Sim City for Real Life | Cindy McLaughlin at Envelope

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Cindy McLaughlin 0:00
First of all, if we give our model and address it will tell us very quickly and show us what’s possible to build. Where do the setbacks go? How much commercial could you build? How much how much residential? Is it likely to be a profitable acquisition if you’re about to go by that line?

Alexander Ferguson 0:24
If you’re developing a building in a major city, understanding the zoning laws is a crucial but often Byzantine process, you must work through 1000s of pages documents, to learn your options on ceiling heights, plumbing systems, occupancy limits, and the list goes on. And changing one factor could affect another Cindy McLaughlin, the CEO of Envelope is trying to help developers navigate the complicated process using software that analyzes plans, locations and laws to deliver data in an easy to understand format. But unlike many others, technology startups, envelopes offerings include human input, as well as a business partnership. In this episode of UpTech Report, Cindy tells us about the origins of their startup and their unique business model. Cindy, I’m excited to chat with you today and talk more about envelope to begin, can you share, describe your company in five seconds? What would you say?

Cindy McLaughlin 1:19
Sure. An envelope is a technology company that understands acquisition opportunities in the most complex cities in the world, starting in New York City

Alexander Ferguson 1:31
acquisition opportunities in a local in the highest areas like New York. Wow. So talking about your market segment just that is those looking to acquire new real estate and understand the complexities around what will happen?

Cindy McLaughlin 1:50
Yeah, um, we have two lines of business. And both of them serve generally developers, potentially brokers who are looking to acquire real estate and hold it where they’re likely to have above market returns.

Alexander Ferguson 2:09
So then, what problem are you solving then with your technology? What problem did you see initially?

Cindy McLaughlin 2:15
Yeah, so in New York City, we started by looking at the zoning code of New York. And if you’ve ever done acquisitions here, you know that it’s a 4300 page document full of legal text. And it’s critical to understand if you’re trying to understand development potential on a particular lot. And so envelopes started by looking at all the rules that would apply to constraining or creating opportunities and development. And we built that into 3d software, kind of like SimCity for real life. And this is important, because first of all, if we give our model an address, it will tell us very quickly and show us what’s possible to build. Where did the setbacks go? How much commercial could you build? How much how much residential? Is it likely to be a profitable acquisition, if you’re about to go by that lot. Now, once you’ve done that at a lot block level, you can match that up and do that in an urban scale. So we can query our own results and ask, you know, we can ask our model show us all the properties that are likely to have above market returns over a five year hold, because we know what’s possible to build spatially. And we’ve layered in a whole bunch of predictive analytics and signaling of distress and so forth to understand where there is transact ability.

Alexander Ferguson 3:48
It’s been four years since the beginning of the development 2016, that when you got started, yeah, late

Cindy McLaughlin 3:53
2015, which followed a spin out from shop architects. And shop over the course of about seven years had been putting together a prototype for the Sin City part, you know, the zoning part of envelope. Um, and so when I came on in early 2016, they handed me some IP and said, Go turn this into something. And my company’s been working on that ever since?

Alexander Ferguson 4:21
What’s the business model? That is a subscription service then for those looking to acquire?

Cindy McLaughlin 4:27
Yeah, it’s a great question. Um, we have two lines of business. One is a tech enabled professional service. And so if you’re a broker, or a developer or an architect or zoning attorney, you can come to us and say, Hey, I’m looking at this one address, show me and tell me help me calculate what’s possible to build. And then I may be interested in running scenarios on that site. What if I were to change the Florida floor height? What if I were to change the mix of use? How does that change my development potential? So our model We’ll run the analysis, we have a zoning expert who spent a decade at Herrick Feinstein as their Chief land use and development specialist. So he will review the results and work with a client to make sure that they’re getting exactly what they need. So that is one line of business, it’s tech enabled professional service. Our second line of business is acquisitions. And we actually act as principal on the acquisition side where we team up with top tier developers. And these may be the largest or the most innovative developers in New York. And we develop co GP relationships with them. And what that means is that we joint venture with them and act as the analytical extension of their acquisitions team. And we buy real estate with them together. So we help them find real estate at an urban scale that is likely to have you know, above market returns over a five year hold. And then envelope shares in the real estate economics,

Alexander Ferguson 6:05
dual business model there have one tech enabled professional service, which I appreciate that term. But then actually, your feet are completely wet in the game in these partnerships. And you are doing these deals yourself. So you all the while you’re collecting more data to make your model more improve it more accurate. I do

Cindy McLaughlin 6:28
all the while, yes, on an ongoing basis. And every day our models sort of we build a bigger moat.

Alexander Ferguson 6:36
You’re let’s dig in a little bit more into the technology. How is it different than anything else out there? Maybe they could people could find this data themselves? How has it developed and changed over the years to?

Cindy McLaughlin 6:48
Yeah, we started by doing this 3d modeling, you know, which takes all the spatial constraints of zoning and allows us to extrude developments, you know, show me what this building is going to look like, where are the Where did the setbacks go? What are the height limits? What happens if I change the bulk type, what is what what is the shape and scale of my building do. Um, and that was unique technology when we built it, or when shop architects built the prototype for it back in the, you know, between 2008 and 2015. We then have been focused on evolving that technology and making it scalable, but also building a proprietary data infrastructure. And this is because when we started we were riding on the city’s data. And the city is wonderful in that they put out a tremendous amount of data, they’re actually very transparent about their data. But it’s not always accurate. And it’s not always comprehensive. And when you’re dumping, you know, 10 to 20, to 50 to $100 million into a piece of land, you can’t be you know, 100 to 200 square feet off of the lot area, because that then gets extruded all the way up across many stories, which can be 10s of millions of dollars of you know, gain or loss. So, we started by building a survey grade parcel map, to be able to do our own lot area calculations. We built the zoning boundaries correctly, we built them to the letter of the law, instead of based on the hand drawn map that the city puts out, which you know, not always but is sometimes inaccurate. And when you get your zoning boundaries wrong, it can really mess up your calculations.

Alexander Ferguson 8:45
You talked about a little bit before, how are you able to keep the data accurate and updated all the time.

Cindy McLaughlin 8:52
We’ve got people in house who are constantly looking at what the city is putting out. Um, zoning, as you know, is a public process. And so if the city is going to propose a neighborhood wide rezoning or even if a development is going through a EULAR process, you learnt means a rezoning a spot rezoning on that particular lot. We can see it coming from a mile away. And so we can even model what would happen if the rezoning were to pass in full, or what would happen if it were only to pass using these parameters and not these we actually understand where the opportunities are in the event that that rezoning were to happen.

Alexander Ferguson 9:41
So let’s shift the conversation a bit to this topic of the world we’re in at the moment with COVID-19 A lot of people think and where they want to live is changed urban environments stuck around lots of people is maybe not that interesting or desirable. How do you see this shifting places? like New York and other places around the world, and what needs to change for cities like this to still thrive and how things are built?

Cindy McLaughlin 10:08
Yeah, I am, I am bullish on cities over the long term. I think a lot of it comes down to short term leadership. But in the end, the cities are more carbon friendly, they are, you know, we still have the in person cluster effects of ambitious people getting together to do big things. They still are cultural centers of the world, you know, we’re still they’re still amazing places to live. So what we’ve been spending a lot of time doing in house envelope is understanding and helping the city chart a path forward for reopening so that we can actually be a better place post pandemic than we were prior. And there are a bunch of different elements to that, you know, New York, as you can imagine, is a city where people commute very long distances to get to often very long distances to get to the central business districts of Manhattan and downtown Brooklyn. And it’s almost this heartbeat, you know, it’s almost a pulse where every morning people schlep in sometimes, you know, over 50 minutes, you know, to an hour commute each way to get to the central business district. And then at the end of the day, on mass, they all get back on the subway or in their cars, and they leave the central business district. So, um, we believe that that heartbeat is going to go away. And we think it should go away. Because ultimately bring using wasting that time, wasting the energy and the carbon, you know, the carbon footprint that we leave behind, bringing people on mass back and forth into the city is bad for our environment, it’s bad for people’s families, it’s bad for productivity. We’ve been looking across the world to find cities that are doing this well. And I would highlight Paris is one in particular that we’re excited about. And Hidalgo, the mayor of Paris has just won her second term on a platform of the 15 minutes city. And the 15 minutes city concept is that people should be able to work, exercise, get services shop, have leisure within a 15 minute walk or bike ride of their home. And when you think about that, as an idea, it’s, you know, it’s like creating, you can you can apply that, especially to these pre industrial cities like New York, where we have many, many walking neighborhoods that are kind of strung together by the subway. And so the idea of bringing people home to their neighborhood, and letting you work out of an office on the commercial street of your neighborhood, letting you go to your local doctor in your neighborhood attend your local schools. It it starts to feel like a greener, more livable, more sustainable environment.

Alexander Ferguson 13:27
Aside from the zoning and regulatory change, that would also be quite a behavioural change or mindset change from just the way people want to live. And and be that might be even harder thing to change. Would you be?

Cindy McLaughlin 13:42
Um, yes or no, right now in a COVID environment, we don’t want to get on the subway, we don’t really want to get into our cars and drive half an hour into Manhattan if we don’t live right next to our office already. So what people really want right now, I think, is to be able to get back to business close to home. Right? You want to be able to pop in and check on your kids who are doing zoom school, or in normal times, you want to be able to pop home and see them at three o’clock when they get home from school or, you know, get that new dishwasher delivered or take your dog to the vet in the middle of the day.

Alexander Ferguson 14:30
It’s a shift, but it’s a new kind of bringing elements of what we are used to but in in a new way. So moving forward for you. For your company. Where do you see it in five years from now?

Cindy McLaughlin 14:45
Yeah, well, things go well, we’ll be part owners in lots of different buildings around New York. We will have scaled to Big Hairy cities like Tokyo. You know, we’re looking at the gateway cities of the world work Where the complexity that tends to be a barrier for most development is something that can bring competitive advantage for companies like ours.

Alexander Ferguson 15:11
Be sure to check out part two of my conversation with Cindy, in which she explains her view that a great CEO must be a great storyteller.