Episode #093 - Self-Storage Investing and Blockchain Technology With Special Guest Scott Krone!

Today hosts Braden Cheek, Brian Duck, Joel Thompson and special guest Scott Krone discuss a type of asset class The Criterion Fund has always been curious about: self-storage facilities!

What is up everyone and welcome back to how to invest in commercial real estate. And today is a super exciting show. We have a guest on the show. His name is Scott Krohn and he's going to tell you a little bit more about himself here in a moment, but I think they're just right off the bat um speaking briefly with the guests before the show um there's gonna be a couple interesting topics. So self storage is a pretty popular investment vehicle in commercial real estate that a lot of people um start with or maybe start to underwrite with. I would like to think it's maybe a little bit simpler in the underwriting and and the facilitation of it, but we can get into that in a second. Um But anyway, scott, why don't you introduce yourself and tell us a little bit about who you are, what you do and some of the companies um and some of the cool stuff you're doing in real estate. I appreciate it. Thanks for having me. And as I said before, what a great setup you guys have there. That's that, that's absolutely fantastic. So thanks for having me on the show.

Welcome. So um my name is Scott Krohn. I have three different companies, but I began in real estate getting my masters degree in architecture um when I was undergraduate in history. So I made the natural transition from a history major to an architectural master degree. Exactly. And so by my professor, I was his t. A. And he owned a real estate development contracting, an architectural firm and it was in multi family. So my background was, my master's thesis was actually a 400 unit $100 million mixed use development. And then I worked for him while in school for three years and then out of school for three years for him. And so my background really began in multi family, it was running 40 units $25 million projects on uh 7 $17 million project with 51 units as a project manager. Project manager overseeing it on the development side. Um I was interacting with our director of construction on on site, so There was myself, him and then we had a project architect.

So the three of us were basically running these projects plus we were converting apartments into condos and also doing property management. And so that was really my background. And then 1998 I started co to design, build and we were a development design build firm. We began in a single family but quickly moved into multi family as well as institutional, we've done five churches and um we got into some mixed use projects as well. And then the crash came and you know, everyone was being forced into multi family in terms of the rental. We looked at that, we did a little bit of that as well. And then that's when I began exploring self storage and in 2013 we started coding management group to be an investment vehicle for developing self storage. So in 18 I sold off my my apartments and um we began just focusing directly on south storage and right now we have facilities in Milwaukee, Chicago, couple facilities in michigan Toledo Dayton, we're building one in Louisville, and then we're also building in Cleveland and we also have main, so that is our portfolio right now and that's all under one stop self storage.

Very cool. So um tell me a little bit more about the decision to exit out of the multi family and and start this self storage, Were you seeking a different return profile or different risk profile or just thought, you know what, what were you thinking when you initially came up with a great question. So there's a couple of different factors. I mean one of the huge cat compression that was in multi family, right, I mean, we were seeing like three and four caps and just really compression and it was very difficult. Um and on the south storage side, when I began researching and I went back and looked at the four last recessions in self storage actually improved in recessionary markets. And so we developed this whole portfolio for this um coming in recession, we've been predicting this um about a year ago, I spoke at it in Vegas at a conference and was predicting that there would be, we would be going into recessionary market. Of course, all the single family guys were like, no, yeah, we're not going into this recession and I'm like that's that's key number one right there, People don't believe it.

So the, that was one factor. And then to when I looked at self storage, it's a very predictable model based upon demographics. And so you can really study the market and see because the markets three miles and um you know, 3 to 5 miles or 20 minute drive if you're in a more rural or dense population and you can see how much supply there is compared to demand. And if you're below that national average then your products should thrive and you can predict what the rental rates will be and what your expenses can be. So you know what we like to describe it is apartments without toilets. And so it's a, it's just a much simpler model of multi family, I view real estate as how elaborate we make a box, right? So you can add, we've worked on $14 million homes and it's very elaborate and we've worked on $100,000 town homes and now we've worked on, you know, self storage units that go for about $10,000 to build. So it's it's a lot more flexible model than multi family. So coming from your development background, I'm assuming you guys are going in developing these or you guys acquiring them existing as is predominantly developing.

Um We are developers at first and foremost, so we've been buying underperforming commercial buildings and converting them into storage and so we we buy them for well below replacement cost um Like the one in date and we bought for a million dollars was 90,000 square feet and then we spent a couple of million dollars converting it and then we're below market rate in the competition in terms of cost. Um but the ones in michigan, we bought an existing facility there and we're just managing it, we did very little capital improvements. Um The second location in michigan, we're buying an existing facility, we're expanding that plus we're building new on a vacant property. So it's a little bit of both, wow. So what kind of cap rates uh would people find on a self storage today? Well I think it depends on the asset. So when we look at cap rates within self storage, um you know, A B and C. Classes in multi family means really good neighborhood. Okay neighborhood. And you know, all right neighborhood um you know, depending on what level C.

But in self storage, that really means like what what type of self storage it is. And so um you know, depending on, you know a class C. We consider it being like more of like a penny stock would be like first generation self storage managed by mom and pop, you know 100 200 no more than 300 units. Class B would be in a more suburban setting. Um Drive up as well, but it might be climate control. We see that as like a blue chip stock and then classes over call it 400 units and it's fully drive in and fully climate control. And so, you know, prior to the recession cap rates were anywhere from 3-7% depending on which class. And I think right now they're typically about probably about 5-8 depending on which class you are. And so scott what kind of building were you buying that you're repurposing to self storage that I'm curious about that. Well, we've had some fun stories like the one in Chicago was the original Lincoln log factory. And so we converted that one and the one up in Wisconsin and Milwaukee. It was the first fireproof building in Milwaukee.

So we actually got historical tax credits for it, but typically in, in an urban setting, these are um, either uh, warehouses or they were offices that were no longer, you know, used. And so that's where we'll be able to convert them. So on on. You said it's all rolled up into one company or are you guys doing deal by deal syndications on these or do you guys have an open ended fund or are you funding these yourselves or tell me a little bit about how the, how you're funding these deals, I guess our capital stack. So that's a great question. Um, each property is in its own LLC so we don't have a reach in terms of just a pool of money that we're distributing. Everyone is investing in a project by project specific, Um, location. And so we do have equity investors that participate with us. We've done that since 1998, um, when our first, you know, we bought a single family home, tore down and built a new one and flipped it. Um, but within the capital stack, we also have some interesting tools. We've done opportunity zones, we've done historical tax credits, we've done pace financing.

Those are all the different layers that we put into the capital stack in order to maximize the rate of return for our investors. So what does, what does that investment typically look like? How long are they typically signing up for or how long is your whole period? And then what I our our discount rate are you underwriting too when you're pitching them? So when we, when we look at a deal, if its development, we're looking at like 3-5 years. And if it's a, if it's a flip, then we'll look at like three years and if it's construction, you know, ever since I was in developing multi family were to always model that 20% plus for development. And if we look at performing asset and we're just trying to improve it, then it would probably be in the mid teens. Um, Those are what we try to underwrite for. Um, you know, but we're always looking at what's in the market place, you know in terms of a pref or you know what the split is in terms of, you know the distributions and so we model it based upon what we're currently seeing in the marketplace. Yeah, wow. Well um I I have a note here that you guys have an interesting thing about an app with investing on self storage and maybe utilize, can't talk maybe utilizing some sort of Blockchain.

Um With that, that sounds interesting. Tell us a little bit more about that we're actually launching it um probably within the month. Um So for those that are not familiar with Blockchain, Blockchain is a, you know a technology which is a contract. Um that once all the different elements of the contract come together then it disperses it and fulfills the contract. And then the Blockchain is actually the security by which it's you know dispersed across many different servers around the world. Um For security sake. And so the byproduct of the Blockchain is a coin and the coin that we've created is called store S. T. O. R. And it will be a self storage Blockchain in crypto coin. And so the idea of it is that people can invest through the coin so they can take a crypto and put it back in by a tangible hard asset but having the security of the Blockchain and then the byproduct of the coin is that people can either pay their rent or they can get distributions um benefits in terms of long longer term leases and those sorts of things with coin and so the idea is as the portfolio increases in value and the value of the coin will also increase and so were created this investment vehicle but also the black chain in order to help facilitate self storage.

So are you are you pushing the investors from the syndication that are funding the deals? Are you pushing the offering, fundraising through the coin? Or is that a different thing where more of like a consumer or maybe a renter at one of your storage facilities would buy the coin thinking that you know, they can take part of the upside. It would be both. So if someone, if a tenant wanted to use the coin they could certainly do that. So if they had like Bitcoin and they wanted to pay um in store coin they could make the conversion and then pay the rent with that and then have a share of you know an ownership within the overall portfolio of self storage facilities. So I'm part of a mastermind of investors of self storage investors, there's like 30 of us from across the country. So we all have these different facilities that as we're developing and growing and expanding them. You know that's the ideas that we would have this network of store coin operators of which then people from across the country if they were moving from one location to the next.

They would be able to facilitate within the store coin as a consumer on the investment side. If people wanted to be able to invest through crypto they would be able to but it would be limited to those investors, they would still have the traditional capital. Right? So how how are you updating the value I guess on the coin by the physical hard assets. How do you how do you get that in real time? Just said, Well it's a great question. It's it's always hard in terms of real time with anything within real estate until you actually have a sale. Right. I mean that's ultimately the true valuation of it. And so it would be based upon that in terms of how the portfolio is doing so if people then want to reinvest that coin then the fund would grow in. If they want the distribution then the valuation would be upon the sales price and seeing the different differentiation and uh you know how do you is it a set number of coins that you try to sell in the beginning or how do you establish a number of coins in the initial value? There'll be a set initial offering in terms of filling that coin base? Okay that'll be very interesting.

It'll be very interesting. I've thought about that a lot. And obviously one of the big problems with these type of investments, we, we face the same struggle when we're doing these deal ideal syndications is the non liquidity aspect. You're essentially writing a check. You don't have any rights during the process and you don't really have any right to call it back. It's just, you know, when we sell the asset and I decided to give it back to you, we'll give it back to you. So figuring out some sort of real time way to buy and sell that or create a little market there through a coin. I think it's a really cool idea. I've, I've thought of it before. It's just, it's a mountain to climb as I'm sure you're in the middle of it. Yeah, there's, there's certainly a lot of hurdles in terms of, you know, just getting the Blockchain approved. Like why do, why do we need this, Why do we need this coin or this Blockchain is the first one and the criteria. And so we had to really model that out to describe what the purpose of it was. And ultimately, I think all of the real estate is going to be going to the Blockchain technology versus title companies. I think title companies will be utilizing it because it's in essence doing what a title company does, but you know, a much greater, you know, security level than, you know, just being in one location and so I think the underlying for us has always been, this is the model for Blockchain within real estate and that's what we began really focusing on and then the byproduct is the coin.

So it wasn't necessarily the coin that we did it for, it was for the Blockchain technology. I I think you're, I think you're right in the money, we're in Oklahoma, so we're abstracting state. So something like that would save us about a month, literally about a month. But anyway, um I know that one of the biggest reasons we do the podcast, I mean it's a passion project of ours. We're not monetizing this. Um, but one of the biggest reasons we do this is to try to get as many people as possible investing into commercial real estate. I love hearing the different asset classes. Um, we do a lot of retail, we've done a decent amount of multi family. You did value add multi family and it was kind of the same way for us. We and, and more Joel at the time felt like we were getting pushed out of it because we couldn't underwrite aggressive enough cap rates to figure out an exit and we pivoted into retail. It sounds like you pivoted into self storage even though I mean very similar fundamentals. But um anyway, any, any way of investing in commercial real estate is, is better than most other investment alternatives and we just try to get that impress in people's brains is that passive income is truly what we believe to be the key to kind of personal financial freedom and allow you to do whatever you want.

I know that you have a few tips here for um, you know, uh maximizing your life or or your definition of success or freedom. I'd love for you to dive into that a little bit more. Well, I appreciate it. And um there there are tremendous amount of similarities in terms of the commercial real estate and what we've been doing. And you know, I think one of the main differences is that self storage is a retail business as well. So it combines your retail element with your multifamily Because you're dealing with daily consumers, right? So people are coming in off the street and it's it's a transaction of $100 or $150. And so it's very much a retail business and we have to have that Web presence much more present than multi family in terms of people being able to buy online or buying the services. And so you know that's one of the reasons why we started one stop, one stop self storage was because we felt we could see the inefficiencies of third party management and we wanted to bring that in house in order to be more efficient in it. So to me, you know, you were asking about what is the definition of success and you know, people, you know a lot of times will equate it to, you know, winning something or um Or being able to say $1 million $100 million dollars or a billion dollars.

And one of the things that I read early on in my life, that was very interesting is that there's a difference between being rich and being wealthy. You know, rich is someone who makes a lot of money but is spending a lot of money, wealthy is someone who makes a lot of money, but then can live within their means. And so for me, you know, my definition of success is probably different than or should be different than all of yours because we all have different goals, right? We all have different objectives of what we're trying to accomplish, like in this mastermind, one guy said, I want to build my portfolio to a billion dollars. Well, okay then you're sacrificing a lot of different things and people say, well, what about your family? Is like, I don't care about the family, I just want to have a portfolio of a billion dollars. Well, okay, that's his definition excess. That's not my definition of success. My definition of success is in my investing in people along the way and in my improving the quality of life of people along the way, not only their investors, but also their employees and the people that come and work with us, but also our clients, you know, so what we see for self storage is we're helping people out during transition during pain and if we can make that process smoother easier and make it, you know, turn a pain point into an okay point to me that's the definition of success because a lot of times people are dealing with death or divorce or you know, being displaced.

You know, these are all challenges that they're trying to overcome in their life and if we can be a form of stability within that and offering them a good service and that's how we approach our business. Very interesting. I really like to hear your perspective and you're right, we all have a different definition of success. Uh, I don't know, maybe I'll ask you guys, mine was always time freedom when I thought about real estate and making more money. It was only to get more time to quit the day job. And so at some point I have enough money and I just want more time. What about you brian anything come to mind? Yeah, very similar. And a lot of the same things that scott said as far as uh, you know, taking care of your family and um, I feel like you can do a better job of that by having more time that you can spend with them. So very similar. What's definition of success for you? I just don't have to worry about money. I don't mind working. I don't mind doing what needs to be done. It's just, you know, generally speaking to not have to question on whether or not I should either Red Robin or some steak house or some chinese place.

I just don't wanna factor price into into anything. And like I said, I don't mind working in exchange for that. But that was, that was the whole goal is just to not have money. Well scott really appreciate you coming on. Obviously congrats on some of your success. I learned a lot today and but also got my mind thinking more about self storage and hopefully we can come up with some questions and ask you and who knows, maybe we can find property to partner with you in a self storage development deal or something. That would be awesome. That'd be great. And what I'd like to offer your, your listening audience is two things. Um, if they emails and reference at the show will send them a feasibility study which explains why we picked the location that we did and like, and it talks about self storage as an overall market, but what was good about that three mile radius and then also a self storage deal analyzer. So you can, if you have your multi family analyzer then you can put your self storage more than you can see how they to compare. You want to give us an email address for them to send that to sure. That'd be info at koda C o D A M G as in management group dot com.

That's info at koda mg dot com. Yeah, I think I need to get my hands on that too. I would definitely be sure. Yeah. Well anyway, I really appreciate you hopping on today. Like Joel said, we learned a ton about self storage. I've always been interested in it. I've just never known somebody that did it. And I would say that should be the motivating point that we end on today. Right. I knew nothing about self storage. I knew it was in commercial real estate. I know it's probably similar to what I did, but the fact that it's so easy for scott and I to network scott's in Chicago were, were in jinx. Right? We're having this amazing zoom discussing the possibilities of investing in commercial real estate through self storage. If you are interested in something right? Like that's why people are watching our podcast. That's why people are, are talking to scott is because they have knowledge and they're interested in sharing it. There's knowledge and there's people out there that have that knowledge that are more than interested in sharing it with you most of the time for free. Just go out there and ask somebody, hey, uh, you know, anybody who's interested in self storage or do you know anybody who does self storage? You're gonna come up with an answer and then you just ask him a few questions and then boom, you're armed and dangerous man.

Anyway, thanks scott and everyone else we will see you next week on how to invest in commercial real estate.