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Global Investors Podcast
GI77: Converting Distressed Properties into Self-Storage Complexes with Scott Krone
December 9, 2020
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Scott Krone is a Chicago Native and managing partner of Coda Management Group which focuses on purchasing, converting, and managing self-storage complexes. He has been involved in 47 syndications, over 400,000 sq. ft of self-storage space and his firm manages nearly 3,000 storage units.

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Announcer:
Welcome to the Global Investors Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host, Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now here’s your host, Charles Carillo.

Charles:
Welcome to another episode of the Global Investors Podcast. I’m your host Charles Carillo. Today we have Scott Krone. Scott is a Chicago Native and managing partner of Coda Management Group which focuses on purchasing, converting and managing self-storage complexes. He has been involved in 47 syndications, over 400,000 sq. Ft of self-storage space and his firm manages nearly 3,000 storage units. So thank you so much for being on the show. Scott,

Scott:
Thanks for having me. I appreciate it.

Charles:
So can you give us a little background on yourself, both personally and professionally and before getting involved in real estate investing?

Scott:
Oh, well it’s boring part of my life before I was involved in real estate investing and I was just a college kid and I, you know, I began real estate investing when I was getting my master’s degree in architecture. So I was fortunate enough to work for my professor who owned a real estate development company that did it architecture and design and bill. And so my master’s thesis was a project that he was working on. So prior to that, I was just a college kid looking at fun in college, play college soccer and, you know, and then converted that to playing football. But you know, I really started off early on in terms of my real estate investing career.

Charles:
So why did you choose real estate as an investment vehicle?

Scott:
Well, I was interested in architecture and that’s where I began pursuing my master’s in architecture. And, you know, quickly during that education process, I learned that it wasn’t development where you actually have control not only of the project, but also the row, the architecture. And so often, you know, a developer will just strictly dictate the architecture and not give, and you’re the architect is dependent upon the developer. So, you know, I, through the education and working with my professor, I learned the benefit of being both the developer and the architect. And so that’s, that’s how I that’s how I moved into real estate investing.

Charles:
Oh, that’s great. Now self storage is a very interesting asset class and there’s a lot of buzz now or around like multifamily investing, which has been over the last several years. Why self storage instead of residential multifamily investing? Like what are the advantages that you find with it? And I imagine you’ve done both.

Scott:
Yeah. My career began in the multifamily arena. So the, my master’s thesis was a 400 unit mixed use development. And I was also in charge of converting apartments into condos and also running different apartment buildings and I’ve, I’ve owned apartment buildings. And so the, my whole background is on the residential side. But, you know, in the, when you say that this last few years, that multi-family has been popular, it’s really been since the crash away, Oh nine, where, you know, that was the only vehicle that banks were lending on was a multifamily. And so we saw such great cap compression at that point in time, it became incredibly competitive. And I had a client that wanted me to find them a distressed self storage during that period of time. And I couldn’t find it. And that’s when I began researching and investigating self storage. And, I told them that, you know, development is always the way in which to make substantial amount of money in real estate. You can buy distressed assets that you can make them improve them. You can make them well, you can get good performing assets out of it, but to generate real income or wealth is through development. And that’s how I began getting involved with it because we, we were gonna acquire a building for a tenant, a client, and he was going to be on the building and be the tenant and we couldn’t get the zoning for it. And so I reached out to my, my real estate class client and said, Hey, would this building might be perfect for self-storage if you’re going to convert it, come take a look at it. And he brought through his team and they assessed it and said, yeah, this is a perfect building for a conversion. We just don’t have anyone to do it. So I, you know, I raised my aunt said we can do it. And that’s how I got involved in self storage. But to answer your question, what do I like about it better? It’s a lot more predictable. It’s a, it’s a number space. It’s demographically based. It’s very predictable model. And on top of that, it’s a fraction of the cost basis. So I can get like 800 units for 10% of the cost. If I were going to have multi-family and my operational expenses are lower. I don’t get the calls in the middle of the night. So it’s, it’s apartments without tenants and without toilets and sinks. And so I don’t have to worry about the same sort of things I do with multi-family.

Charles:
So you have a little bit of a different strategy that I’ve seen from other, a self storage invest syndication firms and your firm purchases, undervalued warehouse space, and converts into self storage facilities. Can you explain your process for identifying, converting and managing those assets?

Scott:
Yeah, it’s just not warehouse spaces. It’s urban buildings. So like our building in Dayton it’s a six story building that was it was a lot of different uses over the period of time, but we, you know, warehouse was one of them, but it’s not your typical warehouse. It’s, it’s, you know, as three elevations that are full of glass windows. So we’re just looking for urban markets in, throughout the Midwest. We think that the South, the East and the West coast are both oversaturated in terms of self storage. And we have reports that show that. And so we’re looking for underserved markets in the Midwest that are in urban markets where we’re looking between 90 and a hundred thousand, 110,000 square feet with growing populations. And then some the things that we also look for is, you know, zoning. We also see if it’s gotten an opportunity zone, if there’s chances for historic tax credits or pace financing. And so those are really our criteria to understand what the market is for these, these different projects.

Charles:
So industrial assets I’ve seen living in Florida are really in high demand now. And you know, months back I was reading that Florida is like kind of balancing you’d man with new development. How do you find deals in this environment where we are now?

Scott:
It’s just not one way we have lots of different ways. So we’re part of a nationwide real estate organization. Like for instance, I just had someone brought me a deal today potentially in Florida that they’re considering doing self storage and analysis, is it is the market, is this location good for that? So we have brokers. We have in our brokers or our date and building, and our Toledo building were off market. They were not even on the market and our broker approached them. So, you know, we have brokers, we have people you know, sending us listings, but most of our listings are not, you know, for self-storage there, they are just industrial buildings or commercial buildings that we’re looking for. So we, you know, we, we can look at LoopNet. We can look at, we tell our brokers to look differently than what most a self-storage investors are looking for.

Charles:
So how difficult is the change, the use of the property to self store?

Scott:
That really depends on like, on the community and what the receptivity of it is. You know, we did want in, in Illinois in a suburb just North of the city and they literally asked us to write the zoning code. So, you know, despite having a master screen architecture I’ve never done urban planning at all. And the here I was being asked to not only come up with the concept, but then not write the underlining zoning for it. So we got it approved in two months. The one we did in river Grove, which was our first one, which we did for that client, we got it approved in two months. Other communities are not as receptive to it. So it’s, if we, you know, if we had to go through the rezoning process in Dayton, we probably would not have gotten the project, but it was zoned as a bright, that’s why we, we look to see if it is zoned as a right. If we have the entitlements or, you know, what is the receptivity we’ve looked at properties and we call up the, the, the plan commission or the zoning administrator and said, Hey, we see that zone, this you know, what, what is the receptivity of this building going to be if it was going to be converted into self storage? And sometimes I say, not a chance in hell or other chance to say, yeah, we’d love it. And so, you know, it’s, it’s really community community.

Charles:
Interesting. Interesting. So how is your financing set? I imagine there’s two stages of financing if you’re holding them for the long-term, how are you financing a distressed asset upfront? And then how does that look? How are you, I guess, how has that, I mean, I guess it differs how, what you’re buying it at, how it’s already zoned, but how is that kind of how are you attracting that financing initially?

Scott:
Each project is different, but generally speaking, what we’re, you know, what we’ve been able to get more recently is the, the lender that we’re closing with is also, you know, construction bridge and all the way through perm. So, you know, we have broken it down between construction and a bridge and then a final perm. You know, if we need to we just refinanced one to an SBA loan. And so, you know, they’re going to take it from bridge to perm. We had a construction loan and SBA came in for the, to the bridge, to the firm, but the one we’re working on right now, the lender is offering us 10 years. And so it’d be through construction and lease up. And then through stabilization,

Charles:
How long does a process usually take for a typical project? Let’s say one of your most recent ones, for example, from the time you’re purchasing it to the time that you’re doing the final, I guess, lease up to your, your storage tenants

Scott:
Our date and one we, we close quickly, you know, we, we the seller only gave us 60 days between the time we went to contract for due diligence and everything. So we closed that one super fast, but once we got, once we got the permit, we’ll have the building converted in nine months.

Charles:
So what is the, when you’re talking due diligence, it’s, I imagine it’s a much different process than when we’re buying something that’s a multifamily asset. What would you be looking at that might differ from purchasing a multifamily apartment complex when you’re looking for distressed asset, whereas warehouse space, whether it’s an old factory space, whatever it might be, what are the things that you’re really looking at to make sure that I imagine environmental is one of them, but is there anything else that you guys are really looking at to make sure that the product B has or does not have before purchasing?

Scott:
Yeah, I mean, we, as part of our due diligence before going to contract, we’ve already done a feasibility report, so that’s the first part of our due diligence. The second part is obviously environmental. You know, if, if a phase one or phase two is necessary, then we’ll certainly go on that route depending on what it is. So then what we’re also looking for is making sure that we have a good understanding of what the local municipality is going to be requiring. We try to go and meet with them beforehand to get a sense of what they’re, what they’re going to be looking for to make sure that we can do that. The one we’re working on right now in, in Louisville, Kentucky, we’re about to close it next month. We, we met with the city, they, they backed us in terms of the, you know, the use. They offered us historic tax credits. It was in an opportunity zone. So we were doing all that due diligence plus in that case, we’re, it’s it’s going to be a combination of flex warehouse space as well. So storage. So a lot of our due diligence was around the existing tenants, understanding what their needs were what we could do to improve their conditions and then renegotiated new leases with them as well. So those are all the different things, but, you know, we make sure if structural would make sure that environmental and it, you know, the building in Dayton didn’t have any power or, you know, our gas or anything like that. So we had to figure out what was going to be involved in bringing those utilities back to the building.

Charles:
Your, your company is managing nearly 3000 units currently. What is your management team and systems look like?

Scott:
Well, first and foremost, we are real estate developers. So we’re, we’re focusing on the acquisition, the construction, the design, and the build of that. Okay. And once we’re done, then we’re turning it over to third-party management, like hue smart to run our facilities. So we’re not trying to wear both hats. We’re not trying to be both developers as well as operators. We understand the operations, but in terms of the marketing and the systems, we rather hire that than do that internally. And so we hire cube smart to run our facilities.

Charles:
And how has COVID affected your business?

Scott:
Well, I it’s, it’s a hard thing to say. Because we’ve kept everything going. We, we were deemed essential. And when I say it’s hard and I understand that there’s a lot of people that have been going through tough times and it’s been incredibly hard and a lot of businesses have closed. Fortunately we’re not one of those. We have been growing. We opened up a facility basically a week or two weeks before governor Pritzker shut down the state of Illinois. And during that time point in time, we’re now at close to 35% occupancy, which is incredibly fast, especially during a COVID era and all the other job sites that we had under construction. We kept open and fortunately not, not one single person at any of our locations came down with COVID and during that period of time.

Charles:
So you work with a lot of, I guess, real estate investors, one way or another throughout the process, whether you’re purchasing a distressed asset from them, or they’re investing or partnering with you, what are common mistakes that you see new and seasoned real estate investors make?

Scott:
Well, I don’t think it’s indicative or is this strictly to self-storage? I think over pain is, is, is a big criteria. You know, you don’t make your profit on the, on the back end. You make it on the front end, which is one of the reasons why we’re going after these assets is because we’re buying them well below replacement costs. So the building that we bought in Dayton and Toledo, where we bought for $11 a square foot, I can’t build buildings that, that low. So to get the, the land and the building for that price is just phenomenal, gives me a competitive advantage right off the bat. So I think that’s one thing is understanding the market and then to making sure that you really build to what the market is and not overbuilding. So I think in terms of residential, I think there’s a lot of times that people overbuild because it’s what they want versus what the market wants. And you know, when we were flipping homes personally, for one way of living it, you know, I would my wife two choices, you know, and be like, what color countertop do you want? Or what, you know, because I didn’t want her getting in, involved in emotionally attached to every house that we were flipping, because it wasn’t going to be our house, the house that we’re in now, which we intentionally built. I gave her every choice because it was like, okay, this is the one we’re going to be in for a long time. So I want you to make those choices. But otherwise I was just doing what, you know, what the Mar the brokers in the market was telling us to do.

Charles:
Scott, what lessons have you learned the hard way throughout your career in both developing and investing?

Scott:
Well, at first, I mean, I’ve had two major mentors in my life. The first one was obviously my professor, and he did things very tight to the vest, very closed, not open to a lot of different people. And I took that mentality into when I started my company and I did that at 28 and I was either incredibly arrogant or stupid or a combination of both, but to start a company when you’re 28 years old is a, you know, it’s a very tough thing. And everyone thought I was 14, so that made it even harder. But the, I came in with that mentality, but later on, I had another mentor who helped me understand the importance of, of, of more of a communal aspect to your business involving a lot of different people. And that’s, what’s helped us expand from not just a Chicago based company, but to a company that’s throughout the Midwest. Now we’re in Wisconsin, Illinois, Ohio, and now we’re going to be in Kentucky. And so I would never have been able to do that if I was not involved, my second mentor who just, you know, demonstrated the importance of, you know, involving a lot of different people and when you’re done.

Charles:
So what do you think are the main factors outside of your mentors to have contributed to your success?

Scott:
Well, my family, the support of my family is a huge part of it. And if if I didn’t have that, then you know, it would be nearly impossible to, to accomplish what we’ve been able to do. So, I mean, cause there’s good times and there’s bad times and they have to be behind you and in both. And you know, there’s, there’s a, long-term play on this. It’s, it’s not a short-term game. It’s not a, a microwaveable investment. And so there’s patients involved and, you know, if you don’t have that patience or that support, then you know, you’re, you’re going to be out of business very quickly.

Charles:
So how can our listeners learn more about you and your business Scott?

Scott:
Well, thanks for asking. There’s two different ways. One is our webpage, which is www Coda, C O D a M G for management group.com. So that’s Coda, M g.com. Or you can email us at info at Coda, M g.com. And in Charles, what I’d like to offer your listeners is if they mentioned, when they’re emailing us, if they mentioned your podcast in you, then we will not only giving them a free physical feasibility report that shows and explains the self storage market and it’s a great resource and tool to understanding what goes into it, but we’ll also sit down and if they have a property that they think, is a deal, we will review that with them and tell them the pros and cons of that. This industry is too small. We’re not looking to steal properties. If they want us to sign a non-disclosure, non-circumvent, we’d be more than happy to do that. But that’s not our goal. Our goal is to, to assist and help people. So we, you know, we’ve had people come to us, Oh, I have the perfect site. And I said, well, give me the address. And there’s like 24 facilities within a mile. And I’m like, are you crazy? This is like way oversaturated. Don’t do it. Don’t do it. Please. Don’t do it. And they’re like, Oh yeah. Now you think about it. Yeah. There are a lot. So

Charles:
One thing on that is of how do you do that? Well, how, give me a little bit, like I heard before, it’s so many square footage per people within a radius. Like, is there a pretty simple way that someone or that you guys can look at something I imagine within 10 minutes and know if it’s going to be good or it’s not,

Scott:
Yeah, it is square foot of lockers per capita within a one, three and five mile radius. Those are, those are the basic metrics. And, and for the most part, the country it’s seven square feet of lockers per capita. And in the highly saturated areas, it goes up to nine, which is like basically the East, West and South. And so we’re always looking to be well below those metrics and the, there are ways in which we do it, but my first litmus test, and this is very sophisticated. So you know, get out your pen and paper and we can figure it, you know, just take very diligent notes. I go into Google maps and I put in the address and it comes up. And as soon as it comes up and I then go to the front of that address and put self storage near space. Okay. And if it comes up and is just like a litany of self storage facilities around it, it’s not even going to, it’s not even worth going after. Cause I already know that it’s way saturate, but if there’s a handful or, and then I look at the market, I see if it’s predominantly like in Google, satellites is good for this. I get an understanding of what the market is, is predominantly single family home, predominantly rural. Is it, you know, as our apartment buildings around the neighborhood, it just gives me a flavor for what’s going on. If it passes that litmus test, then we will take it to the next step. And that’s where we, we have software and tools that we can, you know, we subscribe to that we can put in to get that data and the information on what that square footage per capita is. And so, you know, that’s one of the tools that we’ll give your listeners if they have a property we’ll, we’ll run the report for them and give them that.

Charles:
Yeah. Okay. So Coda, mg.com. Is there anything else Scott, that you’d like to leave?

Scott:
Well, again, I just really appreciate the time and the opportunity to talk with you and thanks for having me on, on the, on the podcast.

Charles:
Well, thank you very much. Have a great rest of your day and look forward to connecting with you in the future.

Scott:
Thank you very much.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.

Announcer:
Thank you for listening to the Global Investors Podcast. If you’d like to show, be sure to subscribe on iTunes or Google play to get new weekly episodes. For more resources and to receive our newsletter, please visit global investor podcast.com and don’t forget to join us next week for another episode.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar incorporated exclusively.

Links and Contact Information Mentioned In The Episode:

About Scott Krone

Mr. Krone is a Chicago native whose career in architecture began in 1991 by pursuing his Masters of Architecture from the Illinois Institute of Technology. While obtaining his degree, he also worked as a Project Manager for Optima, Inc. During his time at Optima, Krone’s responsibilities included such notable projects as the 400-unit Cormandel in Deerfield, IL, the 40-unit HedgeRow in Winnetka, IL, and the 51 unit Optima Center Wilmette in Wilmette, IL.

In 2012, Krone co-founded SSSK Capital Fund – a firm who specializes in managing real estate assets. Since its inception, SSSK manages a wide range of real estate including single and multi-family homes, retail, commercial warehouse and self-storage and multi-use flex athletic spaces. Currently, the platform of investments is in excess of $30 million.

In 2018, SSSK Capital Fund was re-branded to Coda Management Group to complement his design build firm Coda Design + Build.  Krone founded Coda in 1998.  Coda Design + Build is an international award-winning design and build firm which specializes in sustainable building practices.

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