Devon Zuegel
speaker
216 appearances
1 recordings
1 series
first heard Mar 2025
last heard Mar 2025
Devon Zuegel’s voice in public audio — every appearance, attributed to the second.
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The FHA, the Federal Housing Administration, and some other government agencies stepped in and said, this is not a tenable situation. We need to create some form of mortgage that is a much longer term so that people have a sense of stability in the place that they live, which I think is a really laudable goal.
But when they ended up doing that, they created agencies like Fannie Mae and Freddie Mac. And they also ended up creating rule sets for what was and wasn't worthy of the home loan of a mortgage. And they ended up frankly, locking in a lot of the ideals of what an ideal home was at that time period. And the people who just happened to be in charge ended up defining a lot of those factors.
And so there were things like, we don't want to give a loan to a home where the corridor is not at least this wide so that people can bring furniture in. They got into really granular detail. Which might be a reasonable rule, but the thing is that this is a very centralized decision-making power that just applies across the whole country all at once.
And so it gets rid of a lot of the evolutionary pressures that you would normally get in a more free market system. Those rules have evolved over time, but it ended up creating some conventions and norms around 30-year mortgage. And also, frankly, if you're lending money as a bank for 30 whole years, you are even less risk-taking than any normal lender because 30 years is a long time.
Just think about where this country was 30 years ago versus today. It's a completely different place. The whole world order is totally different. And so making a bet on that timeline results in people being extremely cautious and locking in the status quo.
Yeah. So let's split it up into a few different pieces because building a town requires a lot of different steps. So there's the land purchase. Then there's building the infrastructure, which is the roads, the sewage, the electrical, et cetera, the gas. Then there's what's called the vertical development, which is what it sounds like. It's like the buildings.
In our case, we're going to be building a bunch of homes and there will be a hotel or two and there will be cafes and restaurants. There will be event spaces that I talked about. And each of those phases and pieces attracts a different type of capital. And I could say the options for how you could finance, and then I'll say how we're thinking about it.
So one important principle is that the earlier you are in this project, the riskier it is. Kind of intuitive. But when you're buying raw land that doesn't have any infrastructure on it,
or if it doesn't have approvals yet of what you're allowed to build that's considered the highest risk but also highest reward part of any project and some people do borrow money for that stage but it's much harder to get land loans because it's higher risk and Frankly, it's also, I think, in my opinion, not that desirable because you end up putting this ticking clock on your project.
And at that stage, there's a lot of things that need to happen before you have any cash flows coming in. All those things I just mentioned, like the infrastructure and all that, and then also the vertical construction. And so for us, we strongly prefer to do land purchase with all equity.
We think that if you're playing a long game and you really think that this is going to be a long-term value, it's worth not taking a loan. The downside of that is that when you do borrow and you leverage your returns and if things go well, you end up with higher returns because you need less equity to fund the project. So that's what you're trading off when you're deciding on equity versus debt.
And so what we're doing is we're purchasing the land, all equity. Then the infrastructure stage, because it's one click farther, is a bit less risky. Have the land, you have the approvals, so you know what you're going to be allowed to build. There's still other risks in the future that... may affect the returns, like market demand. Did you actually do a good job of predicting what people want?
In our situation, the whole Esmeralda concept, it's got some examples of it working. Chautauqua works well, and there's other communities I've studied that I think are really good comparables. But at the end of the day, there is nothing quite like it in this part of California, and there's real risk that we're wrong.
And so in that situation, it's one click farther in the it's maybe a slightly better idea to take debt than when you're doing it at the land stage. But there's still a lot of risk in that situation. We have not decided exactly how we're going to fund the infrastructure.
We're in talks right now, actually, with several investors who are interested in doing a full equity deal, both for the land purchase and for infrastructure build out. And that's really exciting to us because We wouldn't be as dependent on interest rate fluctuations, but it could go either way. And I think that there's arguments on both sides.
Then getting to the vertical and housing, which is more related to the mortgages that we were talking about. I think that mortgages make buying a home a lot more affordable for people. And there's a lot of good reasons to use mortgages. And my view is that there's other ways that we could de-risk the project to make it attractive to lenders. There's a few specific choices that we've made.
For example, many of the homes in the community will be fee simple lots. So basically people will just own their lots outright, which makes the ownership model a lot simpler and more straightforward. other things that are very tactical, but important where we plan to have zero lot line homes instead of townhomes, which have a shared wall.
And from the outside, they both look like townhomes, but in the zero lot line model, you don't share a wall with your neighbor. And so again, the ownership is a lot simpler. And so there's a lot of tactical decisions like that, that we can make that I think that allow it to fit cleanly into a mortgage lender's box. while still actually being quite innovative and interesting.
To do innovative stuff, especially at the urban planning stage, that is the place where you really don't want to take on the debt. But I think as you go through and you get closer to finished product that you can sell to people, it makes less of a difference and you get more of a benefit.
Property tax. Different cities and states have different property tax levels. People who own a home or a building will pay something on the order of 1% a year on the value of their home back to the state. Property taxes are very unpopular. Taxes in general are pretty unpopular. And so in California in particular, there's this rule on the books called Proposition 13, which was passed in the 1970s.
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