Real Estate Development: No Partners, No Problem

I'm John McNellis with McNellis Partners. A little bit about our firm to start. We've been in the retail development business, that is neighborhood shopping centers, what used to be called barbell shopping centers, supermarket on one end, shops in the middle, drugstore on the other. We started that about 35 years ago. We had no money and no experience, and now we've got a little bit of one and a lifetime of another. This afternoon, I'm going to be talking about a very specific part of the development business, that is partners. If you want to get a broader view of starting, running, and hopefully succeeding with a small development business, you might take a look at this talk I gave a few years ago for the ULI, it's on YouTube. And there were a couple of follow-on talks, one on buying property right, the other on what I think is real estate's hardest decision, what's that, sell versus hold when you have a truly wonderful asset. It's all in the book. ULI kindly published this book, Making It in Real Estate. I think it's available here for purchase. If not, you can pick it up for $10 on Amazon. The reviews have been unfailingly kind. I didn't have to pay Preston Butcher all that much for this review. Anyway. Alright, we're going to talk about partners. You can divide the world, and so many people do, in so many different contexts, into two. You can divide partners, I think, for developers into two. That is operating partners, on the one hand, financial on the other. Operating partners are a much easier proposition to deal with, so let's talk about them first. I suggest if you're starting out, and some of you may be, and some of you have been with me here at ULI forever, but if you're starting out, I suggest you do your very first deal all on your own. You buy it. You finance it. You paint it. You put in the petunias. You manage it. You do the accounting. What this does for you is it enables you to get a pretty good sense of what your service providers do. If you stumble through it yourself, you'll have a greater appreciation for them. However, you do that once or maybe twice, and then, if you have any ambition at all, I think you've got to get away from that. Time does leverage better than money. The moment you can afford to have somebody else get your loans, paint your houses, do your accounting, you need to do that. What you need to be able to do as a young developer is leverage your time. You need to focus on your most valuable personal skill, and if you were meant to be a developer, what is that skill? That's obvious. It's finding, sourcing, and closing deals. The moment you can do it, you move on to outside help. Now, if you start out at the bottom of the mountain peak, in the financial valley, if you start out at that bottom and you want to work your way to the financial peak, I'm going to suggest that you consider a base camp of consultants. That is, you rent, you hire consultants by the hour as long as you can, as opposed to hiring full-time employees or certainly partners. Why? Well, think about it. If you're doing reasonably well and you're spending $100,000 a year on your lawyer, and she's earning $200,000 a year in her law firm, unless you have a Napoleon complex, you'd be crazy to hire her for twice as much money. Less intuitively, though, let's say you've moved on and you've got $300,000 a year in legal fees, and you can hire her for $200,000. Even then, because of the great advantage of consultants, the great advantage is that you can cap them any given day. Your deal blows up, you let that consultant go that same day. I suggest to you that even the flintiest, hardest-hearted developer very seldom fires or lets go his employees on the very first day that he should, on the day the deal blows up. So, rent. But there will come a time, if you're being successful, when you need to move beyond consultants. The question is, how do I do it? Do I go with employees or partners? This isn't an obvious choice as one might think. Employees, if you think about it, they're going to be a lot more expensive if you fail, but no one's planning on failing, of course. Or they'll be more expensive if you're just sort of middlingly successful. If, on the other hand, it's World Series today, let's stick with a baseball metaphor. If you, on your deal, you hit it 400 feet deep center field in Chavez Ravine, and you've got partners, and you think you could have done that without the partners, those partners will have proven inordinately expensive. So, it's a tough call. The thing I'll point out, that you don't necessarily get better help through partners than employees. Key employees can be every bit as effective and efficient. Oh, by the way, I've given this talk a little bit. I have found that the best way for me to impart information is to do it in a question and answer period. I know we're filming here, but please, if you have a question or a comment, please feel free to interrupt. I may not be able to see you, so you should probably shout out. Anyway, you don't necessarily get a better economic deal with partners, but there's more to life than money. Properly viewed, I think life's about the journey, rather than how much is in your suitcase at the last stop. So, what did we do? I've had my same two partners for 35 years, Mike Powers and Beth Walter. If it weren't for them, I think I'd be a night manager at some motel. It's been absolutely great. I think with partners, you share the losses, you share the joy, you shoulder the work together. It's just more fun. I will tell you that, anecdotally, and what I can observe from my ULI colleagues, a lot of them have done the same thing. They have career-long partners. All right, financial partners. A little bit more interesting case. Financial partners, we all start with them. If you're born rich, your first financial partner is your family. If you're like the rest of us, it's your friends. But you have to start with one by necessity. The question is, do you stick with financial partners once you no longer need to? Benefits of long-term financial partners are so obvious, they scarcely need to be commented on. I will say that I think the majority of the biggest, best developers in the country have long-term financial partners. Deal flow, so obvious. What can I tell you? You can do more, bigger, better deals. Prestige, particularly for your outside friends, your friends that you see at the gym, when you say, I'm working on this $300 million project and I'm a partner, much more impressive than saying, I'm trying to rehab this corner coffee shop. I think that one of the biggest things that isn't stressed enough, and I do want to stress it on behalf of financial partners, is the risk management. Typical deal, I think most of you know it, is the financial partner puts almost all the money up. Used to be 100%, now it might be closer to 90% and the developer puts up 10. The partnership, the limited partnership agreement or general partnership agreement is non-recourse. That is, and there's a catch to this, and someone asked me about this later in the Q&A, you have no financial personal liability to the financial partner, nor does she back to you the other way. So, you can leverage your time, you can get into a very large deal for a relatively small amount of money. If I walk you through an example, it's a little bit more obvious. Let's say you have a $10 million project, it doesn't matter what, office building, hotel, financially they're kind of fungible. $4 million in equity, $6 million in debt. The developer puts up 10%, that's $400,000 or 4% of the total cost. The financial partner puts up 90%. Because you have a big financial partner, you're not going to guarantee the loan, what you'll probably guarantee is the completion of construction. So, as long as you can complete construction, you have no risk. And it's probably not even 4% your risk, but it's closer to 2% because every developer who's risen to the level of doing $10 million deals knows that she can charge in addition to her share of the profits 2% or 3% of hard costs and maybe a small acquisition fee. So, maybe the total investment by the developer is at 2%, which means that the project collapses and, you know, let's face it, folks, sometimes they do. You're only risking a couple hundred thousand dollars. If the project goes well, and let's just walk through one, I think $3 million profit on a $10 million deal, that's somewhere between a double and a triple, I guess. That'd be a good deal. The developer could net on that couple hundred thousand dollar investment close to $1.2 million. That's a great deal for a limited risk. Let's go back a stage. And so now, quickly enough, we've kind of arrived at the heart of the presentation today, and that is you had to have that financial partner for the first five or six deals you did. You started out with nothing, but you've been doing well. You've been selling these. You now have $4 million that you can invest. The question is, do you do your own deal? You take that $10 million deal and do it yourself. No partners. You put your whole $4 million in. You put your net worth in that deal, or you take that $4 million and seed 10 new financial partner JV deals at $400,000 a piece. $10 million deal without a financial partner. You put in $4 million. It goes well. You're going to net more than $3 million. Why? Because you're not going to charge yourself any fees. That would just be creating ordinary income out of capital gains. You're not going to be paying a preferred return on your own money. Maybe you'd net $3.5 million. On the other hand, you take that $4 million invested in 10 deals, and you could make almost $12 million. There's the comparison. If you do it on your own, maybe you've got $3.5 million, and if you do it with a financial partner, you're talking about $12 million. At first, this seems like such a no-brainer, such a simple conclusion. It reminds me, since I could see the Hollywood sign from my hotel room, it reminds me of the joke about the Hollywood producer who went crazy and invested his own money in the movie. It's like, why would you ever do that? But it may not be so simple. First of all, there's a couple of assumptions that I think you really need to challenge. The first one is, I think everybody in this room will agree that it is very hard to find a single great deal. They're just few and far between. To find 10 in a row I think is virtually impossible. It's not very likely that you're going to average $3 million in profit over 10 deals. The other, perhaps a little bit counterintuitively, everybody in business grows up to learn, to hear that diversifying is the way to go. Diversifying into 10 deals may not be as risk-free, or it may actually even be more risky than doing a single great deal. I have found that when people have to push deal quotas, they have to loosen their due diligence requirements and their underwriting requirements. Pushing deals could actually intensify your risk. And then finally the point, if you're meant to be a developer, you can do a $10 million deal all on your own. And maybe you can do two of them all on your own, or possibly three. But at some point, there's a lot of work, there's a lot of community meetings, there's just a lot of detail. You're going to be, back to my earlier point, you're going to be taking on partners or employees. So your overhead is going to skyrocket and your profit share is going to go down. So it's probably not a fair comparison that 3.5 to 12 million, it's considerably less. But I think on whole, on balance, and everybody that I've talked to and everyone I know about it, I think financially the difference between going on your own versus having a financial partner, it's a jump ball financially. I think both approaches work just fine, both can fail. Maybe you can do even a little better with a financial partner. I don't think that's the issue. I think more it's more of a lifestyle issue. If you have a financial partner, what's going to happen is the horizon, the financial partner's horizon is going to be either relatively short-term, 3, 4, 5 years, possibly mid-term, 5 to 7 years, and I don't think any of us see them longer than 10 years. And when you sign up for it, you say, that's great, I'm happy with a 10-year deal. But things can change. Here's a real-world example. Pension fund is your financial partner. Pension funds, I think you all know, have allocations in equities or stock, bonds, real estate, hedge funds, and alternative investments. If the stock market collapses, as it does every once in a while, suddenly, overnight, the hedge fund is, in its terms, overweighted in real estate. So, your deal, you can be 2 years into a 5-year project, you can have 80% of the deal done, but still not be complete, and still be at a very vulnerable point, when the pension fund says, we're really sorry, and they're nice about it, we're really sorry, but we need to sell today, or you need to buy us out, and you say, but wait, I've got 2 years of my life in this deal, and we're going to make nothing. And the pension fund says, sorry, deal's a deal. The other thing that can happen, take my $10 million deal, say it's an office building, and say that you lease it to, you get lucky, it's happening in Silicon Valley, you lease the whole thing to Facebook for an incredible amount of money, and you go to your partner, and now it's some publicly traded financial company, and you say, guys, we're in it for 10, we can sell it for 20, let's sell. The market's never going to be hotter, and they say, no, we don't want to do that. Sorry, John, we don't want to do that, because that'll cause a spike in our earnings, and the analysts and our stockholders don't like spikes in earnings, they like to see kind of a reverse bunny slope, just kind of a nice gradual increase in earnings, so we're not going to sell. You sit there and grind your teeth and say, oh my God, we're going to miss this market, and sure enough, you do. And in fairness to financial partners, I'm not trying to be funny here, not too hard, anyway, in fairness to financial partners, you can have the world's best, most reasonable, empathetic, kind, Mother Teresa can be your financial partner, she can be absolutely wonderful, and you can be the cause of the problem. Your wife can dump you, your husband can leave you, another project that she's not involved in can go bankrupt, and two years into a 10-year hold deal, you need to sell, and you say, Mother, can we please sell this project, or you buy me out, and then she kind of goes, no. She says a deal's a deal, we're staying in. So my point is that a long-term financial partner can take what's already, we all know this, a fairly illiquid asset, or let's face it, a highly illiquid asset, and make it that much more illiquid. So, our approach, what happened to us? Again, as I told you, we started more than 30 years ago, no money, and we started with friends doing limited partnership deals. In fact, we still have our first big shopping center that we did with limited partners. And it's 33, 34 years old. But we soon enough, we were lucky in lots of ways. One way we were lucky was this was the early 80s, and this was the SNL time. So, we quickly enough graduated from doing family and friends money to institutional joint ventures. And I think we probably did, we had three or four partners, and we did more than a half a dozen deals. And some of the partners were absolutely great. One, I became a very close personal friend. Some were okay. One, a Texan, he was just an absolute scorpion. The kind of guy that hides behind the partnership agreement, just kind of waiting for you to make a mistake so he can pounce. But what happened was, and it didn't matter whether the partner was good, bad, or indifferent, what happened was they did invariably what was best for them. Not for the partnership, but what was best for their company. Absolutely understandable. Same thing that any of us in this room would do if we were the financial partner. The problem for us is that usually when your financial partners, remember I told you that the limited partnerships are non-recourse. So you do everything you're supposed to do. You go out and you get the tenants, you get the zoning, you get the building permit, you're all set to go. And the partnership agreement says at this point financial partner will fund $5 million. So you go to financial partner and say, okay, please fund. And they say, here are the keys. Oops. And you look at that agreement the other way and say, gosh, it's non-recourse. There's nothing we can do. That happened to us. And that happens almost always at the most inopportune time. That happens when there is no other financial partner out there to take them out because they tend, like the rest of us, to move in a herd. So the herd is coming in, everybody's happy with real estate, or they're galloping off the planes. So after that happened to us a few times, we decided the epiphany on the road to Tarsus in the early 90s was that we'd rather not have financial partners. So we shifted from doing larger scale joint ventures to deals a tenth the size, little deals, not glamorous at all, but that we owned 100% of. And over the last 25 years, we've averaged a couple deals a year doing that. We've sold, I'd say, two out of three. That gave us the capital. And when we could, of course, we'd trade. But that trading didn't always work. So we take the capital and move on to our next deal. And what we found, I'd say to our pleasant, mild surprise that as far as we could tell, the net return to us on these small deals where we owned 100% of it was just as great as talking to our friends who went the big JV partner as those in the big joint ventures, and maybe with a few less headaches. I don't think anyone controls his or her own destiny, but I think if you don't have financial partners, it makes it a little easier. I was talking to somebody last night at a dinner, a younger guy who has the financial partners, and he says the problem is as a young developer, you can create a transgenerational asset. Maybe four or five of the things that you put together are crap, but maybe one of them is I don't know, on the beach in Malibu or someplace that's absolutely irreplaceable, and you know that it's going to be a great asset like the pyramids of Egypt in 3,000 years. But because you have a financial partner with that five-year horizon, you're going to have to sell it. You're going to create this brilliant asset and you know it has to be sold. That's one thing that we don't have to do. Okay. Those of you who are actually looking at the slides, notice I had stuck a reference to the NTM earlier on. Just kind of wrapping up the prepared remarks here, what is the NTM? It's not a formula. It's a question. It's a question I think you might consider asking yourself anytime you're going to do a partnership, buy a piece of property or perhaps take a job. What is it? It's this. What is the net to me? People lose sight of that. What you really want to do before you get into a deal is what am I going to get out of it? And it's not a selfish thing. It's just an analysis. Let's go back to my example and say that developer elects to go the financial partner out and she's going to do the 10 deals. And she's got one or two going but realizes she needs a partner so she comes to you and says, do this deal with me. I'll pay you $150,000 a year in salary and I'll give you 25% of the profits. And you say, okay, cool. How much are the profits? And she says, well, look, they average $3 million. We can all do simple math. You say $750,000, whoa, that's pretty cool. And she says, maybe I'll give you another one. And you say $1.5 million. That sounds pretty cool. But if you're thinking about the NTM and you're a little bit more diligent and you remember this, that most larger developers, they have an outside financial partner and they tend to have an inside financial partner. The inside financial partner is someone who typically gets half the deal for putting up all of the extreme at-risk money. That is the good faith deposits to the seller, the A&E that you need to put up, the fees, the money that goes at risk before the deal is fully entitled. So you've got that inside partner taking 50%. Then once the deal is all set and the ribbons are tied around it and it's ready to start construction, that's when you bring in the outside partner for 65%. So doing the NTM calculation, you take that $3 million, anybody can beat me to this, you take $3 million and take away 65%, then take the remainder of that, take away 50%, and then solve for your 25% and you come up with anybody. I can't see. It's about $130,000. So a fair amount of money but way less than you might have told yourself. And guys, I'm only talking about this because I have heard time and time again here at ULI over the years people saying yeah, the deal worked out. It actually worked out the way I thought but I got a whole lot less money than I thought. But had they really thought about it in the beginning, you could kind of see exactly where the profit was going to be. The other part about the NTM, remember Einstein is famous for a lot of things. One of the things he's famous for is time. Before there was just to be three dimensions. Now there are four, time being the fourth dimension. What all, any of us have in this world is time. Take that $131,000 I just used. Say it's a cashier's check. Say Bill Gates is sitting here in the front row for some unknown reason. Just say. And then you say hey Bill, there's a cashier's check for $131,000 back there. I'm guessing, I don't know the guy, but I am guessing he would say what the hell. He'd get up, walk back and pick up the $131,000. Why? His hourly rate is infinite. I know the rest of us, there'd be a stampede if we said there's a cashier's check for $131,000. We'd all run for that. Infinite return. If on the other hand, back to that same example, the developer told the truth to the young would-be partner and said look, I'll give you the whole $750,000 but this is not an easy rezone. This is in Santa Monica, this is in Berkeley, this is in San Francisco. It's going to take 12 or 15 years of community meetings, of architectural meetings and planning and city council meetings and if you don't actually make the minimum wage on that $750,000 you actually, you're going to feel like you did after your 30th night up to midnight dealing with neighbors who'd rather spit roast you than approve your project. It's time. You really have to ask yourself, how much time is this deal going to take? And just to kind of underscore that, I remember I was present when a homeowner asked a Wiley contractor how long is this remodel going to take? What should I expect? And he said, lady, it's going to cost twice as much as you originally think and take three times as long. Now, that was a little cynical but that's actually not so far off the mark. So, it's going to take a long time. I would think about in the net to me calculation figuring out your hourly rate. Now I'm going to turn it over to questions. Before I do, I'd just like to point out the obvious. Everybody in this room is far more fortunate than 99% of the people on the planet. We've all been dealt a wonderful hand in the poker game of life. The way to thank God or Darwin or whoever it is you talk to in the dark is to give back and not just your money but your time. I'm open for questions, happy to answer anything. The question was, when we left the big financial part in the world into doing deals on our own, how did we deal with having to sign personally? We signed personally is the short answer. I am, I guess almost an apostate on this issue. You'll hear guys smarter than I am and far wealthier tell you that they never sign guarantees and you should never ever do that. That's good advice but particularly if you're starting out, that's almost impossible to follow. We solved that actually. That example I used, $10 million with $4 million down, I suggest if you're going to put $4 million of your own money down, you're going to be really careful in that deal. You're going to say to yourself, hell, I've got $4 million up. What's the worst that can happen? I'll lose that and a little bit more. That said, we don't build spec. The retail, the state of retail is an entirely different conversation. The charm in retail historically was you'd have your supermarket or your drugstore or your McDonald's in tow, so you might be 60, 70, 80 percent pre-leased. We would sign guarantees but not on spec buildings. The question was, in my example, it was very simple. It was just equity and a first of 65 percent. The question was in our deals, do we stick in a mezzanine piece which essentially is a second, if you will, of participating in order to jazz up our return? The answer is no. We don't do that. We're pretty cautious. We try to keep our leverage as low as possible. Leverage is a beautiful thing in an up market. It's a way to get a 10x return and of course it's a way to get killed in a down market. We're very cautious. The question is, what's the difference between friends and family money or country club money, it's sometimes called, and institutional money? Institutional money is often known as hot money and there's a reason because it's going to burn a hole in your pocket and then right into it. Institutional money has a much higher rate of return to it. Institutional money tends to have total control of the project. You've got one partner, which is great, you sell it once, so on the front end, it's a lot easier. But they control it and you tend to have to, if with institutional money, if you hit your marks absolutely perfectly, you're in and out in 24 months, you tend to actually make more money than you might have with the limiteds, but if you miss a year, if you miss two years, the snowball on the cumulative preferred return for institutional money will eat you alive. I think anybody who's done a financial partner, JV, has done deals that end up being okay deals, where the institutional partner has a 10% preferred return, let's say, and the deal works out to be a 9% return, so what happens is the snowball just gets bigger and bigger. We've done that. Back to that point about the hard to find 10 deals that make sense, or excuse me, that make that kind of return. I was thinking about it. I would guess a top-flight developer in 10 deals might get that kind of return, that 3 million or 30% return in five or six deals. He might, because of the joint venture and the cost of the money, he might break even or make a little bit of money on two or three or four deals. He might lose money on one deal. The other side of the coin, the family and friends, the problem is you've got to raise it in small chunks. If you raise a million dollars at $25,000 a pot, that's 40 times you've got to sell the same story. You're like a bad actor in an off-Broadway play. You're just repeating the lines over. This is a great deal. Please invest with me. It's very hard, but the return that they expect is much lower. It's a 5% or 6% return, and they usually tend to be long-term. That first deal that we did in 1982, their limited partners, they're still in the deal. I can't get rid of them. They're delighted. It's got a high return to it. The other thing is once you close a limited partnership, it's harder in the beginning because you're selling it 40 times, but once you close it as the general, you have much more control. You don't have a single 800-pound gorilla who can say sell tomorrow or refinance tomorrow. You've got this disparate group of limiteds that don't know one another, so you have much better control. The question was, have I compared the VC approach to the real estate approach? We're in Palo Alto. We actually own the building that Axel Partners, which is the number one VC firm in the world. We're their landlord. Would they say hello to us on the street? No. Do they know who we are? No, but we know who they are. Most of you know that the VC deal is that they charge 2%, and they get, no matter win, lose, or fail every year of all the money they raise, plus 20% of the profits. The VC model is almost the mirror image of the real estate model. I think they anticipate, just take what I just said, they anticipate outright losing money on 5, 6, 7 deals, making a little bit of money or breaking even on 2 or 3, and then getting that 10x or 100x return on Facebook or Google on that one deal. It's just the reverse of ours. Our worlds don't meet. Somebody was asking me, a journalist in Silicon Valley, about rich. I asked her, I said, what's rich? She said, well, are you talking real estate rich or tech rich? I said, never mind. Totally different story. The question was, when we did have joint venture partners, did the institutional partner guarantee the debt? The answer is no, they did not. We had enough equity up, and then we had to do the guarantee for the construction loans in those days. We as the generals were doing those guarantees, and I think those were more than completion guarantees at that time. We also had, let's say, back to that 60-40 model, we had a relative level of comfort that we could finish the project for that. Yes, there was a guarantee, but no, I didn't think it was that big a deal. The question was, where we were doing the guarantee, did we charge a separate fee? No. Typically, and again, we don't do these kind of arrangements anymore, but I think typically you get maybe a small acquisition fee and maybe 2% or 3% of the hard construction cost, and then with institutional partners, they make it very complicated. We get 80-20 for the first so much, and then 70-30, 60-40, 50, but it ends up, I think if you add it all close to that 65-35 split that I used in my example. The question was, could I tell you about retail? Sure. It's a great segue to going out and getting drunk, I think. Retail, back to World Series, what did Madison Bumgarner say a few years ago? She said, I'm not going to lie to you. Retail is in some hurt. I don't think, I think it's largely, the factoid that I keep reading is that we have 50 square feet of retail space for every man, woman, and child in the country, 50 square feet. Europe, on the other hand, has two or three. We just have this enormous oversupply of retail space on the one hand. If Amazon didn't exist, if e-commerce didn't exist, we'd still have a problem. One of the problems is every new retailer comes out and says, well, I don't want that empty box. I need my own special, prototypical box. The building just goes on and on. When you add in to that oversupply, the fact that e-commerce, while interestingly, e-commerce isn't making any money, it's sure causing everybody else to lose money, so Amazon is, I think, is on its way to becoming the world's biggest bricks-and-mortar retailer. Amazon and Walmart are going to meet in the middle, but I don't think a week goes by now where we don't see some still, let's call it at least reasonably vibrant retailer telling us they're right-sizing. Last one I saw was Kohl's. I think you all know Kohl's. It's a discount department store. 100,000 square feet. Kohl's just came out in the last week or two with an announcement saying our right size is 80,000 feet. That means, dear landlord, that we're going to have a 20,000-foot vacancy in your shopping center. Yes, we're going to be paying the rent on it, but it's going to be a blight in your center. Anytime a big tenant, an anchor tenant, is paying rent on empty space, it's a problem. Why is that happening? We all experience this. I just went into the North Face. I like their stuff. I said, there's a shirt that I wear. Sure enough, they didn't have it in my size. They have very limited stock in size, but they said, here, give me your credit card. I'll buy it for you online right now from our warehouse, and you'll have it tomorrow or the next day. The store got the credit for it. The store, rather than having 100 shirts my size, they've got 10. Even the best retailers are shrinking. The worst retailers, Sears, Kmart, Penny, they're all going to be gone. You may not have heard it here first, but I'm telling you that Amazon bought Whole Foods. Amazon has 1% of the food market. Whole Foods had about 1% of the food market. If Amazon weren't in the headline, it wouldn't have been a story. Amazon bought that, not for food, but as a distribution channel. The Amazon customer and the Whole Foods customer, they're identical. High-end, very tech-savvy. Amazon is going to buy, for pennies on the dollar, I'm guessing, Sears or Penny's or Kmart or one of these guys, and suddenly they'll have a nationwide distribution system of boxes. No one has solved the cost of the last mile. Amazon, frankly, loses money on e-commerce. They say they can make money when they change their business model, but I'm not so sure. Amazon, sooner or later, is going to come around to saying, here's our distribution center. You drive the last mile. Just like you're going to Costco, you come pick up the toilet paper or the books or whatever it is. That's my take on retail. I wouldn't recommend anybody jumping into the retail business right now. The question was, given what I know now about development, should I have picked another career? It's worked out pretty well for us. It's fun. I love doing deals. It's like a three-dimensional New York Times crossword puzzle. Sometimes it's challenging, but I think it's a lot of fun. I highly recommend it. That's why I'm here, talking to you guys. The question was, why do developers want to develop on the coastal flats, where we absolutely know that the waters are rising? I live in northern California. The Russian River, it floods every other year. Every other year, the same people are standing out in front of their flooded house, saying, I don't know what we're going to do. Dude, how about just building your house 10 feet higher? What are we talking about here? It's the same thing. I think it's a shame. There are so many things that you can rail or rally against, but the fact that we use public money to buy insurance for private landowners on beaches where we know they're going to flood, we should give them, you get one bite at this apple, and if it floods once, here's the money, but no more. No more insurance. I totally agree. It's crazy. The question was, knowing what I know today, if I started again in 1982, would I do things differently? I don't know. I'll be honest. Things have worked out pretty well, so I would not want to tempt fate and say I'd like to start over. I'm pretty content, so I guess no. We've made it. You have to make the mistakes along the way, I think, in order to get there. You can't just... You could read my book, but you're still going to make the mistakes. The only way to know what fire feels like is to stick your finger in it. The question was, what do I think about crowdfunding? I've been agnostic about crowdfunding. There are two basic kinds of crowdfunding. One is a pure platform where just putting investors in touch with developers. The crowdfunder uses the software, and so I, as a developer, put my project up, and then I attract investors that way. That actually seems to me like it should work, and that's the Crowdstreet approach. Then the other approach is Realty Mogul, I think it's called, where the crowdfunder acts as the general partner. I think the problem with crowdfunding thus far, but they'll solve this gradually, is they don't have the experience. The guys who run these, it takes, I don't know, five, ten years to get good at underwriting real estate, to get good at underwriting loans. To expect 20-somethings who are very adroit technically to do with software, to expect them to be able to underwrite these projects, I think is asking too much. I think the pure platform will work, but the point I raised at this lunch today, just coincidentally, was the best developers already have their financial partners, or they do it without financial partners. Who is going to be attracted to the crowdfunding? It's either new, young developers who don't have a track record, who can't attract capital any other way, and developers with spotty records. I think the hardest part is getting the quality developers to adopt the platform. I think it'll come. They said there's Jared Kushner has a big crowdfunding platform. What's it called? Cadre. I just heard, this is breaking news to me. Jared Kushner, thanks, Dad, has a crowdfunding platform that was called Cadre. George Soros is backing it, and it's already valued at $850 million, and it's a pure platform, but kind of high-end. Seeking the family investment funds and everybody else so a developer such as ourselves would try to get $1 million here, $5 million there. I think it's going to work, ultimately, but I'm not sure it's there yet, and I still worry about the quality of the sponsorship. The question was the Amazon suite states, where are they going to go, and should a city bend over for Amazon? I'll answer that in reverse. I don't think any city should bend over at all. That just drives me crazy. We shouldn't be giving money to public stadiums or ballparks, and we should not be giving money to tech companies that are putting mom-and-pop businesses out of work. Absolutely, that just drives me crazy. I think the other thing is that the city that will win, and I don't know who it is, doesn't need to give them anything because Amazon has to go where smart kids are, smart tech kids. If Winnemucca, Nevada says, we'll give you a jillion dollars, Amazon still wouldn't do it because there's no talent there. The winner already won, and should just say, screw you, Amazon. It's all right if you love Tom Petty. Rest in peace. It's all right if you love me. It's all right if you don't. The question was, when we tie up a deal, do we put in a promote? I'll try to say it a different way. We don't have outside partners anymore. We just use our own capital. As a result of that, we don't have any preferred returns. We don't have any promotes. It's just money in, money out. Life's pretty simple. That said, if you're a successful developer, ultimately you age out. You could only go to planning commission meetings so long. It's true. Now we're funding younger guys, and there are promotes in there. Again, it's the typical country club deal where there's a small fee to the developer on acquisition, and then a 2% to 3% hard cost piece, and then maybe a 5% or 6% preferred return, maybe a 7%, and then a 50-50 split. That's the classic country club deal. Now we're on the money side of that, and that's where they end up. The question was, am I concerned about the cost of housing in Palo Alto, West LA, and everywhere? The answer is yes. In Palo Alto, the median home price is $2.2 million. That is insane. Basically, everybody has been priced. If you don't inherit the house, or if you're not a tech guru, you're not buying a house in Palo Alto anymore. Two doctors, two lawyers, you still need to save the $500,000 for the down payment, and then I think you need about $300,000. I did this math once. To qualify for a $1.6 million loan on that $2.2 million, you put down $600,000. You need about $350,000 in income. Very few people have that. The answer is simple. It's density. I hate going to all these conferences where people dance around it, or we all recognize, yeah, the cities have to increase density, but they're not so far. It's something that I think needs to be mandated by the state to vastly increase density. Towns like Palo Alto have just raised the drawbridge, or Brentwood down here, I imagine, Hillsboro and Atherton in Northern California, all over. The question is, have we followed the evolution of financial capital and financial institutional money? The answer is no. Once we got out of it, we were content in our little world. I look over my shoulder and see what guys are doing. I do understand that there are institutions now, for example, that are doing longer-term hold deals. That point where you create this brilliant asset, and your financial partner says, gee, sorry, you knew we were a stake. When we did the deal, you knew it was a seven-year hold. We've got to sell. I understand there are partners out there that will do longer holds, but it's not something that we've really investigated. All right, ladies and gentlemen. Thank you very much.