Land Entitlement: Unlock Hidden Wealth

[00:00:00] If you ever want to learn what's involved into the development of multifamily and commercial space and how to not just do the typical value add that most multifamily investors think about when they buy a property and try to improve the property to raise the

[00:00:15] rents and then turn around and refinance and take cash out, but actually what's involved in ground up and the play that's there particularly right now by taking land that's entitled for one use like agricultural and turning it into residential

[00:00:34] development or multifamily development and the increase in value of that land just on the land play whether you ever break the dirt with a shovel or not. And oh, by the way, how the global supply chain right now is seeing

[00:00:49] construction costs come way down and how outsourcing some of that construction materials today is a game changer for the industry, then you need to listen to today's episode for sure. Welcome to The Brick and Mortar Money Show, the podcast dedicated to helping

[00:01:09] business owners and professionals achieve wealth, autonomy and control through commercial property ownership. Join us as we unlock the power of real estate to transform your business and investment strategies. Whether you're seeking to expand, invest or gain more freedom in your

[00:01:27] entrepreneurial journey, this is your destination for insightful stories, expert advice and actionable strategies. Welcome. Hey, welcome listeners today. I have the distinct honor and privilege of having a great guest today. Victor Menashe, he is a senior partner at Y Street Capital, a firm that

[00:01:50] focuses on development and the commercial and the multifamily space. And I'm going to let you, let him tell you all about it. They do quite a bit of very large projects and some very interesting things. He is the host of the real estate espresso podcast and also

[00:02:04] the author of Magnetic Capital. Victor, welcome to the show today. Great to be here. Thank you. Yeah, absolutely. Just to dive right in, tell us a little about first off about your company, what you do, and then I want to get to how you got into this commercial

[00:02:19] space because I know you didn't start in real estate investing. Definitely. So I'm one of the principals at Y Street Capital. We're a development firm. I actually live in Ottawa, Canada, but we're based both in the US and Canada. Currently developing nine different states.

[00:02:34] We're in Washington, Idaho, Utah, Colorado, Texas, Pennsylvania. We're kind of all over. And we develop multifamily apartments, senior housing storage, a bit of flex multi-tenant industrial. And we do a fair bit of land development as well. And we also do a little bit in Canada.

[00:02:54] So it's a bit, a fairly broad spectrum, really assembled a crack team that I'm really very pleased with. It's continuing to grow and we're having a tremendous amount of fun fulfilling a mission that for us is all about building communities that people feel compelled to call home.

[00:03:11] So that's really at the core of our mission. And it's been a great journey. To answer your question about how did I get into this? It was definitely not the typical career path. That's for sure. I graduated with a degree in electrical engineering.

[00:03:28] Spent most of my career developing microprocessors, rising through the ranks of both public and private telecom and semiconductor companies. Held a number of executive roles. Did five mergers and acquisitions, one IPO. And right around 2009 made the decision to take a bit

[00:03:47] of a hard left turn in my career. You might remember there was something going on in real estate at about that time that made it a great time to enter the market. A good time to be playing offense in real estate, not a wonderful

[00:03:58] time to be playing defense, but a great time to be playing offense. So that's how I got here. Yeah. That's I remember 2007, eight and nine very well. It was, I was in real estate finance at that point had been for

[00:04:11] quite some time and yeah, there was blood running in the streets for sure. Definitely a good time to come in on the tail end of that. Someone very famous. I think probably many people over the years have said the best way to make

[00:04:25] money in life is to buy low and sell higher. You came in at that time. So that's interesting. Tell me this, obviously you had, it sounds like an amazing career in electrical engineering chip design space and things you've done there.

[00:04:37] Why the, why did you move out of that space with it? Sounds like I said a very illustrious career there already. I was looking at what was happening in the tech industry. When you think about any technology venture, you're talking about combining

[00:04:55] the risk associated with developing a business, the technical risk of designing a new chip and is it actually going to work? Then you are compounding on top of that, the risk of the market developing and accepting your product. And so you're compounding risk on risk.

[00:05:11] It's a little bit like saying that I want to win the lottery when I grow up because your chances of success become vanishingly small and with the level of investments in particular in semiconductors, if you

[00:05:22] consider that the minimum investment you need to get a chip out the door is maybe 50 million and maybe in year four, I'm going to get you your money back and maybe year five, I'm making you a profit. Are you lining up for that investment?

[00:05:36] It's not a great story, but that is the reality of that business. So unless you have the depth of pockets of an Intel or a Samsung or someone like that. Very hard for a small to medium sized company to make a go of it.

[00:05:50] So many, there's so much consolidation happening in that space that medium sized companies are just getting gobbled up and I see it over and over again, so you get a few behemoths that really end up growing through

[00:06:04] acquisition or they get very lucky and find something that they've developed that they can readapt to another segment of the market. Nvidia is a fabulous example of that because they're really not pioneers in AI. They're not pioneers in crypto, but they just simply happen to have

[00:06:26] invested in accelerated computing that could be readapted and that really positioned them extremely well. And there's others, there's other examples of that, but for example, even medium sized companies like ATI now part of AMD, very difficult to go it alone.

[00:06:42] So it looked at real estate and said, you know what? Here's a, an industry that's not a monopoly. It's not a duopoly. My goodness. People will lend you money to invest without taking an equity stake in the project.

[00:06:54] There's had so many things going for it that you could literally build a scalable business. You were relying on pretty well established examples of success in a given market. And you simply had to do a good job of copying it or a better job

[00:07:11] of copying it to do well in the market. Okay. That makes a lot of sense. Yeah. The Nvidia's of the world have done some amazing things, but to your point, it does sound like there was a lot of luck and fortuitousness that came along.

[00:07:25] It's one thing to be smart and have a good idea. It's another thing for that to intersect with the market and particularly a market like that that is changing so fat. What is it Moore's law changing so extremely fast that how do you keep up? Right. All right.

[00:07:38] So you took a pivot. You went into real estate because it's for your aforementioned reasons, which are great reasons that a lot of our listeners are familiar with. And they, a lot of our listeners are business owners in different

[00:07:52] industries and they're generating cash and they want to diversify. And they've read Robert Kiyosaki's book, rich dad, poor dad. And they want to get a piece of that and grow some passive income that you've moved into your firm.

[00:08:06] Into you talk about departments and your apartments and your mission with helping families, giving them great places to live and that sort of thing. Why a lot of investors go after projects are already built. They're looking at the value play to try to improve a property and then

[00:08:22] increase the rents and so forth. But you're more on the development side. It sounds like talk about that a little bit. And where we got into the development game was actually in Philadelphia. No, we started acquiring properties. They're deeply distressed properties.

[00:08:36] In fact, our very first acquisition was 15 properties in a single day in an auction from Philadelphia housing authority. And so we were basically doing very heavy rehabs, basically demolishing the interior of a building, keeping the stone facade or the brick

[00:08:55] facade and putting a new building on the inside that we were buying these properties so deeply discounted that the numbers worked. We'd gone through a period at that point, by the time we were delivering four or five years with virtually no new product entering the market.

[00:09:10] So there was some pent up demand clearly for new product. And when you're delivering what is a brand new building in a historic context, that was actually quite attractive. So the step from there, some of the properties that we acquired

[00:09:25] had been scraped to the ground and they were just vacant lots. So the step from there to building new was a small step. The step from there to asking for a little additional density through variances, that was a small step.

[00:09:37] The step from there to doing larger greenfield type developments, land assemblies was a small step. So we attacked it in an incremental fashion. We didn't go from flipping a couple of houses to acquiring 1800 acres on the edge of Colorado Springs in one go. It was an evolutionary step.

[00:10:00] It was an evolutionary process. No, that's fascinating. I think a lot of people come into real estate and real estate investing that are new and they have these huge dreams of what they want to do. But they don't realize there is a process you to your point.

[00:10:16] You don't generally go from flipping your first house to buying a hundred unit multifamily building. I get the question all the time. I had one yesterday, I was sitting out downtown at a cafe and my wife was off doing something.

[00:10:28] So I was scanning my text and joined the day. And a great friend of mine, a realtor, very successful sent me this text. He's getting involved more in multifamily and he has a few properties. And he's, he's, Hey, I just found this.

[00:10:40] It was, I don't know, a hundred unit multifamily. And he's, I want to do this. And I was like, okay, let's walk that back and talk about the process to get there. You need some experience.

[00:10:48] You need some, or you need to be with a team of people that have some experience because there's a lot, there's a gap there of, of issues and things that could come up. And you have to seize your way there.

[00:10:59] You could ultimately get there for sure and beyond, but it's step to step. So it sounds like you guys have done that now to a very high level. I don't know. We were talking recently about some of the challenges though, that

[00:11:11] you're seeing in that multifamily space and development. What talk about that right now? Cause there's a lot of noise out there in the market about what is going on and opportunities and that sort of thing. You really have three or four variables that you're working with.

[00:11:23] So maybe to answer your question, why didn't we, why do we stick with development as opposed to the value add play? What we found was that many of the value add deals, because there's so many people chasing that space that any existing property, if it appeared

[00:11:40] on the market effectively became an auction and a 400 unit property with 20 people bidding on it. I don't think I want to be the winning bidder. Numbers don't look too good at the end of that play, do they? You're overpaying.

[00:11:57] And so then when I look at what prices were trending on a lot of those acquisitions simply wasn't making the numbers work using our calculator and we could build brand new product for a third less money made sense to build new.

[00:12:13] So that's where we really developed expertise in that space and you have a few variables to play with. You've got rent per square foot. You have construction costs per square foot. You have cost of capital. Those are your major levers.

[00:12:30] And you either have something where they intersect and it works or they don't. Today we've got some significant headwinds. Number one, obviously interest rates has been talked about at Nausium for the last day, 18, 24 months. You have at times rising construction costs today, construction costs are

[00:12:49] falling and we can talk about that. So that's a tailwind working in your favor. We have rents that have risen dramatically over the last 24, 36 months, but they've plateaued and in a lot of cases are falling. Some of that is a function of oversupply new product in the market.

[00:13:09] Part of that's a function of simply ability to pay. There we've reached a saturation point where the average working Joe and Jane simply don't have it in their paycheck to afford even $50 more a month. So you can get an Excel spreadsheet to show you rent growth on a

[00:13:30] nice regular formula. It doesn't work that way. But it's those levers, right? Okay. Yeah. So going from academia to realities is interesting. Okay. So you're talking about, you mentioned falling construction costs. I know COVID sent those numbers through the roof, right? Yeah. The supply chain issues and whatnot.

[00:13:48] Why are they falling now? Why isn't it just level out at the peak that it hit? Well, so there's two things to think about. I want to answer this question. I want to go back to some, another element that's worth talking about as

[00:14:00] well, but so construction costs are driven by materials. A lot of materials are commodities. If you think about self-willed lumber, that's a supply demand issue. And the rates that the lumber mills are charging to the timber stockholders is shockingly low.

[00:14:17] So the majority of the profit is in fact going to the lumber mills. Home Depot makes a pretty fixed margin. All of the distribution makes a pretty fixed margin. So that's where the majority of the profit goes. So it's a supply demand issue.

[00:14:30] We peaked at $1,465 per thousand board foot at the height in I think May of 22. Today where they've changed the way they measure it, but in equivalent dollars, it's around $450, $500, a thousand board foot. So it's fallen by two thirds, which is significant.

[00:14:49] But the other piece that is significant is you've no doubt heard about the oversupply of housing in China and how many of the major developers in China have gone bust. So you've got a tremendous amount of manufacturing capacity in China to build literally tens of millions of homes.

[00:15:07] And that product is now being sold all over the world at prices that quite frankly are shockingly low. So that's a definitely for someone who's looking to build and is willing to source global supply chains, there is tremendous opportunity to source

[00:15:24] things at much better prices than you're finding here domestically. And in fact, I'm fresh back from a week in Turkey, in Istanbul, attending a builder expo where we are actively shopping for materials that we can acquire there that are much higher quality than often what we find in

[00:15:43] China at a very comparable price. In some cases, even lower. Interesting. That is, you're the first person I've heard address that. And it makes total sense. Yeah, because they have these huge in China, these huge developments of,

[00:16:00] I don't know how many units, but building up for building that are just empty. And yeah, we're working with a kitchen supplier out of China. That is the largest manufacturer of kitchen cabinetry and closet systems, closet organizers in China. They manufacture about 1.8 million kitchens a year, about 750,000

[00:16:18] closet systems a year, super high quality, just super high quality. And you can get, I think a decent kitchen done in an apartment for 1,500 bucks. Yeah, you got to add a shipping cost to that, but so maybe landed prices, maybe 2,000, 2,500 years, still far below what you'd be paying

[00:16:40] to get the equivalent product here in North America. Yeah. Yeah. Wow. That is fascinating. And so is that, do you see that impacting the residential space as well, the single family space or is most of the single family in your opinion

[00:16:55] done by smaller players who aren't going to be have the ability to do that kind of global sourcing and supply chain? A lot of the track builders are in fact sourcing global supply chains. You would be surprised that you don't necessarily see that, but many

[00:17:09] of the major players are in fact, I've visited a panel manufacturer in Turkey, visited their headquarters. They're the largest in Turkey, third largest in the world. They supply to Clayton homes. And so most people would think, okay, Clayton homes, Warren Buffett owns it.

[00:17:24] American manufacturer, but a lot of the interior finishes are coming from Turkey at under a dollar square foot. Wow. Wow. That is absolutely fascinating. So when you, so with the falling construction costs, what about like land costs here, what do you run into there?

[00:17:39] Cause I know you're acquiring quite a bit of there and we're not making any more of that, right? There there's always opportunity. So when we look at value creation with land, so we're big value add players when it comes to land.

[00:17:51] And when you think about the value of land, it's associated to its entitlement. Think about any agricultural land pretty much anywhere in North America. It's going to vary between three to 10,000 an acre. It's usually in that range might be at the higher end of the spectrum.

[00:18:08] If you can grow weed on it, it's in that range. If that can now be a residential subdivision, you're looking at maybe a couple of hundred thousand an acre, if you can put a 40 story building on it, it might be in the millions per acre.

[00:18:22] It's the same dirt. Right. What's different about it? Right. It's the same dirt. So it's about entitlement. Of course it's about supply and demand and location. But if you can take a piece of land that is zoned agricultural as we have

[00:18:35] done, for example, and we do it routinely and convert it from agricultural land to either residential subdivisions, for example, we're doing a project right now on the edge of Salt Lake City. It's not a huge project. It's only 21 acres. It's in Brigham city.

[00:18:50] It was in fact approved by city council last night and that property is going to have a Marriott hotel, 120 apartments, 50 towns and some flex multi-tenant industrial. We bought the land at a very good price. It's across the street from a Walmart super center.

[00:19:05] It's right at the interstate 15 interchange. And this is a growing market. You, I don't know if you've heard of the, or your listeners have heard of something called the inland port. You might remember during the pandemic, there was this congestion in the port

[00:19:20] of long beach and port of LA and it's because those ports are land constrained among other things. So the inland port is a solution to that. The new process container comes off a ship. It goes immediately on a rail car and it gets shipped to Utah.

[00:19:37] And that's where the port is where there's tens of thousands of acres available, right? And in this particular instance, it's bringing about 5,000 jobs to the immediate area and we happen to have acquired a property that's in the shadow of that

[00:19:52] in a great location and building the right product and do very well on it. We've just as a land play. So we've already got buyers for the parcel, for the hotel and for the apartments and the towns. And we'll probably go vertical ourselves on the flex multi-tenant industrial.

[00:20:09] But that's just an example. At the larger end of the spectrum, we acquired 1700 on the edge of Colorado Springs, gigantic property perimeter of the property is seven miles. So it took a little while to walk the property.

[00:20:25] Our immediate neighbor is Shreve Air Force base, which is US space command. Yeah. And we're able to have discussions with the leadership there and they've given us their shopping list. What would you like? I'd be nice to have an office building. We'll be your tenant. Okay, awesome.

[00:20:43] What else would you like? The closest hotel is 30 minutes away. Awesome. What else would you like? We have 7,000 people come to our front gates every day. Daycare would be fantastic. Terrific. What else would you like?

[00:20:54] You get the idea and we acquired that dirt at 23 cents a square foot, which is a good price post entitlement, post annexation into the city. It should value between four to $5 a square foot. So that's a pretty good lift.

[00:21:09] And that's without really putting a shovel in the ground yet. Of course, there's infrastructure to build. There's utilities to pull. We got 67,000 linear feet of roadway to build ultimately over the span of the next 15 years. And of course that requires incremental investment, but there's

[00:21:25] a pretty decent multiplier on the value. And even with inflation, these are numbers that are not, these are, I'm talking today's dollars. If you layer inflation on top of that, we'll look like absolute geniuses. We're not geniuses.

[00:21:40] We'd simply, we simply bought and then inflation is going to work its magic and inflate those asset prices as well. Yeah. Talking about inflation, it's real estate is one of the best ways, obviously, to hedge against inflation.

[00:21:53] We talk about that all the time, but so to me, it's really interesting. So your value, so you've figured out that you can, can build new for less, for less than this value add play, but you are still using a value

[00:22:07] add play by finding basically, I won't say worthless land, but land that's not being utilized to its highest and best use, positioned in an area that is, that could have potential future growth for various sundry reasons, the inland port, which is really wise.

[00:22:28] And then you, and basically just, and it sounds, and I know you get some resistance, you have to deal with the politicos of the area and that sort of thing, but by and large, if you're bringing a true

[00:22:38] value add to the area, my guess is you're not getting a tremendous amount of pushback, but you're really improving back to your mission, improving the quality of life for families. I'm butchering your mission a little bit, but, but you're,

[00:22:56] you're bringing high quality housing and ancillary services and products to serve that community and those people, which improves their quality of life. And oh yeah, by the way, as a result, we're going to do pretty well financially as a result of this.

[00:23:09] We talk about doing good and doing well at the same time. Now to go back to something you talked about earlier, which is the value add play. If you look at the vast majority of value add deals that were

[00:23:22] underwritten in the last 36 months, most of those would have been financed with some form of bridge debt with the assumption that the permanent financing would start. The first digit would start with a three, maybe a four. And today it's a six or a seven.

[00:23:42] So the financing assumptions were dramatically different. Many would have assumed that they are going to get a cash out refinance on completion, on stabilization. And when you rerun the math at the higher interest rate, not only

[00:23:53] are they not going to get a cash out refinance, you're going to have to write a big fat check just to get into their permanent financing. And where they were thinking they were going to be at 80% loan to value,

[00:24:03] they're going to be debt coverage limited at 55% loan to value. So they're in a world of hurt. Yeah. And some of those have already gone to distress. There's still quite a bit more to go. There is opportunity in that segment of the market coming up.

[00:24:19] We're looking at some ourselves right now we're looking and we're doing due diligence on a 700 unit facility. So there is absolutely opportunity coming up in the marketplace. We're not religious about new development, but we see the opportunity and new development to create tremendous value over the long-term.

[00:24:38] So it's a new, so basically I won't see your opportunists. You're going to go where the opportunity is to add value. But again, you have an apartment that to your point that it was purchased under certain assumptions that have radically changed.

[00:24:52] Now you have investments that are moving in, they're going to be very distressed, which is going to create all kinds of problems, right? For the property for probably for the tenants and everything, because now the management has no money and the banks involved and so forth.

[00:25:06] So are you looking at, is the investment play there to try to find these properties and buy them wholesale or are you buying distressed notes at a discount? I mean, how are you approaching this? So far we're not hunting for properties.

[00:25:20] We never have, they all come to us in one form or another. This particular one's no example, no different. So we look at them as they cross their desk, we say no to the vast majority, but occasionally there's one that looks intriguing

[00:25:33] and we'll put it into our due diligence process. Right. Interesting. Interesting. So how do, okay, so we've got a big picture of how your company operates and how you create value for the end consumer, the user of your space and then for your firm itself.

[00:25:52] How, how do you help investors? You, are you raising capital from, for instance, our listeners that have capital and they want to put it into real estate, where what's the value there that you bring to the table?

[00:26:06] So we, we look to be good stewards of our investors capital. We have quite a few investors that have been with us for a number of years because we're growing. We're always looking to grow that investor base because eventually you

[00:26:19] exhaust the ability of your pool of investors with the size of projects that we're doing, so we're always open to accepting new investors. The vast majority of them tend to be accredited investors. That's typically our focus and be happy to connect with your listeners.

[00:26:35] If see if there's a fit between what we're doing and their objectives. Yeah. Yeah, absolutely. And I know you've got your book, Magnetic Capital and your podcast for someone who's interested in learning more about what you do and how they could be a

[00:26:51] part of it potentially or those places to start or what are your recommendations? Yeah. You can connect with us directly at ystreetcapital.com. There's a place to sign in to sign up for the investor portal. You'll get some visibility of the projects that we have

[00:27:05] underway and we have quite a few. Happy to have listeners subscribe to the real estate espresso podcast, which is a daily show seven days a week. Today was episode 2,301 published today. So be happy to have you as a listener and continue the conversation that way.

[00:27:24] So you have a lot to talk about Victor. Last question. That's fantastic. Is there anything that we maybe briefly touched on here as we wrap up that that kind of struck a chord or something that you'd like to add

[00:27:37] additional commentary to or something that we didn't discuss that you think is important for people to know today? Yeah, I think the thing for to watch out for many people just think about I'm looking to get into the space and I need more knowledge.

[00:27:51] So you go take a course and you think you're all set and then you'll find that's not working and you'll run into the mindset guys that say it's your mindset. You need some emotional fortitude or whatever it is.

[00:28:03] And you go attend Tony Robbins event and you're all on fire and that's not enough. And what I think is the game changer is to get in the right environment with the right people that are doing this at a very high level.

[00:28:17] Why is it that all of the elite figure skaters in the world train out of two rings in Canada? They have ice in Japan. It's because they need to be in that environment. So they're playing with, they're competing with and training with their

[00:28:33] competition and playing at a high level. So I think that's, there's a powerful lesson in that to really surround yourself with people that are doing this at a high level. Yeah. Yeah. No doubt. No doubt. Awesome. Victor Sage words were never said before like that.

[00:28:48] I don't know if that came out right, but anyway, very wise for sure. For someone who has had a lot of success and everything it seems like you've done and are doing this at a very high level. So I appreciate your time today. This was a great conversation.

[00:28:59] I learned a lot. I'm sure our listeners will and it's fascinating. So I appreciate it. Thank you so much. Hey gang, just wind it down here today. Thanks for listening to the show. And as always, if you need capital to grow your business, you're looking

[00:29:15] to purchase commercial real estate or build a building or invest in commercial real estate or looking to acquire a business or a competitor or just need growth capital. We'd love to talk to you. We fund businesses all day long.

[00:29:27] Our mission is to help entrepreneurs win and to fund their businesses and fund their dreams so that they can make an impact in their community. Reach out to me today, go to our website, click the button, schedule a 20 minute conversation discovery call.

[00:29:40] We'll have a quick conversation, see if there's a need, see if there's a fit and we can take it from there. The website is VPC Victor Paul Charlie dot capital. That's VPC dot capital. All right. There's no.com on that. It's VPC dot capital.

[00:29:59] As always, keep crushing it and hope to see you soon around here. Take care.