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When I was 10 years old, I made my first investment. I didn’t know it at the time. Apparently I had $10,000 kicking around that my grandmother had put in my account. My uncle who owned a seat on the NY Stock exchange was an aggressive trader and a very wealthy man. He lived on 5th Avenue next to the Italian consulate overlooking Central Park. It was as good an address as you could possibly have in the financial center of the world. He would actively trade all day long. He would trade stocks in Asia after dinner, and he would get up early in the morning and catch the end of the trading day in Hong Kong. He had a 4 hour break before the opening bell on Wall Street. He was the expert when it came to investing. So my mother asked his advice when it came to making the first investment for her 10 year old son.  My uncle suggest that we buy two mining companies that traded on the Vancouver Stock exchange. Mountain State Resources Exploration and another small cap mining company. I’ve long since even forgotten the name of the company.  My uncle said that both companies had made some solid discoveries in the world of mining. The two companies were expected to merge. As a result, he predicted that the value of both companies would multiply.  Well, you might have guessed it by now, the merger never happened. Both companies went broke, and my $10,000 evaporated. I was 10 years old and my life savings to that point in time evaporated. But, none of this is the reason I’m telling you this story.  There were several powerful lessons in that story. Do I wish I still had those $10,000? Of course. Had I invested them myself, I expect that I would have multiplied them many times over. What you get when you don’t get what you want is an education. So all I have to show for those $10,000 is an education.  So what was the lesson? Listen to find out.

Mark and Tami Kenney are multi-family investors. In a few short years they have acquired about 4,500 units of multi-family apartments together with their partners. It's enabled them to abandon the corporate life, and focus on their passion. Join me for a great conversation about how to make the transition from small projects to larger multi-family apartment investing.

Michael Flight is a principal at Concordia Realty from the Chicago suburb of Oak Brook. He specializes in shopping center investing nationwide. Just because retail is going through major changes, doesn't mean there isn't opportunity. Join me for this immensely educational conversation about investing in shopping centers. You can reach Mike at www.concordiarealty.com

In late-18th-century America, something of minimal value was often described as being “Not worth a Continental,” which referred to the Continental Dollar, the American currency at the time of the American Revolution. The continental was paper money. It had occurred to the colonists that, as their revolution was costing quite a bit to maintain, they could go into “temporary” debt to finance the war. Pretty soon it became clear that the debt could not be repaid. The printing of paper banknotes resulted in inflation. The solution? Print more of them. Further devaluation of the continental motivated the colonists to print more… then more… then still more. The Continental became worthless, either for trade or for repayment of debt. The new country, the United States, then did something quite unusual. In its new Constitution, it created a clause to assure that this would never happen again. Under Article I, Section 10, the states were not permitted to “coin Money; emit Bills of Credit; [or] make any Thing but gold and silver Coin a Tender in Payment of Debts.” This week, Federal Reserve Chairman Jerome Powell testified in front of the Senate Banking Committee in its semi-annual Report on monetary policy. In that discourse, Chairman Powell described one of the debates inside the Federal Reserve. The question was whether the 2% target for inflation was a maximum or an average. It was felt that during times of economic weakness, prices would not rise as fast, and therefore there could be some relaxation on the inflation target during times of economic boom such as we are experiencing now. This would average out over time.  It’s interesting that this particular statement didn’t invite any discussion with the committee members.  There seems to be a misconception among law makers that inflation is the increase of prices, when in fact, the increase of prices is actually the symptom of inflation. The real inflation is the inflation of the money supply. Every time a government prints money, there is inflation. When there is more money available, then people become more willing to pay more for goods and services. The increase in prices is the consequence of too much money in the system. Lord knows we’ve been pumping money into the system over the past 10 years like never before. Quantitative easing was the new buzzword for printing money. We went through 3 rounds of quantitative easing over the past decade. The fact is, much of the money never made it into the broader economy. It was held within the banking system to restore profitability to banks that otherwise would have needed to earn their profits the old fashioned way.  Before the financial crisis, the fed balance sheet represented about 6% of GDP. Most of the demand for funds was for currency, and a small amount for reserves. After the financial crisis, the Fed balance sheet grew to about 25% of GDP. Most of that was to fund demands for reserves at banks, and the Fed also purchased assets. Assets is code for the Fed purchasing long term government debt. So when the US government borrowed money to bail out the financial system, the Fed printed the money, and the government issued bonds which the Fed purchased and earned interest on. Pretty good gig. Banks made 237B in profits last year, some of which came from cash reserves given to banks using printed money by the Fed. The excess reserves held by the banks above their statutory requirements were in turn loaned back to the Fed and the banks earned interest on those excess reserves. Wait, what? The loan had zero risk, and was basically a license to print money for the banks.  So here’s the bottom line. Inflation is a phenomenon of having too much money in the system. It causes prices to rise, albeit not uniformly. If you’re going to be playing the finance game, it makes sense to know the rules of the game.

Today’s show is a personal story. We are all part of this journey called life. The daily struggles are universal. Managing time, energy, diet, exercise, finances, commitments, friendships, cleaning up messes and mistakes. Finding the time, and creating the space to live out your dreams. I’m a pretty driven individual. If you’ve been listening to the podcast you probably have that sense by now.   On today’s show I want to share with you something deeply personal about how I start my day each day.  I’ve discovered that some days are better than others. Some are more productive than others. There are a number of factors that can come into play which affect the quality of my day.  Sleep is high on the list. Sometimes I sleep really well, and other nights I don’t. There doesn’t seem to be a consistent pattern.  My mindset in the morning is consistently the best indication of what kind of day I will have.  This morning was one of those when I woke up at 5:00. I had got to bed late and it took me a long time to fall asleep. I was really tired, my mind was already racing with thoughts about the day ahead and the insurmountable todo list. I was tired and I was anxious. My wife was still sound asleep next to me and I didn’t want to wake her. So I put earphones on and listened to several podcast episodes including Hal Elrod, author of the Miracle Morning. By the time my wife was stirring, I was full of energy, determination and focus on the one thing that would be my focus for the day. And then I slipped into the best part of my morning routine. I rolled over, gave my wife a hug for several minutes. We then put on the recording of our guided meditation. We both lay in bed, side by side, holding hands, while we did our meditation together. I gave her a kiss on the back of her neck and thanked her for being my best friend.  We then got out of bed and continued with our morning routine. 

On today’s episode we are going to slow things down. Often in this fast-paced world, with a short attention span we only see a very small snapshots what is really happening. When you turn on the television news you will see a nine second segment of the Federal Reserve Chairman‘s testimony in front of the US congressional committee. We are talking nine seconds out of a two hour hearing. There is no way that any nine second snapshot taken at random in those two hours can be an accurate representation of the full two hours. So today I want to introduce a concept that is not new in the world of cinematography. It might be a first on a real estate podcast however. On a podcast we don’t have the benefit of visual aids. So I want you to close your eyes and imagine a beautiful scene of a mountain panorama. There’s a big blue sky. there are the snow capped peaks. There is a Valley down below. To start with we’re looking at a single panoramic image a single snapshot in time. Now we’re going to do an upgrade and technology and go to live motion video. Whether the video is shot at 30 frames per second, or 60 frames per second very little changes from one minute to the next. After about 20 seconds, we’re starting to get bored. Your attention is starting to wander and you were easily distracted. But imagine for a moment if the cinematographer left the camera in place for several months and shot one frame every 10 minutes. By animating those individual images into a time lapse sequence over a longer period of time you see the movement of the clouds. you see the change of color from Dawn through mid day, until dusk. You see the change of the seasons. You see the weather storms come through and attack the mountain peaks with great fury. A time lapse sequence gives you a completely different perspective than a still image, or a live stream video.  Find let’s photography was invented by Louis Schwartzberg. As it turns out, he did not set out to develop time lapse photography. When he was just starting out early in his career, he did not have a lot of money. He wanted to capture high quality images. By shooting a single frame every 20 minutes, he could make a four minute roll of film last a lot longer. Little did he know he was going to invent an entirely new way of looking at the world. If time I photography can be more effective at helping you see a flower open from a close bud to a full-blown blossom, or the morning sunrise on the beach, what else can this technique be applied to?

Today’s episode is another AMA episode.  Today's question comes from BJ in Raleigh North Carolina. He sent me quite a detailed package of information that is far too much to cover in a single episode. However, I will summarize his project and give my initial reaction based on the information provided. BJ is looking to assemble five different parcels of land into a single large development site for a multi family apartment complex. His question relates to how he should best negotiate with the five independent landowners, hoping to make the land part of the equity contribution to the deal. Presumably that would reduce the amount of capital required and would have the benefit of allowing the landowners to participate in the future value creation of the apartment complex.  First of all, congratulations BJ for having the guts to consider a project of this size. Larger projects have the benefit of providing enough value and enough cash flow in order to afford all of the necessary skills you need to pull it off. Having said that, large projects also represent more risk. Larger projects come with larger problems. While there are many aspects of this project that I could provide comments on, I’m going to zero in on three items. Undertaking a project of this size requires that you have the right experience team working with you. You can still be one of the principals of the project, but you need to bring in people with significant development experience building multi family apartment complexes as partners in the project.  If the success of the project requires all five landowners to agree to similar terms in order for the project to be successful, your chances of success start to drop very very quickly. Complexity, is the enemy of any project. The land assembly process can be lengthy, and the negotiation can be difficult. Sometimes, it is simpler to raise the money and buy the landowners out. However, you only want to do that once you are assured that you will be given the entitlements that you require. You want to negotiate a deal with the landowners whereby you offer a lower price today that is a reflection of the as-is market value for the land, or a higher price once the entitlements have been granted. Land that is entitled for an apartment project is worth substantially more than land which is being used for agriculture. By keeping the negotiations with each of the sellers simple and straightforward, you increase your chances of success. Also want to look at the minimum land assembly required for your project to be viable. That may not require all five parcels of land. You might be able to get away with only three parcels. Yes it will be a smaller project, but it will also be simpler. The third area that I noticed in the information you provided is the construction budget. I am currently building a project of similar size and scope in another state. However, construction costs in North Carolina will not differ materially from other locations in the south. When I look at your construction budget, it seems quite low to me. If you under estimate the cost of construction, you are setting yourself up for failure. The definition of success or failure of any project often has little to do with the actual cost of the project. It has more to do with the expectations that were set at the beginning. If you set the expectation of too low a construction cost, you are almost certain to fail. My third piece of feedback on the construction cost is easily solved with my first piece of feedback which is to make sure you get some experienced apartment constructors involved as part of your core team.

On today’s episode we are talking about the laws of economics and how they apply to the world of investing.  As real estate investors, we make choices about where to invest, when to invest, what us a class to invest in, and the positioning of the product in the marketplace. When you perform due diligence on a particular opportunity there are always three elements to look at in detail.  The team. The overall market  The specific deal.  One of the realities of our modern world is that nothing ever stays the same. You’ll either be in a period of growth, or a period of decline. That is true of companies. That is true of cities. That is also true of individuals. Often, the period of growth or decline can be self reinforcing. What I mean by that is growth attracts growth. decline attracts decline. During periods of decline, people tend to run the other way. Whenever you have a self reinforcing function, it has the effect of accelerating. That is why you see companies experience financial difficulty slowly at first and then all of a sudden they’re in bankruptcy. Cities can experience the same phenomenon. Most cities are incorporated. It’s a special type of corporation that gets its power from the province or state in which it resides. Cities are not enshrined in the constitution. Municipal governments get their power usually from an act of the state or provincial legislature. So why is all of this important? The financial health of any municipality is determined by a number of complex factors. Most cities get the bulk of their revenue from property taxes. In an environment of rising property values, property taxes increase in proportion to the value of the property. As long as there is an influx of population, and an influx of jobs. We will tend to see rising prices for real estate and rising tax revenues If people are leaving the market, and prices are falling then local government revenues will fall unless the city raises the tax rates. This is politically unpopular, and therefore politicians are reluctant to use that approach. The other major variables are on the expenditure site. Cities spend most of their money maintaining the infrastructure of the city, paying local welfare checks, education, and funding other entitlement programs like pensions for those city workers who used to be in the police department, the fire department, or one of the numerous municipal bureaucracies. It’s no secret that the number of people retiring has accelerated to an unprecedented level. We can expect about 10,000 baby boomers to be entering retirement across North America every day for the next 15 years.  So what happens when a city can no longer afford to meet its pension obligations? At first they start to cut back on discretionary spending. Next they start to defer maintenance on critical infrastructure including roads, water, sewer, and public parks. Then they cut back on the number of teachers in the schools. We see class-size is increasing. When that trick stop working the city has no choice but to declare bankruptcy. We have seen it in Detroit which owed $18.5B in debt. We have seen it in Stockton California. Even Jefferson county Alabama had to seek bankruptcy protection with 4 billion in debt. The 36 cities across the United States that have declared bankruptcy are just the tip of the iceberg. So my question to you was a simple one. When you make an investment decision to invest in any municipality, are you taking a close look at that city’s upcoming pension liabilities? Are you paying attention to their ability to fund those liabilities?

On today’s episode, we are discussing what it’s like to work with an architect on a new development project. Few people understand the myriad of constraints that have to be balanced when developing a new building. Justin Greenleaf is one of the principals at the architecture firm of Greenleaf Lawson based in New Orlean, Louisiana. Join me for this insightful conversation. 

Limor Markman is a Toronto based real estate educator and host of the national TV show The Fortunate Future. She's one of those folks flying around the country hosting weekend workshops for new investors. Unlike many educators, she's still an active investor. On today's show we pull back the curtain on what it means to be a real estate trainer. 

Today’s episode is the book of the month book review. In order to be considered for a book of the month the book has to meet a very simple criteria. It has to be impactful enough that it will change your life or your perspective on the world. Whether it does or not is entirely up to you. You might read the book and comment on what a great book it was. But if you don’t internalize the book and make a part of you, you’re missing the point. The book selection this month is certainly worthy of meeting the book of the month criteria. Many people go through life looking for answers. But before you can look for answers you need to be looking for better questions. Our book this month is “The one thing” by Gary Keller.  Gary Keller is the founder of the Keller Williams real estate empire. He began this brokerage and grew it systematically organically into the dominant and largest brand in real estate brokerage in the world.  The ONE Thing has made more than 400 appearances on national bestseller lists, including #1 Wall Street Journal, NewYork Times, and USA Today. It won 12 book awards, has been translated into 30 languages. Unless you have been living under a rock, you have probably heard of the title. I’m certain that many of you have read it.  So why would I be selecting the one thing for the book of the month?  I read the book about 4 years ago. It had a big impression on me at the time. Fast forward to 2019 and the memory of the book and its lessons have faded. I need this book every bit as much today as I did in 2014 when I read it for the first time. 

On today’s show we are talking about a new rule under the generally accepted accounting principles that could profoundly affect the way commercial real estate leases are written in the future. If you’re a property owner where your commercial tenants sign multi-year leases, you need to pay close attention.  There is a new rule under GAAP that requires companies to disclose long term lease obligations on their financial statements. For all leases with terms of more than 12 months, the revised standard requires a right-to-use asset to be added to the asset section of the balance sheet and the present value of the related lease obligations to be included as liabilities.  So let’s say you have just signed a 10 year lease with lease payments of $100,000 a month, of which there are, say 9 years remaining. You would be required to add a right of use asset on your balance sheet in the value of 9 x 1.2M or 10.8M. You would also have a liability added to your balance sheet in the amount of $10.8M. Next month that liability would be 10.7M, 10.6M and so on as you draw down the residual balance of the lease. You might argue that there is no change really since the you’re adding an asset and a liability to the balance sheet and they fully offset each other.  However, not everyone looks at liabilities the same way. These changes could make lessees appear significantly more leveraged and cause unprepared entities to violate their loan covenants. Remember, just because the generally excepted accounting principles have changed, doesn’t mean that banks and lenders are going to change their underwriting rules to accommodate the changes in GAAP. Many bank underwriting rules compare the loan amount to the total liabilities. If these long term liabilities now appear on the company balance sheet, it can change the way a bank looks at a borrower.

This week Berkshire Hathaway published their investor newsletter. It’s widely read and many people look to the newsletter for clues on how to invest. Warren Buffett and Charlie Munger are legendary in their sustained performance. The company has been conservative and continues to build cash reserves. They haven’t made a major acquisition in nearly 3 years. The part that I noticed in the newsletter has nothing to do with investing, but instead on financial reporting. With the latest changes in GAAP rules, it will become increasingly difficult for investors to make sense of what is happening with a company. In 2018, Berkshire Hathaway reported 24.8B in operating earnings, a 3B non cash loss from its interest in Kraft Heinz, a $2.8B cash gain on the sale of assets, and a $20.6B loss from a reduction in unrealized capital gains. The net result of all those items is a report of only $4B in net income, down from $44.94B a year earlier. So here’s the problem, the company reported a record in terms of operating earnings, but rather dismal results against GAAP earnings.  A new GAAP rule requires the company to include the a reduction in unrealized capital gains as part of their earnings. Both Warren Buffett and Charlie Munger, believe that rule is silly. They argue that the new rule would produce wild swings in their bottom line. Let’s look at their quarterly results during 2018. In the first and fourth quarters, they reported GAAP losses of $1.1 billion and $25.4 billion respectively. In the second and third quarters, they reported profits of $12 billion and $18.5 billion. In complete contrast to these gyrations, the many businesses that Berkshire owns delivered consistent and satisfactory operating earnings in all quarters. For the year, those earnings exceeded their 2016 high of $17.6 billion by 41%.   What is Warren Buffet’s advice? Focus on operating earnings, paying little attention to gains or losses of any variety. So here’s the problem. Investor shave long since had a hard time making sense of corporate financials. The emphasis has been on operating earnings for a long time. But a complete set of financials requires a look at the income statement and the balance sheet. If you ignore the balance sheet, you can hide an awful lot of really important facts about the company in balance sheet transactions. When you add another layer of noise on top of the accounting to include unrealized gains or losses, it makes the balance sheet virtually impossible to use as a tool. I know why the accounting profession has added this rule. Many companies have avoided making prudent transactions in order to avoid declaring losses. This will force an additional level of transparency. But the quarterly report will cease to be a meaningful trend indicator when you consider the level of stock market volatility. The financial statements will be valid for only a few hours. After that, they will cease to be a meaningful representation of what is happening at a company.  We live in an era of fake news. We have now entered an era of fake financials. 

About a decade ago a Brazilian private equity firm called 3G Gapital made waves in the US when it spent billions to buy Americas most notable food brands including Kraft, Heinz, Burger King, Oscar Mayer and Budweiser.  Following the acquisitions the new owners relentlessly cut costs including mass layoffs to create greater efficiency and profitability. The companies single minded ability to improve profit margin‘s through cost cutting sent ripples throughout the entire food industry. A decade later 3G‘s strategy appears to have failed. Earlier this week craft Heinz wrote down the value of its Kraft an Oscar Meyer brands and other assets by $15.4 billion and disclosed an investigation by the federal securities and exchange commission into their accounting practices. In after hours trading shares fell nearly 28%. While they were paying attention to the expense line and the bottom line, they failed to pay attention to what it might take to grow the top line revenue. During that time consumer tastes have changed. Consumers are seeking healthier alternatives, more organic food, and many younger consumers have shifted away from beer towards drinking cocktails. Through a series of acquisitions 3G bought its way into the beer market and owns 40% of the volume of beer consumed in the United States. They completely missed the microbrewery threat to their business. Maintaining a healthy business requires adapting your product offer to your customers tastes. Real estate is a business like any other business. It is the same as selling beer, and ketchup, and hotdogs. Even in housing customer tastes do change over time. If you fail to invest in developing product that is going to be at the forefront of customer demand this year and next year, you will find yourself on the slow road to obsolescence. Putting a fresh coat of paint on that 1950s bungalow is just like putting a new label on the can of Budweiser. For the loyal consumer of Budweiser, the new label maybe eye-catching. But if your customers have shifted to craft beers or cocktails, the new label won’t do it. You will be playing catch-up in the market at best, or possibly bankrupt at worst.  So what do today’s tenants want? They want certain amenities in a rental property, or an office building.  Your customers don’t want 6 inch floor tiles. They want large rectangular 12 x 24 floor tiles. They don’t want laminate counters. They want natural stone like granite or a semi synthetic stone like quartz.  They don’t want ornate colonial style trim on the windows and doors. They want clean lines that are crisp and modern.  They may tolerate the old stuff, but that doesn’t mean they want it. I will tolerate Heinz Ketchup, but my taste has shifted towards other brands that have more vinegar and less sugar. You see the folks at Heinz never asked me. I had been buying Heinz ketchup for years. But then one day, my taste changed. I wanted a more natural ketchup. I never gave them the feedback. There was no way for them to know I had stopped buying Heinz. The folks at Heinz were busy looking internally for ways to save money. They eliminated single sided printing to save paper. They cut the corporate jet that the Heinz family used to use. Profits were growing, so everything looked good. All of a sudden they woke up one day and discovered that Victor and thousands like me had stopped buying Ketchup and Oscar Meyer hot dogs.

On today’s episode we’re talking about how you can prevent the next violent social revolution. History has seen its share of violent uprisings.  The French revolution which began in 1789 was not just a single event this was a protracted period of a people that lasted over 10 years. The causes of the French revolution or complex and still debated amongst historians. The French revolution took place after a seven-year war and the American Revolution. The French government was deeply in debt. it attempted it’s financial status through some pretty unpopular taxation’s games. Years of worsening living conditions for the general population combined with several years of bad harvests inflamed popular resentment of the privileges enjoyed by the establishment and the Aristocracy.  The American Revolution was a Revolt that took place also over an extended period of time. It started in 1765 and ended in 1783. I believe we are witnessing a moment in history right now that is not that different from the early days of the French revolution. The yellow vest movement has brought hundreds of thousands of protesters into the streets all over France for 15 weeks in a row. The five star movement in Italy which was elected to lead the current governing coalition had its roots roots in a similar Anti establishment popular uprising. Increasingly a disenfranchised segment of the population is looking to government to solve the problem. There is no question that there are millions of honest hard-working people who are struggling to create and maintain a minimum living standard. I believe that lack of financial education is one of the major causes of financial hardship, and what will emerge as social unrest. Even in the United States there are political movements afoot that could be enormously destabilizing. One of the best examples is Alexandria Ocasio Cortez who was recently elected to the US Congress. She was a very vocal opponent of Amazon creating jobs and investing in the New York area. When the population is angry and politicians get elected who don’t have the most basic understanding of grade 3 level arithmetic, the outcome can be extremely dangerous. The newly elected Congress woman does not understand the difference between a tax reduction and a tax credit.  Most of us would agree that there’s a big difference between a gift card and a discount. You can’t spend a discount but you can spend the gift card. Amazon was given a discount not a gift card. When politicians who don’t understand the difference between a gift card and a discount further confused and in rage the public , The results can be highly unpredictable. Arguments get made and they are completely irrational and have no basis in actual fact. Whether the lie is intentional or simply naïve, both are equally dangerous. This is where the importance of financial education comes into play. Every single one of us shares a burden of responsibility for ensuring not only that our children become financially educated, but also those members of our society who are most Disconnected from understanding how money and our financial system works. If we fail the educator society on how money works, more and more members of our society will continue to look up in the sky with arms outstretched waiting for the giant piggy bank in the sky to shower money up on them. If the piggy bank doesn’t produce enough, they will band together and smash the piggy bank in a violent uprising. If you don’t believe me, take a deeper look at what’s happening in France right now. These are not just the usual protests in the center of Paris or in other major cities like Lyon. These protests are occurring even in small villages and towns all over the country.

Today's episode is a real life case study recorded live at the Real Estate Guys, "Secrets of Successful Syndication" conference in Dallas Texas. This project started like many of our projects with a clear plan and solid market data to support the thesis for the project. Everything changed when the city announced a plan to expropriate 1344 properties in the area, including the land for this project.

Today's episode is about a purchase that ended in a lawsuit. This story is packed with suspense, uncertainty, stress, and wisdom. Check it out. 

On today's episode we are talking about the major considerations when designing a new development site.  Developers often look at a site from the perspective of how many units of finished product you can place on the parcel of land. This is an area that is fraught with complications. I can tell you from first-hand experience that the number one constraint on virtually every project is road access and parking. It is relatively easy to increase density by going vertical. However every time you do so, The density is going to gobble up more land for parking. Whether you're building an apartment complex, or a small residential subdivision, or even an office complex, parking and driveway requirements will dictate the design of the overall project.

On today’s show we’re talking about how to negotiate with your general contractor.  Often times, when a project is designed by an architect there are design tradeoffs that seem perfectly reasonable at the time. The design process consists of a complex puzzle of conflicting constraints of function, aesthetic, zoning constraints, building code, and cost. At the end of that process you get a few hundred pages of detailed drawings and specifications. The General Contractor will take the drawings send them out for bid to multiple subcontractors and get multiple bids for each sub trade. When the results come back, how should you as the project owner respond to the General Contractor? Most of the time the General Contractor will provide you with summary data for each of the major divisions of work. You will get a number for site work, another one for framing. You will have a bid for electrical, for plumbing and so on. This will probably consist of about 25 line items.  So the question is, how do you decide if any of the numbers are acceptable? Even if the summary numbers match your budget, you may still have a problem. If the numbers are too high relative to your budget, you definitely have a problem. So how do you resolve it? You could try and negotiate with the General Contractor. But in my estimation, that kind of arm twisting is a pretty blunt instrument. You may get a little bit of savings but not much.  In my experience the problems in most construction budgets are the result of mismatches in assumptions. In some cases, design decisions have unintended consequences that if they were fully understood at design time, would never have been made. We were recently reviewing a construction budget for a project and were shocked to see $225,000 in expenses for outdoor electrical work on the site. Only by digging deeper, we were able to determine that the electrician had specified 25,000 linear feet of 1” conduit on a site that measures 300 feet by 800 feet. Where on earth could you even begin to bury that much conduit on such a small site? By digging into the details we were able to determine that by using building mounted lighting, we could eliminate the lamp posts, and by using optical fibre that is specified for outdoor underground placement, we could eliminate the need for the 1” conduit almost entirely.  This whole process is called value engineering. By systematically digging into the details of the specifications with the General Contractor, and the architecture team you can create major savings in a project.  I’ll give you another example. We had completed the site plan and everything was working. But when we looked at the routing of the utilities, we had far more pipe circulating around the property than necessary. This was because the spacing between the buildings was too narrow to allow the utilities to be routed between buildings. They had to be routed around the buildings at much higher cost. By making a minor change to the site plan, we were able to move the buildings apart and save a bunch of money on the underground utilities. We also noted that when the buildings were close together, we had to use fire rated windows on the walls that were close to the neighbouring buildings. Fire rated windows cost about double the price of regular windows. The end user can’t tell the difference. The windows look the same. By moving the buildings apart we were also able to save 50% of the cost of the windows.  Each one of these savings are not huge by themselves. In every case, we were able to save cost without sacrificing quality or the value of the end product. The changes would be completely invisible to the end user of the property.  After you’ve completed that exercise, and saved as much as you can save on the scope of work, then it's time to negotiate with the contractor and save a few pennies more.

On today’s show we are talking about the most insane statements to come from economists in recent memory.  I’m acutely aware as I’m sure many of our listeners are, of the unsustainable levels of government debt in the US, Canada, the UK, France, Switzerland, Italy. I could go on.  The justification for the debt is that as long as the interest rates are lower than the level of real economic growth, that is growth of real GDP, the debt is sustainable.  But folks here is where the argument falls apart. We know that our population is aging. That’s not a secret. We also know that as people age, their spending patterns change. They spend less. They also borrow less. So the argument that economic growth will continue at the same 2.1% rate in the coming years in the western economies makes no sense.  We saw in Japan that economic activity stagnated as soon as the working population peaked as a result of the aging process. Japan’s lost decade happened as soon as the domestic spending shrank. In other countries in the west We have a population that as it retires switches from actively contributing to economic output to one that is strictly consuming from society. They spend less. They pay less in taxes. They demand more from the society in terms of social security and health care.  The deficit spending at the federal level gets the most attention. But the federal government has the tool to print money at will and inflate its way out of the problem by effectively devaluing the currency. That’s a way of taxing the population without them really noticing.    The government racked up a new debt of $2750 for every man, woman and child in America this year. That comes to $7,100 per household. That’s in addition to the already existing debt of 22T dollars. That debt comes to $67,000 for every man woman and child in the country, or a total of $173,000 per household.  Nobody seems to be talking about this. This is a train wreck in the making. Here’s what my friend Peter Schiff had to say about the 22T in debt. He says,  "This is just a funded portion of the debt. This is where the US government sells a bond and somebody owns that bond. It doesn't include the 70T in unfunded liabilities like what the government owes for Social Security, or guaranteed bank deposits, or mortgages, or student loans, or all that nonsense. That's not there. Those are contingent liabilities. They're just as real. They're not even part of the national debt calculation." I may not be an economist, but I can perform pretty basic arithmetic. The economy will not grow faster than interest rates. A country will never grow its way out of a deficit. Remember, interest rates reflect a connection to the rate of inflation and also carry a risk premium. When countries carry irresponsible levels of debt, the risk of default clearly goes up. It’s not the Federal reserve who will establish the risk premium, it’s the open market. When China decides it no longer wants to hold 25% of the global float of US treasury bills, who will step in to buy them? When Saudi Arabia decides it no longer wants to hold dollars so much, who will step in to buy them? We see countries in South America with much higher interest rates than the US. Why? Because they’re at higher risk of default. When investor sentiment shifts and global investors don’t want to hold US dollars any more, then the US dollar will carry a risk premium, the same as Argentina.