Jack Heald: Welcome back everyone to the OZExpo Podcast. I am your host Jack Heald and I am joined today by Scott Krone who is the principal at Coda Management Group. Scott, welcome to The OZExpo Podcast.
Scott Krone: Thanks Jack for having us. We really appreciate it.
Jack Heald: Glad to have you. So real quick, tell us about Coda Management Group. What do you guys do there?
Scott Krone: Coda Management Group is our investment arm within our companies where we focus on investments. Now I'm more on a speculative basis and currently we're focusing on the self-storage arena. So, we are taking underperforming commercial, existing buildings that may be dark or underperforming and converting them into self-storage.
Jack Heald: Alright, so self-storage is one of those segments of the real estate and development market that seemed like an obvious fit for the Opportunity Zone market. But let's kind of take it from the top. Tell me about the self-storage market in general, and then we'll drill deeper from there.
Scott Krone: Well, it's certainly getting traction in terms of its sexiness or appeal. Prior to most recently, I've considered it to be the like the ugly stepchild that's one and maybe above RV parks that a lot of people claim they don't understand it. But I think the sexy one was the apartment market, which we're seeing just tremendously low cap rates. One person I saw today was asking my opinion about buying an apartment building that was a 60% percent occupied at a two-point 11 cap. And I was just like shocked that people are willing to go that low on cap rates on buying apartments. But for us, we see it's a natural progression. I began in condominiums and apartments and then self-storage. To me, it's a rental unit, no different. But it's just apartments without toilets. And so it's a lot easier to manage. It's a lot easier to build. And, it's certainly getting traction across the country. People say that it's getting tougher and tougher and they're certainly over saturated markets, but that's why we're looking in secondary markets where it's a three to five mile radius for each site. And so it's a, it's a very demographic supported in specific business.
Jack Heald: One of the things I was interested in when I was doing my research is that you guys repurpose existing buildings rather than, build starting from scratch.
Scott Krone: Yeah. I mean the building we just bought in Dayton, we bought it for $11 a square foot. It's 90,000 square foot building. I can't build a building that big for $11 a square foot. So that certainly gives us a competitive advantage compared to building to new.
Jack Heald: But there's a lot of work once that's done and as I understand it, you guys are particularly qualified for refurbishing, for redeveloping that building. Tell us about that.
Scott Krone: Well, I began Coda almost 21 years ago. And my background, I got a masters in architecture from Illinois Institute of Technology. My first job while in graduate school was working for an architect who was also the real estate developer and builder. And so that was my apprenticeship, my mentorship if you will for the first six years of my career both while in school and out of school. And, my master's thesis was $100 million mixed use condominium town home and single family home project that I got to work on plus working on other projects for him during that period of time. So I really got to understand the full breadth of not just the design side but construction and development. And you know, we've taken that concept and we've applied it to our business where we've done both a fee-based for customers as well as our own investment portfolio. And so that's been our focus for the past 20 years is doing both sides of it.
Jack Heald: Now has it been self-storage the whole time or is that a relatively recent move for you guys?
Scott Krone: It has not been self-storage all time. It began in about 2010 and 2013 is when I really got into it. It began in the single family. I mean when I started off, we didn't have the resources for a $100 million project. So we began with single family and then worked our way into multifamily and mixed use. The first project that we did, we tore down a house and built a new one and sold it for $1 million and we just took it from there. And so that was in ‘98 and we began working on different projects and even have done churches where we've taken old warehouses and convert them into churches. And so, it's a concept that we've seen being able to apply it in different venues, whether it was converting a building into a condominium or converted into churches or now most recently converting them into self-storage.
And the reason why I got into self-storage was in that market when I really began studying it for a client who was looking to get into the space, I couldn't find a distressed self-storage. And this was in the height of the market crash. And I was seeing that self-storage was actually performing better in the recessionary market than in a boom market, which really caught my attention. And we converted a building, we entitled it, designed it and converted it for this client. And you know, that allowed me to really see the backside of things and you know, all that was necessary to go forward with the process and do it on our own.
Jack Heald: Alright. So let's talk about what Coda Management Group does. Coda Management Group's work specifically in the self-storage market as we've talked about the market in general, let's talk about what the stack of services that you guys bring to the market are,
Scott Krone: Well, within Coda Management, we are the developers. So we will identify the building. We will put together the entitlements if necessary, the financial package, raising the capital stack from private equity to do pace financing, opportunity zones, to debt financing. And then we will manage the asset once it's completed. And we hire Coda Design Build to do the design as well as the construction of the process. So we literally will do the process from a to z until the building is operational. And then we will hire a third party self-storage management company to operate our facilities.
Jack Heald: That's pretty extraordinary. Is there anybody else that you're aware of right now who's an a to z provider in that market?
Scott Krone: I'm not aware of too many that are in any different types of markets, whether it be apartments or self-storage or commercial. We are pretty unique in that sense.
Jack Heald: Well, it seems like it. All right, so let's take us one step deeper down the rabbit hole into the opportunity zone market. What are you seeing out there in the opportunity zone market? Are you working nationwide? Are you, do you have a particular geographic footprint?
Scott Krone: We are predominantly in the Midwest, so we have assets from, Wisconsin, Illinois into Ohio. And we have two properties in Ohio that have fallen both under pace financing and as well as the opportunity zone. So what we're seeing is that there is great opportunity. We just identified another site that we're going to be going after. That is when I say we're going to go after, we're gonna continue our due diligence on it. What we're seeing is that there are great opportunities for the products that we're trying to do within the opportunity zones. People think of it as poor neighborhoods and it's not necessarily the case. It means areas where the local municipality want to encourage development to spur the economy. And the one we have in Toledo and the one we have in Dayton are both in the downtown community within two blocks of the Triple A baseball team.
Scott Krone: And the one in Dayton, I mean there's like 600 apartments and condominiums being developed within a quarter mile of our sites. So that made it incredibly attractive for us. So we were very excited to see the economic worlds that was occurring, especially in the Dayton market. You know, just how strong it was. And it's also developing in the Toledo market, but it was just further along in the Dayton one. But that's what we're seeing there. And you know, they're not rural. We're focusing on secondary markets which have the need for the redevelopment and, and growth.
Jack Heald: Now, does Coda function as the general contractor doing this? These projects, do you hire that out? Do you have a team that you work with?
Scott Krone: Coda Design Build acts as the general. So what we do is obviously we have to have plans stamped by local architects and we have to have someone on site. And so in each of our facilities, we hire someone locally to run our jobs through for us. But then our director of construction and our support staff you know, facilitate all the bidding, all the contract work and making sure that the person who's running the job has all the documentation and backup that they need in order to keep it going.
Jack Heald: Now when we were in Las Vegas, you guys were significantly different from most of the parties that I spoke with at the Las Vegas show, in that you've put together a couple of funds – that didn't make you unusual. What made you unusual is that those funds had actually been deployed. Awful lot of folks out there with funds raising money for funds, but you guys have taken it to the next step. Talk about those a little bit.
Scott Krone: Well, it was on July of 18 that I first learned more fully what the opportunity zones entailed. And that's when I began diving into the research of it. And the first thing I did was plug in all of our properties that were near construction or going to be under construction to see which ones fell underneath that. And our Toledo one met that criteria. And so I immediately called, sent out an email to our investors asking – this is before we bought, we were still in the due diligence process – "this property is in an opportunity zone. If anyone is interested in having the benefits of that, then please let us know because we could set up the fund for you. And then instead of investing directly in the property, you can invest in the fund and then get the benefits of it."
And so we had three people come to the table and say that they really want to utilize that. And so I did deep dive research and when I was beginning to do the research, the information on the tax code was only on two pages. It wasn't even a full two pages.
Jack Heald: Yeah, that was before the first set of guidance came out.
Scott Krone: Exactly. So in order to understand it, to get the sense of are we going to do this properly? I was literally calling the IRS and leaving a message and then someone would call me back and the first time I called back, I didn't recognize the phone number. I was in a meeting and it went to voicemail and then, “This is the IRS we're calling you back regarding opportunity zones. If you would like to call us back, please do so and so” that was it. So I called them back, had to leave another message and then when I saw that number pop up again, I was in another meeting. I'm like, okay, here you go. And you know, I got out of the meeting and answered the call. And I spent a good two-and-a-half, three hours on the phone with this IRS agent just trying to understand the concepts that were being going to be implemented. Because keep in mind while the Senate and the House came up with the tax method or the tax code, it's up to the IRS to interpret that and then apply it.
Jack Heald: Right?
Scott Krone: And so you know what comes first, the chicken or the egg.
And in this case we were waiting for the regs. And so a lot of it was like, OK, this is what is going to be intended and this is how you should consider it and this is what most likely will be done. And so taking that information, then having a conversation with our corporate attorney on this and then having to call the IRS back again to try to work out more details. And ironically I got exact same person a third time, which made it really great because we could begin going off our previous conversations.
We decided to take an ultra-conservative approach to it, that all money going in would be exactly the same time and all money would be deployed at exactly the same time. So that way, from a compliance point of view, we could just make sure that we didn't have a rotating money's going in and out and all those sorts of things.
And so it was, it was a very straightforward, simplistic fund. And so we did that and we closed on our property in Toledo. Then we were hosting our Christmas event and we had a handful of investors come up to us and say, when are you going to open up your second fund? And at that point in time we were not looking for another property.
Jack Heald: You hadn't thought about another fund, huh?
Scott Krone: No. And so they were really pushing us to open up another fund. And so we did. And then we subsequently found the property and then the fund then invested into the property. And so our funds are property-specific and a lot of people felt that you have to raise $100 million or $100 billion or extraordinary amount of money in order to do these things. And you know, when we were talking with Glickman in Las Vegas and he was presenting on it, it's not as complicated as most people tend to think it is. You know, are there nuances, are there things that you have to be aware of? Yes. But ultimately, it's an LLC and you have to treat it accordingly and properly. But it's not as onerous as everyone thinks it is.
Jack Heald: What kind of steps are you taking to track impact in the community? Or are you doing anything at all?
Scott Krone: Well, our impact is we're taking a dark building and with lights off and many cases where there's no power, no heat, nothing. And you know, the one in Dayton, it's been empty for you know, five, 10 years and now we're turning it into a performing asset. So for us it's, pretty easy to manage that. The same one we're doing in Chicago, it's the old Lincoln Logs factory, and it was vacant for five years. And so they couldn't do apartments in both these cases, they couldn't do apartments because of parking. There's not enough ability to provide onsite parking. And you know, in Chicago, the local Alderman was absolutely refusing apartments because they didn't want to. It's already an incredibly dense population. We have over 500,000 people within three miles. And from a self-source perspective, that is like a goldmine.
Jack Heald: Oh, I would guess.
Scott Krone: And so they're like, we don't want any higher level of population density here. We're already very dense. And so, from a parking point of self-storage as the lowest impact than any other use. I mean, for 100,000 square foot facility, if we have indoor parking where people pull into the building, we only need like three or four onsite parking spaces. And so it's a great adaptive use. It gets the lights back on it and instead of an eyesore, becomes a benefit to the community. And so for us it's, an easy thing to monetize or evaluate the impact on the neighborhood.
Jack Heald: I want to know a little bit more about Scott Krone. You're literally the first architecture graduate that I've had on this show. How did you make that move from being an architect into the building, the development, the management. That's a dramatic expansion of both your skills in your work. How'd that happen?
Scott Krone: Well, when I was in high school, I played soccer and I was recruited for soccer in colleges and I was looking at different schools and I took architectural classes in high school. Our high school, we had 4,000 students and were fortunate that I could take multiple years of drawing and drafting and those sorts of things. But I wasn't convinced that I wanted to go to a tech school and then decided it was not for me and then be stuck at “this nerdy school” and you know, not being able to play soccer and do the things that I really also wanted to do in college. So I chose to go to a liberal arts school, Kenyon College in the middle of Ohio. Thought I closed the door and architecture altogether and was going to pursue my liberal arts degree, play soccer and then get a job once I graduated.
I, more than likely, I thought I was going to be in the family business and it was my senior year, parents weekend in the fall. My parents showed up and said, “Well, what are you going to do next year?” And I said, “Well, I figured I'm going to go work for you, being the oldest male.” It was manufacturing, die casting. You know, it's not really an industry in the early 90s that women were going into. And everybody else was either doing something else or didn't live in the Chicago land area where our factory was. And so I felt like there was only a couple people that could have been going into it. It was me and my brother, my brother is five years younger than myself.
Scott Krone: And my dad said, “You're not going to do that.” And I'm like, “Oh my gosh. What did I do?” He goes, “No, you haven't done anything wrong. We're selling the business.” I was fourth generation. I did work there for a period of time. And so I was fourth generation. And, and to hear that you're losing a fourth generation family business it does set you back.
Jack Heald: I can imagine.
Scott Krone: And so, he immediately turns around and says, “Well, what do you think about architecture?” I'm like, “Well, I thought I closed that door.” And he's like, “Well, there are programs where you can get a Masters in Architecture without having it as an undergraduate.” And so I began looking into it that fall and I found..
Jack Heald: So you finished up the BA?
Scott Krone: Yeah, I got my BA. I got my BA in history. I graduated in May and in June I started my master’s degree. So I literally had like 20 days off and immediately went into my postgraduate career. And, because I had done the undergraduate in history, which I also did ECON, poly sci, math, statistics. I mean, I did physics, I did all those sorts of things and being in liberal arts, I was used to reading 1,000 pages a week for my history classes and you know, my poly sci and econ and all that. When I got to architecture school and then my professor, who asked me to be his TA, owned this development company. I was the only student who had a liberal arts background. So not only was I drawing in class, but I could also then do a spreadsheet, work a computer, write and more importantly, read.
And so he threw me on the development side. So all my classmates were drafting for him, but I was the only one on the development side.
Jack Heald: Okay. So you're a TA at architecture school.
Scott Krone: Yep. And then, during the morning I'm reading loan docs, and PUD, which is a planned urban development proposals and applications. And then in the afternoon I'm in his class drafting it and I go home and do homework for him, which was more drafting. So I was literally working from seven in the morning until about midnight for three years. And then during the summer while we were off, I was working in his office from seven until six or seven at night working. And so I was putting together the whole financial modeling of it. I was reading the condo decks, the loan decks, the contracts, working with buyers in terms of buyer change orders. So I really got more of the back office development side of things rather than just the architecture.
And not only was I working on the 400-unit condominium development, but then I was running a four-unit development with one guy on site, one project architect and myself. So the three of us were running that project by ourselves and that was a $25 million project. And then I had got put on some condo conversions and renovated his house at the same point in time during this six-year period of time. So I was working in everything from his own single family home to a forty-unit development to a 400- unit development, all aspects of it. And so it was a baptism by fire, just getting dumped into it and trying to figure it out. And one of my favorite stories is when he asked me to create a financial model for all 400 units that were going to be proposed being developed.
Jack Heald: But you really got the from the dirt up experience of design and build, you saw it all.
Scott Krone: Absolutely. It was a great six years. It was incredibly hard. I mean, after I went from part- time to full-time, he mandated that everybody work 80 hour weeks for the next two months in order to meet the deadline for the PUD submission. And it was that during that summer that I was supposed to get married too. So imagine getting ready for a wedding trying to make sure that you have a girlfriend to make it to the wedding. Working 80 hours, I think I was making $1.25 an hour.
Jack Heald: Okay. Let's get back to Coda Management Group as we finish it up for the day. You do both design, you do design, you build, you do management. That tells me that you kind of sit right in the middle of the entire process in terms of Opportunity Zone businesses work. Clearly, you put together funds to fund these projects. Are you also in a place where people bring you properties to look at?
Scott Krone: Well, absolutely. I mean, we were regularly getting them. The hard part is, is just winnowing out very quickly how many different properties we get. Interestingly enough, a lot of people will send us – I probably get about 10 solicitations for apartment buildings on a daily basis. And we've sold our entire apartment portfolio. So we don't own any apartments at this point in time. But you know, we'll go through things fairly quickly, but our director of sales and acquisition really handles that side of things. And then once he whittles it down or comes up with two or three good properties, then that's when I'll begin diving into it. So he knows our criteria. But if it doesn't meet our square footage requirement or you know, it doesn't have to have the zoning, but if it does have the zoning that's a bonus. Does it fall in an OZ zone? What are the basic demographics around there? Those are the basic things that he whittles out.
Scott Krone: And then when things begin to look promising, that's when I'll jump in and that's how what we're doing right now for the next property that we've identified.
Jack Heald: Got one more question. You're setting up qualified opportunity funds, is that correct?
Scott Krone: We do have two of them, yes.
Jack Heald: Okay. You've got two. Is that something you plan to continue doing?
Scott Krone: Yeah, I mean obviously it helps our investors. So what we're doing is looking for any ways that we can accelerate, enhance, put it on steroids, if you will. Any sort of way in which we can make our investors' investments stronger, we will do that. And so as long as people are telling us that they have money that they want to shelter, then we will create that fund for them. And that's what we did.
Scott Krone: I mean, unlike other people that are running a fund for their business, our funds for our investors. And so we're not making money off the funds. We're making money off the projects. And so if we can do that to enhance our investors, then that's what we're doing. And I think that's another thing that makes us different or unique because we're not, we're not creating a fund and then trying to find properties. We find properties and if they're in the fund, in the zone, then we create the fund. And so we're not under the pressure of having to place money into businesses because of the fact that when we find a location that works, then we create the fund.
Jack Heald: I think that's a very significant difference. I can't believe we're 30 minutes into the conversation before I finally figured that out. That's a huge difference. You're not making money on the fund. You're making money on the project, I would think that would make you a very attractive partner.
Well, Scott, I think we've reached the point where it's time to say, you got anything else you want to leave us with before we shut it down for the day? Any last words?
Scott Krone: Well I really appreciate our time and I enjoyed our conversation. And if people would like to learn more about us in our web pages, www.codamg.com.
Jack Heald: Codamg.com. And I will remind our listeners that this information is also going to be printed on the podcast website so you can pick it up. Well Scott, I too have had a good time.
Jack Heald: I am Jack Heald for the OZExpo podcast. On behalf of Scott Krone of Coda Management Group, thanks for joining us today. Be sure to press that subscribe button on the podcast so you're notified every time we've got a new episode released; that's happening all the time.
Jack Heald: And we will talk to you next time.
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