The EQ Journal Blog

For the Small Investor

I get a lot of calls from former students – from the b. school, from engineering, from architecture – and from consulting clients to tell me that they are now ready to invest in real estate. The calls are all pretty much the same: “Hey, Bruce, I have a few dollars kicking around and I want to buy a multi res property. Can your team help me with that?”

I have yet to hear from anyone that they might look at a different class of property, say, for example, industrial property or commercial retail. That is because they don’t believe that a small investor can play in the commercial space and because the multi res market is all they have ever heard about.

Investors are all the same everywhere – they only tell you about their winners. So you will hear someone talk about the multi res property that they bought a few years ago in Deadmonton that went up by 30% in two years and they sold for a humongous profit.

People like to tell stories where they are the hero and there is always a happy ending. But before you run off and buy your first multi res property think about this:

1. Are you ready to be a residential Landlord?
2. Do you know anything about the RTA (Residential Tenancy Act) that governs relationships in Ontario between Landlords and Tenants?
3. Can you stand to get a midnight call: “My plumbing is plugged and I need you to come over right away and fix it?”
4. Are you any good at collecting rents, doing credit checks, looking at the background and references of prospective tenants, fixing stuff that gets broken, property maintenance, etc.?
5. Have you got the time and expertise to go down to the Rental Tribunal and start and complete the process of evicting a tenant that does not pay their rent or causes trouble for you or other Tenants?
6. Can you market your multi res property effectively?

Now you might be thinking that you can delegate some of this or out source some of this to, say, a property management company. You can but it will cost you. Have you taken those costs into account?

I am not trying to discourage you but residential rental is not a game for the faint hearted or the time-pressed executive. It is in an industry in itself and you need expertise in a lot of different areas to become a proficient, profitable Landlord.

When I was younger, I looked at other opportunities and I try to get some of my clients to, at least, think about alternatives. One area I am keen on is the industrial condo market.

You can buy industrial condos in the Ottawa area for between $125,000 and $300,000 for anywhere between 1,000 and 1,500 sq. ft. I like this market because:

1. Industrial tenants tend to be more reliable than residential tenants.
2. They tend to pay their rents on time.
3. If something goes wrong, they fix it themselves most of the time and don’t even bother to phone you. These folks are independent people to begin with.
4. They tend to stay a lot longer – five year leases are common.
5. Cap rates in the industrial sector are higher than in multi res so returns can be higher to the investor…
6. There is less competition for the product. Your main competitor is, in fact, the sitting owner (owner-occupied space). The big guys: REITS, Banks, Insurance Cos., Pen Funds, publicly traded r.e. firms – don’t buy little spaces like these. Plus other small investors are all running after multi res product.
7. Vacancy rates are generally low in this class of product.
8. The property management function is low intensity so you should be able to manage it yourself.
9. If a tenant does not pay their rent, you can distrain – lock them out and seize their property as liquidated damages for unpaid rent. You do not have to wait months for the Rental Tribunal to allow you to change the locks and kick a tenant out.
10. Leasing is relatively straightforward. You can hire any number of commercial brokerages to assist you with marketing and drafting up the Offer to Lease or Agreement to Lease or you can do it yourself.
11. Most commercial leases these days are triple net. That means that the tenant must pay (in addition to their basic rent or minimum rent which goes to you, the Landlord): operating costs (like snow and garbage removal, common area charges, insurance, property management fees), property taxes and utilities. The Lease is ‘carefree’ to the Landlord. This gives you some inflation protection too. Think about what has happened to utility bills or property taxes, for example, over the last few years.

There is a long-standing tradition in commercial real estate to prepare two documents for a new tenant – an Offer to Lease (OTL) followed by a Lease. To me, this is anachronistic.

The reason it is done is to get the Offer drafted and signed by all parties relatively quickly. The Lease (which can often run 30 to 60 pages long versus the OTL at maybe 5 to 10 pages with Schedules) takes much longer and usually requires lawyer involvement for both the Landlord and the Tenant.

When I was a developer, we signed an OTL (which all parties agreed would be the Lease) for 80,000 sq. ft. with Nortel which was four pages long. As many of my readers already know, when you have a 60 page document, it is presumed by a Judge in any future dispute between the parties that you were trying to anticipate any or all eventualities. When you have a four-page document, the reverse is true. So in the former case, the Judge will usually look to the document for answers, in the latter, he or she will look to the merits.

Speaking personally, I would rather take my chances on the merits of a case. Nortel felt the same way.

This was a huge competitive advantage too – we could draft up a short from Agreement to Lease, written in English as opposed to legalese, and have it executed by all parties in a few hours or days while our competitors were fussing about with two documents and their lawyers, sometimes for months. It is also a heck of lot less expensive.

I certainly would not recommend an OTL followed by a Lease for a 1,000 sq. ft. transaction. But some people won’t make a move without their lawyer and that is OK with me as long as they understand that there are alternatives.

When you sell an industrial condo, you are basically selling into either the owner-occupied market or the investor market so your exit strategy has two options. Often, the place to find your Buyer is your existing tenant.

Real estate is a ‘get rich, slow’ field. You should not buy a property to flip it – the transaction costs are just too high – real estate agency fees, LTT (Land Transfer Tax), legal fees, commissions paid to REALTORS for their assistance in finding a tenant (even if you represent yourself, the tenant may have a Brokerage representing them and they will want you to pay a Brokerage fee), maintenance and repair costs, etc.

The stuff you see on TV – Flip This, Flip That – is just entertainment. Don’t be misled – there is no easy way to get rich that you can plan for. Hard work, effort, focus and expertise are needed. Some luck doesn’t hurt either.

There may also be some added value that you can bring to your industrial condo. My Dad loved basements – he always put a basement in the buildings he built. I like mezzanines – we used to add legal mezzanines to roughly double the space we had for rent.

We had numerous 1,000 and 1,500 sq. ft. industrial condos with 18 to 24 foot ceilings. As the nature of industrial companies has changed over the last 25 years, they use relatively more office space and less warehouse space. (A higher proportion of the value of products and services these days are produced by what Richard Florida calls the creative class. These people need high end PCs not warehouse space and loading docks. See: The Rise of the Creative Class and How It’s Transforming Work, Leisure and Everyday Life, 2002. Basic Books.) So we might decide to put in a mezzanine that could add anywhere from 40% more space to 87.5% more.

Other cool things that we used to do included putting in a double door and fire separating the upper and lower levels so you could rent out the upper level separately from the main level. In real estate, it seems that every time you draw a line on a piece of paper (create a severance, create a separate floor, have a second entry, create a second tenancy), you increase the value of the property.

One of the negatives about this type of investing is that you need to put up relatively more equity – maybe as much as 35%. Banks and other lenders view commercial property as more risky. Plus any type of commercial financing can be hard to come by today.

Real estate provides some tax advantages – you can deduct your CCA (Capital Cost Allowance, i.e., depreciation) from your income. When you sell your investment, it will in all likelihood be treated as a capital gain and not income and tax rates will be lower. Remember though that when you sell, even if the gain is treated as a capital gain, you will have CCA recovery; that is, you will pay taxes on the depreciation reserves you took earlier against income. Like so much in the taxation field, taxes are deferred not avoided. Also, how you set up your investments can be important.

Many of my clients already have a personal holding company (PHC). If not, I tell them to get one. The PHC is a fundamental building block to successfully owning and controlling different classes of investments. Your primary residence is not usually owed by the PHC because (at least in Canada), increases in value on your primary residence are tax free. The ownership of the principal residence is usually in the name of the spouse with a lower risk profile. But shares in, say, your tech company or your r.e. company would be held by the PHC. Note that your tech co. and your r.e. co. are separate corporations. If anything bad happens to your operating company where liability and the chances of something going wrong are much higher, hopefully, you will still have your r.e. co.

In Canada, you can move funds from your subsidiaries (for eligible Canadian Owned and Controlled Companies) to the PHC without paying any taxes using tax free inter-corporate dividends. Once you have money in your PHC, you may also be able to dividend out funds to your shareholders (i.e., you) tax-free if you have a capital dividend account. You can also do some income splitting – pay your spouse some money or your kids (after they turn 14 or 15). Like my Dad used to say: “Proudly pay your taxes in a great country like Canada, just don’t pay any more than you have to.” Never invest to intentionally lose money. That is a sucker’s strategy.

The types of returns you will see from owning real estate include:

• Cash on cash returns;
• Real estate inflation;
• Wealth effect from paydown of mortgage principal;
• Tax advantages (mortgage interest deductibility, capital cost allowance deductions, capital dividend account for tax free dividends, capital gains taxes are lower).

You can deduct not only interest you pay on the mortgages for your commercial property but if you mortgaged your principal residence to put up equity, the interest on that mortgage also becomes deductible from your income.

It is also a heck of a lot easier to build up, say, $2 to $3 million in real estate (using leverage, aka mortgages, and principal paydown facilitated by your tenants’ monthly rent payments) than it is to save that amount in cash from after tax, personal income, or to develop a stock or mutual fund portfolio of that size. So if you ever plan to retire, buying say 20 industrial condos and paying off those mortgages in the next 25 years might not be a bad strategy. If you got $1,000 per month net from each unit after taking into account all factors including a vacancy allowance, you would have $20k a month to live on – somehow, you might find a way to squeak by on that.

Prof Bruce

Ps. It is also likely that your cash on cash returns from your industrial condo portfolio will be higher than on your T-bills or a conservatively managed stock portfolio or mutual funds. And it could be a lot more predictable too. The downside is that r.e. investments may be a lot less liquid.

Using the IRR to Measure Real Estate Returns for a Seller

I have done a lot of spreadsheets for clients about to purchase residential or commercial property—to give them some idea of the rate of return they can expect in the future. But I recently had the opportunity to do one for a couple of investor friends of mine who were thinking of divesting one of their residential properties by looking back to measure their return on investment.

The subject property is on a nice residential street; has five bedrooms and two full baths; it is rented out to students from a nearby university on a room by room basis. Because of this, they are exempt from Ontario’s RTA (Residential Tenancy Act)—they are free to raise rents as they see fit and evict roomers with a minimum of fuss if they are troublesome.

They are active Landlords in the sense that they are over at the rental property at least once a month and they keep a close watch on their tenants. They paint each room when it becomes vacant and have a good relationship with their tenants.

We prepared a CMA (Comparative Market Analysis) for them and the value of the property, based on what comparable homes have sold for in the neighborhood in the last eight months, was estimated to be between $289,000 and $299,000. They were not particularly happy with the news that their property had not appreciated more.

In fact, they looked at it this way: the property had ‘only’ increased in value by $19,826 after deducting prospective agency fees for listing and sale plus closing costs (basically legal fees). With a purchase price of $262,000 in 2005, this seemed to our clients like a pretty puny increase in the four years that they had owned it. By their calculation, they had only seen a return of around 2.8% p.a.

(The subject calculations are shown below. For a more useful tool, you can download the spreadsheet in .xls from my server.)

Now these folks are bright, talented people but the analysis they did on the spot was far from complete. First of all, they will make (assuming that it sells in the range we expect it to) $19,826 not on the original purchase price of $262,000 but on the cash equity they actually put up to buy the building, which was $65,000. So right away, the rate of return jumps significantly from 2.8% to 6.88% p.a. Not especially great but certainly better than you could get from your bank or on a T-Bill or from a Term Deposit (maybe you would get 2.5% on a $20,000 Certificate of Deposit these days).

Next, they had forgotten that they were cash positive throughout—their cash on cash return amounting to an average of about $645 per month. This yielded them a second return on their equity (ROE) of an additional 11.9% p.a.

Lastly, every month that they owned the house, their tenants were helping them to pay down their mortgage. This is a wealth effect or, in an owner-occupied building, a form of forced savings. This amounted to another $18,911 paid off during their ownership period—a third form of return. Their ROE from this is around 6.6% p.a.

So if we now simply add up their three types or return (real estate inflation (all of which goes to the equity holder and none of which goes to the mortgage company), their cash on cash return plus the benefit they receive from the paydown of their mortgage), we get an estimated total ROE of 25.4% p.a.

Now this is just an estimate; to get a clearer picture, we need to use a somewhat more advanced technique—we need to measure the IRR (Internal Rate of Return) for their project.

When we do this, the IRR comes out a little bit lower: it is 22.6% p.a. (The reason it is lower than the ROE is because the IRR calculation properly takes into account the time value of money. For example, a cash on cash return of $7,744 is more valuable to our investors in year one than in year four.)

But still, a 22.6% p.a. is a lot higher than what you could get at your Bank and a lot more than their initial view that they had only seen a return of 2.8%. (It is also a heck of a lot better than they did with their stocks and mutual funds which last year and this year alone had dropped 29%.)

Now there are a lot of assumptions that are implicit in these calculations like, say, we did not put in a fee for their monthly management of the building. Also, there is very little in here for marketing. (It turns out that Kijiji and other free websites were pretty much all they needed for this well located property.)

But if the alternative was sitting on the couch watching more TV, we can be forgiven for this oversight.

The happy news is that the spreadsheet gives them confidence that, if they do decide to sell, they have done not so badly after all.

Prof Bruce

Ps. It is also interesting to note that the Cap Rate (Capitalization Rate = NOI/SP, where NOI is Net Operating Income and SP is Selling Price) is just 8% p.a. Cap Rates are a rule of thumb that has a lot of traction in the R. E. biz but it does not capture real estate inflation nor does it take into account the wealth effect from forced savings/paydown of the mortgage so it is a very limited tool indeed. To properly inform a client of their prospects in real estate, the IRR is a preferred method.

Pps. The numbers and facts have been changed somewhat to protect the identity of the property.

Ppps. Note that this analysis is done before tax. Since tax calculations can be complex and highly subject to individual situations, each reader is advised to look at the tax implications of asset selling with their accounting advisor.

129 Anywhere Crescent Confidential

Purchase Price $262,000 2005
Equity ($65,000)
Mortgage $197,000
Rental or Imputed Rent $2,200 per month $550 per month 4 bedrooms
$26,400 per year

Property Taxes ($2,489) per year 0.95%
Vacancy ($1,452) per year 5.50%
Marketing ($118.80) per year 0.45%
Insurance ($1,310) per year 0.50%
NOI $ 21,030.20 per year

Cap Rate 8.0% per year

IRR

Equity ($65,000)
Mortgage $197,000 4.50% 25 year amortization
($1,107.12) per month
($13,285.49) per year

Year

0 ($65,000) 2005
1 $ 7,744.71 2006 $ 645.39
2 $ 7,744.71 2007
3 $ 7,744.71 2008
4 $111,483.12 2009
IRR 22.6% per year cash on cash return + real estate inflation + forced savings (paydown of mortgage) Total Return
$ 30,978.85 $ 19,826.71 $18,911.69 $ 69,717.25
Principal Repaid ($4,420.49)
($4,619.41) Original Equity $65,000 $84,826.71
($4,827.28) Real Estate Inflation $ 19,826.71 (net of realty fees and closing costs)
($5,044.51) ROE(1) 6.88% $ 84,820.17
Total Principal Repaid ($18,911.69) Cash on Cash $ 7,744.71
ROE(2) 11.91%
Paydown of Mortgage $18,911.69 $83,911.69
ROE(3) 6.60% $ 83,934.82
Real Estate Inflation 3.25% per year 25.39%
Selling Price $297,756.69 after 4 years
Real Estate Fees ($14,887.83) 5%
Legal Fees & Closing Costs ($1,042.15) 0.35%
Net Selling Price $281,826.71
E&OE

(All Else Being Equal)

I recently wrote a letter of support for a Dharma project (not the Dharma that is in the hit TV series LOST but an Ottawa-based developer) that wants to bring more people to live and work in or close to Stittsville Main Street. Here is what I wrote to the Secretary-Treasurer of Ottawa’s Committee of Adjustment:

“I am a Broker at Partners Advantage GMAC Real Estate and we have a branch location at 1445 Stittsville Main Street. In addition, I have a background in urban economics, development and entrepreneurship.

I am aware that there are some concerns on the part of the Stittsville Village Association about this development.

I believe that rezonings, official plan amendments and applications to the Committee of Adjustment should, in principal, be a process of affirmation between the proponent and his or her neighbours.

To that end, I would like to point out a number of factors that tend to support this development and this application to the Committee.

1. Do we build cities for cars or for people?

I believe that we should build cites for people; cars are an important consideration but they should be a lower priority.

Stittsville Main Street is a major commuter road but achieving high speed for through-traffic should not be the top planning priority. High speeds make vehicle ingress and egress from the many small buildings along Stittsville Main Street more dangerous and make it more dangerous and less pleasant for pedestrians.

In other parts of the City of Ottawa, such as Westboro and the Byward Market, drivers tend to good naturedly accept lower traffic speeds as a price they pay for a successful mixed use zone—where people can live, shop, work and be entertained and where pedestrian movements are fostered and protected.

Neo-urbanist planning encourages:

a. on-street parking is allowed (this buffers the pedestrian and encourages pedestrian traffic).
b. people can live and work at home.
c. people can shop nearby.
d. there is a mixing together of folks from differing socio economic strata.
e. people build close to the road.
f. they have front porches.
g. roads are narrower.
h. densities are higher.
i. elders can stay in their communities.
j. the gardener, nurse, school teacher can find affordable housing in the neighborhoods where they actually work.
k. in-home apartments and granny flats and apartments above the garage increase property values not decrease them.
l. rooming houses and live-in students are tolerated.
m. apartments above shops are built.
n. there is a tolerance for diversity.
o. problems are solved at ‘town hall’ style meetings.
p. schools, government offices, post offices, libraries, places of worship get the best sites in town not the worst.
q. short blocks are common.
r. roads are grid based.
s. every road is two way.
t. left turns are permitted.
u. connectedness is the underlying principle of town design.
v. everyone suffers some through traffic so that no one suffers all of it.
w. grided systems prove that the slower the individual vehicle goes, the faster you move traffic over the entire system (i.e., average vehicle speeds are higher not lower even though there are no ‘collector’ roads designed by traffic engineers to move vehicles at 60 or 80 kph (which they never do because every trip is a car trip and all cars have to be on the one collector)).
x. there are no beggar-thy-neighbour policies whereby you put speed bumps, no through traffic, no left turn, one way and other self defeating traffic management policies in place.
y. cities use vertical transition lines and the wow effect (window-on-the-world, where all buildings open to the street at grade).
z. density bonusing is coming to encourage mixed use (read residential use) in commercial zones.

(Build-To Lines Instead of Setbacks + On-Street Parking = Walkable Cities)

Orville Station, in my view, embraces many of these principles and should be a welcome addition to both the business and residential communities.

2. Does increased density help or hurt real estate values in the neighborhood?

Prima facie, if density increases in a neighborhood, property values should climb. If a mixed use project such as Orville Station is approved, it brings more people to live, work and shop in the area. This increases demand—people who live in the area tend to shop there. People who work in the area may also want to live in that area.

When demand increases, prices follow, otherwise the rent curve in downtown Manhattan would be the same as downtown Ottawa, which is patently not the case. Density, all else being equal, does increase property values, not only for the specific site but for the neighborhood as well.

The major proviso on this statement is that crime rates in the area do not increase. Experience has shown that when a city encourages mixed use, the area sees a decrease in crime and vandalism. This is because you do not have a suburb where all its residents leave during the work day and a business core that does not see all its workers leave at night.

Eyes on the street, both during the day and at night, have been shown to improve public safety.

3. Can we relax parking requirements without jeopardizing quiet enjoyment?

The proposed variances to the parking requirements appear to be justified and minor in nature. Again, there needs to be a decision taken to encourage more density while providing reasonably for the private car.

Neo-urbanists believe that some flexibility on the part of planning authorities will result in more interesting and, frankly, better urban design.

It is expensive to operate, maintain, occasionally replace, insure and store a private automobile. Cities should accommodate people of all social-economic status, even those who do not own or do not wish to own cars.

Accommodating the parking ratio for Orville Station will be a step in that direction and may even have the effect of improving transit ridership as well.”

Prof Bruce, June 3rd, 2009

(Disclosure: since we have a Brokerage branch on Stittsville Main Street, there could be a direct or indriect benefit to Salespersons or Brokers who are selling residential real estate from having more product in the area.)

June 11, 2009

Malcolm Gladwell appeared at the National Arts Centre yesterday in an interview format with Ottawa-personality Mark Sutcliffe.

Malcolm is a Canadian living in NYC and is a leading thinker about the key ingredients leading to success, as well as a perceptive observer about unconventional solutions to daunting social problems. He is a best selling author of The Tipping Point, Blink and Outliers.

Here are a few notes that I took during his lecture yesterday:

On Homelessness:

• It is more expensive to ignore the problem than to solve it.
• The hard core homeless can cost society more than $1 million per year each for police and health and social services.
• The problem can not be solved until you give a person a permanent address. (Hernando de Soto also recognized this—without a permanent address, a person is a vulnerable human being with limited rights and prospects, Ed.)
• Singling out individuals for help may not be fair to many others in less dire need, but society has to solve problems, one at a time and this will not always be fair but so what? That’s just the way it is.
• Some people may take advantage of the opportunity to have a ‘free’ home and support services but nothing can be done about this. (Chapters made a decision in its early days to allow people to sample its wares even if it meant tolerating a minority who would read an entire text and put it back on the shelf without purchasing it. But so what? The cost of policing this small group and ejecting them from stores would be more costly than permitting it and more alienating of the general customer. NHL star players are certainly treated differently than journeymen players; it’s just the way it is, Ed.)

On Entrepreneurship, Success and Life:

• “We make it up as we go along.” (That is so typical of Entrepreneurs. Plans don’t tend to last very long in a world that changes all the time, Ed.)
• John Rockefeller was the world’s richest person—worth over $400 billion in inflation adjusted dollars.
• Malcolm met John’s great, great, great grandson and he said: “I read that you said that my great, great, great grandfather was the richest person who ever lived. I don’t know where all the money went!” (Watch your costs and each generation has to apply itself and work hard or the money, no matter how much you start with, will be gone, Ed.)
• To make money, you need to match ability to opportunity. Timing is important—you need to be born at the right time to become a Silicon billionaire like Bill Gates. (You want to position yourself in an industry where all boats are rising, Ed.)
• Success is a function of: talent, desire, luck, work, love of what you do, intensity of effort, timing, exposure, parental influence.
• Love of what you do tends to come from: meaningful work, autonomous work and sustainability.
• Mozart was successful not only because he was talented but also because he was the hardest worker.
• Most times, we overstate the importance of talent and understate the importance of effort.
• Success is not a zero sum game.
• It takes 10,000 hours to get good at anything. (One has to wonder if the recent appointment of the new Head of GM who has NO experience in the car biz can have any success. People who say a business is a business and that running AT&T is the same as running GM have not studied the unfortunate career of Mike Zafirovski at Nortel. Every business has ‘secrets’ to success that are not easily verbalized or known. They are things that come from experience and are discovered in the process of building a successful enterprise. There are buttons that you push to make a business (or Non Profit or Charity or NGO or, for that matter, a Governmental Department) successful. A great player like Wayne Gretzky may not make the best coach or CEO—admonitions to “Just do what I did for goodness sake!” doesn’t work when you can see the play in slow motion and know where everyone will be on the ice 30 to 45 seconds ahead of time, which almost no one else on the Planet can actually do, Ed.)
• Excellence is open to someone who is willing to put in the effort and love. KIP (Knowledge is Power) Schools prove this. They can turn a poor Hispanic child in the South Bronx into a math prodigy by having the kids work Monday to Saturday, 6 am to 11 pm and all of July.
• There is a seemingly inexhaustible need/demand for education.
• Society needs to provide places where kids and people CAN work hard. (We should have a High School for the Technological Arts in Ottawa in addition to a High School for the Arts (Canterbury), Ed.)
• Medieval society in northern England worked from Dawn until noon then began drinking. They had lots of holidays and not a lot of hard work. Rice planting nations, on the other hand, worked incredibly hard at their agriculture.
• Underdogs can win if: they are highly motivated, thick skinned and willing to embrace the unconventional as well as defy the conventional and, of course, work harder than their opponents/competition. (The harder you work, the luckier you get. When any of my students ask me for an extension on their assignments, I say: “When I was 22 I was living in Australia (in Sydney). I was recently married, our first child was on the way, we bought our first home, I was building an addition on it for the baby, I was working for the New South Wales Government solving a critical waste disposal problem and working long hours with ten other people in our research division, I was taking my M. Eng.-Sci. degree, part time, at the University of New South Wales where I was not only taking courses but also writing my Masters thesis, I bought a motorcycle that I maintained myself because it was the only way to get across the Sydney Harbour Bridge and make class on time, I wove between lines of static cars, trucks and buses, it was incredibly dangerous. I still had time to see my friends. What I didn’t have time for was drinking and smoking dope and such. So why can’t you get your essay in on time?” One thing the iron ring of an engineer connotes is that they know how to work hard, Ed.)

On Societies:

• Canada is a low hierarchy/high collectivist society.
• It allows us to experiment with things such as Medicare.
• Solutions to social problems may be obvious but still hard to do.
• How you frame a questions or an idea can significantly affect its acceptance.
• Seat belt laws were a huge failure as long as it was the Government bossing people. But when it was rephrased as a ‘child protection’ measure, parents buckled up their kids and then kids forced their parents to do the same. Acceptance went from the teens to more than 70%.
• CEOs tend to be tall people. CEOs should be selected behind a screen—we want the best CEOs not the tallest. (Walt Disney knew this. He auditioned the singing voice of Snow White behind a screen, Ed.)
• “We should all band together.”

Prof Bruce

GETTING THE RIGHT PEOPLE IN KEY SEATS

There is nothing more important in an enterprise than HR. It isn’t great assets or great ideas that create value and wealth—it’s the people in your organization that do that. Once you get past the point of being a sole practitioner, the first hire is your most important decision.

Now I am a terrible judge of character—I like everyone so the most important decision I made when I ran Terrace Investments Ltd. (the first parent company of the Ottawa Senators) was to hire Cyril Leeder, a CA, an excellent executive and, fortuitously, a good judge of character. Cyril remains with the Sens to this day as the COO of both the team and the building (Scotiabank Place). My next best decision was to let Cyril hire EVERYONE else.

Jim Collins (author of classics like Good to Great and Built to Last) published part of his research in a recent issue of BusinessWeek (May 25, 2009). His findings are of such importance that I repeat them here and strongly recommend you read them, twice—whether you are running a SMEE or a charity or a Not-For-Profit or a major Fortune 500 firm, I think Jim has got it exactly right.

We are going through a process where I work—there is debate going on about how much management is enough or too much. I tend to fall on the not too much end of the scale and some others think that staff need much more hands on, daily management. While I agree that there is no such thing as a ‘fire and forget missile’ in management and that you as a manager must always follow up, I don’t want to be around people who need to be told what to do every day or worse, five or six times a day.

That is why at the University of Ottawa’s Telfer School of Management, we are teaching entrepreneurship not only to would-be entrepreneurs but also to intrapreneurs who will take the entrepreneur’s skill set into established organizations. Skills like being a self-starting, self-correcting executive who initiates things, completes things, constantly innovates in both big ways and small ways, learns new stuff, adopts and adapts best practices from wherever they arise (from colleagues, direct reports and superiors to competitors) plus knows how to use smart marketing, social marketing and guerrilla marketing, knows how to get launch and pre-launch clients and how to raise bootstrap capital, can squeeze a dollar and make it go further, understands the cash flow cycle and the cash conversion cycle, tries to collect early and pay later, can build a successful business model with a strong value proposition which also includes many of the above attributes; all of this is crucially important to organizations of all stripes.

Anyway, here is what Jim Collins has to say:

“The specifics can vary, even within companies, but our research delivered six important traits that identify ‘the right people’”, Jim Collins, Author of Good to Great and Built to Last (as quoted in BusinessWeek, May 25, 2009.)

1. The right people fit the company’s core values:

Great companies build cultures in which those who don’t share the institution’s values are surrounded by anti-bodies and ejected like viruses. People ask: “How do we get people to share our core values?” The answer: Hire people already predisposed to them – and keep them.

2. The right people don’t need to be tightly managed:

When you feel the need to tightly manage someone, you may have made a hiring mistake. You need not spend a lot of time “motivating” or “managing” the right people. It’s in their DNA to be productively neurotic, self-motivated, self-disciplined and compulsively driven to excel.

3. The right people understand that they do not have “jobs” – they have responsibilities:

They grasp the difference between their task list and their true responsibilities. The right people can complete the statement, “I am the one person ultimately responsible for…”

4. The right people fulfill their commitments:

In a culture of discipline, people view commitments as sacred – they do what they say they’ll do, without complaint. Equally, this means that they take great care in saying what they will do, careful never to over commit or to promise what they cannot deliver.

5. The right people are passionate about the company and its work:

Nothing great happens without passion. The right people display remarkable intensity.

6. The right people display window-and-mirror maturity:

When things go well, the right people point out the window, giving credit to factors other than themselves; they shine a light on others who contributed. Yet when things go awry, they do not blame circumstances or other people; they look in the mirror and say: “I’m responsible.”

In a Small City Like Ottawa?
(Guest blog by Dale Craig, Chairman, J. L. Richards & Associates Limited, Ottawa ON)

Bruce:

I think that one of the greatest differentiators between mediocre and superior businesses is the constant desire to excel (both for your own fulfillment and the knowledge that your clients will appreciate the effort) backed up by the inner confidence that you have the people and skills to do so. I truly believe that JLR’s success has been fueled by employee ownership and a top down mutual respect, and support, for each other.

I remember talking to my associates when we were about to embark on the Palladium project (now Scotiabank Place, ed.) and promising them that I would try to get the contract and lead the effort but only if they felt they could deliver a world class product on time and one that we could all be proud of for years to come. Accomplishing those goals on what was our biggest project to that time made us realize we could take on almost anything as long as we believed in ourselves and were honest about our own limitations. That has proven to be right on many occasions since then.

Finally, treating everyone in an organization, from the least to the greatest, with respect and honesty is so empowering that I am amazed many business leaders don’t get it. Witness the result of the unmitigated greed and hubris in the world financial system over the last year. I think to many smart people get caught up in their own self importance and forget that any enterprise is like a chain, only as strong as its weakest link. I believe that leaders should not hog the credit and but rather share the praise (and the wealth) and things will work out beyond their wildest dreams!

Please keep on inspiring young people to dream big and deliver bigger.

Dale

Dale C. Craig, P. Eng.
Chairman
J. L. Richards & Associates Limited
864 Lady Ellen Place
Ottawa, Ontario
K1Z 5M2
Phone: 613-728-3571
Fax: 613-728-6012
Cell: 613-277-3571
Email: dcraig@jlrichards.ca
Web Site: www.jlrichards.ca

I can’t speak to the issue of what we should do with Lansdowne Park or whether a snow dump in Kanata should be the home to a new MLS team. But I can answer the question—why is Scotiabank Place where it is?

I get asked that question a lot. Why isn’t Scotiabank Place (SBP) at… (pick one) Lebreton Flats, Lansdowne Park, in Orleans somewhere along Highway 174, at South Keys, at Lac Leamy in Gatineau or right downtown like the Bell Centre in Montréal or the Air Canada Centre in TO.

All of these locations were ones we looked at from 1987 to 1989 before we decided on the current location for the Palladium—in Kanata along Highway 417 with its ‘own’ interchange.

First, here are a few observations that came primarily from Gino Rossetti, the Detroit-based architect who was the architect-of-record for the Palladium and who pioneered the concept of consecutive rings of suites with his successful first effort at stadium and arena design—the Palace of Auburn Hills where the Detroit Pistons play. A city needs an arena site that has:

1. A large horizontal surface for parking;
2. A site that is not less than 85 acres and preferably 100;
3. Access to a major transportation corridor;
4. Access to public transit;
5. A site that would allow the structure to be half in the ground and half above the surface to distribute guests more efficiently and to make the building more human scale.

Other things on our collective wish-list included:

a. Access at grade;
b. Double loaded storefronts at grade so that on days when the arena was dark, there would still be life in and around the facility;
c. Opportunity for architectural signage to maximize that revenue stream;
d. A curtain-wall entrance that left no doubt as to how to access the arena.

Let’s first look at some of the alternative sites. Lebreton Flats is owned by the NCC and the NCC informed us that they had a (very) long term plan for the site that did not include an arena, even if was going to be a ‘very nice arena’, it was still just a rink to them. The NCC felt that national priorities such as a new museum (which turned out to be the War Museum) or a new SCC (Supreme Court of Canada) building would take precedence. They gave us two opinions—a private view which just said “No.” And a public version: “We’ll study it.” In bureaucrat’ese, that is the same as a “No.”

We also looked at the Lac Leamy site where the Casino du Lac Leamy is now. It’s a beautiful site, next to water, close to a major highway and just five minutes from the Parliamentary precinct. Better yet, it was for sale at that time. After all, you can’t build on a site that doesn’t belong to you (i.e., in the case of NCC ownership of Lebreton Flats).

But there were already two NHL teams in the Province of Québec (unfortunately, the Nordiques have long since moved from Québec City to Denver) and the majority of our potential fan base did not want to see a third team headquartered there while Ontario only had one team.

What about locating the team at Lansdowne Park? There were two significant issues with that choice. Firstly, there are more lawyers living in the Glebe than practically anywhere else in Ottawa. How would they and the Glebe community react to having another two million visitors descend on their neighborhood? I can tell you from hard experience—not well. The planning for a new arena might have taken years to get approved, if ever.

Secondly, the NCC would never allow OC Transpo to run buses on Queen Elizabeth Drive. Hence, the only way to get people in and out by public transit would be Bank Street. The MAXIMUM number of people that OC can run up and down Bank Street would be about 2,500 pph (people per hour). For an arena with a 20,000 capacity, it would take four hours to exit everyone from the building using buses and another three hours or so to get them there in the first place, if you were to rely on public transit for, say, 50% of our attendance at a game or an event. (Arrivals tend to be more spread out than departures since, if you lose to the New Jersey Devils in Game 7 of an Eastern Conference Final as the Sens did, EVERYONE wants to go home at exactly the same moment. Hence, departures for OC buses on Bank Street would have been problematic since the mix with cars would effectively lock down the street.)

Now that tells you something about why the ACC and the Bell Centre are downtown arenas. We could have built the Palladium on a downtown site if Ottawa had a big time people mover like the Métro in Montréal or the subway in TO. Those two systems can move between 20,000 and 30,000 pph—a huge increase from what OC can do.

When we used to go to Montréal to see Expos games, we used to drive to downtown, have dinner and then take the Métro to the Big ‘O’; we would never think of taking our car.

But I can tell you that if we relied on buses, we would have had one sellout—opening night and after that, there would have been a fan revolt.

Even in 1987-1989, we thought the event horizon to get a rapid transit system here in Ottawa was a generation away and given the way our City is currently proceeding (or not proceeding), I am not holding my breath to see a high capacity light rail system appear in Ottawa any time soon.

In fact, people coming from Orleans by car would have taken more time to get to Lansdowne Park than to get to SBP—sure, they can get to the Queensway and Bank Street in 20 minutes but threading their way off the Queensway and hunting and pecking their way to a parking spot, who knows where, could easily take more time and gas than going to the Kanata site.

So why not build a big, multi-level parking garage somewhere? Well, for the reason discussed above, you can’t actually park more than 7,000 vehicles vertically. Since everyone will leave at the same second the team loses in overtime to the Maple Leafs, a multi-level garage will simply not work. It will become grid locked. If you have ever been in the Rideau Centre on Christmas Eve (the only time of the year when men outnumber women there) and everyone leaves at the same time (i.e., closing time), the public garage becomes such a nightmare that the cops have to come and untangle the mess—one car backing out while another is moving forward on every level results in an unsolvable puzzle. I know, I was in just such a mess one Xmas eve.)

So I knew when we were looking for a site that we needed one that we could own, that would have enough room for 7,000 cars and 500+ buses on one level. The soil conditions had to be right to bury half the building. (If you have ever been to Madison Square Gardens, you already know what a pain it is when everyone has to go UP to get to their seats for a Knicks game or whatever.) There had to be room for a new interchange and there had to be more than one way to get to the site. It couldn’t be imposed on existing communities who would react in NIMBY fashion to the extra traffic and noise that would be generated by a MCF (Major Community Facility).

(Communities are now being built around SBP by Mattamy, Minto, Richcraft and others but the key difference here (a matter that caused me a great deal of worry at the OMB Hearing that would eventually approve the construction of the Palladium) is that people who buy these homes are self-selecting to be near SBP. We are not imposing on an existing community. We believed that this would happen—if you look at our original plan called West Terrace (now expanded on and improved by the City of Ottawa and called the Kanata West Concept Plan Area), it called for significant residential development as well as other employment and commercial development.)

Well, we looked for a long time for an appropriate site and we didn’t find one—the CCEA did that for us. The Central Canada Exhibition Association has thought about moving out of Lansdowne Park for quite a while. Their Board found the site where SBP is now—not me. One day I woke up to read in a local newspaper that the CCEA had optioned a site of some 500 to 600 acres at Huntmar and the Queensway. I jumped in my car and drove to the Huntmar overpass; I stood on the bridge looking east. I could see the homes of Kanata marching like ants over Moodie Hill towards me and I knew that the CCEA had beaten me to a great site.

I silently saluted them and cursed them too.

I told the guys at Terrace Investments Ltd., the first parent company of the Sens. We were all disappointed.

But a couple of months later, for reasons known only to the CCEA, their Board decided to release their options on these lands. Again, I read about that in the same local newspaper. By 10 am, Jim Steele (still with the Sens) and I were sitting in one of the local farmer’s homes drinking rye and trying to convince the family to sell their lands to us.

Fortunately, many of these fine people did—we ended up with 600 acres.

Now, finally, I have to deal with the real estate play.

We told only a few people what we were doing—Des Adam, then Mayor of Kanata knew as did Jimmy Durrell, Mayor of Ottawa and Andy Haydon, Chair of the RMOC.

We told them and then Premier of Ontario, David Peterson, that they each had a magic wand and we wanted them to use it—we said that private money would buy the team ($50 million) and build the building ($240 million) but we needed three things from Government*. One, we needed the Palladium site (100 acres) and the remaining lands (500 acres) rezoned for a MCF and for other uses. Two, we needed public monies to fund the new interchange (a $30 million cost) because the day the interchange was completed, it would have to be given to MTO (the Ministry of Transportation for Ontario) for $2 and you can’t finance something you don’t own—it would be like me putting a mortgage on your home. Three, we needed their support to tell the NHL what a great place Ottawa is, how much hockey is loved here and what a great place Ontario is to invest in. Alberta had two teams, Québec had two teams but the largest (and, at that time) the richest Province only had one.

(*We told Mr. Peterson that this was not another Sky Dome which cost the Ontario taxpayer about $450 million in losses.)

We asked them to focus their wands on the Palladium lands and, presto, the lands (after all due process) would be rezoned. The average price we paid for the lands was $12k per acre and we made no secret of the fact that, after rezoning, we hoped the value would increase to $112k per acre (lands in the area are now trading for $300,000 to as much as $546,000 per acre). The $100k per acre increase in value multiplied by the 500 acres of ‘surplus’ land we had bought (and which we planned to resell) would exactly equal the $50 million purchase price for the NHL expansion team.

But we told the guys we wouldn’t keep that money—we would put it in Brinks trucks and take it to then President of the NHL, John Zielger’s office on Park Avenue in Manahttan and give it to him. In return, we would get a (pretty crappy looking) piece of paper called a NHL franchise under the NHL’s Plan of Sixth Expansion. We would put Ottawa on the map and it wouldn’t cost the City of Ottawa a dime.

We won local votes in Kanata and at the RMOC by a margin of 32 to 1 and we obtained the agreement of the Liberal Government of Ontario to our three requests. Things were looking pretty good in the summer of 1990.

But for some reason, Mr. Peterson decided to call an election two and a half years early and, with a nearly impossible splitting of the vote, Bob Rae and the NDP came to power later that summer with a majority in the Legislature based on 35% share of the total vote.

As a result, after we won a conditional franchise for Ottawa in December 1990, we knew that we faced a brutal 13 and a ½ week OMB Hearing where we would faceoff with our own Provincial Government who would: a) not support a franchise for Ottawa, b) use all the power of the Provincial Government to defeat the rezoning of the Palladium and the surrounding lands and c) not pay for any public infrastructure (aka, the Palladium Drive interchange).

It is, to this day, the only interchange in Ontario built privately.

I was on the stand for three and half days of examination and cross examination along with Doug Logan of Ogden Corp., our arena manager. Doug got so sick of the proceedings that, during a break in the hearing, he offered us $20 million to relocate the franchise to a recently completed Ogden building in Anaheim. Imagine, the Sens could have been the Ducks and maybe, in a parallel universe, we actually won the Stanley Cup in 2007. I told Doug: “We didn’t Bring Back the Senators to play in Anaheim.”

Anyway, when our lawyer told us we were losing the hearing, I decided to make a public offer—if the OMB would approve the 100 acres for the Palladium, we would try to keep the other 500 acres in agricultural use for a generation. This would allow the NDP, hockey fans and Ottawa to find a win, win, win solution. The NDP could claim they had preserved farmland for a generation (even though Cyril Bennett, who had tried to farm the land and whose lands the Palladium actually sits on today, told the OMB that his land was heavy wet clay and the most money he had ever made in a year from the farm was less than $10,000.) Hockey fans would have another NHL team to cheer on. And Eastern Ontario would get our ‘Honda Motor Car plant’—much needed (union) construction jobs in what was then a pretty tough recession.

The offer was rejected by the NDP and the matter was litigated to a conclusion. The Board ruled that the MCF zoning for the 100 acres needed for the Palladium could proceed. But it was silent about the fate of the other 500 acres. Plus we would have to pay for the new interchange. Consequently, we wrote down the value of our land holdings by $50 million and took another equity hit of $30 million (the value of the interchange). That is why we have NHL hockey in Ottawa today, why other people own those lands now and why yours truly is the Entrepreneur-in-Residence at the University of Ottawa’s Telfer School of Management and a real estate Broker and not involved in hockey or land development.

Prof Bruce, Founder, Ottawa Senators.

Ps. I had a hand in the traffic solution for SBP. Our original plan included a connection to Highway 7 by extending Huntmar south to intersect with Hazeldean Road (which the NDP also opposed) and a slave on-ramp to Highway 417 from what is now Parking Lot 9. The Huntmar extension was finally completed by Mattamy and opened in 2008 but the on-ramp from Lot 9 does not yet exist. I didn’t realize the on-ramp was left out until one event day, I parked in Lot 9. It took me 45 minutes to get out of there—I couldn’t believe it. When I got home, I looked up the plans and realized the slave ramp had been left out. It turns out MTO wouldn’t allow us to build it—the distances between the Palladium Interchange and Terry Fox Drive were too close to permit it, in their view. Ridiculous. The ramp would only be open for 45 minutes after major events when traffic speeds are reduced from 100 kph to 45 kph and, obviously, safe distances are likewise reduced. So there is hope yet for Lot 9 parkers that this can be rectified as SBP undergoes further development.

Pps. I stood on the Huntmar overpass one other time with Gino Rossetti. The first time he saw the site, he loved it. There is only one problem he told me: “The Highway has to be at least eight lanes.” I replied: “Gino, you know that and I know that but that is the last time you ever say that out loud because if the Province ever hears that, they will make us pay not only for the darned interchange but also for a brand new Highway and that will certainly sink the boat.” One day, the transitway will extend to SBP (for buses, not LRT) and you will be able to travel from the core to SBP on a double decker bus without ever mixing with cars. This will be a major improvement; I believe that the City has made such a mess of LRT that it should focus right now on the doable—finish the bus transitway to Kanata, Orleans and Barrhaven before doing anything else.

For Residential Real Estate

When you think you might be in the market for a new home, look for a REALTOR who is the right fit in terms of personality and experience in representing you as your Buyer Agent.

Look for someone who is thorough—there is lots that can go wrong in these transactions.

A Buyer Agent will have access to the backend systems of MLS.ca (called MLX) and can help you find the right home in the right area at the right price. He or she will do a CMA (Comparative Market Analysis) for you so you know what comparable homes are selling for in the immediate area.

By narrowing done the choices, you will save a lot of time and aggravation.

Your Buyer Rep does lots of these deals so he or she can help with: a buy low/sell high strategy, arranging for a building inspection and building inspector, selecting a mortgage broker, determining your closing costs (like legals and LTT, Land Transfer Tax) and help in the negotiations as well as the legal agreements that go along with these negotiations and completion of the transaction.

I recommend that your principal residence is put in the name of the spouse or partner who runs the lowest risk of being sued assuming you are in a long term relationship. It is a bit of a creditor proofing strategy for you and your family. If you are not sure, put it in your own name or in joint names.

Your principal residence should be in your own name(s) because, in Canada, the capital gains from the sale of your principal residence is tax free.

Any business or any other real estate you may buy should probably be in a personal holding company. This has some tax advantages as well as income splitting possibilities and represents the possibility of diversifying your portfolio.

To learn more about creditor proofing, see: http://www.dramatispersonae.org/CreditorProofing.htm.

One final note, although your Buyer Agent represents you, he or she almost always gets paid by the Seller so it costs you nothing to have a professional REALTOR represent you in most cases. If you think you can negotiate on your own, remember the Seller’s agent may not be representing you and that agent will get the entire commission so you haven’t saved any money or time and you may have deprived yourself of representation. Plus REALTORS are insured, so if anything goes wrong, you may have something to fall back on. Litigation is a very expensive alternative.

Prof Bruce

Ps. The reason I am so strongly in favour of using mortgage brokers is explained elsewhere on my blog. See: http://www.eqjournalblog.com/?p=34.

Pps. Get yourself a good real estate lawyer. One who provides value for service and cares about you as a client.

Ppps. Here is why I think real estate investing can be a good idea: http://www.ottawarealestatenews.ca/WhyInvestInRealEstate.html. And here is why home ownership has been a boon to the economy and the sub prime mess is blamed on the wrong people: home buyers (http://www.eqjournalblog.com/?p=169).

Of a Commercial REALTOR

The value proposition of engaging a Commercial REALTOR as well as owning your own real estate can be summarized as follows:

1. The Agency has access to MLX, the back end system of MLS.ca, as well as a list of established Sellers. More than two thirds of all real estate transactions are derived either from web based searches or from existing clients’ inventory.

2. A Commercial REALTOR typically does dozens of Agreements per year and develops a facility with these agreements that is unmatched even by most lawyers.

3. The probability of completing an Agreement is significantly higher through their involvement. Real estate transactions are the only area of commerce where, by law, the Agreement MUST be in writing. Real estate is complex and a lot can go wrong*.

(* The list of what can go wrong is endless. Due diligence is especially important in terms of building inspections, examination of leases, timely fulfillment of Conditions, completing financings, arranging for Seller Take Back Mortgages, environmental audits, ensuring that chattels and fixtures are properly accounted for and included, examination of maintenance records, understanding building systems, examination of contracts and sub-contracts for property management and maintenance, equipment rental agreements, appraisals, providing law firms with the paperwork to complete deals on time, etc.)

4. Legal disputes are also a costly reality: for example, many arguments revolve around fixtures, chattels or outbuildings in dispute. REALTORS are insured in Ontario to provide Sellers and Buyers with additional protection. Deposits are held in trust accounts, which are also insured.

5. The Agency brings a sense of what the market is doing at any given time. CMA (Comparative Market Analysis) gives Buyers the confidence that they are entering into a sound arrangement.

6. Spreadsheets that estimate the Internal Rate of Return (IRR) for a project are one of the key decision tools that a Buyer needs to have. The IRR takes into account the three types of returns that real estate provides: cash on cash returns, forced savings (the pay down of the mortgage principal each month) and real estate inflation.

7. There is also the additional potential financial advantages of owning real estate including the sheltering of income using depreciation reserves.

8. One other item needs to be mentioned and that is the value of a professional’s time. It takes time to gain the expertise of a REALTOR and also it takes time to sell or buy a property. Professionals are often better off using their time more productively in the things that they do for a living rather than trying to be REALTORS.

9. The Agency will do most of the negotiating. It is not easy representing yourself and many Canadians find it difficult to negotiate aggressively. Buyers often do not feel comfortable representing themselves.

10. It may also take longer to source your own property, negotiate the Agreement and complete it if you go without representation.

11. Owning your own real estate can alleviate future rental increases, provide for security of tenure, allow the owner to develop brand equity in the location that they can retain over long periods of time, diversify their asset mix, provide for retirement, make the operating business more sellable and/or provide for a hierarchy and diversity of ownership that makes tax sense and operating sense.

12. Real estate investing is quite stable in Ottawa—it is get rich slow.

13. It can be less expensive to own than to rent.

14. Owning your own real estate gives you more financial flexibility too—if there is a sudden need for cash, you can re-mortgage your property to obtain that.

15. Interest rates are hitting historic lows and prices have come off their peaks. You make money in real estate when you buy not when you sell. That is, buy low, sell high. Or buy when everyone else is selling and sell when everyone else is buying.

Prof Bruce

This blog entry is for Lostaways and, if you don’t know what that is, please don’t read any further.

Time travel is interesting to Hollywood writers because it always ends in a paradox. If Marty McFly never goes back to 1955, does Chuck Berry ever pen “Johnny B. Goode”? Marty hears Chuck’s tune, learns how to play it in 1985 and goes back to 1955 where he plays it at his Dad’s high school graduation. One of Chuck’s relatives is there also performing, hears Marty play it, likes it and gets Chuck on the phone to listen to ‘his’ tune, which Chuck then writes. Who actually wrote the tune?

Well, in a recent episode of LOST, Sayid Jarrah goes back to 1974 in order to kill evildoer, Benjamin Linus. Sayid shoots the young Ben to prevent all the cruel things that Ben will do later on as an adult. But Ben, the kid, is an innocent.

Can Sayid change the past? In fact, he only wounds Ben. Then Kate and Sawyer can’t bear to see an innocent child die so they take him to the mysterious Richard who takes him to the Island’s wizard (Jacob) to heal him. But nothing in life is free—Ben must pay with his soul.

So did Ben become evil because Sayid shot him or did Ben’s evil doing cause Sayid to shoot him? Who is responsible?

One way to look at time travel is that these characters all live in a Möbius strip universe—a two dimensional universe that has only one side. It twists (once) and loops back on itself so the answer is that there is no paradox: they follow each other endlessly on a loop with no cause or effect. It just is.

Prof Bruce

ps. if this is an accurate description of time travel, it also answers the question– can you change the past? The answer is: “No.” If you exist in a Mobius Strip universe, you follow exactly the same path forever; it has no beginning and no end. So Sayid was going to shoot the young Ben because adult Ben was evil, the adult Ben was evil because Sayid shot him as a child and this can not be changed.