan Stanley having to write down 2 billion or so dollars from the sub-prime mess. As I listened I felt very calm in a deja-vu sort of way. In fact, at the Emerging Trends program we heard it there first! Not about Morgan Stanley but about the broad credit market and how we are only 8 weeks (at the time) into a 2 or 3 year period of predictable instability. After that program I had a bad taste in my mouth. You know the kind of bad taste you get after taking some nasty "cherry" flavored cough syrup. The good news is now that I have "taken my medicine" I feel better. I know we are headed for more disclosure from various financial institutions about how many billions they are going to write off this quarter. Lets face it, times are looking bleak.
Too bad it took so long for the sub-prime mess to rear its ugly head. A dose of fear is just what the doctor ordered for investors pouring money into investments they do not understand - and that includes Wall Street, not just the little guys caught holding 4 houses when they can barely afford one.
When I did my market update this fall, I did not get it 100% correct. Things have declined a little since then and may in fact get worse. The questions are how much worse and for how long. I am an optimist. I cannot help it. I feel in my soul that we are in an opportune time to buy distressed real estate. Each deal needs to make sense (and cents) on its own merits. No more blind investing just because it is real estate. Here are a few ideas I want to share with you that may make you feel better. First, 80 million baby boomers are retiring in the next 20 years. This will not be a gradual event. Sure at first it will just be a trickle but in my opinion in the next 1-3 years we will see a wave of retirement analogous to drinking water from a fire hydrant. If you live or invest near the coast (any coast in America) AND within 60 minutes of a major airport, you better get on your wet-suit because the retirement tsunami is coming. Here in Southwest Florida I like to think we will see 1% of the baby boomers move or buy a second home here. I know it does not sound like much but a small sliver of a very large number is a very big number. In english 1% is 800,000 people. To put that into perspective our tri-county population is only 900,000. So our population will double just from baby boomers and that is not count the hundreds of thousands that will be needed to provide the necessary services to support the population. Another idea I want to share is our country is supposed to grow by another 100 million people in the next 30 years. Re-read the above and think about what I am saying. So there are maybe 15,000 houses on the market right now. So what?! Yes it is going to be painful to carry those houses and condos in the short run. In the long run (20-30 years) we will need another million or so homes. If you assume a linear population increase (it never happen that way, when it rains it pours) that is 50,000 homes and condos will be needed every year for decades. What will be different in the next 20 years from the last 5 is the majority of the new residents will not overpay for something here they can get in another state for half the price. Another fact is many of these people will prefer to rent instead of buy. Well that is it for now.
Take your medicine then tune out the news and be confident in our future.

When it pays to buy, BUY!

2007-11-01T07:46:00.000-07:00

The key to successful investing is to purchase something, be it a stock, a certificate of deposit or real estate for example and then sell it for more than the original cost. While this sounds simple enough in theory: the key is in the execution. A mistake inexperienced investors make is to incorrectly account for all of the costs either before the investment is purchased or when calculating their profit after the sale. If you buy something for ten dollars and sell it for fifteen dollars then you have a gross profit of five dollars.
Inflation is the investor’s enemy. Inflation erodes the real value of your investment while returning more actual dollars. An extreme example can be found in the US economy of the 1970’s. Back then inflation was as much as eighteen percent per year. So if you bought something for ten dollars and sold it for fifteen dollars in three years you would have lost money in terms of buying power even though you made a gross profit of five dollars. By the end of the third year the money used to buy the asset would have earned almost six dollars in interest and yet the profit was only five dollars.Inflation is the borrower’s friend. If money is borrowed at a rate less than inflation and invested in an appreciating asset the investor makes money on the difference between the loan rate and the inflation rate.Generally, the safer the investment, such as a certificate of deposit, the lower the return. Something to watch out for is if the inflation rate rises to more than the rate of the certificate of deposit as this results in a loss in purchase power. Long-term certificates of deposit are the most susceptible to this scenario. If the rate on the certificate of deposit is greater than inflation then BUY.Stocks are considered more risky or volatile than the traditional certificate of deposit. Barring a bank failure, you will always get more money back when a certificate of deposit matures. Stocks do not always sell for more money than the original cost. However, over time stocks have proven to consistently provide a higher return or profit than traditional certificates of deposit. Besides inflation, stocks incur additional costs that certificates of deposit do not. Most investors use a broker of form or another either traditional or Internet based. These brokers charge commissions when the investment is bought and sold. The size of the commissions is based upon the amount of the investment and quantity stock purchased. These commissions can seriously erode or even eliminate an investment’s profit.The best way to avoid commission is to buy and sell in chunks and hold for periods long enough to diminish the commission’s impact. Stocks that pay regular dividends can also help enhance an investments profit. The best time to sell a stock is when the stock has appreciated enough to cover the commission costs and the resulting profit is more than the going rate of a certificate of deposit. A wise stockbroker once said, “You never go broke selling at a profit”. Unfortunately some investors are unsure of when to sell an investment and watch the stock go up and back down, sometimes way down, before they then sell in frustration. Investors and their advisors need to choose what stocks to buy. Just remember to sell when you have made a profit. If a quality stock is paying a dividend that is greater than the going rate for a certificate of deposit, BUY.Real estate can be a very rewarding investment. There are basically two types of real estate, raw land and improved land. In simpler terms think of land as an empty lot in a subdivision and improved land as a lot with a house. The problem with all real estate as an investment, regardless of type is property taxes. There are not many if any other forms of investment that charge an investor an annual fee with so much impact on the bottom line. Another problem with real estate is few investors can make the initial purchase without a mortgage. These two costs are collectively called “carry costs”, as in the investment will not pay for itself so the investor must carry the costs until the investment is sold. Much like stocks, real estate also has brokers and commissions. In real estate, commissions are usually paid by the seller and only rarely charged to buyers. A “hidden cost” sometimes forgotten by investors is the real estate commission. It is true that an investor can sell their own land without a broker but few possess the skill set, time or experience necessary to find a credible buyer.Investors that purchase vacant land therefore have a two-fold hedge against making a profit; property taxes and mortgage payments. In areas of high appreciation investors have been able to make stunning profits in short periods where the carry costs were minimal compared to the profit made. These days, the amount of rapidly appreciating real estate is almost non-existent. When an opportunity to buy vacant land comes along, be sure to account for the carry costs and sales commission when forecasting a potential profit. An important note to make here is if the asset is being purchased for either a present or future use then maybe the profit potential is less important. An example of this is if you buy the vacant lot next to your house for increase privacy or simply a place for the kids to play then carry costs are less important than the present and future enjoyment of the “investment”.Investors that purchase improved land are usually looking for income on a regular basis from the investment. Examples are rental houses, shopping centers, office buildings and other commercial property. Besides the carry costs noted above, improved real estate usually needs insurance and maintenance for the building portion of the investment. Traditionally insurance and maintenance costs were a small part of the overall budget. With heavy losses from the insurance industry, property insurance in many locations is very expensive. Sometimes the tenants cannot afford to absorb the increased insurance meaning the owner faces the choice of either paying the additional expense of the insurance or finding a new tenant that will.On one hand commercial real estate is much more involved than buying stock or a certificate of deposit. On the other hand, if the cost of purchasing the property plus the reoccurring costs (taxes, insurance, maintenance and management) still result in steady positive cash-flow then the extra effort is worth the trouble.The gross income minus the reoccurring costs is known as net operating income or NOI. The NOI divided by the total cost of the property and building is known as the capitalization rate and often referred to as the “cap rate”. The cap rate is the dividend of real estate investment. Generally, the cap rate should be at least the rate of a certificate of deposit plus the rate of inflation. So if a certificate of deposit is paying 5% and inflation is 3% then the cap rate should be at least 8%.Finding investment property that meets the criteria outlined above is very difficult. Now that we are in the beginning stages of the baby boom retirement tsunami, there is a lot of money chasing income producing real estate. Since 2004 the cap rates have steadily declined due to “return hungry” investors willing to pay more for a property than the previous owner. Since investors pay more and the NOI stays about the same, the new investors are willing to earn less of a return on their investment dollars.The foreseeable future, will most likely reward multi-family investments more than traditional strip malls and suburban office buildings. This is due to the anticipated increase in demand for apartments as millions of homes head in to foreclosure. Rents should be stable and grow modestly as demand remains steady or even rises. Office rental rates may stagnate or even decline due to oversupply or reduced demand depending upon the location. The slowdown of the housing industry has greatly reduced the number of solvent builders and subcontractors, thus the demand for office space. As vacant homes fill over time the demand for services will improve the demand for office space.Be careful when choosing your real estate investment. Ask questions, consider all of the costs including your time and determine your ability to deal with uncertainty. Real estate investing can be very rewarding, just ask Donald Trump. While today’s economy appears shaky and there are many reasons not to buy investment property the rule of thumb is “When it Pays to buy, BUY!”

How to buy investment property

2007-02-09T07:26:00.000-08:00

Real Estate Investment in 2007 and Beyond
By David H. Farmer

The real estate market is DEAD! Or is it? I like the analogy of a pendulum swinging from boom to bust and back to boom again. What makes the real estate market swing from boom to bust and back again is demand. Let’s be honest, consumers or end-users drive the real estate market just like they drive any market. When a product is scarce or demand outstrips supply, the price goes up. When a product is widely available or demand is slack, the price goes down.For those pundits and experts that claim the market is fine “we just need some time to sell the inventory”, you are wrong. For those “investors” that have been burned, due to slack demand, after the recent run-up in prices that claim the market is dead, you are wrong too. To the pundits and experts I say end-users prices need to fall to build demand. The excess product inventory in the market (pick your product, it does not matter) is so extreme time itself will not cure the problem. Prices need to fall. To “investors” I say desirable product at the right price is selling.In Southwest Florida where I live and spend over half of my time you can see both sides of this issue. Two production homebuilders that I work with regularly are looking for land to keep up with demand for their product. These homebuilders have price points that reflect what most of us can afford to pay in rent, namely in the $150’s to the $250’s. Many other builders, mostly nationally known, are cutting prices and “dumping” massive amounts of inventory in an effort to reduce the pain of interest carry costs. These homebuilders have price points that reflect the crazy “irrational exuberance” of 2003-2005, namely in the $300’s to the $500’s that most people cannot afford to rent on a modest income. What is really sad is the nationals are cutting prices, but they are still above the $300’s mark which is out of most peoples reach. I had one national builder exclaim “I don’t even know how you can build a house for less than $250 thousand!” Boy, are they in trouble.Another group that is in trouble is “mom and pop” investors who got caught buying or holding real estate when the music stopped. These folks do not have the same deep pockets that the national builders have. They cannot afford to cut their asking price to 60% of what they paid. So, in the case of homes and condos they try to rent them accepting a loss for what they hope will be a short period of time, maybe a few months, hopefully not years. The problem here is the sheer number of small investors that are holding property in this fashion. It will be hard for a builder to charge more for a particular product when a buyer can find many similar examples on the market for less than the (future) cost to build new. Prices will stagnate and the market will view the area as a poor place to invest money for the future.Now that you are convinced all real estate is currently and for the foreseeable future a poor investment, let me tell you a little secret; land and homes at price points that “normal” people can afford are selling and selling well. Places that did not experience the surge in “appreciation” like Naples, Florida did are selling new homes priced $250 thousand and under with little apparent lag from pre surge levels (circa 2004). In general terms, if you buy a quality home for less than $250 thousand you will probably experience the traditional 3-6% annual appreciation of past years, maybe more. If you can sell homes for less than $250 thousand, you will probably do very well indeed.Here are the five essentials to professional real estate investing:1. Location, Location, Location. This mantra is tried and true but it has a cousin some investors forget about, namely Quality, Quality, Quality. You can have a great location in terms of proximity but a poor location in terms of quality. Sometimes quality can be mitigated by installing buffers for noise and site problems. Other times a low quality site is just that, low quality and that will come back to haunt you in terms of sales velocity. Your competitor’s sales will occur much faster if you are both in the same location but you have a quality issue and he does not.2. Price, Price, Price. One of my favorite questions is “How much for how much?”. Sellers that are not serious will tell you to make an offer. Motivated sellers will tell you the bottom line and stick to it. Regardless of price what matters most is value. Brokers have tried to sell me land that was only $5,000 per acre. Sounds good so far right? The key to value is how much of that land will be needed to produce a given amount of product. For example, if I need 10 acres to meet zoning codes to build one house, then each “unit” will have a land cost of $50,000. In some areas that is a great deal. In most areas that is a terrible deal. I try not to get too excited about a deal until I know the answer to “how much for how much”. There is an old saying in real estate “you make money buying land not selling it”. In other words if you pay too much on the front end it will be hard to make it up when it comes time to sell. Knowing what something is worth is part art and part calculation.The issue of price cuts both ways. When you go to sell the property it is most helpful if you can show the buyer why the property is worth what you are asking. At a very minimum you need to be able to explain how you arrived at the asking price. One method I use to sell property is to show the buyer how they are going to make money. You see, I am a specialist. I know my limits and I do not want to be the guy that does everything from A-Z. This also means that I do not necessarily get the highest sale price. So what. I want people to buy from me again and helping them make money will bring them back again and again. A friend of mine was telling me “I just cannot give this property away”. I immediately said, “Excuse me, give?” I will take anything you are giving away. He then qualified his statement saying he wanted X million dollars. I asked him where he got his number and he told me “that is what they were paying last year”. While he at least had a basis for his price, last year’s numbers do not mean a hill of beans, especially in a soft market. I tried showing him that is price was inconsistent with the neighborhood but he said he would hold out for his price. He is still holding.3. Investigate, Investigate, Investigate. A word that should be synonymous with investment is investigate. As Ben Franklin said “an ounce of prevention is worth a pound of cure”. The internet can be a great source of preliminary information about a particular site or region. I use a site that offers access to USGS maps and aerial photos. The great thing about USGS maps is they show general topographic information and can indicate if an area is inundated with water for part of the year. The maps are only a guide but this preliminary legwork is a great first step in deciding if a property is worthy of spending on the traditional studies and surveys. In a typical property investigation, known in the business as due diligence, costs range from a few thousand dollars to hundreds of thousands. A general rule of thumb for a due diligence budget is about 2% of the purchase price.4. Variety, Variety, Variety. As the saying goes variety is the spice of life. This is also an often overlooked key to successful investing. I call it the Neapolitan approach – a little chocolate, a little strawberry and a little vanilla. Make sure you have a variety of products and locations to suit more than one budget and lifestyle preference. This may include multiple lot sizes, single and multi-story units and units for families and singles. Commercial developments can also benefit from this approach. Also, incorporation/integration of commercial and residential, sometimes referred to as mixed-use, goes a long way toward satisfying the Neapolitan approach.5. Taxes, Taxes, Taxes. Anytime you are talking about making money taxes need to be considered before the investment is made. There are many ways to structure deals, there are only a few ways to do it right in terms of taxes. Structured correctly, a long-term capital gain can be accomplished at favorable rates as compared to regular income rates. Expert tax advice from a trusted personal tax consultant is advisable.Professional investors should focus on land or developments that will produce products affordable to the masses. While this attitude is socially responsible, I am advocating this position out of pure investment responsibility.There are many facets to real estate investment and development. Think of the preceding information as general guidance and not the complete picture. Start small and try to learn from other’s mistakes. Another good piece of advice is to partner with an experienced person or group that is reputable and has a track record in purchasing, permitting, marketing and ultimately selling the property at a profit.

All articles, text, graphics, the selection and arrangement are Copyright 2006-2007 by Keystone Companies, LLC. ALL RIGHTS RESERVED. Any use of materials on this blog, including reproduction, modification, distribution or republication, without the prior written consent of David H. Farmer or Keystone Companies, LLC is strictly prohibited.

Welcome to my blog

2007-02-06T07:21:00.000-08:00

Welcome to my Blog. The reason I started this blog is to share my views with you on real estate investment and what I see as market trends. I have worked in the development industry since 1989, originally at an engineering consulting firm, and since 2000 as a developer and investor. I believe in the practical application of common sense (or common cents) to real estate investment. With that said I have also been in a position where I just had to buy something, without being able to give good concrete reasons. I just went with my gut. Most of the time though I try to rely upon basic fundamentals/principles such as “you never go broke taking a profit”, “do your homework” and “begin with the end in mind”. I hope you like the blog and feel free to challenge me or ask a question.

Please keep in mind that all articles, text, graphics, the selection and arrangement are Copyright 2006-2008 by Keystone Development Advisors, LLC. ALL RIGHTS RESERVED. Any use of materials on this blog, including reproduction, modification, distribution or republication, without the prior written consent of David H. Farmer or Keystone Development Advisors, LLC is strictly prohibited