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Welcome to the West Side Investors Network, WIN, your community of investing knowledge for growth. This is the Real Estate Professionals Investing Podcast. For Real Estate Professionals by Real Estate Professionals. This show is focused on the next step in your career....... investing.
Welcome to the Westside Investors Network. WIN, your community of investing knowledge for growth. This is the real estate professionals investing podcast for real estate professionals by real estate professionals. This show is focused on the next step in your career, investing. Thank you for listening.
Intro speaker:And please, if you like our content, rate us on your podcast provider. Just a quick disclaimer. The views and opinions expressed in this podcast are for educational purposes only and should not be construed as an offer to buy or sell any shares or securities to make or consider any investments or take any other action.
Trent:Today, we are joined by Michael Hamilton on the Westside Investors Network podcast. I'm your host, Trent Werner. Michael, thanks for joining me today. Tell us a little bit about yourself.
Michael H:Yeah. For having me on. Yeah. I'm a real estate developer here in Portland. We specialize in mid rise multifamily construction and development.
Trent:Very nice. And what's your company called?
Michael H:Seneca Development is the development arm, and then Hamilton Building is our construction company.
Trent:Very nice. Obviously, development and honest real estate in general is a hot topic with everything that's been going on aside from Silicon Valley Bank. But what is the Fed policy and their maneuvers doing for development? I know what it's doing on the syndication side, but what about development? We haven't talked about that yet.
Michael H:Yeah. I mean, I think it's probably a lot like what's happening on the syndication side. You know, in development, there's so much risk involved, long durations of construction, holding periods before you even get cash flow. So I see a lot of developers kinda sitting on the sideline. And then I also see groups that are taking advantage of the blood in the water.
Michael H:I see guys out there that are also really aggressive wanting to pick up pieces at 10% discounts in comparison to what the price would have been last year. And I think the Fed policy increase, the first thing that gets impacted is really land value. So I think if you're a developer and you want a land bank, now's the time to do it. But on the syndication front, I think it's a lot more difficult to do right now.
Trent:So you I mean, it's kind of a common known fact that when you're doing development, there are longer hold times. There's also a a longer duration before you really start seeing returns. How has variable debt impacted that hold time and that, I guess, certainty on when you're going to get your returns? Because I know investors are waiting for sometimes two years to see returns. How does a huge jump in your interest rate and your debt affect that?
Michael H:Well, that's the beauty. I guess it's a double edged sword when it comes to development because it takes so long. You know, we have certain projects right now that are in a great phase just because we're in design, we're in permitting, and the next six to eighteen months where we're gonna see a lot of how this lands, we're able to maneuver. Right? We're able to speed up our design process or slow down our design process, probably not so much speed up.
Michael H:But if we see, like, wow, rates are gonna go all the way to 12%, well, we're not developing anything. Right? We're gonna sit and hold and wait till the market stabilizes. So that's the beauty of it. When you're more of, like, a syndication model, once you've gotten that acquisition done, ideally, you wanna turn it as fast as you can.
Michael H:It is a little bit slower, on the flip side, I think it's a little bit more conservative in terms of the amount of equity that you create through the development process, almost insulates you a little bit more.
Trent:Okay. And you may not have certain debt structures that other people have, but if someone does have a variable rate and their debt is getting really expensive and maybe they're really early on in the actual development process, maybe they haven't even gotten to design or or whatnot, What do you think the best, I don't wanna say bailout plan, but the best, you know, way to combat that? Do they just put it on the shelf right now, or do they continue going with that?
Michael H:You know, if you've got the liquidity to continue your design process and service the rate, fine. I guess one of the things is when you're in development, your land price, right, your land cost is is a small portion of your capital stack. Right? It's only a portion of what you're ultimately gonna be spending when you build the building. Right.
Michael H:And so because it's such a small cost upfront in relationship to the entire project, ideally, I love financing in a variable rate when it's on land. One, because it's not a huge loan. And second off, I'd rather have the liquidity in my pocket and pay an extra three or four thousand a month knowing that I can service that payment and rather have the liquidity on the sideline than to buy land all cash. And it really comes down to an IRR analysis. You know?
Michael H:People look at annual rate of return or their overall return on a project, and we really like to hone in on IRR because then we start talking about velocity of capital. And the longer that I can hold on to my equity and my liquidity before sinking into the project, the better. And so, you know, to each their own, I wouldn't advise someone going into a 12% loan right now. That's variable rate. And if you are in that situation and you can still stomach the payments, just keep going.
Michael H:But if not, I'd quickly look for a place to refinance, which as of last Friday might be a little bit more difficult.
Trent:Okay. How does and there's been multiple factors that have affected real estate, especially development over the last three, four years. How is the fed raising rates stacked up compared to the pandemic and material costs, logistics, nightmares, all these other things that have, know, kind of been a problem for development. How has this new rate adjustment period been compared to the other ones?
Michael H:It's definitely different. And I would say COVID was such a weird, if that's the best word to use, such a weird thing that was happening to all of us that it slowed everyone down a little bit. I looked at COVID like a blessing in disguise. It really allowed you to kind of sit back and say, alright. Now's an opportunity for us to figure out a way to get nimble.
Michael H:Right? A way for us to be dynamic because that's the environment we're currently in. And so, you know and with that said, we're vertically integrated on the construction side. So that means that we've got guys in the office that are constantly checking indexes, constantly getting lead times, and kind of staying out in front of a lot of those hiccups. Good example is we're framing a 55 unit building.
Michael H:And we had the opportunity before lumber spiked to purchase the lumber about five months in advance, hold it off-site and have it insured. Knowing that the flip side is we can either wait and see if lumber stays stable and order when we want, but we went ahead and pulled the trigger. And then, you know, four months later, lumber spiked and it doubled. So we try to stay out in front of those things. We kinda look at it like, let's take advantage of the construction company that we have in house and constantly communicate so we can make those decisions as ownership.
Michael H:Whereas the fed and so on the flip side, whereas the fed increasing rates, it's I would say it where COVID only impacted a handful of projects, the fed raising rates impacts all of them. It it impacts people that are not only building and developing. It impacts people that have owned buildings for ten years, but they happen to have refinanced on a floating rate in the last two years. And so it's very different, but I think that the writing was somewhat on the wall. I think a lot of people, at least we did on our side, tried to look at these 0% interest rates as a once in a lifetime kind of thing, but continued to underwrite to pre 2020, pre COVID guidelines.
Michael H:And I would say we're probably a little bit above that now with the rate increases. But, yeah, it's such a different monster because now everybody gets impacted. Whereas with COVID, it was just so selective.
Trent:Right. So when you say obviously, it affects like you said, it affects people that are building and it affects people that have owned and refied recently. Yeah. What do you think this does going forward? Do you think it's gonna slow down new projects from getting started whether I mean, we don't have to get into the city of Portland and how long things take with with the city here.
Trent:But, you know, just across the country or across the, you know, the globe, you think this is gonna obviously, it's more tailored to The United States. But you think this is gonna slow down a lot of the new projects that may have been started?
Michael H:Absolutely. And I think what it's gonna do is it's gonna slow down the smaller guys. It's gonna slow down the guys that do just a couple projects a year for sure. But like I said, when there's blood in the water, people take advantage of it. So it really depends on the position that certain investors are in.
Michael H:If there's investors that have liquidity right now and they're willing to stay patient, they can find really good opportunities. But nonetheless, projects are absolutely gonna be impacted. I know probably 90% of the colleagues that I know can't get finance on a project right now even if they wanted to, a lot of them just don't wanna pull the trigger because we don't know where this thing's gonna land at the end of the day. But the difficulty of, you know, some of these guys were underwriting to their building at a four cap. Well, now that building's a five and a half, six cap on a good day.
Michael H:So a lot of these guys are having to revisit and say, okay. Well, if our financings weren't expensive, then we've got to pour more cash into this thing to have the leverage balance out. And then when they look at their numbers at the end of the day, it says, why don't we just wait? Why don't we just wait and see if these rates will come down? So I think that a lot of developers are in that position, and I think it's just gonna tighten the pipeline of inventory that's already very tight.
Trent:Yeah. And that was so what my next question was gonna be, do people just have to start over capitalizing everything and raising more money, getting more cash, or do you start buying cash and not have any, you know, debt service on the piece of land itself and then figure out what to do after that?
Michael H:Yeah. You know, start with the latter. I think that, you know, when you run your models now, I think I'll answer with maybe how you should look at it is when you're running your financial model on one of these acquisitions, be obnoxiously conservative on what you think your financing cost is gonna be. Because the flip side is the deal turns out to be really great if it's not as conservative as you think it is. Or if you don't do that, you're gonna lose the building.
Michael H:Right? You're gonna lose the project. And so one of my things that I've done, even some of my partners give me crap about it, is I will run a series of models on a project, and all of them will have certain inputs that are just obnoxious. For instance, I'll run a model where our rent growth year over year is 1%. Right?
Michael H:And I think it's important to do that so you know when you're looking at your final model what the trigger points on the project are gonna be. You're gonna know that if rates go up a certain amount that the project's not gonna work. And so I think it's really revisiting those financial models and stress testing them and kind of starting from there.
Trent:If you had a crystal ball or you invented a crystal ball, what would your crystal ball say is the next year and a half to two years when it comes to development and the feds?
Michael H:Yeah. I mean, you know, the fed's a national thing. I think development's absolutely a regional thing. You know, when I see headlines that are like, oh, there's big rent declines. You gotta keep in mind that they're accounting for places like Florida that are extremely overbuilt and their rents are declining year over year at 42%.
Michael H:We're in a very stable market and a lot of that stability comes from our very tight inventory pipeline. Vacancies are fairly low, occupancy rates high, rents year over year are pretty consistent. And I think that the slowdown that's happening now and the shortage that were happening now is only gonna compound. So from an investment perspective, it's great. From a practicality perspective, it's not.
Michael H:So you've gotta kinda play the two sides of the coin there. But at the end of the day, just like any business, it's supply and demand. So supply is down, demand's high, price goes up. And that's why I think it's really important that these services that we get from the Portland Bureau of Development are expedited. So more developers can come in here and not worry about spending two years to permit a building when, you know, we're we could build 30,000 units every year for the next ten years, and we're still not even close to hitting our shortage.
Michael H:So I just think that what's happening is gonna compound what's already happening. And now here's a word from our sponsor.
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Trent:Speaking of the city of Portland, what do you think and I don't maybe you haven't seen it yet, but I'm sure you have. You're a pretty knowledgeable guy. What do you think of this new proposed adjustment to the rent control caps and all that stuff that they're talking about?
Michael H:It's not great, if I'm not gonna lie. It's not great for some very obvious reasons. You know, whenever I get into the discussion of rent control, I just say, go on to Google and type in rent control case study, and tell me what case study points out that rent control implementation actually keeps rents low. There isn't one because that's not how economics works. It's not how services and goods and the exchange of money works.
Michael H:In theory, it makes sense, but again, that's just not how economics operate. And so when I think about it, I think it's such a shame that there's so many other tools at our disposal in order to keep rents low. But we look at a headline that says rent control without understanding any context of it and think that it's going to ultimately lower those rents. When in turn, all it does is keeps a lot of out of state money out of here, which then in turn means people are not investing as much in the market, less is being developed. And what did we just talk about with supply and demand?
Michael H:If there's less inventory, that price is going to go up. In fact, if I'm building a brand new building and I now know that my rent is capped, my starting out rents on that building are going to be a whole lot higher than they normally would be because I'm gonna be making up for all of that time
Trent:lost. Mhmm.
Michael H:And so it's things like that where I'm like, wow. If that's the case, all these new buildings that hit the market are gonna be egregious. They're gonna be really expensive. But, you know, that's one of many outcomes of why rent control is is is gonna be a backwards policy. But, you know, like I said, the two cities that have rent control, San Francisco and New York, so happen to also have the highest rents, and that is not by coincidence.
Michael H:So
Trent:A little side note here. We were at the best ever conference last week in Salt Lake. Great conference. I was talking to a guy that invests in Washington DC, and then he was there was another guy standing there that invests in Minneapolis. So Portland got voted the worst city to be a landlord in.
Trent:It's number one. And I was kind of you know, obviously, we have our issues, but I was talking to these guys. And Washington, DC, there's a cap on what you can raise it after a tenant moves out voluntarily. And then in Minneapolis, you, like, can't raise it. Even if a tenant moves out voluntarily, you have to re rent it and then go through this whole process.
Trent:I was like, how is Portland the worst if you got other states that are and cities that are capping Yeah. What you can do after a tenant moves out voluntarily. Yeah. That's for another day, though.
Michael H:Yeah. I mean, yeah, I'd rather deal with what we're dealing with than to have a cap. I'll tell you that much.
Trent:Going back to what you said, though, you said that if there's a tighter rent cap we already have a rent cap, so that is what it is. But if there's a tighter rent cap, not only does that deter people from building, it also means that the people that are building are gonna have to increase their rent rates to basically make sure they don't fall behind market in the first couple of years. And all that does is drive every other rent up because if people are willing to pay x and there's more people competing for the ones that are already standing, rents just keep going higher and higher no matter what kind of property you're looking at.
Michael H:Absolutely. No. I agree a 100%. It's just one of again, like I said, these are just one of the many problems with that type of policy.
Trent:There's a lot of people that talk about the market pulling back. Right everyone compares this to 2008 everyone says great financial crisis this great financial crisis that we just saw Silicon Valley Bank and there was one other bank that took a nosedive I can't remember the name of it but where does Signature
Michael H:Bank of New York.
Trent:Yep. Yep. Yep. Thank you. Where does the real estate market because that was, you know, a huge headline in o eight.
Trent:Now we're looking at banks, were obviously an issue in o eight as well. Where do you think the real estate market is right now? And with what we've talked about the feds and all these things going on, is real estate still a good idea to be involved with?
Michael H:Yes and no. I would say if you don't know what you're doing, just maybe hang on a little bit and wait till things mellow out. But what's so interesting about 2008 initially is that it all started with a housing crisis in in the mortgage world. And so it affected residential a ton. Right?
Michael H:But back in 2008 in Oregon, there were only single digit foreclosures for apartments, for multifamily buildings. So less than 10 apartment buildings in the entire state went under, yet hundreds of homes dead. Right? So it was a lot more residential focused. Where now I almost wanna say it's the 2008 for commercial real estate because unlike residential, there is somewhat emotion involved in a transaction for residential.
Michael H:Someone loves a house that they're willing to spend $25,000 more for it. Where in commercial, it's numbers. If rates go up, cost of capital goes up, what you can buy something for goes down. Right? The price goes down.
Michael H:And so with every increase by the fed is a decrease in valuation for commercial real estate assets compounded by the fact that some of those assets have floating rates that are also now becoming unserviceable. So I don't think it's a great reset for residential, but I think it is a reset somewhat for commercial real estate. I think with residential, especially in the market like Portland, there's still not a ton of inventory. I wanna say last month was one nine. You would have to correct me if I'm wrong.
Trent:That's right.
Michael H:But not a ton. Right? And the rate increases aren't gonna deter a buyer of a house as much as they're gonna deter an investor from investing in commercial asset.
Trent:So one thing that you said, loans becoming unserviceable. At this conference, there was a guy that gave a speech. His name is Neil Bawa. He's big syndicator. He had an interesting some interesting data where he said according there's a I can't remember the name of it off top of my head, but it's not Fannie Mae or Freddie Mac, but something like that that's loans on big, you know, commercials.
Trent:Yeah. Yeah. They said that by July right now, I think it was like 20% of loans are becoming unserviceable or bleeding money. By July 1, it's projected to be 40% at the current rate that we're moving. And if feds keep raising rates, it's only gonna get that number's only gonna get higher.
Trent:So in my opinion, if a loan becomes unserviceable and you can't refinance it because it doesn't make sense, I mean, are we just gonna see a bunch of foreclosures or are we gonna see a bunch of haircuts from these people that are just trying to offload at a discount?
Michael H:Well, you know, it's an interesting time for banks to wanna foreclose when there's such a liquidity crisis with depositors. Right? It's like they much rather collect some money than go through a year long foreclosure process right now at all times, in my opinion. But every financial institution set up differently, some guys are totally fine right now, others are not. But I think you will see a lot of fire sales.
Michael H:I think you'll see guys you know, good piece of advice, I was talking with Romano Capital Corp in Romano. They're based out of Vancouver. One of the pieces of advice he said to me because I wasn't in business in 2008, but he was, was in a time like right now, you gotta live to fight another day. Don't try and hold on to something thinking it's gonna be your last deal because those are the guys that in 2008 ended up having the big come and take it all for 20¢ on the dollar. So it's better to be proactive now and maybe a little bit more conservative on your decision making because decisions are based off of the information that you have at the time that you make them, not on the ultimate outcome.
Michael H:And so if you were to get out of the deal that is starting to get sticky for you and you, you know, let's say you break even and two years later, the person that bought it made a bunch of money, you still made a good decision because that outcome had nothing to do with the decision you made at the time. And so when he shared that information with me, it kinda created a philosophy behind how we look at assets that we hold onto and don't as a more of a entire portfolio decision than a per asset decision. And I think that anybody in that situation needs to look at it like that instead of trying to hold on to something, think about how it affects your entire portfolio. You know, right now is a really good time to not be the guy that's defaulting on your loan so you can get loans in the future. So things like
Trent:that. That was before Sorry.
Michael H:To answer your question, I think there will be just a lot of fire sales, but probably not a ton of foreclosures. It just depends how bad the damage is when the you know, where the Fed ends up going here.
Trent:Well, that's another thing Neil talked about. Basically, he said, get to twenty twenty five. Like, right now, your goal is to get to 2025, whether that's doing a capital call if you're a multifamily syndicator or, you know, developer. However you gotta get to 2025, just get there. Don't let the bank take your property.
Trent:And if you can avoid fire selling, don't do it. But if you have to, like you said, better to do that and fight another day than go down with the ship type thing.
Michael H:Yep. Yeah. Couldn't agree more. 2025 is a I hope that's the prediction. We're banking on 2025 too.
Michael H:Good to hear someone else started in there.
Trent:When it comes to your guys' current portfolio, what are you guys working on? I know you talked about a 55 unit or Yep. So you guys are working on a 55 unit. What else you guys got in the works?
Michael H:About last July. That building's leased up. We've got a 27 unit that we're building right now. And then we've got a 72 unit that's in design review. We just had a design advice conference actually earlier today.
Michael H:And then we have a 60 unit building that's probably a mile up the street from our 55 unit that was just starting to go through schematic design. So that's the again, that's almost the beauty of development is we've got a good year and a half of design and design review and permitting, allowing us to make decisions on when and if we pull the trigger on ongoing vertical. And I think it's more of a win, not so much as if. And so, yeah, it's a good luxury to have, and it's good to know that we are hopefully trending towards the top of this interest rate market. And when things go up, they go down.
Michael H:And when they go down, they go up. So we're hoping we can time that in 2025, '26 well.
Trent:When it comes to I mean, you guys got hundreds of units in the works in the pipeline. How do you go about picking, you know, picking the piece of land to what you can do with it, how you can do it, that kind of thing? What's that process?
Michael H:Yeah. You know, you've got your ideal site, which to us is the rectangle site. We like a nice street frontage. Corner lots are great, but it really comes down to zoning and we kind of stay in a few buckets and a few type of build types. So we focus on these rectangles because it allows our design to be double loaded.
Michael H:What that means is there's a corridor down the middle of the apartment building, and you have units on both sides of that corridor. Because when you go into development and design, we've seen colleagues fail to understand the gross square footage versus rentable square footage and then also understanding where their specific market is. And so, you know, Trent, we build a lot of our products within a four, five mile radius. We don't build in Hillsborough. We don't build in Beaverton.
Michael H:We're really stuck in North And Northeast Portland because we know it really well. And so we know a lot of our geo reports kind of come out to the same thing. And what we try and target is a mid rise five story building. Once you go above that, your construction type changes. It gets a little bit more costly.
Michael H:And in turn, you have to charge higher rents. So we try and stay a little bit below the market rent. Another thing it does, especially with the city of Portland, is it puts you in a different design review category, which means it takes, in a nutshell, twice the amount of time to get it permitted and likely twice the amount of cost. Right? And so we try and stay below those certain thresholds with the philosophy of taking the path of least resistance, which is ironic to say because we're permitting in the city of Portland.
Michael H:But nonetheless, when we're targeting an ideal asset for us is something that's, you know, three or four houses that are all side by side by side that are all zoned for apartments. That way when we acquire the property, we can hopefully fit tenants in those homes and have them cover some of that that carrying costs while we're in the permitting phase. In a flat site, I mean, think one of the biggest mistakes a developer can make is buy a site without taking into consideration if they have to do any shoring or how much grading they've got to do on that site. We've had sites, identical sized sites, a 16,000 square foot site, another 16,000 square foot site. One cost us a million dollars in excavation, the other one cost us $200.
Michael H:Right? And so those are things now that, you know, we really look at, again, path of least resistance. You know, is the site flat? Is the demo light of a small homes that we can plug people in? But a lot of that is what we try and focus on is how can we take costs that doesn't really see a benefit.
Michael H:We'd rather put that money into the amenity space or the appliance package for the tenants rather than, you know, piling 35 feet down around the entire perimeter of the building. Right.
Trent:Have any of your criteria changed in the you know, whether that's with COVID or everything else going material cost, labor cost, all these things that have been over the last four or five years three or four years, excuse me. Has any of that changed since you first started or been adjusted?
Michael H:Oh, yeah. Where where do I start? Yeah. Absolutely. But I think it it really comes down to refining what we like and don't like when it comes to the types of investments we wanna make.
Michael H:A lot of the buildings we build, we intend to hold for a long time. So we wanna be good neighbors in the area. But focusing on those things when we originally started the business, I would be lying to say that that was a focus. For us, it was more of let's try and find a deal regardless of where the deal is. And when we recently completed our 55 unit building, you know, came to the market 50% pre leased, at least up in three or four months after that, and it leased up 8% higher than our pro form a had projected.
Michael H:And a lot of it, other than it's a beautiful building, of course, came into the area and how we tried to fit into the neighborhood rather than putting some sort of monstrosity in there or something that looks really cool. Putting something in that can be received by the neighborhood as best as it can has become a priority for us. And then secondly, just size. You get such great economies of scale and and also hugely with the property management. I know you could speak to that where, you know, we're realizing there's a certain unit count in a building that once you hit that unit count, the cost to service that building, although not cheaper, becomes a lot more efficient.
Michael H:And so for us, it's making a lot more sense when we look at our financial models over the course of a ten year period, it adds up. And so it makes sense for us to do these larger projects, get the economies of scale, both on the construction side, but also on the operations side.
Trent:So it sounds like your criteria hasn't necessarily been impacted by outside factors. It's more trial and error and making adjustments when you see fit.
Michael H:Yeah. Absolutely. I think that if we were more extreme in the type of consumer we are targeting, I think that might change. What I mean by that is if we were a high end apartment developer, I think our criteria might shift a little bit. But I think being in the middle of the market, there's not a ton of room to change what we're targeting.
Michael H:It's more so timing. That's what shifting is how are we going to kind of move when we pull triggers on certain things, but less of, you know, we know the product we want to build. We're really big and believing that if we could just build something 10% better, which is not a whole lot better, but just 10% better that it'll be received tenfold. So just kinda running with those philosophies and refining them and getting feedback from our tenants on what they like and don't like.
Trent:Throughout these, you know, these kinda trying times recently, I know you said you focus on economies of scale for a lot of different reasons. If there's a site that we're gonna play a hypothetical game here. If there's a site that you could say put a 100 units on, right, but you're you know, obviously, you're trying to stay under or five stories max, some of the other criteria you talked about. But with five unit or five stories, you could only get 50 units, we'll say. Would you I mean, would you forego some of that ability?
Trent:Or
Michael H:No. So there's a really good balance because that's a really good question. Actually, it's a really good question because when you start getting into and it does matter. If you're saying, hey. You could get 55 units or you could get 75 units.
Michael H:Well, I'd run the financial model on that. But if you're saying, hey. You can go from 55 units to a 100 units, then we're talking about something completely different. Right? Because your land basis just per unit got cut in half right off the top.
Michael H:And then there are such efficiencies when you're doing an institutional project like that. Ideally, you try and keep that construction type where you're only going five stories. But even if you go six, it would make sense in my opinion to do a double deck and maybe four stories of wood frame above. So you'd have your foundation, then your first PT deck would be the second floor, and then your third PT deck would be the following floor. I would absolutely take that.
Michael H:Yeah. That would make a ton of sense. But again, when you're saying, know, hey. You can go from 55 to 75, you really wanna look at it. But when you're doubling your unit count, I think it's a no brainer.
Michael H:And when you get to that 100 plus unit realm, there's so much so much efficiencies that happen not only on your land basis, but on your construction. I mean, operations aside, when you're buying, let's say, a 100 appliance packages versus 55 appliance packages, your cost per package drops significantly. So your per unit cost at that point into that project starts dropping a little bit too. I mean, it balances out because you've got more structural costs, but most of the time, that would make sense to me.
Trent:Okay. So even with everything that's going on right now, you're still not gonna give up double the amount of units just to save some money?
Michael H:No. No. No. And, again, frankly, if we were to start a project, I don't think we would start a project today. The projects we have under construction, we essentially bought the land for half of its appraised value.
Michael H:So we're our basis into it is very much insulated. But if we were to start one of our other projects now, I would probably wait just based on the premise of we don't know where we're gonna land on that thing. So yeah.
Trent:I mean, makes sense. And I'm sure there's a lot of people out there that are doing the same thing. I mean, from an acquisition side of things on the syndication, you know, realm, it's really hard to get deals with a pencil right now. And so the best things that we've come up with is, you know, we got lucky, are assuming a great loan that has plenty of time left on it, but getting new debt right now is frankly terrible, and it doesn't make sense.
Michael H:Yeah. I hope, you know, I hope I'm not wrong, but I can totally agree because, you know, you're gonna go hop into a five, seven, ten year term when there is a decent likelihood that rates are going to start falling in the next eighteen months. And so you're going to lock into a term where are you going to pay a 3% prepayment penalty? It really depends on the deal, but yeah, that's exactly why assumable debt right now would be the number one thing. I think it's also going to be really attractive to continue to keep cap rates in a healthy spot if sellers can have buyers assume loans.
Michael H:Right.
Trent:I'm interested. What are your thoughts on kind of the cap rate spread right now and how it's really stayed pretty consistent when there's a lot of variables saying it should be moving more than it has been?
Michael H:Yeah. I think there's a huge standoff right now. I mean, there's a big standoff between buyers and sellers. And the consensus I see is if buyers are in a ten thirty one exchange, you know, depending on where they're ten thirty one exchange and where they want to and the type of asset, they don't have a ton of choices. And sellers that can afford to sit are just gonna sit.
Michael H:I mean, you know, sit for another sixteen months or a year if you can. But again, there's a huge unspoken consensus out there that there's a lot of guys that can't sit. And so a lot of these buyers are just waiting and waiting and waiting. So you have this standoff where it's like, well, hey. I'm I'm listed at this price, and I can wait this amount of time to sell.
Michael H:And if a $10.31 guy has gotta go in, he'll pay the price. But a lot of these guys that don't have time constraints on their transactions, they're just waiting, and they're taking advantage of what they can.
Trent:That was one of the main talking points at this conference we're at is there's a lot of people on the sidelines ready to sprint off the sidelines when, you know, someone gets hurt and they're they need to come out. You know?
Michael H:Oh, yeah. We're doing an acquisition. We're we're bailing out a developer that has a piece of land, and we're essentially paying the same price he paid for two years ago. And, you know, he's grateful for that because now he can get liquid on it. But the idea is that there's gonna be a lot of those where someone bought something two or three years ago in a syndication and they've gotta get their investors' capital back at a minimum, they're gonna sell.
Michael H:And so I think a lot of those transactions might happen pretty soon.
Trent:Absolutely. Well, Michael, do you have anything else you wanna share with the people today?
Michael H:If anybody's got tips on how I can become a single digit handicap, just have them come my way.
Trent:I mean, I can help you with that offline.
Michael H:Is that a Scottie Cameron I see back there?
Trent:There's one Scottie. Yeah. And then the rest are tailor made spiders.
Michael H:There you go. Well,
Trent:Michael, I appreciate you hopping on with us today. Thanks again for your time, and I can't wait to share this with everyone so we can share our knowledge on the current development market along with some of the other things that we talked about today.
Michael H:Yeah. Absolutely, Trent. Thanks for having me.
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