9/11 and a Leadership Lesson

I remember distinctly where I was on 9/11.  I was living in my studio apartment in West Vail.  I had a great job working for the developer of Beaver Creek.  I had my own place for the first time, no roommates.  I was driving my shiny new red Tacoma truck around a great mountain town, skiing all winter, mountain-biking all summer, catching as much live music as I could.  Life was good.

I woke up that morning to the sound of NPR on my clock radio.  It must have been about 7:30 AM Mountain time when the alarm went off.  I could not make any sense of what they were talking about.  They were panicked and something big had happened.  I drifted in and out of sleep.  I had an answering machine and a friend from New York called.  She started talking about something, and left a message I couldn’t understand, either.  What the hell was going on?

I got up and turned on the television.  Planes had crashed into the World Trade Center in New York?  And the Pentagon, too?  I just could not process it and had no idea of the significance, so I showered , dressed, and went to work. 

photo credit to http://www.foreignpolicy.com

Not much got done that day.  By the time I got to the office, all the team who had decided to come in were gathered in the conference room, watching the news, mesmerized and in complete shock.

Again, I was working for a development company, had a nice office in Beaver Creek.  We felt very safe and far away from any danger.  I remember feeling like the Rocky Mountains were fortress walls all around us.  I had lived in New York and still had some good friends there, but it felt a world away.

photo credit to http://www.summitdaily.com

Some of us would occasionally go to our offices or cubes and pretend to work but you couldn’t distract yourself and no one was working in an office anywhere in the country.

The man I worked for at the time was one of the best leaders I’ve ever known and someone I consider a role model to this day.  He was hyper energetic, fearless, creative, sincere, fair, generous, and an excellent communicator.  Despite his busy schedule and important business, he never walked by someone without saying hello.  He made everyone feel included, important, and valuable to his organization and because of that was able to attract tremendous talent around him.  He and his leadership style are worthy of another blog at another time.

But I remember something distinctly about how he reacted on 9/11.  He was popping in and out of the conference room on that day, too.  I think we were all in the room when the first tower fell, and I remember a woman in the office started crying.  I just couldn’t imagine what had happened.  All I could think of was my favorite view of the towers when I lived in the city, from Mcdougal Street in the Village.  Looking south they were framed perfectly on the horizon, looming over trees in the Village and the low buildings in SoHo.

photo credit to http://www.cnn.com

But the leader of our group that day was focused on the President.  He was so frustrated by the fact that no one knew where the President was.  We now know he was flying around the country on Air Force One, avoiding the possibility of being a target, but I cannot remember the public knew that any time that morning.  But our leader at work thought that was terrible leadership and it bothered him tremendously.  He thought the President should be on the ground, unafraid, making decisions, and communicating with the country in a traumatic time.

photo credit to http://www.sogoodly.com

I don’t think anyone else in the office was thinking that.  We were thinking, “OK, whatever they tell us or don’t tell us, the President needs to be safe”.  I am certain none of the rest of us were anywhere near our company owner and leader on the leadership intelligence spectrum.  His reaction was different, he was thinking about how to lead in a crisis, and I’ll never forget that.

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The Great Recession

The Great Recession happened right in the middle of my career.  I worked for a real estate development company on a large-scale project that was about 7 or 8 years into a 25-year master plan.  And it was high-end, second home resort development in California.  It really could not have been worse.

We started on several golf and ski resort communities in 2000.  We were taking a model that had worked in the high-end mountain resorts of Colorado especially well during the convergence of the late 90s tech bubble and empty nest baby boomers arriving at the peak of their vacation home purchasing potential.

photo credit to http://www.beavercreek.com

We adopted the model to California resorts with high hopes that the market was ripe for some new development.  The plan included two brand new golf course communities, a high-end luxury hotel with a residential component, and an 1,800-unit master planned community at the base of and on the ski resort, and a club to bring it all together.  Entitlements and planning took a couple of years but when the first real estate was offered it was obvious the plan was right.  In 2002 we began delivering finished lots and townhomes, and by 2005 we were delivering a multi-story mixed-use base ski village that was the nicest in the state. 

photo credit to http://www.thetahoeweekly.com

At both the golf course communities and the ski village we had oversold lotteries to allow potential buyers the opportunity to select lots or units based on architectural renderings and site plans.  We had people threatening to sue because they showed up at a fancy hosted party and were unable to get their chance to plunk down a hefty deposit for a lot that hadn’t even been built.  That was the peak and we all now know that money was just too easy to come by and that was the real source of the hyper-competitive market for any and all real estate. 

We were writing the term sheets for construction loans and delivering to the banks, knowing if they didn’t take our proposed terms another bank would.  We created three different Community Facilities Districts with local utility and community services providers based on appraisals showing sales in the billions of dollars over the next 20 years.  Based on the way real estate was selling at the time, the assumptions were correct.  We had taken out every loan available, including the biggest loan the company had ever closed on to build the 5-star luxury hotel.  The loan was so big it took a consortium of four major international banks to deliver the funding.

photo credit to http://www.rgj.com

None of this was easy.  There was so much effort put in by smart and hard-working people.  We had folks that had relocated from around the country, experts in construction, sales and marketing, land planning, architecture and design, and finance.  The machine was humming, and the future was bright.

It was all too good to be true.

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Residential RE Advertising

Real estate advertising is tricky.  Selling a house is nothing like selling laundry detergent, a refrigerator, or even a car.  It’s different and so is the marketing and advertising that goes along with it.

I assume we’ve all seen the magazines and newspaper sections with house after house after house, hoping to attract your attention with the headlines….LUXURY!  SWIMMING POOL! LAKEFRONT! NEWLY REMODELED!  HOA!  NO HOA!  MASTER SUITE! 5,000 SQUARE FEET!  WINE CELLAR!

There are lots of keywords to choose from, but they do get a little bit repetitive.  How do you make a home stand out?  Real estate advertising seems to go one of either two ways.  Sell you on the lifestyle you’re going to live in this house or sell you on the outstanding features and finishes of the house. If you’re selling both, it’s getting expensive.

photo credit to http://www.martiscamp.com

Location, location, location is still the undefeated champion of real estate.  Folks choose where they want to live and then begin looking for a house.  Do they want to be on a golf course?  In the best school district?  Near public transportation or close to work?  A lot of self-sorting and narrowing of scope of product goes on before anyone does the research about specific houses.

Ideally, you choose the city, town, or neighborhood you want to live in and then start looking at prices and figure out if you can ratchet up expectations or if you’ll have to ratchet them down.  This is usually when a buyer thinks about bringing in a real estate agent to check out the available product.

Real estate advertising has morphed just like every other industry to acknowledge that digital and social are the most efficient ways to reach possible customers and buyers.  It amazes and kind of disgusts me every time I get a glimpse behind the wizard’s curtain to see the power of Facebook and Google, when it comes to tracking our every move on-line, and building a detailed profile of our behavior to then chase us around the digital world, advertising products their algorithms think will interest us.

The virtual tours, the Google earth street views, Zillow valuations, and the general abundance of information that can be provided on-line is wonderful for everyone.  If you were in a real estate showroom in the 90s or early 00s you know it was like an arms race among developers to produce the most beautiful and most expensive brochures, books, and catalogs.  Individual sellers didn’t go quite so far, but brokerages produced some very nice pieces which featured their best (most expensive) homes.

Nevertheless, I haven’t seen much evolution in the stories told in real estate advertising.  You go with product details such as hardwood floors, Wolf appliances, Italian marble tile, square footage, lot size, etc. Or real estate advertising shows you the life you aspire to….happy kids riding bikes in the driveway, a couple enjoying a glass of wine with the neighbors on the patio as the sun sets, a young man hosting the crew for a Super Bowl party in the man cave.  Real estate advertising isn’t too far removed from the Bud Light commercials showing everyone having the time of their life with beautiful people at the local watering hole.

photo credit to anheuser-busch. Long live Spuds!

The digital tools are great and allow for specific searches and a glut of information to help advance informed real estate sales, but I would like to see what the next big thing is.

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The Advertising Agency

My first “real job” wasn’t in real estate.  I was the man in the gray flannel suit.

I rode the subway downtown every day to the famous birthday cake building at 375 Hudson Street, headquarters of Saatchi & Saatchi Advertising.  It was great learning experience and a strange tumultuous time to be in advertising.

375 Hudson St. /photo credit to:
http://images.skyscrapercenter.com

We had 3 or 4 computers in one office on the top floor of the about 10 floors we had in the building that had internet access.  I would go up there to browse and be the only one in the space.  Pages took minutes to load and there wasn’t much content to find.  Something was coming but no one knew what.

It was still a world dominated by the three classic departments of the advertising biz…account executives, media planners, and creatives.  Account executives were the client people, the supposed hubs of the wheel, pulling together the resources of the agency to deliver a strategy and a product. 

The media folks were the data geeks of the industry.  They spent their time talking about reach, target audience, demographics, impressions, and Nielsen ratings.  They were sequestered on the lower floors with messy offices, but they got invited to some cool parties hosted by television networks and magazine publishers.

The creatives had it the best.  They were the precursors of today’s tech cultures.  They had no dress code, no real work hours, and anyone who went up to their floors had to be careful not to disrupt their creative flow.  They had ping-pong tables, leather couches you could nap on, and I’m pretty sure they had a beer fridge.  They came down, rarely, to see the suits to show off their latest creative genius. You had to be careful not to bruise their egos if their product wasn’t good.

The clients were freshly minted MBAs from Kellogg and Wharton and Michigan.  They worked hard.  As far as I can tell they were expected to live in their offices at corporate headquarters and compete with their colleagues and peers viciously for a bigger chunk of the company’s marketing budget.  I worked on the Johnson & Johnson account, selling Children’s Tylenol.  It was and is a great product.  But its world was being rocked by the introduction of pediatric ibuprofen.  It was the middle of the great Advil vs. Tylenol marketing wars.  It felt important.

photo credit to www.tylenol.com

One of my main responsibilities as junior account executive was to race to the nearest FedEx dropbox every night before the last pickup so that a strategy memo or sample of new creative could be delivered to the client the next day.  We used the fax sometimes for memos, but the resolution quality was low on that slippery paper that rolled up and fell to the floor when it came of the machine.

I did go through the MTP, the legendary Management Training Program.  It was like a fifth year of college.  All the new account execs and media planners were like a freshman class.  We were expected to stay late and work on semester-long projects for presentation to senior management by the end of the class year.  I can remember getting a little loopy one night and realizing the modern idea of a brand comes from a cattle brand.  A brand is a way to say this is mine, this is what I stand for, these are my qualities and attributes.

It was a rewarding experience though I only stayed two years.  I couldn’t wait to get to back to the mountains of Colorado after a couple of years in the city.  I’ll write more about lifelong business lessons learned in future blogs.

photo credit to www.vail.com

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HOAs

Homeowner’s Associations are such a mixed-bag when it comes to real estate development.  When a buyer hears HOA it can sometimes communicate a superior product, with lush maintained lawns, sparkling pools surrounded by towel draped chaise lounges, and shiny new fitness equipment always empty and available to help you change your life for the better. 

photo credit to http://www.cnn.com

HOA may also communicate lengthy Board meetings full of contentious issues, know-it-all Board presidents who like to impose their will on unsuspecting neighbors, and lawn police.

photo credit to http://www.rebelcircus.com

One of the first questions I hear out of many real estate shoppers when informed the property they’re looking at is part of an HOA is, “How much are the dues?”

Many of the real estate projects I’ve worked on through the years have included HOAs.  The appeal to developers is they can put in that fancy entrance gate and signage, they can include a park with bocce courts and firepits, and they can add the pool/fitness room/men’s and women’s locker/spas and not have to pay for them forever.  The facilities are very attractive in the sales process and many buyers are truly attracted to an amenitized community that will have certain standards enforced on new construction within the community.

photo credit to http://www.mlentrygates.com

Developers build the amenities, hope to recover the costs with increased sales revenue, and know they can turn the facilities over to HOAs to maintain and manage in the future.  In theory, it’s wonderful.  In reality it can be, too.

But when things go south with the HOA it can tear a community apart and be hunting grounds for construction defect attorneys.

One risk a developer takes with constructing and operating HOA amenities is that sales pace could slow dramatically and leave the developer paying tens or hundreds of thousands in dollars in annual dues for units that have yet to sell.  In California, developers are required to provide financial instruments that guarantee the viability of the HOA until the point when enough units have sold to buyers that the expense of the HOA is not concentrated with the developer.

Another problem HOAs create for developers is they provide a gathering place for buyers to complain about problems with their units.  Developers and builders generally offer warranties on their products and successful developers stand by their product and take pride in what they do because they want to continue doing it.  It’s relatively easy to deal with one buyer and their complaint(s).  When a group of buyers convene in the HOA and share complaints they tend to feed off each other.  Suddenly, an innocent design or construction mistake can transform into the belief that the builder and seller conspired to construct a low-quality product and commit fraud upon their customers.

Next add a construction defect attorney to the mix, who gets paid a percentage of whatever he or she can recover from the developer and their insurance company.  There exists an entire industry based on hijacking HOAs and convincing them to enter lawsuits that cost millions and take years and tear apart many relationships.  There may be ultimately be siding repaired or windows replaced but when the motivation becomes the largest possible legal victory instead of fixing simple construction problems, much is lost along the way.    

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Opposition to Development

There is much opposition to new development in this world, some of it warranted, much of it not.  This is one of the most difficult parts of the development process.  Developers like to work on a level playing field but so much of what happens when plans materialize for previously undisturbed land is highly emotional and can become a political issue.

Two of the major opposition groups to developers are environmental groups and the classic NIMBYs.  I’ve worked on development projects in the mountain resorts of Colorado and California.  It’s amazing how much local sentiment can affect the ability to create new communities in certain locations.  As far as I can tell, there is not an acre of land in the US that is not spoken for by someone or by some entity.  And as mentioned in a previous blog, every parcel of land in this country falls under some jurisdiction, whether it be a county or the federal government.

photo credit to http://www.forbes.com

Most developers study and understand the rights vested in land when they purchase it with an eye for future development.   Land must make sense physically.  You don’t want to have to move a mountain or fill in a lake if you don’t have to (though projects like that start to make sense in certain cities).  But after you determine the land makes sense you need to make sure the governmental entity in charge allows for the land use you would like to build.

In today’s world, most cities and towns want to grow and have a plan for that growth.  Commercial in certain locations, dense housing (apartments) in others, parks, schools, single family residences, and roads, trails, and public transportation corridors that connect it all together.   You can tell when you’re in place that’s been planned versus a place that grew up in fits and starts and doesn’t make sense.

Most developers would like to create a place that functions well for their customers and that starts with fitting into the bigger plan for the community.  But when someone sees the empty field behind their house that their kids rode dirt bikes on, or that they walked their dog in, sometimes something snaps when they find the current usage might change.

Mountain towns are infamous for the “pull up the drawbridge, we’re full” mentality.  I’ve seen it so many times.  There are many folks who have their house on the lake, near the creek, or in the dense forest, who object to anything like their very own property ever being built again.  It’s remarkable how emotional folks get in their effort to deny additional opportunities for people to live the lifestyle they so love.

photo credit to http://www.colorado.com

We cannot poison our waters and cut down all our trees and I’ve never met a developer who wants to do that.  Most understand the reason people want to live in a specific place and the goal is not to ruin that.  A major part of development expense (which ends up in the home price) is when a developer buys land with certain rights, but the plans to develop are objected to by members of the community, and local politicians and government officials don’t play by their own rules or even change them midstream.

There exists a perception of the big bad developer who would poison the environment to make a buck, but I haven’t seen it.  There is however now a whole industry motivated towards fighting development and the professionals who engage in it are no less motivated by financial gain than the developer.

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Appraisals/Valuation

In real estate development there are many reasons and ways to determine what a parcel of land is worth.  It’s easy to figure out what a house in a neighborhood that has an abundance of sales activity is worth.  We all start with the average sales price per square foot on recently sold homes in the same neighborhood.  Adjust the per sq ft number up or down based on the level of finish (floors, counters, fixtures, etc.), amenities (pool, outdoor kitchen, 3 car garage) and precise location (backs up to permanent open space, views, away from heavy vehicular traffic).

photo credit to wikipedia.com

It’s far more imprecise when considering the value of that neighborhood’s vacant land in the state when no development improvements had begun, and houses had yet to be constructed or sold.  Appraisers are independent certified professionals who can offer an opinion of value on the land, your building, your house, or whatever else you need.  They’re most often called in when you’re securing debt on property, from a construction loan to mortgage, or even the public financing options that I discussed in the previous blog post.  Appraisers are hired by the group or institution that is doing the lending to provide some comfort that there is value in excess of the debt to be provided.

Appraisers are doing the same work as the county assessor and the underwriter for the developer who is trying to figure out what a piece of land is worth.  There are two key ways to determine value on an undeveloped land parcel.  Appraisers use discounted cash flow models or look for market comparables.  In a perfect world they have both.

A discounted cash flow is a business model that shows the cash flows, in and out, over the life of the project.  In real estate development the first big outflow will be for acquisition.  Second, you’ll see outflows to design the project and obtain county or city approvals.  Next, you’ll see outflows for construction of infrastructure and for the team to manage the process.  Finally, you’ll see marketing outflows that ideally soon generate sales, and cash inflows. 

The discounted cash flow (DCF) will take those periodic cash flows and discount them by a factor that incorporates the relative risk of the project, inflation, and bakes in the cost of the invested capital that is used to fund the costs.  DCFs are strange in that the discount rate is negotiable but should be relatively similar to projects with similar profiles and life spans.  Regardless, take all the cash flows in and out over time, apply the discount rate, and you have a present value of the project.  The appraiser is generally going to start with the developer’s model since it’s presumed the developer has a reasonable handle on the costs and the market for sales.

In almost every instance the developer wants the appraisal or valuation to come in as high as possible.  Except when you’re dealing with the county assessor, in which case you want their DCF to generate as low a present value as possible.  Adjusting costs higher or lower, adjusting sales volume and pace, and tinkering with the discount rate will all drastically change a project’s value.  Excel is the tool most everyone uses.

This just begins to touch on the art and science of valuation.  There is a lot of gray area, but it can be critically important in determining if a project will get off the ground.

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