EQ Journal Archive 17

By Bruce Firestone | Uncategorized

May 14

https://www.eqjournal.org/?paged=17


         Due Diligence        

       
   Posted on
       Saturday 20 November 2010  
     
   
       

The process one goes through in purchasing a piece of real
estate is remarkably similar to the process one utilizes to determine a
site’s highest and best use (https://www.old.dramatispersonae.org/HighestAndBestUse.htm).
It also resembles the process Banks and other funders use to determine
their risks from lending to a proposed (or existing) project.

Duly Diligent

What are some of the key things one has to do or look at when buying
real estate, financing real estate or determining a site’s highest and
best use?

It’s a valuable exercise for sellers of real estate as well as
appraisers to undertake too. It can help them set a market price for
their property as well as prepare for some objections that buyers might
raise.

I can’t believe how many sellers of real property do almost nothing
to boost their case—many don’t bother to prepare a comprehensive sales
and marketing package. You would think that real estate agents would be
very good at it but many are horribly unprepared to sell property.

I have bought (and sold) hundreds of properties and I have had the
rather frustrating experience of asking a REALTOR or a seller basic
questions like: what is the zoning on the property; what’s the FSI
(floor space index); what are the current rents and so forth and gotten …
nothing.

Vacant Land

Real Estate is an industry where local knowledge is of paramount
importance. Something that works well in Toronto and New York (say for
the Reichman family of Olympia and York fame) may not work at all well
in, say, London (at Canary Wharf, for example). Here are some of the
things you should do or look at when buying vacant land:

What is the current zoning?
What is the current Official (or Master) Plan designation?
What types of uses are the adjacent lands being put to or contemplated?
How is the local economy doing?
What direction is the neighborhood heading in (is it stable, improving or deteriorating)?
What is the crime rate like in the vicinity including petty crime such as vandalism and graffiti?
How can you add value to this piece of real estate—what type of uses are most in demand?
What is the competition like?
Are other developers doing projects in the area?
How are they doing with those projects?
Is it possible that competition in the area could actually boost your
proposed uses much as fast food restaurants or petrol stations flock
together and feed off of each other (so to speak).
What kind of support (or opposition) are the neighbors likely going to give you for your proposed uses?
Have you talked to any of your neighbors?
What does your local councilor think of your project?
Have you walked the site, photographed it, developed a gut feeling for it?
Are your head, heart and gut all in agreement with your plan and offer to purchase?
Is the local infrastructure sufficient to support your project (storm
water outlet, sewer capacity, piped water supply, road capacity,
power,…)?
Are high speed Internet, cable and telephone service available?
Is public transit readily accessible?
Have you completed an economic feasibility study and rate of return calculation?
Does it meet your rate of return requirements?
How long will it take to get the project off the ground and realize this return?
Can you sustain the project if there are any delays?
Have you tested the economic feasibility of your project should there be any delays, cost overruns or changes in demand?
How can you tweak the project to either increase the benefits or decrease costs?
Have you spoken with city staff to gauge their level of support for your proposed uses?
Are there any wetlands on the property?
Is there any environmental contamination?
Are there any easements?
Does the Seller have clear title?
Is there any litigation affecting the property?
Can you get title insurance (https://www.old.dramatispersonae.org/TitleInsuranceExplained.html)?
Is this a freehold acquisition, long term land lease or a condo?
Can you obtain financing?
Will the Seller provide any financing (i.e., a STB, Seller Take Back mortgage)?
Can you get reasonably priced insurance?
Are there any heritage or archaeological constraints?
Have you met with officials from Provincial or State Ministries
(environment, natural resources, transportation, agriculture, municipal
affairs …)?
Are there any important natural resources on the property?
Are you purchasing riparian, subterranean and air rights too?
What are the setbacks and height limits affecting the property?
What are the building permit, development charge and other City, Province or State fees?
Have you had the property appraised by a professional appraiser?
Is the appraised value close to your proposed purchase price?
What are the property taxes?
What is the property’s assessed value?
Are there any Tenancies and, if so, what is the income statement like and what is the capitalization rate and IRR?
Is there any deferred maintenance?
Is it a condo and, if so, what are the condo fees and is the condo corp solvent?
Are there any noise sources close by such as rail,  car washes, turbines or high intensity industrial uses?
Are there any dangerous or noxious uses in close proximity (such as
abattoirs, fire works factories, pulp and paper mills, petro chemical
plants,…)?
Are there any streams, water courses, navigable water ways that impact of the proposed uses for the site?
Is there enough room for parking and park land?
Are there any short term or long term land leases (such as agricultural uses or parking uses) that impact the lands?
Can you get vacant possession of the lands?
Are there any residential tenancies and, if so, can you get evictions if you need vacant possession?
Can you get vehicular access to the property, road cut permits or culvert permits?
Can you take down trees if you need to?
Can you get full left in, left out access for vehicles?
If the property is being developed on private services, is there potable water on the site?
Can you install a septic system on the site?
Why is the Seller selling?
Can you obtain a survey?
Does the survey show all easements, encroachments and rights-of-way?
Is the APS (Agreement of Purchase and Sale) subject to any excise fees
(land transfer taxes, Goods and Services Taxes, HST, VAT (Value Added
Taxes), withholding taxes for non-residents,…)?
Are the property taxes up to date?
Is the property subject to foreclosure, power of sale conditions and rights of redemption?
Are there any liens on the property or other encumbrances?
Is the property subject to any rights of first refusal?
What did the Seller originally pay for the lands and when?
What did neighboring lands sell for?

I am sure there are many more due diligence questions that we could come up with but this is a good start.

Buying real property is hard. Many, many people make mistakes in this
business and, as a good friend of mine once told me (Barry G. Lett):
“You make money when you buy real estate not when you sell it.” So
getting it right the first time is pretty important.

Land and Buildings

When you buy real property that has existing buildings on it, you
have just added more complexity. I tell my clients that the land under
existing buildings is often more valuable if they remove the structures
so, if they want to get full value for their properties, it is often
best to pull down tired structures that are at the end of their economic
lives and create a vacant lot.

Why is this? Well, sometimes it is because people can’t visualize
their own projects on a piece of land if there are other people’s
buildings ‘in the way’. Humans are very territorial. That’s why
residential real estate agents who sell a lot of homes tell their
clients not to leave anything personal around so that prospective buyers
can visualize themselves and their stuff in the home not the current
occupants. Same thing in commercial real estate, I am afraid.

Also, when you build something on a piece of land, you have locked in
all the options for the foreseeable future (a life of 30 to 60 years is
typical for commercial projects these days). It’s just like when you
buy a new car—you decide on the colour of the vehicle, engine size,
whether it has a tow package, interior finishes, automatic or manual,
etc. The moment you drive it off the lot, it devalues 15 to 30%
overnight. If you drive it back to the dealer the next day because, say,
you just lost your job, you will discover this for yourself.

There are the ‘restocking charges’ and the transaction costs to take
into account but the biggest devaluation has taken place because you
have locked in all the options, The person who next buys this vehicle
might not like fire engine red or lemon yellow but they’ll take it for a
reduced price…

Same thing in buildings—there are thousands of small changes in the
economy every year—so that a building built to meet one functional
program (say, a roller disco rink) might not be suitable for a
technology user a couple of years later when the disco craze dies. (I
actually had this experience and the costs of retrofitting the building
for a tech company after the roller disco place went bust were
substantial.)

Most developers only think about form following function—they
determine what the highest and best use is at one moment in time and
then get an architect to wrap a form (i.e., a building) around those
functions. But architects being the independent and stubborn people they
are often disregard the developer anyway and design something that
suits the site and the neighborhood—it grows organically from the
ground, in a way. So function follows form; that means that they
intuitively understand that a building will probably see a multitude of
uses in its life.

Think it can’t happen in residential construction? Think again.
Imagine the computer cabling that a home like ours requires. Built if
1988, it had zero cabling for PCs. We now have five in our home and
fishing the wire through walls and floors is hard and expensive.

Think about how many people work from home today or have home based business? It’s phenomenal.

Think about how many baby boomers are going to need elder care soon,
first for their parents, and then for themselves. I think that we are
building homes that are wrong for the times—the whole industry needs a
rethink but that is not the subject matter here.

Here are some due diligence questions for structures:

Have you had the building inspected?
Do you plan to tear down the existing building?
Can you get a demolition permit?
Are you going to renovate, rehabilitate or add to an existing structure?
How is the wiring, plumbing, roof, foundation, structure, etc.?
Are there any leases in place?
Are they long term or short term?
What are the rents?
Are they net, net, net leases (i.e., does the tenant pay all operating costs, property taxes and utilities)?
What operating costs will you have to pay?
Are the rents at, below or above market rents?
Which way is the rental market heading?
Who pays for major repairs such as structural repairs?
Who pays the property taxes?
Are there any inclusions or exclusions with the property (appliances, other chattels, fixtures, etc.)?
Are there any environmental or bio hazards (e.g., asbestos insulation, ‘Legionnaires’ disease)?
How are the HVAC (Heating, Ventilation and Air Conditioning) systems?
Are your operating costs above, at or below the norm for this type of real property?
Can you reduce your operating costs—are there any environmentally sustainable practices that you can implement?
Are the tenants sound financially?

Buying existing buildings is a lot like buying existing businesses.
It takes a great deal more due diligence and a different mind set than
building from scratch. Some people are really good at buying existing
property or existing businesses and turning them around.

Those folks are often really bad at creating a new project so I would
say that the industry is split between operators and constructors. I
have been much more involved in the latter and I know that the skill set
to build from nothing is quite different from the skill set to be a
good operator.

Both can add a lot of value—the constructor can see a project in his
or her mind’s eye long before the first rivet is driven into the steel
structure. They have a natural feel for the local market and what will
work and they see things before other’s do—they pioneer things.

A good operator can be creative too—they can see how it might be
possible to add some ‘lipstick’ here and some ‘makeup’ there and create a
whole new ambience. They can differentiate their projects on style,
panache, quality, maintenance, clever redesign and use of space, etc. It
isn’t just that they mop the floors better than their competition.

Prof Bruce

       
       
       
     Prof Bruce @ 1:02 pm

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         Media (Unwanted) Attention        

       
   Posted on
       Saturday 20 November 2010  
     
   
       

Why Pioneers Get Shot

No one really ‘handles’ the media, or at least, not for long. In many
parts of the world, the strategy of the media is to ‘comfort the
afflicted and afflict the comfortable’. While you are seen as an
underdog, you will probably get favourable or sympathetic media
attention but, once you are successful, they might turn on you.

It is impossible to conduct your business in the full glare of the
media spotlight. Things that are in the normal course of business can
become distorted through the lens of the press.

If you are asked: “Sir, do you beat your wife?” and you answer: “No, I
don’t beat my wife,” the headline will read: “Jones Denies Beating
Wife”. The next thing you’ll overhear as you pass the water cooler at
work is a colleague telling a friend: “Gee, I didn’t know that Jones was
a wife-beater.”

Entrepreneurs Stick out from the Crowd: Mighty Tempting Targets for the Media (Far Side Comic)

If you’re in divorce proceedings, all a person has to do is accuse
her or his partner of child abuse or spousal abuse and almost
automatically they now have the upper hand. I have known lawyers to
advise their clients to be deceptive like this simply to strengthen
their hand in settlement negotiations.

Candidate Jimmy Carter’s admission to Playboy Magazine that he did in
fact have lust in his heart for women not his wife almost led to his
failure to become President despite the fact that Jimmy was loyal to his
wife Roslyn and that this is a question that practically no male on the
planet could honestly answer any other way*.

(* The smart truth answer for President Carter would have been: “I
have always been faithful to my wonderful wife, Roslyn, who I love very
much, and she is all the woman I need.” It is truthful and smart and
Jimmy should have just stuck to this even if, as the media is wont to
do, he is asked it over and over again albeit in slightly different
forms by gotcha journalists.)

In the commercial office (real estate) business, leasing inducements
(sweeteners) are normal course—they go to pay for TIs (Tenant
Improvements). I have seen press reports labeling them as ‘bribes’.

In an Offering Memorandum, standard legal language describes the
risks associated with the offering in often bleak terms; basically, ‘If
you invest here, YOU COULD LOSE ALL YOUR MONEY.’ Or: ‘You should be
prepared to lose your ENTIRE INVESTMENT if you do this.’ Or: ‘Don’t
invest here unless YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT AND NOT
MISS IT.’

To an investigative reporter, who may know next to nothing about
business, this is tantalizing; the headline could read: “Smith Peddles
Worthless Investment.”

People, who buy professional sports teams often, in retrospect,
describe their purchase of the team as the ‘second happiest business day
of their lives’, the first happiest being the day they sell it.

It may not be because they lost money on the team; it could be
because they suddenly became a focus of media attention that hugely
damaged their other business interests, their personal lives, friends
and family.

So, if you stick your neck out, watch out… jealousy is a powerful
force. Members of the media will be only too happy to take you down a
peg or two. Remember, they get promoted when they produce a ‘gotcha’
story; they win prizes for this, sometimes even if it proves to be
untrue later on.

The idea that a journalist needs to have two independent sources
before they print something is seen in some quarters today as a quaint
concept. Now they need only wait for the tabloids or the Internet to
report something before they publish it as ‘fact’ in the mainstream
press.

And it doesn’t matter if you are the most ethical person since Mother
Théresa, you are in a no-win situation. Denying a story can just give
it more legs.

What can you do about it? You might decide to KEEP A LOW PROFILE.
Remember that the media builds you up only to tear you down. Using the
media to garner attention, to promote your business, to gain ‘earned
media’ through GM (Guerrilla Marketing) works for you for a while and
then it doesn’t.

Other than keeping a low profile, the only other thing that seems to
work for most people is telling the smart truth. I learned this from
litigation lawyer Scott McLean. Politicians know how to do this or they
are not long for the political world.

A few years ago, Coca Cola announced that they had invented a soda
dispenser that hiked the price whenever the weather got warmer. This was
truthful but awfully dumb. Coca Cola looked like a heartless
corporation overcharging you just when you need to quench your thirst
the most; i.e., when it is hot. The smart truth would have been that
they had invented a machine to lower prices whenever the weather got
cold. The effect is the same (that is, they are using differential
pricing algorithms to maximize profitability) but the PR impact is
vastly different.

Media and public reaction to their dumb truth was so bad that they had to withdraw the new machine.

I’ll bet there was an engineer involved in this press
announcement—engineers tend to be linear thinkers and can’t believe that
this type of thing can actually be important. It is.

The person who said all press is good press as long as they spell
your name right*, doesn’t know what they are talking about. If you get
great press, it makes everything easier. People are sheep-like; bankers
are sheep-like. If you get good press, you’ll have more clients and
you’ll get more loans. The reverse is also true. So either get no press
or good press, OK?

(* There is another saying: “Living well is the best revenge.”
Unfortunately, this isn’t true either: even if you have more money than
God, no one likes bad press. It upsets your employees, your
friends and, above all, your family. When politicians, business people,
entertainers, rock stars or hockey players and other athletes tell you
they have broad shoulders and can ‘laugh off’ bad PR, they are either
lying to you or lying to themselves, which is worse.)

There are exceptions, of course. Ted “Mouth of the South” Turner
seems to have pulled it off as has Richard Branson at Virgin. But again I
tell my students that this is like reading about the two pals who
sketch an idea on a napkin, set up a business with no revenues and sell
it for $180m, 18 months later to some foolish large company. It happens,
except not to you.

It is more like winning the lottery—you can’t count on it. There
aren’t too many Ted Turners or Richard Bransons who by their very
nature, charisma, luck, charm, whatever, seem to get away with
outrageous statements and behaviour and still be successful
entrepreneurs.

Today, entrepreneurs have much greater scope for telling the smart
truth and making their voices heard. They can blog or Tweet to put their
point of view out there. They can message and Facebook their friends.
They can work to gain the trust of other bloggers and Twitter users to
help spread the word. They can hope to get their story featured on Digg
or Reddit. These marvelous social media tools, free for the most part,
are, at least for now, giving entrepreneurs an opportunity to compete
for mindshare on a more even footing with mainstream media. There is
nothing a journalist hates worse than being proven wrong or shown up, in
print.

Prof Bruce

       
       
       
     Prof Bruce @ 12:12 pm

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         10 Reasons Why Landlords Wouldn’t Lease to God        

       
   Posted on
       Saturday 20 November 2010  
     
   
       

This is becoming a serious input problem for startups– I see
this every week: Landlords refusing to lease space to entrepreneurs.
They prefer A-rated Tenants and are so risk averse that they are missing
out on the next generation of major space users.

So my son, Matthew, and I came up with a list of Ten Reasons Why Landlords Wouldn’t Lease Space to God. Here is our list:

1. God doesn’t have a Beacon Score.

2. God doesn’t provide references.

3. God refused to supply the City or the Landlord with His building plans for approval/permit.

4. God wouldn’t comply with opening hours of the Mall; He is always open.

5. God didn’t provide proper ID for FINTRAC forms.

6. Landlord can’t distrain or lock out God for non-payment and is powerless to otherwise enforce provisions of the Lease.

7. God is not registered for HST.

8. God is difficult to negotiate with or otherwise take advantage of
from the Landlord’s possession of asymmetric information since He is all
seeing and knowing.

9. God declined to give the Landlord a percentage rent.

10. God refused to produce His personal Balance
Sheet or put up a LC or other form of security since He claimed
ownership of the Universe and everything in it.

Many Landlords today are taking the ‘Lord’ part of their name too
seriously and they need to ease up a bit and make some of their space
available to entrepreneurs. One of the most senior persons I know in the
development industry told me last week that he left brokerage because
he couldn’t find entrepreneurial Landlords willing to lease space to his
less well-established and younger clients.

Unless we get some progress in this area, the economy will be unable
to produce the next generation of A rated companies. If you look at the
Fortune 500, in just ten years (from 1999 to 2009) nearly 50% (238) were
eliminated*. If we don’t encourage startups, where are the next 50% in
the next ten years, 25 years, 50 years, going to come from?

Prof Bruce with Matthew Firestone

* See: The cost of culture, a 50% turnover of the Fortune 500 by Toby Elwin on February 4, 2010.

Postscript: for more on this subject, please also see-

Landlord from Hell (https://www.eqjournalblog.com/?p=1851)

and

Commercial Rents: Commercial Leasing is Trickier than Residential (https://www.eqjournalblog.com/?p=1698).

       
       
       
     Prof Bruce @ 11:12 am

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         Ways to Get Paid        

       
   Posted on
       Saturday 20 November 2010  
     
   
       

I don’t have to tell you that collecting your receivables or
getting compensated for your work is the sine qua non of every
enterprise. But getting paid is not easy these days. So I put together a
list of the things you might do if you feel you are owed something.

Here are the steps:

1. Ask for it in a non-threatening way. You could call someone up and
accuse them of something but this almost never gets you anywhere.
Instead, phone them up and say, for example: “I heard you were thinking
of going over to the winning bidder? Can we talk about that?”
2. Meet F2F with everyone. People find it a lot harder to lie to your face.
3. Phone them on a regular basis.
4. Write personal emails. The squeaky wheel does get the grease.
5. Try faxing them. It’s so old fashioned it just might work.
6. Ditto for snail mail.
7. Use a tag team approach. People tune you out after a while. Get
someone else from your organization to repeat steps 1 through 6.
8. If you are in construction or you are an architect, lien the
property. This will get their attention since they can’t mortgage the
property or sell it without first dealing with your lien which pretty
much outranks everything else (including mortgages) except government
claims for statutory payments like income tax owing, source deductions,
HST and so forth.
9. Withhold further work. Stop work on the project. If you are an
architect, refuse to certify monthly payments. That way no one gets
paid.
10. Find some real property that they own and register your agreement or
claim on title. This creates the same problems for them as a lien does.
11. Take your complaint to their BOD and shareholders.
12. Talk to their suppliers and clients and enlist their support.
13. Talk to their lenders.
14. Talk to their employees.
15. Show up in person at their offices and stay there until you get paid.
16. Picket their place(s) of business. Form a picket line.
17. Visit them at home and ask for a fair shake.
18. Compose a media release.
19. Organize a boycott of their business.
20. Tweet about them.
21. Ask a lawyer to write a letter on your behalf.
22. Take them to small claims court which is cheap and fast and where you can represent yourself.
23. Maybe, as a last, last resort, you hire a lawyer to sue them.

Prof Bruce

Postscript: this originally appeared as a footnote in: Protecting Your IP by Suing (A Cop) Is Probably a Bad Idea (https://www.eqjournalblog.com/?p=1884).

       
       
       
     Prof Bruce @ 11:01 am

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         Protecting Your IP by Suing (A Cop)        

       
   Posted on
       Sunday 14 November 2010  
     
   
       

Is Probably a Bad Idea

Years ago, a friend of mine, a sign maker in southern California,
came up with the concept of a stalking horse* for traffic cops.

(* This post was originally a Postscript I wrote to another article on ‘stalking horse marketing’: https://www.eqjournalblog.com/?p=1868.)

He designed a full size sign that looked just like a cop car and he
could install it next to any highway. It was actually nothing more than a
Hollywood set but here is the clever part: you could park a real police
vehicle behind it and the real cop could poke his radar gun through the
fake window.

So drivers would never know if the speed trap was manned or not. They would always have to slow down when they saw it.

Stalking Horse
[From: InventorSpot.com]

It was a cheap, traffic calming solution.

Now when you come up with a bit of IP like this, how do you protect
it? You could apply for a utility patent (hard and expensive to get), a
design patent (usually a bit easier and cheaper to get) or a business
methods patent (hard to get in Canada, a bit easier in the US: Amazon
got a patent on 1-click checkouts, if you can believe that).

But you may have heard the saying: “Patents are only worth what you
are willing to pay to defend them.” So my friend thought that just
building and selling them to police forces might work fine without
taking the time and incurring the cost of patenting it. After all, he
was presenting the idea to the police, upholders of the Law.

The first police force he presented it to wasn’t interested in it and
he got discouraged. He basically gave up on his idea although, to be
fair, he had other problems: one of his bigger investments came a
cropper and he went broke.

That led to a considerable period of time when he went wandering off
into the desert where he eventually found God and another line of work.

But a few years later, driving down a highway in the same police
jurisdiction where he had originally pitched his idea, he saw his signs
and his idea at work.

Turned out that the person he had pitched it to actually thought
enough of the idea to ‘borrow’ it and get his brother-in-law to build
them. My friend asked me: “Do you think I should sue them?”

For those who have read this blog extensively, you’ll know what I
think of suing people: it’s your last resort and probably not even then.
Besides he had moved on in his life and I would think only bad things
happen to you if you sue your local police force.

Protecting IP is difficult. I am not only not persuaded by the cost
and time it takes to get and enforce patents, I am not sold on the value
of ideas, per se.

I believe information wants to be free, ideas are abundant* (and
hence relatively cheap) and execution counts for a lot. Was Google the
first search engine? Was Facebook the first social media? Was the iPhone
or the iPad the first smartphone or tablet computer? No. But these
companies can REALLY execute and sell.

(For more about this, please see: Why Large Companies Buy Cashflow Not Ideas, https://www.eqjournalblog.com/?p=431.)

If you look at my buddy’s problem, was his SoCal police force the
only group he could have sold it to? Would it matter if they had
‘borrowed’ his idea without permission or compensation if he had
installed thousands of these for other forces across the state and
nation?

If you have a good idea, you will have competition. If you have a bad idea, you won’t but so what, it’s bad idea.

Maybe he could have come up with other designs, like, say, a
motorcycle cop dummy billboard. A whole line up of signs, disguises and
decoys are possible.

Who knows, maybe he would have stumbled onto another idea that was
even more valuable, like creating 3-D images that scare drivers into
slowing down:

3-D Image of Girl/Traffic Calming
[See: RawStory.com]

A former student of mine, Daniel Beauchamp, had an important point to
add here: “While your competition can copy your ideas, they can’t copy
what you are going to do next.” Which means, that if you have a bright,
talented group, it doesn’t much matter if you have a copycat competitor
since they can’t know and can’t copy what you are going to do next to
differentiate yourself from everyone else.

So my preference would be that your first priority as an entrepreneur is to: “get out there and hustle, kid*”.

Facebook and IP

And hustle is the one thing that Mark Zuckerberg at Facebook had in
spades if you can believe anything in the film, The Social Network. I
enjoyed the movie and suggested to my entrepreneurship students that
they all go see it.

The reason? Not to see Zuckerberg getting sued for allegedly stealing
other people’s ideas but to see the level of talent, focus, energy and
commitment he had to making Facebook a success.

I laughed when everyone else in the theatre (most of them 30 years
younger than moi) were serious because I realized that if Zuckerberg had
actually gone to work for the Winklevoss twins building ‘Harvard
Connect’, no one would have heard of it outside of a few guys at Harvard
who wanted to scope out the girls there.

Ideas are relatively abundant but good execution is scarce. Zuckerberg can execute.

Now having said this, if he did indeed borrow or build on others’
ideas, he should never have been in discovery. Just pay them, Mark.

Disney’s Wide World of Sports

The Disney Company faced this issue years ago when they opened
Disney’s Wide World of Sports (since re-branded as ESPN’s Wide World of
Sports).

Two guys (a former Baseball umpire and an archtiect) had talked with
Disney about the concept as far back as the late 1980s. Disney then
rejected the idea only to open Wide World of Sports in 1997.

The two fellows sued Disney and won a jury decision for $240 million
which was later settled for an undisclosed amount. It almost certainly
would have been less expensive for Disney to compensate the guys for
their idea in the first place but Disney was then known as a combative
organization that aggressively pursued a litigation strategy whenever
they felt their interests threatened.

In the US, small fry can at least hope to take on massive companies
like Disney if they can find a law firm willing to shoulder the burden
of the litigation on a contingency fee basis: they get typically 30%+ of
the final settlement, if any. That is why it is called ‘contingent’.

In Canada, you have virtually no hope. Law firms here are much too
risk averse to take on something like this even if their Law Societies
permit it, of which many do not or, at a minimum, they frown on it.

Canadian lawyers practically bar the door until a new client has
whipped out her credit card to pay for a 45 minute consultation. This
happened to a young friend of mine recently. She is an immigrant to
Canada who needed some advice about wrongful dismissal. The lawyer she
saw, yawned throughout the 45 minute pre-consultation, told her her case
sucked and that, if she won anything, it would all go to his legal fees
or to taxes and then asked for her credit card before she could leave
the office and billed her 200 bucks.

So don’t bother suing in Canada, you’ll lose in every way you can think of: your money, your time and your spirit.

Ottawa Convention Centre

We put in a bid to assist the City of Ottawa and Ontario with the
urban design of their new Ottawa Convention Centre. We had a credible
team and a solid bid but lost to a major accounting firm. Now what does a
major accounting firm know about urban design? Right, nothing.

But after they won, they enticed the architecture firm on our, losing
team to work with them, taking with them all our IP and design ideas
for the new Centre. We were not happy with either the winning bidder or
the architecture firm but what to do? Realistically, in Canada, nothing
other than asking for our IP back and never, ever using either firm
again.

Interestingly, the architecture firm’s order book took an immediate
plunge downward after this: Ottawa is a small town and people talk. Even
in mega cities like New York, there aren’t really that many movers and
shakers and, if you muck people over, it gets around.

What should they have done? If the winning bidder and the
architecture firm had simply asked us for permission, we almost
certainly would have agreed. They could have offered to compensate us
for our ideas and, if you know anything at all about creative people,
more than anything, they just want to see their ideas implemented.
They’re driven to create.

A modest ten percent of the bid price would have been more than
enough and that would have been a solid investment since their ROI on
their winning bid was negative if you take into account the fact that
they lost nearly all their clients in Ottawa after the story circulated
in the industry.

This happened on another occasion: we caught a REALTOR who was
working with us on a commercial bid leaking info to a competitor who
undercut us by a nickel on a 10-year lease which we lost. The
consequences for the REALTOR were so bad that he left town a few months
later and stayed gone for more than 15 years.

Same story for a lawyer who leaked confidential client information
(ours) to a developer who bought sites next to us over the years to
benefit from the rise in real estate prices from projects we were
involved with at the time. With the help of the firm’s  senior partner,
we set him up with false information; he fell for it and was summarily
fired. His career never recovered.

So while a litigation strategy may not work in Canada, there are other ways**.

Prof Bruce

* Thanks to Norm Green, former owner of the Minnesota North Stars, for this quote.

** If you feel you are owed something, what are the steps you should
take to collect a receivable or be compensated for your work? Here is my
list:

1. Ask for it in a non-threatening way. You could call someone up and
accuse them of something but this almost never gets you anywhere.
Instead, phone them up and say, for example: “I heard you were thinking
of going over to the winning bidder? Can we talk about that?”
2. Meet F2F with everyone. People find it a lot harder to lie to your face.
3. Phone them on a regular basis.
4. Write personal emails. The squeaky wheel does get the grease.
5. Try faxing them. It’s so old fashioned it just might work.
6. Ditto for snail mail.
7. Use a tag team approach. People tune you out after a while. Get
someone else from your organization to repeat steps 1 through 6.
8. If you are in construction or you are an architect, lien the
property. This will get their attention since they can’t mortgage the
property or sell it without first dealing with your lien which pretty
much outranks everything else (including mortgages) except government
claims for statutory payments like income tax owing, source deductions,
HST and so forth.
9. Withhold further work. Stop work on the project. If you are an
architect, refuse to certify monthly payments. That way no one gets
paid.
10. Find some real property that they own and register your agreement or
claim on title. This creates the same problems for them as a lien does.
11. Take your complaint to their BOD and shareholders.
12. Talk to their suppliers and clients and enlist their support.
13. Talk to their lenders.
14. Talk to their employees.
15. Show up in person at their offices and stay there until you get paid.
16. Picket their place(s) of business. Form a picket line.
17. Visit them at home and ask for a fair shake.
18. Compose a media release.
19. Organize a boycott of their business.
20. Tweet about them.
21. Ask a lawyer to write a letter on your behalf.
22. Take them to small claims court which is cheap and fast and where you can represent yourself.
23. Maybe, as a last, last resort, you hire a lawyer to sue them.

Postscript: I wrote another essay titled: ‘en bas les droits
d’auteurs’. Despite the French title, the post is in English. I argue
that patents and other types of IP protection are, in fact, a form of
restraint on trade: https://www.eqjournalblog.com/?p=63.

       
       
       
     Prof Bruce @ 11:38 am

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         NutriChem Compounding Pharmacy and Clinic        

       
   Posted on
       Sunday 14 November 2010  
     
   
       

Business models have come a long way. NutriChem, a local
Ottawa pharmacy, has added a biochemical lab to their pharmacy where
they can custom-make natural hormones and other products either
specified by doctors in their building or by a diagnosis they do
themselves for you.

These hormones, mostly for women, can be topically applied and do not have to be taken in pill form.

The lab can do a complete work up on your blood to see what you are lacking and what they might suggest to address that*.

If you think about it for a minute, a lab that customizes medicines,
vitamins, potions and lotions on the spot is pretty hard to outsource to
China or India. The lab itself is a profit centre (they charge $500 for
a complete work-up on your blood) as well as a generator of knock-on
sales—many of which are recurring revenues as people renew prescriptions
or use up their inventory of vitamins, pills and lotions.

These are very high value added, personal services that also
give them a nearly unbeatable advantage over their mass market
competitors like Shoppers Drug Mart and Rexall Pharma Plus. If you can
put something like their lab in front of your business, it becomes a
kind of stalking horse marketing arm.

Courtesy of thefreedictionary.com, there are three definitions of ‘stalking horse’:

1. a horse or an imitation one used by a hunter to hide behind while stalking his quarry;
2. something serving as a means of concealing plans, a pretext;
3. a candidate put forward by one group to divide the opposition or mask
the candidacy of another person for whom the stalking-horse would then
withdraw.

Tony Greco and Greco Lean and Fit Centres do this with their
charitable foundation (The Foundation to Fight Obesity in Children).
Involvement in their Foundation by kids fighting obesity is almost
certainly going to lead to adult participation in Greco programs—either
by the kids when they grow up or by their parents dealing with fitness
issues themselves.

This stalking horse marketing can actually be a negative
cost—NutriChem’s lab actually makes money while bringing in new clients
and then keeps them coming back for more. Tony’s Foundation, while not a
profit centre, works on a non-profit basis so it is, at a minimum, a
neutral cost. But if it acts as a marketing arm and it replaces costs
that Greco Lean and Fit would otherwise have had to incur to attract new
members, then The Foundation to Fight Obesity in Children is almost
certainly a form of negative cost marketing (aka stalking horse
marketing**) for Mr. Greco.

Prof Bruce

* They call it their Body Chemistry Balancing Test for individualized health.
** For more about this, see: Magic Marketing Button, MMB, https://www.eqjournalblog.com/?p=1146).

Postscript: this is actually not the first time I have run into a
stalking horse. Years ago, a friend of mine, a sign maker in southern
California, came up with the concept of a stalking horse for traffic
cops.

He designed a full size sign that looked just like a cop car and he
could install it next to any highway. It was actually nothing more than a
Hollywood set but here is the clever part: you could park a real police
vehicle behind it and the real cop could poke his radar gun through the
fake window.

So drivers would never know if the speed trap was manned or not. So they would always slow down when they saw it.

Stalking Horse
[From: InventorSpot.com]

It was a cheap traffic calming solution.

Now when you come up with a bit of IP like this, how do you protect
it? You could apply for a utility patent (hard and expensive to get), a
design patent (usually a bit easier and cheaper to get) or a business
methods patent (hard to get in Canada, a bit easier in the US: Amazon
got a patent on 1-click checkouts if you can believe that).

But you may have heard the saying: “Patents are only worth what you
are willing to pay to defend them.” So my friend thought that just
building and selling them to police forces might work fine without
taking the time and incurring the cost of patenting it. After all, he
was presenting the idea to the police, the upholders of the Law.

The first police force he presented it to wasn’t interested in it and
he got discouraged. He basically gave up on his idea although to be
fair, he had other problems: one of his bigger investments came a
cropper and he went broke.

That led to a considerable period of time when he went wandering off
into the desert where he eventually found God and another line of work.

But a few years later, driving down a highway in the same police
jurisdiction where he had originally pitched his idea, he saw his signs
and his idea at work.

Turned out that the person he had pitched it to actually thought
enough of the idea to ‘borrow’ it and get his brother-in-law to build
them. My friend asked me: “Do you think I should sue them?”

For those who have read this blog extensively, you’ll know what I
think of suing people: it’s your last resort and probably not even then.
Besides he had moved on in his life and I would think only bad things
happen to you if you sue your local police force.

Protecting IP is difficult. I am not only not persuaded by the cost
and time it takes to get and enforce patents, I am not sold on the value
of ideas, per se.

I believe information wants to be free, ideas are abundant (and hence
relatively cheap) and execution counts for a lot. Was Google the first
search engine? Was Facebook the first social media? Was the iPhone or
the iPad the first smartphone or tablet computer? No. But these
companies can REALLY execute and sell.

If you look at my buddy’s problem, was his SoCal police force the
only group he could have sold it to? Would it matter if they had
‘borrowed’ his idea without permission or compensation if he had
installed thousands of these for other forces across the state and
nation?

If you have a good idea, you will have competition. If you have a bad idea, you won’t but so what, it’s bad idea.

Maybe he could have come up with other designs, like, say, a
motorcycle cop dummy billboard. A whole line up of signs, disguises and
decoys are possible.

Who knows, maybe he would have stumbled onto another idea that was
even more valuable, like creating 3-D images that scare drivers into
slowing down:

3-D Image of Girl/Traffic Calming
[See: RawStory.com]

So my preference would be that your first priority as an entrepreneur is to get out there and hustle, kid.

       
       
       
     Prof Bruce @ 10:34 am

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         Landlord from Hell        

       
   Posted on
       Wednesday 10 November 2010  
     
   
       

Ten Reasons Why Your Landlord Wouldn’t Lease Space to God

I recently saw a notice from a property management group that I
thought just might be the worst form of ‘client relations’ ever. I
scrubbed it of identifiers and here it is:

Worst Client Relations Notice Ever

As you can see this Landlord has pretty frosty relations with their
tenants. But it leads to another concern: there is a shortage of
entrepreneurial Landlords. Most large office and retail spaces in NA are
now controlled by huge publicly traded corporations: Banks, REITs,
insurance companies, Pen Funds and the properties are run either by
their own internal property management groups or by third party firms.

The property managers live in fear of losing their jobs or their
contracts and won’t take any initiative without the blessing of head
office or their client. These properties are run like military
dictatorships, top down and filled with fear. Their property management
employees or contractors are paid dirt and treated the same. Head
offices tend to be run by MBA-types who read prescribed rents off their
spreadsheets as if they were written in stone a la Ten Commandments;
i.e., they are highly inflexible in their ‘negotiating’ stance.

It isn’t just that they won’t budge on rental rates, it’s that they
won’t rent to companies that are startups or even a few years old
without LCs or other forms of guarantee for rent owing. In addition,
Landlords today won’t commit their resources to Tenant fitup costs, an
important source of bootstrap capital for new enterprises.

This is becoming a serious input problem for startups– I see this every week.

So my son, Matthew, and I came up with a list of Ten Reasons Why your Landlord Wouldn’t Lease Space to God. Here is our list:

1. God doesn’t have a Beacon Score.

2. God doesn’t provide references.

3. God refused to supply the City or the Landlord with His building plans for approval/permit.

4. God wouldn’t comply with opening hours of the Mall; He is always open.

5. God didn’t provide proper ID for FINTRAC forms.

6. Landlord can’t distrain or lock out God for non-payment and is powerless to otherwise enforce provisions of the Lease.

7. God is not registered for HST.

8. God is difficult to negotiate with or otherwise take advantage of
from the Landlord’s possession of asymmetric information since He is all
seeing and knowing.

9. God declined to give the Landlord a percentage rent.

10. God refused to produce His personal Balance
Sheet or put up a LC or other form of security since He claimed
ownership of the Universe and everything in it.

Many Landlords today are taking the ‘Lord’ part of their name too
seriously and they need to ease up a bit and make some of their space
available to entrepreneurs. One of the most senior persons I know in the
development industry told me last week that he left brokerage because
he couldn’t find entrepreneurial Landlords willing to lease space to his
less well-established and younger clients.

Unless we get some progress in this area, the economy will be unable
to produce the next generation of A rated companies. If you look at the
Fortune 500, in just ten years (from 1999 to 2009) nearly 50% (238) were
eliminated*. If we don’t encourage startups, where are the next 50% in
the next ten years, 25 years, 50 years, going to come from?

Prof Bruce with Matthew Firestone

* See: The cost of culture, a 50% turnover of the Fortune 500 by Toby Elwin on February 4, 2010.

Postscript: If you would like to know more about commercial leasing, please see: https://www.eqjournalblog.com/?p=1698.

Postscript 2: One of the reasons I wrote this was that, back in the
day when we were developing office buildings, we made sure to set aside
space* for entrepreneurial ventures. We had 120 mini offices downtown
and 44 in the west end (the business was called Terrace Corporate
Centres Ltd., TCCL). These offices came fully furnished with all
services; people could be in business with a phone, fax, computers and
reception in under an hour. Speed was essential and costs were shared
and reasonable.

(* This included two floors (nine and ten) at a downtown Ottawa
office tower, Heritage Place, 155 Queen Street and one floor in the west
end of Ottawa in the Royal Bank Pavilion, 303 Moodie Drive.)

TCCL was always 90 to 96% occupied and companies as different as Apple Canada and McLoughlin Media
got their start there. The concept was that some of these enterprises
would explode and take large amounts of additional space. In effect, we
were planting a few seeds and harvesting them a year or two or three
later.

Now obviously, some of them failed but the overall concept was sound
and we later proved it by selling it for quite a bit of money, money
that was subsequently invested in a NHL expansion franchise that we
acquired (the Ottawa Senators.)

We are back in this business in a small way with our not-for-profit organization (Exploriem.org) and MiniOffice.org.

But we are limited in what we can do. The industry should play ball; after all, it’s in their best interests to do so.

Postscript 3: After publishing this, I got quite an avalanche of
comments, the most colorful of which called the industry ‘corporate
pukes’. The rest I can’t publish on a ‘G’ rated blog.

Comment:

“I guess right now large Landlords are investing in the S&P 500
and missing out on other indexes such as small caps – they are
apparently happy just tracking the general performance of the economy so
convincing them that they can achieve higher returns by leasing to
small cap companies will be nigh on impossible. They might never come
on-board even when things go pear shaped. At that point, they might just
sell underperforming assets to real entrepreneurs to create
value therein. These guys are just opportunistic feeders who don’t
create real shareholder value – I wouldn’t touch a commercial property
trust with a ten foot pole,” Andrew Firestone, ACT Australia.

       
       
       
     Prof Bruce @ 9:19 am

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         Property Rights        

       
   Posted on
       Monday 8 November 2010  
     
   
       

Introduction

Many of us think that when we own a property, like a home for
example, we own that property in an unfettered way. In many
jurisdictions around the world today, individual ownership to a property
is held in the form of a fee simple title to that property, which is
the highest form of estate with the most rights associated with it. But
it is not absolute ownership. In Canada, which follows the English
common law system (everywhere except the Province of Québec which
follows the Napoleonic Code), even a fee simple estate is subject to a
lease from the Crown, which means it can be expropriated by an
expropriating authority using their power of eminent domain.

An expropriating authority can be a Municipal government, Provincial,
State or Federal government, a crown corporation or a host of other
bodies that have expropriating authority such as a utility or pipeline
company. In the US, there have been many cases where municipalities have
used their powers of expropriation to take lands that are subsequently
turned over to private, for-profit companies for redevelopment of
‘blighted’ urban areas. Needless to say, the use of this tool to take
lands in this manner is controversial*.

Municipalities often do so because they feel that re-development will decrease crime rates and increase realty taxes.

(*There is a wonderfully funny and quite touching 1997 Australian
film that focuses on this called ‘The Castle’. It is well worth seeing.)

You may also think that you own the air rights above your property or
the subterranean rights below. Obviously, aircraft fly over your
property without asking your permission but, in Canada, the minerals
under your property do not belong to you, they belong to the Provinces.
When former Prime Minister Pierre Trudeau introduced the Canadian
Charter of Rights and Freedoms, it did not include protection of
property rights because some Canadian Provinces and many municipalities
opposed it. They were concerned that they could lose control over
natural resources and they were concerned that zoning by-laws could be
compromised by such protections.

It is my view that property rights and human rights are intrinsically
linked and that the Charter should have included protection of property
rights as Mr. Trudeau originally wished. In countries where there is no
respect for property rights, there is usually no respect for civil
rights either. History has shown that if you want to reduce a person to a
non-person, first make them homeless. The reverse is also true.
Hernando de Soto, a leading development economist, has shown that
economic takeoff in developing nations is immeasurably aided by
developing a system of property rights, increasing home ownership and
giving people a permanent address. The number one source of capital for
entrepreneurial startups is home equity and entrepreneurship is another
one of the conditions for economic takeoff in developing countries so
you can connect the dots.

In places like Arizona, where water is scarce, riparian rights may or
may not go with title; it is possible to buy beautiful ranch lands
which, without water rights, are essentially valueless.

In Florida, two friends of mine invested in two lots in a well
established, built-up neighborhood, to provide for their daughter’s
university education, only to find out when they went to sell them, they
had no value because an endangered species (the Scrub Jay) was found on
their land. Hence, their development rights were removed—they could not
build a home on either lot or sell them to people who wanted to.

So really, you can look at ownership of property as a bundle of
rights and knowing which ones you actually own and which you don’t is
important.

History of Property Rights

The Saxon empire fell to King William of Normandy in 1066. King
William established a land holding system in England based on a tenant
relationship between approximately 1,500 Lords and their King. The King
retained all ownership of the lands and the Lords became, in effect,
tenants of the King paying annual tribute to the King in the form of
various services, crops or coin of the realm. The Lords were allowed to
sublet their allotted lands to others who worked the lands as
sub-tenants of the Lord. Thus, the Lord became a Landlord, a term still
in use today to describe owners of property who rent out land or
property to tenants. (Neal Stephenson in his marvelous book ‘The Diamond
Age’ coined another term for these people—Equity Lords.)

Tenants had right to tenure of the property so long as they, in their
turn, paid their Landlords the called-for rents. The Lords continued to
hold the Lands in trust for the King and only for their own lifetime.

The idea that land could form an estate developed through the
practice and application of common law applied by the Royal Courts and
approved by the King*. An estate would eventually become the basis for
the idea that Lords could develop an ownership interest in their lands
and could will it in their last testament to their heirs. Eventually,
this concept was broadened and some of their sub-tenants also were able
to develop ownership interests in their lands.

(* The Magna Carta of 1215 played a significant role in limiting the
absolute right of English Kings to decide all matters and helped to
further develop the idea that all of the people including the Kings of
England, should be bound by the rule of law.)

The doctrine of estates dealt with real property (i.e., not personal
property such as art works, chattels, etc.), which eventually became
known as real estate. There are many types of estates and new ones are
being created by innovative lawyers and clever developers. For example, a
relative newcomer is the idea that one could develop land condominiums.
There are, for example, advantages to creating a land condo for shared
access rather than using a more traditional tenants-in-common approach.
The land condo gives the owners more powers in the event, say, that the
road access needs repairs or an individual refuses to pay his or her
share of maintenance costs.

Estates

As discussed above, fee simple is the highest form of ownership that a
private citizen or corporation can attain. This form of ownership has
the most rights and the fewest obligations or restrictions on it. Fee
simple ownership never ends. It has both possessory rights (the right to
occupy the lands) and ownership bundled together. You can will it or
sell or lease it.

One can also create a fee simple with conditions, another form of
ownership. For example, a person may gift lands to a religious order to
be used for a specific purpose such as a retreat for religious
practioners. As long as the lands are used for such purposes, the
ownership remains with the religious order. But if they decide to
perhaps develop the lands for a shopping centre then the lands would
revert back to the original owner or his or her heirs.

In most expropriations, the expropriating authority has to
demonstrate that their planned use of these lands will meet some public
purpose and presumably a higher (public) good. They must also compensate
the owner for lands that are expropriated. In theory, if the
expropriated lands are not used for the purposes intended, they should
be returned to the original owners.

Unfortunately, there are many examples where this is ignored.
Thousands of acres of farmland were expropriated by the Federal
Government of Canada around Mirabel (near Montreal) for a major airport.
The airport was built, it was a huge fiasco and much of the lands were
never used or needed but did not find their way back into the hands of
the families that lost them. In Ottawa, the National Capital Commission
has been known to expropriate lands to add to the Greenbelt that
surrounds Ottawa only to turn around years or decades later and rezone
the lands for other purposes such as retail development. They might then
offer to sell it back to the original owners but not at farmland
prices; instead at prices that reflect the up-zoning and obviously way
out of the price range of the original family.

There is another form of estate called the future estate. For
example, I could will my lands to my daughter but I may also create at
the same time (upon my death), a life estate for my spouse. In this
case, my spouse has possessory rights for her lifetime and my daughter
has the remainder. These two estates co-exist. When my spouse passes
away, my daughter owns all the rights. But while my spouse is alive, my
daughter can not sell the lands with vacant possession because my spouse
has possessory rights. However, my daughter and my spouse could agree
to sell both estates together and then they would come together again in
fee simple.

One can also convey a leasehold estate; this is an interest in land
for a known term. Today, we simply call it a lease. In Ontario, one can
not create a lease longer than 21 years without applying to the
Committee of Adjustment (or Land Division Committee) since longer leases
are thought to create more than a leasehold interest and, in fact, are a
form of ownership instead. It requires special permission to do so.

Limitations to Rights

There are many restrictions and limitations to rights. It is
obviously in everyone’s best interests not to have, say, a fireworks
factory in the middle of a residential area because these plants have a
habit of blowing up and injuring or killing many people.

Zoning is an obvious restriction on rights. Zoning by-laws came about
in New York City as a reaction to the very poor living conditions of
the city circa 1900: high densities were combined with substandard
housing, poor ventilation, high incidence of disease and the mixing
together of animals and humans. (Horse power was the main source of
muscle to move people and goods and around 100,000 horses were stabled
in vertical buildings in Manhattan at that time.) Zoning and Official
Plans (sometimes referred to as Master Plans) together control the
direction, timing and type of growth and development the municipality
will permit. Zoning by-laws must conform to the Official Plan.

Other restrictions on ownership include: the right of the
municipality to impose realty (property) taxes, restrictive covenants,
condominium by-laws, fractional ownership, the power of escheat, mineral
rights, air rights, riparian rights, easements, rights-of-way and, of
course, expropriation. There are other types of restrictions on property
ownership which may apply in certain jurisdictions like: (residential)
rent control, Ontario Residential Tenancy Act (formerly referred to as
the Landlord Tenant Act), search warrant, no change of water course(s)
or drainage, stop work orders, building permits, site plan approval,
heritage committee, design committee, septic approval authority,
development charges, power to distrain, Letters of Credit, etc.

Municipal by-laws can be enforced by Police Power, which essentially
means that Municipal by-laws have the full force of State power behind
them.

Realty taxes are made up of two components: the assessment and the
mill rate. The mill rate is the rate at which the municipality taxes
real property. It can be and usually is different for different types of
property. Commercial property usually has a higher mill rate or tax
rate than residential property. Apartments are often taxed at the same
rate as commercial property imposing a higher tax burden on apartment
dwellers who usually have lower incomes than single family homeowners
but who typically don’t vote in municipal elections to the same degree
as homeowners and, thus, may be disadvantaged. Politicians may feel that
the extra tax burden gets passed back to landlords but, in most cases
and certainly where there is a shortage of apartment units, the higher
tax burden gets passed forward to apartment dwellers. This is inherently
unfair.

The mill rate or tax rate for single family dwellings in a city like
Ottawa tends to be in the one cent per dollar range so for a house with
an assessed value of $350,000, they can expect to pay around $3,500 per
year in property taxes. Commercial property pays more yet requires fewer
municipal services. Residents demand and get garbage collection, snow
clearance, libraries, schools, recreational centres and many other
municipal services. Commercial property owners get practically nothing:
they must pay for their own garbage removal, snow removal, etc.
Consequently, the fiscal impact on a city from commercial development is
generally positive while the fiscal impact of residential development
is either less positive or can be negative.

Most cities these days impose development charges on new projects
both residential and commercial; these development charges, levied at
the time of building permit issuance, are supposed to address the fiscal
impact and pay for new municipal infrastructure such as expanding
sewage treatment plants, water filtration systems, transit systems, new
schools and other infrastructure that serves the city as a whole.
Developers are expected to put in all the municipal services for new
residential or industrial sub-divisions and then turn those works (water
mains, sewers, local roads, parks, etc.) over to the municipality at no
cost to the municipality. Developers usually have to put up Letter of
Credit (LC) for the cost of these works so that if the developer does
not complete them, the City can cash the LC and complete the required
work. In essence, Developers are paying twice for their works—once, when
they build them and once, when they put up their ‘refundable’ LC.

Cities today view most new works as a cost and not an investment. Two
generations ago, at the end of World War II, municipalities viewed,
say, a new road as an investment; a lever for economic growth. One could
think of a city as a network of infrastructure where once a new road is
built, every property owner is required to hook into the infrastructure
and then pay the city realty taxes forever whether they get any city
services or not. In my view, it is a mistake on the part of cities to
relentlessly pursue the idea that everything is a cost and that the city
should be developed at no cost to the municipality. The at-no-cost
policy also means that the City is relinquishing any claim to
leadership; it has no power to change the city for the better by taking
positive actions. The at-no-cost rule is one of the reasons we see so
little public art in newly built portions of major cities in North
America.

Rent control* has been shown to hurt the interests of the people it
was designed to help. In city after city, rent control has reduced the
number of new rental dwellings constructed and also caused the existing
rental stock to decrease either through demolition or conversion to
condominiums or owner-occupied housing. A decrease in supply has allowed
landlords to be more selective in choosing tenants tending to favour
double income couples with no kids over single mothers, for example.
When tenants leave, they tend to turn over favorable leases to their
friends and may demand ‘key’ money. Key money is upfront money paid to
the departing tenant by the new tenant for the privilege of taking over
their lease. Unfortunately, the Law of Unintended Consequences tends to
apply to many government programs and initiatives.

(* Minto Construction, a large Ottawa-based company, is living proof
that rent control works against the interests of those it was intended
to help. One of the Founders of the company, Irving Greenberg, once told
me that the best day in his business life was when the Government of
Ontario under (Conservative) Premier Bill Davis introduced rent control
in Ontario circa the 1970s. After the introduction of rent control,
Irving made more money than ever from his residential rental property.
First, there was less competition as builders, developers and investors
foolishly fled the market and, as a result, his vacancy rates fell.
Second, he was able to buy his competitors cheaply and add substantially
to his portfolio. Third, he was able to pass on rent increases every
year since such increases were ‘government approved’ and tenants had
nowhere else to go anyway. Fourthly, he could be picky about his tenants
and damage to his units and maintenance costs went down. Fifthly, he
could pass on the costs of upgrades, repairs and maintenance to his
tenants again in additional government approved rent hikes every year.
Rent control was a travesty in my view—it certainly didn’t help those
who most needed help, aka the poor who are disproportionately single
mothers. Minto ended up with tens of thousands of rental units in
Ottawa, Toronto and Florida and tens of millions of dollars in free
cashflow too.)

Here are some definitions for other terms used above:

Escheat: the power of the State to take a property when a person dies with no will and no heirs.

Restrictive covenants: restrictions placed on the deed of a property
(and thus there forever) such as minimum house size, types of materials
that may be used on the outside of the home, etc.

Condominium by-laws: the rules that govern the condominium
corporation such as the monthly fee raised by the corporation for its
maintenance, how the Board of Directors is elected, its reserves, etc.

Fractional ownership: can refer to time share corporations but is
usually a form of collective ownership where individuals are named on
title; it is a bundle of rights that make up all the rights of property
ownership.

Stop Work Orders: orders posted by a municipality to stop work on a
project where an offence has been committed such as construction without
a building permit or work not in accordance with plans. Once, a stop
work order is posted, it must be obeyed by all persons on site: they
must down tools and remove themselves immediately. Continuing to work on
a site where a stop work order has been posted may result in criminal
charges as well as civil penalties.

Distrain: the power of a commercial landlord to padlock a door of a
tenant’s demised premises and to sell whatever assets are within to
defray non-payment of rent. This does not apply to residential
tenancies. Commercial tenants are supposed to be sophisticated persons
or organizations who engage in equal or near equal negotiations with
landlords. (For more on commercial rents, please see: https://www.eqjournalblog.com/?p=1698.)

Residential tenants, on the other hand, are afforded much greater
protections in most jurisdictions. For example, removing a residential
tenant in Ontario must be done in accordance with the Residential
Tenancy Act. The Act states that the tenant may only be removed for non
payment of rent or because they are unduly interfering with the quiet
enjoyment of the premises by other tenants. There is a significant legal
process involved in removing a residential tenant which must be
followed exactly by a landlord and it requires significant notice
periods and the ability exists for a tenant to redeem.

Land Description

Governor Simcoe in 1792 divided Ontario into counties. Each county
had to make some kind of physical sense; i.e., conform to river
boundaries or follow a ridge line. Counties were in turn divided into
townships and the townships were further described by a system of lots
and concessions. Concessions were divided by unopened road allowances
and this system was based on the concept that no parcels of land would
exist without access to a public road.

The idea was to prevent pieces of land becoming landlocked; problems
could then arise as one neighbour was forced to cross another’s land
holdings to reach their own.

Concessions are numbered I, II, III, IV, … Lots used numbers 1, 2, 3,
4, 5, … So a piece of land could then be legally described as Lot 3,
Concession II, Township of ABC in the County of MNO, Ontario.

As long as people owned lots and concessions this system of
describing land worked well. When land was divided into smaller parcels
through application to local Land Division Committees, other means of
describing lands were needed.

Lord Simcoe made it the law of the Province that all real estate
transactions had to be in writing—it is the only form of trade that can
not be done on a handshake. His concern—too many handshake deals
resulted in misunderstanding and possible violence. An Agreement like:
“Sure, Hank you can plow and seed my back 40 acres,” might not be
honored by the Landlord at harvest time when families were hungry.

Legal Descriptions

Legal descriptions are one of the key building blocks for our entire
economic system. Accurate legal descriptions allow us to trade real
property with confidence. It allows Banks to place mortgages on lands
with confidence. It gives us permanent addresses from which we
communicate with the rest of the world. What is the number one source
for new enterprise formation world wide? As discussed above, it is home
equity loans. Without accurate legal descriptions deposited permanently
in the Land Registry Office (or Land Titles Office), none of this would
be possible.

Lot Sizes

The single front township (typically fronting on a river) was divided
into lots that were 20 chains wide by 100 chains deep (each chain is 66
feet) with an area of 200 acres.

For townships with a river and a road, double loaded land ownership
could evolve and, hence, lots could then be 100 acres each with a depth
of 50 chains per lot.

As the Province of Ontario attracted more settlers and land was
divided into smaller parcels, legal descriptions were based on a metes
and bounds description of land. That is, word descriptions were used;
for example, starting at a known point, land would be described using
linear measurements and compass bearings. These metes and bounds
descriptions would always close on themselves so that if you followed
the directions, you would end up where you started. If you followed the
description and ended up somewhere else, an error had occurred.

Unfortunately, the Land Registry has many errors in it and every
lawyer involved in the transfer of real property has to check for a good
root of title (a minimum search of 40 years is required). This is time
consuming, expensive and still may contain errors.

Building lots created in industrial or residential sub-divisions are
described as Lot 16 on Plan 4M-799, City of Ottawa, Ontario, for
example. The letter ‘M’ means that the plan has been deposited into the
Land Titles system instead of the Land Registry and, thus, the accuracy
of the title is guaranteed by the Government of Ontario.

Land Registration Reform

In 1985, the Land Registration Reform Act was put in place to create a
unified system of legal descriptions in Ontario where all titles would
eventually be deposited into Land Titles either because the owner of a
parcel of land would have their land surveyed and would then apply to
have their title deposited into Land Titles or, after 40 years, all
legal descriptions in the older Land Registry system would be deemed to
be in land titles and, hence, clear title would be guaranteed.

Each parcel of land in Ontario will eventually have its own unique
PIN (Property Identification Number) and electronic completions of land
transfers will be the only method of title transfer. In larger cities in
Ontario, electronic closings and registrations is now the norm.

Conclusion

In a way, land descriptions are nearly as important as the invention
of a common time and calendar. Before there was a common calendar and an
accepted universal time (towns often set their own times), it was
difficult to set up a meeting time to trade. We take it for granted when
we ask: “Can you meet me for a coffee at Tim Hortons in Kanata on March
Road near the Royal Bank Wednesday Nov. 15th, 20__ at 3:30 pm (eastern
standard time) and let’s see if we can make a deal?” Or your Bank
Manager asks you to come in to see her about a loan the next day at
10:00 am for the house you just bought at that Wednesday meeting.

When she approves your mortgage loan, your bank manager is not at all
concerned that her bank may inadvertently put their charge on the wrong
property and, hence, have difficulty getting their loan repaid. (Don’t
forget that you probably signed personally for the loan so that even if
their lawyers did make a horrible mistake, you would still have to cough
up the dough.)

In Mexico, you will see many homes that are half completed or three
quarters completed because their financial system was not able to
produce mortgage loans even for people with very good credit ratings and
excellent jobs or businesses. This is a huge handicap for that nation
and now that US-based banks and others are moving into that market, you
will see dramatic changes in home ownership in that nation.

Home ownership* is an important parameter of economic growth and an indicator of social stability:

a) Home owners have a stake in their nation-states;

b) They tend to support civil law and respect for the sanctity of persons and property;

c) They tend to vote;

d) They develop home equity which then becomes a source of capital
for new business formation either for themselves or their children or
extended family;

e) They show concern for their community and work for its betterment;

f) They are concerned for the future of their children and the condition of the local schools;

g) They pay taxes which support public services and help for the less well off;

h) They tend not to become a burden on the state and their fellow citizens.

I ask my students every year, how many of them can save $700 or
$1,000 or $1,400 a month and, obviously, few of them can do this while
they are students but it turns out that few of them can do it even when
they have good jobs later on. But almost all of them can pay that in
rent or, better yet, in the form of a mortgage. If home ownership does
one thing well, it forces people to ‘save’ by paying off their mortgages
a bit at a time, every month**.

Dr. Bruce M. Firestone, Ottawa, Canada. Nov. 12, 2006

(** See also Speak the Truth, the Whole Truth, Frankly and Boldly: https://www.eqjournalblog.com/?p=74)
(** See also Why Invest in Real Estate: https://www.eqjournalblog.com/?p=434.)

       
       
       
     Prof Bruce @ 8:42 am

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         Cell Phones Ready to Morph into Handheld AI        

       
   Posted on
       Sunday 17 October 2010  
     
   
       

I think cell phones are ready to morph into handheld AI, Artificial Intelligence. This is the future of computing.

It wasn’t until PCs got the ability to communicate with each other
(first through intra-office networks and then email and browser) that
their impact on personal productivity took off. Handhelds hold the key
to the next great transformation of computing and work and play.
Developing nations are skipping the desktop revolution and going
straight to always-on Internet via smart phones and tablets.

Nations like Korea are upping speeds and availability of wireless
Internet to prepare for handheld computing, communication and AI leaving
behind traditional powers such as the US.

Handheld AI is wonderfully described by Kim Stanley Robinson in his trilogy, Red Mars, Green Mars, Blue Mars. His Martian colonists could not hope to survive without them. Read the stories to find out why.

For me, I already know that when I have access to all my systems,
websites, blog, SM and data, I am way smarter and can control far more
pieces moving around on the board: people who work with me, client
needs, student requirements, teaching, research, writing, family
obligations and so forth. Here is what I said about that on
“Entrepreneur Sayings”:

814. “I’m like the Scarecrow in the Wizard of Oz: I have half a brain. My computer is the other half,” Prof Bruce.
(See: https://www.eqjournalblog.com/?p=1084 for the other 999 sayings.)

So here is my list of the functionality of future handheld AI. I am sure I missed a great deal.

1. telephone/cell phone/video phone
2. radio
3. television and universal (infrared) remote
4. music player and ‘stereo boombox’
5. video player and streaming plus video projector
6. mike and loudspeaker
7. data projector
8. holographic projector for telepresence and other uses
9. musical instrument and musical composition
10. Karaoke machine
11. email/messaging/social media platforms
12. camera, video cameras, video conferencing and video recorder
13. audio recorder
14. video editor
15. virtual mouse, virtual keyboard, face and gesture recognition, voice
commands, speech recognition, voice generation, gesture commands
16. compass, gyroscope, microscope, telescope, binoculars, spectrograph and DNA analyzer
17. scanner and bar code reader
18. GPS & maps
19. calculator and computer
20. software apps and video games
21. flashlight, laser pointer
22. calendar, diary
23. emergency beacon, personal (infrared) security system & personal
black box recorder (In case of accident or misadventure or theft of the
device, in the latter case, yelling or signally for help and, if not
rescued, then turning itself off)

The Dish Ran Away with the Spoon but your Handheld Won’t

24. heater
25. my wallet (payment system including credit cards)
26. my passport
27. my driver’s license, registration and insurance
28. my medical records, biometrics (fingerprints, retinal scan, DNA) and
access ‘card’ as well as all my ‘keys’ to my house, cars, offices,
cottage, storage sheds, etc.
29. my data storage and backup, my USB key
30. my passwords
31. my favourite newspapers and magazines
32. my desk top
33. book reader and audio books
34. always-on access to the Internet and to Search Engines
35. art and design tool/fabricator
36. virtual overlay on RL, Real Life (Hold up your device and see an
overlay on buildings, landscapes, the sky– an information layer and news
layer)
37. my personal digital agent (Artificial Life Form/Artificial
Intelligence to act as a personal consultant, personal advisor and
personal advocate/agent to and for me)
38. my personal avatar (Your form in the Metaverse/Internet)
39. keeper of my PWS (Personal Web Sites) and my SM profiles and interactions
40. my last will and testament plus my life after death alter ego.

That will do for a start.

Prof Bruce

       
       
       
     Prof Bruce @ 8:55 am

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         iPhone Yields at least 288% p.a. Return to Apple        

       
   Posted on
       Saturday 16 October 2010  
     
   
       

Advanced Spreadsheet Use—For Product Managers

There is probably no invention more helpful to the product manager
today than the spreadsheet. It probably deserves to rank up there in
importance with what the invention of double entry bookkeeping meant to
the accounting profession.

Use of spreadsheets does not substitute for human judgment—rather it
is an aid which will help you make better decisions. Decisions that lead
to entrepreneurial success are probably based on a combination of three
factors—when your head, heart and gut are all in alignment. Steve Jobs
at Apple did zero market research before he introduced the iPod to the
world figuring that consumers didn’t know and couldn’t see what his
overarching goals were for a new business ecosystem—made up of a
seamless integration of music player and download service, iTunes—and,
thus, were not in a position to provide Apple with any useful guidance.

(If consumers couldn’t help market researchers at Apple with the
introduction of the iPod, imagine how much harder it would be with the
much more complex business ecosystem of the iPhone with its highly
variegated utility to its users and multiple revenue channels including:
a share of carrier monthly subscriber revenues, iTunes downloads, app
sales and revenues plus advertising revenues in addition to the sale of
the gadget in the first place.)

Hence, I chose the iPhone for the purposes of demonstrating advanced
spreadsheet use because it is such an extraordinary and revolutionary
product and, in part, because quite a bit is known about its revenue and
cost implications. Nevertheless, I am using a grossly simplified model
here.

First, let’s look at the number of iPhones sold. We have:

Phones Sold

1 2,320,849 units sold
2 13,727,740 units sold
3 25,103,770 units sold
4 35,000,000 units sold est.
5 46,391,461 units sold est.
6 57,332,809 units sold est.
7 68,274,157 units sold est.

Year 1 here is 2007 and Year 7 is 2013. I chose a 7-year product lifecycle which seemed reasonable for this industry.

I had data for the number of iPhones sold for 2007 to the third
quarter of 2010 which I used to estimate the numbers which will be sold
in 2011, 2012 and 2013. I did a simple linear regression analysis which
yielded:

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.999436215
R Square 0.998872748
Adjusted R Square 0.998309123
Standard Error 581160.6385
Observations 4

ANOVA
df SS
Regression 1 5.98566E+14
Residual 2 6.75495E+11
Total 3 5.99241E+14

Coefficients Standard Error
Intercept -8315281 711773.5115
X Variable 1 10941348.3 259902.9387

This gives us a predictive equation as follows:

No. iPhones sold per annum = -8,315,281 + 10,941,348.3 x (Year – 2006).

The predictive power of this equation seems quite high—its multiple R
value is .9989 which means that iPhone sales seem to be on a highly
predictable trajectory. Here is what the data look like on a graph:

iPhone Sales 2007 to 2013

I attributed all of Apple’s R&D spending from 2006 to 2009 ($4.6
billion) to the iPhone which is obviously too high. I also ignored the
knock-on effects of an iPhone sold in one year continuing to operate in
subsequent years and produce revenues in later years from iTunes
downloads, app sales and revenues, Apple’s share of carriers’ subscriber
revenues and advertising revenues on this platform, for which I did not
have any figures.

(Think how much more important the iPhone is to Apple’s future than
more Mac sales—sure there is some follow on software sales that Apple
might generate from the installed base of Mac users but, with the
iPhone, recurring monthly revenues are large and growing, ‘stable’ and
predictable.)

So if anything, I have underestimated what the future holds for Apple
in terms of net revenues and rate of return generated by the iPhone.

Here is the cashflow for the iPhone from 2006 to 2013 and the estimated IRR, Internal Rate of Return, from it:

IRR Cash Out Cash In Cashflow

2006 $ (1,150,000,000.00) $ (1,150,000,000.00)
2007 $ (1,150,000,000.00) $                                                     1,521,123,592.60 $     371,123,592.60
2008 $ (1,150,000,000.00) $                                                     8,997,392,414.17 $  7,847,392,414.17
2009 $ (1,150,000,000.00) $                                                   22,939,590,529.53 $21,789,590,529.53
2010 $                                                   22,939,590,529.53 $22,939,590,529.53
2011 $                                                   37,576,890,222.28 $37,576,890,222.28
2012 $                                                   44,748,034,503.51 $44,748,034,503.51

IRR 288% p.a.

If you introduce a product with a rate of return of, at least, 288% per annum, you are in line for a big-time promotion.

Now, of course, we are looking at the value of the iPhone from
Apple’s POV. To experience this type of growth, the product must really
resonate with customers. And in fact, all you need to know about what
the iPhone means to its users is to watch a few minutes of video made on
the New York subway in October of 2010 by Atomic Tom: https://www.youtube.com/watch?v=NAllFWSl998.

The video was made in one take while the B Train passed over the
Manhattan Bridge into Brooklyn using only iPhones—as instruments, as
well as to audio and video record the tune “Take me out”.

The iPhone’s value proposition, its extraordinary utility to its
customer base, is apparent to these young people and millions more on
the planet. There is no doubt that mobile computing is the future of the
industry and, right now, Apple is in charge.

Prof Bruce

Postscript 1: (Jan. 25, 2012) I estimated above that Apple would sell
122m iPhones by the end of 2011/180m by the end of 2012. Actually, they
sold 183m by end 2011. Wow. Please see: https://www.nytimes.com/2012/01/25/technology/apples-profit-doubles-as-holiday-customers-snapped-up-iphones.html?_r=1&nl=todaysheadlines&emc=tha26.
Apple is currently (Dec. 2011) worth more than $426 billion making it
the most valuable company on the planet ahead of Exxon Mobil.

Postscript 2: Want to be sick? Apple’s PROFIT per employee was > $400,000 in 2011: https://www.eqjournal.org/apple-revenue-per-employee-2011.xls. Most companies would die just to have those as revenues/capita.

Postscript 3: other data I used other data I used included—

Phone Revenues

Q3, 2010 $  5,300,000,000.00
8,750,000 units sold
$                  605.71 per phone (includes sale of phone and subscriber fees)

iTunes and App Revenues

Q3, 2010 $  1,100,000,000.00
$     490,071,283.10 Estimate for iPhones
$                    56.01 per phone per quarter
$                  224.03 per phone per year

iPod

Q3, 2010 10,890,000 units sold
$174.33 cost to manufacture iPhone

The spreadsheet is available in .xls format for you to download from:

https://old.dramatispersonae.org/AdvancedSpreadsheetUseTheAppleiPhone.xls

Sources used:

https://www.mobilecrunch.com/2010/04/20/apple-q2-earnings-million-iphones/
https://www.numberof.net/number-of-iphones-sold-2/
https://thetechjournal.com/electronics/iphone/apples-iphone-sales-up-90-from-same-time-last-year.xhtml
https://www.andpop.com/2008/07/19/final-cost-to-manufacture-the-iphone-17433/

E&OE

       
       
       
     Prof Bruce @ 9:26 pm

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         Commercial Rents        

       
   Posted on
       Friday 15 October 2010  
     
   
       

Commercial Leasing is Trickier than Residential

Commercial rents in Ontario are more difficult to understand and calculate than residential rents.

Residential rents are pretty basic: typically, the Tenant pays
monthly rent in advance. There is no HST (Harmonized Sales Tax) on
residential rents so if your apartment rent, say, is $1,000 monthly,
that is what you pay.

You may also be responsible for paying additional amounts for
utilities, parking, grass cutting, snow removal or storage but this
would be spelled out in your residential lease.

Usually, a residential Landlord pays property taxes, water and sewer
charges and building insurance although you will need your own Tenant’s
Insurance to protect your contents and also provide liability and
property coverage to guard against accident or damage to the building caused by you.

In a commercial setting, things get more complicated. You need to ask about and know:

a. What is the basic rent sometimes called minimum
rent? [This is the money that goes to the Landlord and is theirs alone.
They typically use it for mortgage payments and return on capital as
well as return of capital.] b. What are you paying in terms of operating costs,
condo fees (if it is a commercial condo), utilities, property taxes? [It
is important to know exactly what is included in operating costs. For
example, any maintenance inside your space may not be included and you
may be charged a fee for every call made to the Landlord to come into
your unit and, for example, change a light bulb.] c. What are you paying for the common area? [Common
area includes lobbies, washrooms, stairwell, mechanical room, electrical
room, parking lots, elevators and so forth.] d. What are you paying for signage and parking? [Is parking designated or shared on a first come first served basis.] e. What are the management fess and admin fees on
things like operating costs and utilities? [Landlords may charge
management and admin fees as a percentage of operating costs and
utilities and even minimum rent. The former can be perverse in the sense
that the higher the operating costs and utilities are, the more money
the Landlord makes.] f. What is the gross up from useable to rentable area?
[Commercial Tenants typically pay rent not on useable area (the area
actually inside their demised premises) but on the useable area grossed
up to take into account the common area of the building. You need to
specify how this is calculated and we tend to use the BOMA (Building
Owners and Managers Association) Standard. This says what the Landlord
is and is not allowed to include in common area. In addition to the
above elements, common area may include all penetrations through the
floor plate such as columns, air shafts etc. Also, it makes a difference
if you calculate the area using inside or outside building
dimensions—BOMA Standard balances competing interests.] g. Is there a percentage rent? [Usually applied to
retail businesses and especially restaurants, a percentage rent
(typically 5% to 8%) means that the Landlord gets a portion of your
sales in addition to all the other charges you are paying. The better
you do, the better they do. You will want to pay no percentage rent but,
if you do, at least try to negotiate a percentage rent that only
applies after you reach a certain level of sales and not from dollar
one. Say you are paying a percentage rent of 5% and your minimum rent is
$20 per sf per year and you have 5,000 sf of rentable area. Your
minimum rent per year is then $100,000 ($20 x 5,000 sf). Ask that no
percentage rent apply until your sales are over $2 million
($100,000/5%). So if your restaurant sales are $3 million, you will pay
$50,000 in percentage rent not $150,000.] h. Are the utilities being retailed to you? [Some
Landlords retail their utilities. So if they are buying Hydro at bulk
rates from OPA (Ontario Power Authority), they will charge you as if you
bought at retail from your local power company. They keep the
difference and this can be a lot. Also, if they install power savings or
generating devices (like say rooftop solar), they may have the right to
those savings/revenues and you get zip.] i. Who does the cleaning, snow and garbage removal and
who pays for that? [They may have a separate charge for cleaning your
space or may not do it all.] j. Is the Landlord’s Building Insurance included in
operating costs? [You will need to have your own Tenant’s Insurance but
you will also, in all probability, be paying for the Landlord’s
insurance too.] k. If there are vacancies in the building, will you be
paying a higher percentage of common area costs? [That is, let’s say you
occupy 10% of a building, you would naturally expect that you would pay
10% of common area costs. But some commercial leases allow the Landlord
to make up for any vacant space. So if the building were say 50%
occupied, he or she would have the right to charge you 20% of common
area expenses. In commercial leasing, it’s caveat emptor—there
are no rules. In common law, the parties (commercial Tenant and
commercial Landlord) are treated as if they are equal in terms of
knowledge and sophistication so no special treatment is afforded to
commercial tenancies.] l. What are you getting in terms of free rent and is it
gross free rent (no payments at all)? [You may get a period of time to
do a build out of your unit and a period to operate with no rent or
reduced rent. This can be crucial to your success. However, just getting
a few months of minimum free rent may not be enough since operating
costs and utilities can be significant monthly costs and you may have to
pay these even during ‘rent free’ periods. It depends on what your
Lease Agreement says.] m. Will you be getting a leasing inducement? [Leasing
inducements or tenant inducements go towards moving costs, fit up of the
space and other Tenant costs. You also have to know when you are going
to receive your inducement—when you sign the Offer to Lease, your Lease,
take occupancy of the space, open for business or 46 days after you
open for business? It can be some combination of all of these. The 46
day period comes from the fact that the lien period is 45 days after
work is completed and the Landlord may not want to give you your
inducement until they check that there are no liens on their property.
If you want your own contractors to do your fit up, you need to make
sure that you have the right to use your own team—many Landlords want to
do the work on their buildings themselves so, in essence, they use your
inducement to pay themselves to do the work in your unit. Also, they
may only allow union contractors in their building so if you want to use
non-union workers, you need their permission in writing in advance. If
the Landlord does the work, you will want to ensure that their rates are
reasonable. The Landlord may also have the right to supervise (and get
paid for it by you) your contractors. Everything is negotiable, in
advance.] n. Your Landlord may also have the right to bill you
after their year-end if there are any overages. [So if property taxes,
for example, increased during the past year or utility rates, they can
come back to you with a requirement to pay a lump sum amount to cover
their additional costs.] o. Usually, you enter into an OTL (Offer to Lease)
prepared for you by a licensed REALTOR first then a Commercial Lease.
[The OTL outlines the commercial terms and conditions (described above)
and, once it is accepted by both parties, it is legally binding. The OTL
typically runs eight to 12 pages in length. However, it is then
superseded by a Commercial Lease which incorporates the commercial terms
and conditions of the OTL in a comprehensive document (which can be
anywhere from 30 pages to 80) that also describes the legal
responsibilities of the parties to each other. You will need a lawyer to
help you with that document and he or she needs to really understand
the commercial terms of your OTL otherwise, if you and they make a
mistake, the Lease will take precedence over the OTL and you’re stuck*.]

(* I have always felt this was a dumb system and anyone should be
able to re-engineer the system to combine the two documents and
eliminate the Commercial Lease. It would save a lot of time and reduce
fees by quite a margin.

I have done Agreements where the parties agree to use their OTL as
their Lease. In fact, some very large tech companies I have worked with
have refused to sign the Landlord’s Standard Commercial Lease, feeling
it is too biased in the Landlord’s favour. Instead, we have done 4-page
Offers to Lease that worked just fine for all parties.

Sometimes, the process is even worse: three steps instead of two. The
parties first enter into a non-binding LOI (Letter of Intent) followed
by an OTL and Lease. Huge time and money suckers.

There is also a principal in law that says if you put your mind to a complex document like a Lease, you should be bound by the written
terms of that agreement. If, instead, you rely on an abbreviated
agreement like an OTL, then, if a dispute ever went to Court, an
arbitration proceeding or mediation, you might persuade the
Judge/Arbitrator/Mediator to look to the equity of the matter instead,
i.e., what the parties intended rather than just the written agreement. I
have always preferred this approach, especially since you can never be
sure you really understand an agreement written by a clever lawyer who
can hornswoggle the best, non-lawyer, minds around.)

Residential leases are covered by the RTA (Residential Tenancy Act of
Ontario) and so there is some protection for you in the sense that
Landlords can’t ‘hide’ costs and spring them on you or evict you to let
someone else take your unit so he or she can jack up the rent. Your
apartment may also be under some type of rent control so at lease
renewal, there may be a limit on how much of an increase the Landlord
can saddle you with.

Not so in commercial leasing. After your lease is up and, if there
are no options for renewal, the Landlord can terminate you on the day
after your lease ends—you have no right to over hold (as you do in
residential where you go to a month to month lease and still retain
rights of occupancy).

Also, in commercial leasing, if you don’t pay on time, the Landlord
has the right to distrain you immediately—lock you out of your space and
seize your goods within and liquidate them to mitigate his or her
damages. In residential, the eviction process is guided by the RTA, it
takes months to do and the Tenant has the right to redeem (i.e., pay the
amounts owing) at any time during the process and stay.

A Simplified Example

To better help you understand how commercial rents, let’s look at a
simplified example of a recent lease we did for a PR firm who leased an
office building  in Westboro, Ottawa. We’ll call the company Skinny
Media.

Here is Skinny Media’s deal. It is a net net net lease (also called a
triple net lease) which means it is ‘carefree to the Landlord’; i.e.,
the Tenant pays everything.

Minimum rent: $14 per sf per yr for a 5-year lease term [This is their basic rent.] Operating costs: $3.85 per sf per yr for 2010
Property taxes: $4.10 per sf per yr for 2010
Utilities: $5.25 per sf per yr (est)
Parking: two spaces included with minimum rent at no additional charge
Signage: free
Useable space: 1,600 sf
Gross up: 11%
Percentage rent: 0%

+HST

So Skinny Media’s monthly rent would be calculated as follows:

Oct. 15, 2010 Commercial Lease: Skinny Media

Useable Area 1600 sf
Minimum Rent $14 per sf per yr
Operating Costs $3.85 per sf per yr
Property Taxes $4.10 per sf per yr
Utilities $5.25 per sf per yr
Parking $0
Signage $0
Gross Up 11%
Percentage Rent 0%

Estimated Monthly Rent $                                    4,074.91 per mth
HST $                                       529.74 13%
Total $                                    4,604.64 per mth

E&OE

That is, they would pay a total estimated monthly rent of $4,074.91 +
HST or $4,604.64 in advance on the first of each month. So on the
surface, it looks relatively straightforward but it is definitely a
market where buyer beware applies.

I have often thought that Commercial Landlords may have taken a few lessons from French Finance Minister, Colbert:

“The art of taxation consists in so plucking the goose as to
obtain the largest possible amount of quills with the smallest possible
amount of hissing,” Jean Baptiste Colbert.

Prof Bruce

Postscript: you can download my simplified spreadsheet in .xls format from: https://www.eqjournalblog.com/CommercialLeaseSkinnyMedia.xls

       
       
       
     Prof Bruce @ 7:29 am

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         Fear of Loss/Desire for Gain        

       
   Posted on
       Sunday 10 October 2010  
     
   
       

Fear of Loss Is MUCH Stronger than Desire for Gain
People Often Make Irrational Decisions

Recently, we asked a Landlord, a well-to-do Civil Servant who has
extensive residential real estate holdings, if he would accept a
can’t-miss deal; he surprised us by turning it down.

Here is the deal we put to him on behalf of his existing Tenant:

Option A

-Existing tenant pays ½ month’s rent on Feb. 1
-Existing tenant returns keys on Feb. 15th
-Landlord does renovations last two weeks of Feb.
-Re-rents apartment to new tenant for March 1st
-Gets 1st and last months’ rent March 1st from new tenant
-Already had last month’s rent for March from original tenant

So if you follow what is on the table, the Landlord is giving his
existing Tenant a break of a half month’s rent because these folks have
bought a house and plan to move out February 15th (2011), six weeks
before the end of their lease. That’s the bad news for the Landlord.

But here’s the good news: he can paint the apartment during the last
two weeks of February getting it ready for a new tenant for March 1st.

Why is that good news? Well, for two reasons: a) the apartment is in a
location where demand is high and b) he already received the last
month’s rent from the existing Tenant (a year ago when they signed their
lease) and so now he has the opportunity to get paid TWICE for the
month of March.

So the Landlord stands to gain a full one and half month’s rent if he accepts this deal from the existing Tenant.

That’s because his alternative is:

Option B

-Landlord refuses to reduce rent for Feb.
-Accepts keys back on March 31st
-Landlord does renovations in April
-Re-rents apartment to new tenant for May 1st
-Gets first and last months’ rent from new tenant on May 1st

Basically, the apartment will be vacant for the balance of February
and during the month of March, the Landlord can’t get in to do his renos
until April 1st thereby losing his opportunity to get two months’s rent
for April the month and not being able to re-rent the apartment until
May 1st, in all likelihood (or, in the alternative, finding a tenant for
April 15th by giving them the last two weeks of free).

So here are the calculations:

Fear of Loss Calculations

(If you would like to download this spreadsheet in .xls format, please do so from our server at: https://www.eqjournalblog.com/FearOfLoss.xls.)

So the Landlord, by turning down this deal, is losing a potential
rate of return of 335% PER MONTH. That is, by giving up ½ a month’s
rent on Feb 1st in return for double rent in March*, he is forgoing a
rare opportunity to make a fabulous return, one that is so high that if
he were charging interest on a loan to get this kind of IRR, he would be
hugely beyond the maximum interest rate you are allowed to charge in
Canada.

(* Don’t confuse the double rent he receives in March for the first
and last months’ rent he receives from his new tenant as shown in the
model above. We are analyzing cashflow here; we are not using not
accruals-based accounting.)

So why did he turn it down? For most people, fear of loss is a
stronger force than desire for gain. He simply isn’t willing, under any
conceivable circumstances, to give up a ½ month’s rent on Feb. 1st.
The existing Tenant can not realistically induce his Landlord to agree
by offering a higher IRR, it’s already shy high. In other words, even if
the Tenant offered to pay, say, ¾ of March’s rent, the Landlord would
still likely refuse.

When a person is fearful, which is a powerful emotion lodged in the
most ancient part of our brains (the reptilian brain), they often make
what appear to be irrational decisions.

The Tenants told us that they will simply hold onto the apartment
until the end of their lease and just take more time to move their stuff
out. The Tenant loses and the Landlord loses and it appears irrational
and unreasonable to me but so it goes.

C’est la vie,

Prof Bruce

Postscript: The Landlord did come back and tell the Tenant that he
would accept the deal so long as the existing Tenant guaranteed it. His
deal: pay full rent on March 1st, hand over the keys on March 15th
(thereby giving the Landlord six ‘free’ weeks) and, if the Landlord did
re-rent it, he would give the existing Tenant a refund for a half
month’s rent.

Of course, if the Landlord did not re-rent the place, the existing
Tenant would see de nada and, in fact, the Landlord would have little
extra incentive to re-rent it.

What do you think the Tenant said to that arrangement? This is a
family-rated blog and I can’t tell you. But anyone who offers an
unethical ‘heads I win, tails you lose’ type of deal should expect a
resounding ‘No’.

Postscript 2: This phenomenon is another reason why, in sales, you
want customer involvement and buy-in early on in the process. Once
someone takes ownership of a ‘thing’ or a process, the fear of losing it
will come into play. And as we have seen above, fear of loss is a
powerful motivating factor. Consequently, your probability of concluding
a sale is likely to increase significantly.

This is one of the reasons I am so keen on the Virtual Home Builder model (see: https://www.eqjournalblog.com/?p=1626)
and ones similar to this. The VHB model allows consumers to ‘build’
their homes online before even entering into a sales office or design
centre. They get exactly what they want, they have a hand in its design
(and construction) and at a price they know they can afford in advance.

Postscript 3: I have seen fear of loss in play before. A few years
ago, two 50/50 restaurant partners came to me with a problem: they could
not get along. I met with them together and then individually.
One partner came forward with what I thought was an irresistible offer:
he would buy out his partner for $55,000 or he would sell his half of
the business to his partner for $2. That’s how much he wanted to end the
partnership. His partner turned him down: he couldn’t stand to see the
business in the sole possession of his partner and possibly go on to
success and, at the same time, he didn’t think he could make the
business a success on his own.

I talked with him: “What exactly do you think is going to happen to
this restaurant if you two keep fighting and nothing gets done?” “It’ll
fail, I suppose…”

That’s exactly what happened, causing both partners to have to pay $85,000 each to their Landlord to buy out of their Lease.

So it meant that one partner was willing to forgo a gain of $55,000
and sustain a loss of $85,000 just to bring down the business in order
to hurt his partner. He lost $140,000 out of spite. Now that is
irrational.

832. “Anyone who thinks people make rational decisions just hasn’t done enough deals yet,” Prof Bruce. (From Entrepreneurship Sayings: https://www.eqjournalblog.com/?p=1084.)

       
       
       
     Prof Bruce @ 12:06 pm

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About the Author

Bruce is an entrepreneur/real estate broker/developer/coach/urban guru/keynote speaker/Sens founder/novelist/columnist/peerless husband/dad.

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