On today’s show we are talking about how to deal with inertia when you hit an obstacle. There are two types of inertia. The first one is obeying Newtonian physics. But we’re not going to focus on that one. Hitting an obstacle when you’re in motion usually results in a crash. But we’re not talking about physics. We’re talking about when your project encounters an obstacle. We’re talking about finding that perfect balance of persistence and knowing when to pivot.
As syndicators we have to keep our fiduciary responsibility to our investors at the forefront of our decision making process. That consists of a combination of preservation of capital and maximizing investor returns. We also have a responsibility to the employees of the organization and the residents of our properties.
So along comes a pandemic and financial performance suffers. Agreements that were in place prior to the pandemic evaporate. The choices are simple.
- Keep pushing on the current path.
- Slow down and wait for the obstacle to clear
- Give up
- Change course
I have several projects that have been impacted by the pandemic. In one case, there is a dramatic decrease in construction capital available for that project. So we decided to pivot and deliver a different product in that location. Our original idea was to build a 4 star hotel. But at a time when hotel occupancy is at historic lows, it’s very difficult to engage people in investing in a new construction hotel. So much of the hotel capital is waiting for the deluge of distressed properties that are expected to hit the market in the coming months. So if a hotel doesn’t work this year in that location, what should we build?
We feel that a high rise building in the core of the city is best suited to provide one of three products.
- Hotel
- Apartments
- Condominiums
All three were analyzed at the start of the project. So a pivot to one of the alternate options was straightforward. We knew that all three products were viable in that location,
When a lender on another project surprised us with a much higher interest rate and higher fees, we had to change gears again. The reason for higher rate was the uncertainty introduced by the pandemic. The appraiser gave a low valuation compared with the historic data. His rational was the uncertainty introduced by the pandemic. The appraiser reduced the rents in his model compared with the actual rents in the market. He also changed the cap rate compared with the market in order to account for the uncertainty associated with the pandemic. The net result was a financing that was simply unworkable. Again, you have here choices,
- Keep pushing on the current path.
- Slow down and wait for the obstacle to clear
- Give up
- Change course
Trying to convince a lender to fundamentally change their terms rarely works. A bad quote from one lender is hardly a reason to give up. Changing course is the only sensible option.
We have another project where the negotiations on the land have been underway for an extended period of time. In the end, the land owner put the land under contract with conditions with another buyer. The seller put the chances of the buyer closing at 50%. But somehow he had convinced himself that he had made the best choice.
Obstacles appear in every project, often without warning. Sometimes it’s a regulation change affecting construction. At other times it’s an increase in interest rates. This year it’s a pandemic.
The question of when to push, when to wait, when to quit, and when to pivot presents itself with every obstacle.
