All Forum Posts by: Scott Krone

@Brian Keegan - I agree with @Michael Wagner that knowing and dividing the responsibilities is important. It is also important to define the level of risk each party is taking, and the level of compensation for that amount of risk.  Rather than assuming or guessing what a partner seeks in return for that risk, we begin the conversation with asking questions to understanding expectations to determine if the arrangement is good for both parties before we present a solution.

@Brandon Pace - We do both, develop as well as buy existing.

Like @Anthony Gayden, I too will try to answers your original question @Brandon Pace.  

A few reasons why I have focused on commercial, specifically self storage over SF and MF.  I have worked on SF, MF, condos, townhome, etc.  Commercial within self storage is:

1.  More predictable. We can model out performance closer to actual versus sf, and mf.

2.  Easier to manage, 25%-35% operational expense compared to MF at 50% - 55%.

3.  Greater ability to implement different tax strategies.

4.  Greater barrier to entry for competition.

5.  Greater flexibility in product to meet demand.

6.  Cost basis lower per unit, less risk.

7.  Greater access to financial debt structures.

8.  Bigger market on exit sales.

9.  We also compared the amount of time we spent on a flip, new construction and self storage.  They were about the same amount of time, and not even close on the profit.  

I am sure there are those who will disagree with 1 or more (even perhaps all of them), but these are the reasons we have directed our focus on investment away from SF.

@Michael Patti.  The answer to your first question is yes, we have.  The answers to your other questions are as follows:

1.  You are on the right track in your analysis.  That being said, there are other factors to consider:

     a.  Market demographics - how much competition is in the market place, what is the supply and demand.

     b.  Zoning

     c.  How big is the building

     d.  Construction type of the building

     e.  Access to the building

     f.  Existing condition of the building

     g.  Height of the building

These will all factor into the cost of the conversion.        

"How do you go about finding construction financing".  First step is determining the viability of your concept.  The second step is assembling a team to work with you - mortgage broker, architect, GC, attorney, etc.  These types of transactions are not done by individuals, they are done by teams.

Feel free to reach out with questions.

@Janine Iweka.  It is possible.  We have established OZ Funds for the purchase of various properties.  That being said, there are some requirements that must be met.

1.  You just can't purchase a building with OZ Funds.  You must also perform "substantial improvements."  It was determined that "substantial" means 50% of the value of the acquisition.  So, if you buy the MF for $2.0m you must make $1.0m of improvements to the building.

2. You must also have an OZ Fund for your partner's capital gain investment. The fund would then invest in the LLC which acquires the property. If you contribute equity which matches their investment, that is works as well. It is possible to establish an OZ Fund, but your equity partner can't do it. That is a prohibited transaction. They can not be a manager of the LLC which purchases the property for the same reason.

Feel free to reach out to discuss further.

@Brian Garrett We are in 4 states in the Midwest, and expect to be in a 5 state shortly. I have sold my MF. Yes, I sold them because I felt the market was near, if not, already at the top for MF. I have learned in 30 years and multiple recessions you can not control the market, but can control how you respond to the market. A significant amount of my time is studying what is happening in the market place and the economic drives in the market. MF was spurred due to lending. Post crash every lender turned their focus to MF. Thus, creating a surge of demand, and resulting in CAP compression. Same was true for SF prior to the crash. We pivoted into self storage due to a few factors - 1. less competition and 2. understanding the underlying market forces.

That being said, I am a developer.  As a developer, I previously mentioned in this post why I like self storage.  Do I think it will last forever, no.  Every market has its peaks and valleys.  The constant challenge is trying to understand where on that journey we are!  Self storage has mostly been the outlier in real estate investing, as it typically does not involve glorious buildings.  What is new is it is beginning to attractive conventional lenders on a broader scale.  New lenders are coming into the market place versus those who specialized in self storage.

@Justin Goodin  Based upon my real estate background, we were hired to help find and assess distressed self storage, which proved to be difficult.  Instead, an option to develop one presented itself.  We were retained to handle the entitlements, design and construction.  I applied what we knew (MF) to self storage - as in my mind it was a simplified version of condos or apartments.  I studied all the models, and the structure to learn it as thoroughly as possible.

@Justin Goodin  I began in MF 30 years ago.  We sold our last MF in 2018.  I like self storage for many reasons:  1.  Recessionary Resistant 2.  Lower cost basis compared to MF  3.  Operationally 35% compared to 55% for MF.  4.  MF without toilets.  5.  Predictability and modeling compared to MF.  and last 6.  More flexibility with product type compared to MF.

@Brian Garrett   - Absolutely.  Hard to do business in new markets without partners.  We utilized existing relationships to build the partnerships.

@Brian Garrett I applaud you for being diligent and aware of the local market conditions.  The indicators you are noting show the market is either at the top of the market or already past the top of the market.  When we faced those conditions, we sought ways to use our knowledge in other areas of the market that were underserved.  Fighting the market tends to lead to overpaying, over extending, and losses.

We have made a few significant transitions in response to the market to reduce our exposure.  One was changing our strategy, and the other was changing the asset type.  Nevertheless, we apply our experience into the new asset class.  We went from MF to self storage, and then changed markets in order to maintain our goals and objectives.  Both changes required taking a hard look at our systems to insure we could expand beyond our markets.  Without solid systems in place, we could not have made the transition in asset class or outside of our market.