Scott Rhodes and Jason Coalter discuss development
Friday, June 29, 2018
Whether it's rehabbing an existing building, building new buildings or providing housing options, with each new development there's an entrepreneur taking the lead. In this edition of B Magazine, Rex Rust, Co-president of Rust Communications, talked with local developers Scott Rhodes and Jason Coalter to get their insights on why they do what they do, what keeps them up at night and how municipalities play an important role in fostering development. the following interview has been edited for space and flow.
Both of you were more established in existing operating businesses, Plaza Tire for you Scott and The Printing Company for you Jason, before you became more intentionally active in real estate development. How and why did you get so interested in real estate? What drives you to continue to invest in real estate, particularly in this area of Southeast Missouri?
Scott Rhodes: My father was involved in real estate from the late '70s locally, and it became more a part of our business model. We own the real estate for a large amount of our stores. We continue to build upon it. My wife and I were raised here, went to school here. Our children will be raised here. My brother and sister's families all live here. So it's important to be part of the community by developing and adding developments to the community.
Jason Coalter: When I got out of high school my father had a small insurance and a small printing company. I was going home every day from The Printing Company, which started out on Sprigg Street, and I drove past an old boarded up house. I had taken building trades in high school at the vo-tech and just thought these houses would look cool -- this was in 1998 -- so I thought it would be cool if they were 2000 models.
We started with getting one done, and I moved into it. From that I came to understand the need for quality housing for low-income families. I believed I could make a difference for some other people.
I invested in apartment buildings and additional rental houses. Fulfillment came from taking one of the worst things on the street and making it the nicest. That evolved into some commercial real estate. In several cases it's been when other people needed exit strategies.
There are the different types of development opportunities such as commercial, multi-family, industrial, low income, senior housing, to name a few. Adding the various choices whether to purchase a more established building, rehabilitating a distressed building, or purchasing land to create a whole new development. Have each of you found yourself gravitating towards any particular area of focus?
Coalter: My niche has been, go down and look at any old property downtown, and I can quickly find a way to see it finished and see something in it that would thrive and be vibrant. I wouldn't know the first thing to do with a vacant piece of land.
Rhodes: We prefer commercial property. We have some residential, not much. As far as raw land development vs. existing and rehabbing, they both have many challenges. It just depends on the opportunity that's there.
From a return standpoint is there a particular area that is more solid?
Coalter: I guess what draws me to repurpose or to do something already existing is that we're small and growing; I don't have the sustainability for something to sit unoccupied for a long period of time. That's always a risk. As far as a specific return of investment, this vs. this, it's kind of just where does my intuition and heart take me.
Rhodes: Probably similar to Jason. You look at a project or an opportunity and say, "Yeah, I might be able to do something with that." Redevelop it and get a decent return. There's no guaranteed return. Real estate is probable as risky as anything. Vacant land is even more so.
Do you have tenants lined up before you buy land or a vacant building or do you more often believe that if you build it they will come?
Rhodes: You do a little of both. You don't want to jump off of each project without some kind of idea or tenant base of what can happen there. It depends on the size and scale of the project. Sometimes you run across a development or piece of property and think, "Yeah, that's a good piece."
Coalter: It's probably more intuition and passion for me. Everybody would love to have a guarantee before you go in. That typically doesn't work in my case. If you do what you believe is right, and you do it the way you would want to occupy it, you are going to create some demand and excitement from others who will want to get on board.
What are some of the specific criteria or key drivers that you look for in an opportunity before you pursue it?
Rhodes: You learn in marketing that it's location, location, location. So location is important. Different types of developments or different types of uses dictate location. What kind of value can you add to it? Then price comes into play and development costs.
Coalter: We just learn by failure. You learn what not to do. Whether it's sports or any industry: you practice, you practice, and you learn. If you're choosing the wrong spot out of the gate, the opportunity for success is going to be diminished really quickly.
How do you plan for those risks that are out of your control, like rising interest rates or market developments?
Rhodes: It's like any other business. We've been in an extremely low interest rate environment for 15 years. You know that it's not going to last forever, so you build a pro forma, you shock it -- or attack the interest rate -- and make sure you pick an interest rate that you think is a reasonable rate it can go to, and make sure the project can perform at that level.
What are some other risks?
Rhodes: In the building process there are always budget issues. You better have some contingency money. And different projects have higher risks. Older buildings. Vacant land has a different risk if you carry it for a long time without opportunity for income. Sometimes you get into government requirements that you didn't realize would be out there. You have to acquire different permits that take more design fees and permit fees.
Coalter: For us, we've done a lot of redevelopments of older buildings. With that you can buy a property and start the redevelopment and discover that someone has covered up a failing beam or failing structural support. All of the sudden you realize this project isn't about making money. It's about how much it's going to cost you. You have to anticipate that everything's not going to go right. And also not bite off too much.
How do you balance your relationships with other developers in the area given the competitive nature of tenant acquisition and/or going after the same deals?
Coalter: One thing I think is great about Cape Girardeau and the relationships with the developers that I have, they're ethical stand up people. I've never watched anybody try to steal a deal from anybody else. I've never seen with my friends, other than the nature of being competitive, someone try to manipulate or leverage a deal. I can't build everything, and I don't have the desire to build everything.
Rhodes: Cape's not a large market. We know most of the developers. I'm friends, partners and competitors with some of the same people. Our philosophy has been that anything we're involved in businesswise, we want to be a good competitor. We want to operate at a stand up level. Not try to be malicious or undercut people. There are times when we unknowingly compete for the same deal. We feel we go in when that happens, that we're putting together a respectable deal and may the best man win. There are some deals if we think they may do a better job, we'll just back out.
Looking back on all of the years you have been involved in the development business, what have been some of the hard lessons you have learned?
Coalter: There have been times when I've let my passion get in the way, regardless of what it does to me emotionally or physically. I've made a commitment to do this, and I'm not going to back up and punt, regardless of the outcome. I think it's helped shape how I am today. Certainly that comes with cost, delay and pain. I'm happier than I've ever been. Certainly one of my biggest setbacks, because I wasn't focused on money and just followed my passion, is I didn't understand the strength in building something that I could replicate. It would have been a whole lot easier to build 50 of the same thing.
Rhodes: I don't know if you have enough paper for all the hard lessons we've learned over the years. One thing, you have to be patient. If you get in too big of a hurry you'll make a bad deal. There's a lot of due diligence that takes time. Fortunately, we've not made just a totally disastrous deal. It usually just ends up that if you get into a bad deal, your return keeps getting smaller and smaller. You hope you can manage it where you do at least break even.
And what have been some of your most exciting and personally rewarding projects?
Rhodes: At Kingshighway and Lexington, we worked with the city and created something exciting. People may remember Route W used to snake through there before the stoplight was at Lexington. It was kind of a swamp. They had this island, piece of ground that was swamp. Kingsway kind of dog legged down through there. And I went to the city and said, "You know, I've bought ground on both sides." In exchange for the ground, we rebuilt part of Kingsway Drive, which was relocating a bunch of utilities, and that's where Banterra Centre is now. Plaza Tire's there, and we have a small strip there that's called LaCroix Market. That was really taking a useless piece of ground for the city. We redeveloped Kingsway Drive and straightened that out. I think we have one of the nicer developments in Cape on that corner. It was fun. The city was great to work with on it.
Another one was at William Street and Kingshighway where Plaza Tire had a store. There were some vacant buildings that were dilapidated. Part of our corporate office and warehouse had been there. We were able to locate CVS there and a new tire store. It really changed the landscape of that corner. It was fun, too. The city was eager, at a time when they really wanted to make things happen.
Coalter: Some of my greatest accomplishments would probably be El Sol and Broussard's. They were big to me. A deal with Frank Bean was big to me where it was a deal we did with the Drury family. The deal we did with the Rust family on merging The Printing Company.
What was it about El Sol or Broussards?
Coalter: I think it was the expectation of failure. I heard that a lot. "You can't do that." Or "Another Mexican restaurant is never going to make it." When we did the Broussard's building, when we demoed it, I just remember people walking down and people saying, "That's just going to fall down. There's no way that's ever going to work out." To watch Broussard's come back bigger and stronger, to watch El Sol perform the level that it does, that is rewarding to me.
Considering the components and timeline of a development project, are there any particular types of projects that are more difficult to navigate through the process, at least as it exists here?
Rhodes: The permitting and due diligence, and architectural design approval continues to get more complicated. Nothing gets easier. Codes continue to become more stringent. There's more concern. There's environment concerns, asbestos, lead paint on existing properties. The highway department's traffic concerns are more prelevent than they used to be. And different municipalities are harder to work with. The most frustrating issue is a lot of municipalities are agencies. If it's a city, if it's a highway department, if it's DNR (Department of Natural Resources), they don't know exactly what they want. They can tell you what they do not want. So you're spending money, throwing a dart at the board hoping you give them what they want. Their timeliness on approval or commenting is very frustrating. Things that you have no control over and you cannot predict. If you have a large project going on, you're going through this, you're accruing interest. You're accruing property taxes. You've lost opportunity to get the project done.
Coalter: I was raised to service people, and in all of our businesses we try to do that with a level of excellence. When you go to a drive-thru or a restaurant, how long are you going to wait for a cheeseburger? Respectfully, we should be the customer of our community in whatever municipality we're working in. And I think that that's lost in some places.
If I get slow service at a drive-thru every time I go there, I'm going to stop going. Or I'm going to be mad every time I choose to go there, because I know what's coming. So I think getting back to service and trying to find ways to take care of people. Keep it simple.
I know you both do projects in other municipalities, compare your experience here as compared to other places.
Rhodes: Municipalities, some are better than others. Some have a lot of development going on. They have a more organized system. Cape is very average on being able to understand their expectations and their timeliness on being able to turn things around. As Jason said, when you go somewhere to order a hamburger, you have certain expectations. You do not get that in many cities, as part of government. I think many cities, I don't want to be specific to just Cape, we work in 50 different cities. It's how they have empowered their people. If they have someone in charge that has the ability to make a decision it's much better. Some of these municipalities are agencies that want to run things by committee, and it doesn't work. I relate the direct correlation of how the development services are to their growth. Along with their codes and growth.
Right now the city of Poplar Bluff is exploding. The city is very eager and very welcoming to make things happen. I personally have not done a project there. But our construction company has been involved. Their permitting process is very fast. I've done stuff in the city of Springfield, which over the past 20 years has exploded for numerous reasons. Their development services are very efficient. They have a process. They can give you a timeline.
A city staff needs to have some accountability to make sure you're getting stuff out and reviewed in a timely manner.
I can also tell you that if you go into the city of St. Louis, and some of the municipalities in St. Louis County, it's a nightmare.
If places are harder to develop in, hard equals cost. It just costs more there. Then people are going to back away. If it's local, developers such as Jason and I may not back away because this is home. We want to see things happen for the community. But they forget that if you make things harder and we're paying consultants to represent us, or a zoning attorney, it all adds dollars to the development. People will eventually choose to go somewhere else.
Here is a problem that I think municipalities get caught up in, and that's saying "They're doing it in X community, so we should do it here." I know the City of Cape a few years ago adopted a landscape code. Cape had no landscape code. Which is probably not right. There should be some type of code. But they got pretty aggressive on it.
They first started out wanting 20 percent granting area. So from the business standpoint you say, "If my project today takes an acre of ground, which is 43,000 square feet, and now to do that same project I have to buy 20 percent more ground." If you're paying $10/square foot for ground, that's $430,000. So if I have to add 20 percent to it, that's an additional $86,000 just for ground. Not including the additional costs of landscape, etc. Municipalities don't seem to think about the added costs. And then they turn around and say, "The city of Chesterfield, they require 20 percent." Well, Cape isn't the city of Chesterfield. We don't have the demographics. We don't have $110,000 average household income. We're not a hub for those types of demographics. So when you get your development costs as high as other markets such as Chesterfield, but you don't have the demographics to support it, you're not going to attract the businesses. These businesses take the demographics, the number of people in the market and they figure what they can make. The store's going to do $X. Then they will go back on the other side and say this is how much to build the store here, this is how much the ground is going to cost. Add all that up and (developers will say), "The model doesn't work in Cape, in the market."
How about building codes?
Rhodes: One thing our city did a few years ago was they adopted a new building code that had just come out. I think it was the IBC code, International Building Council. I think every two years they issue a new set of building codes. Cities adopt those. Usually these run maybe four years behind the latest code. So Cape adopted this new code that had just came out. There are always revisions to these codes as they come out, because they find mistakes or they find things that don't make sense. We had a lot of conversation about it. Why not adopt the code that's two years old? I equated adopting a code that came out as like going with the newest version of Microsoft when it first comes out. You know there's going to be issues and there's going to be problems. So back up two years and work out the new code issues and adopt it two years from now.
But the city was determined to adopt the latest code, and there were a lot of issues originally. As the developer, when you're working through those codes and you're paying an architect and civil engineer a couple hundred bucks an hour, and then they come project after project without consistency. And it's just spinning your wheels and wasting your money.
Coalter: I think a lot of that goes back to a disconnect. I've heard multiple times, "Developers are upset because they didn't get their way. They're trying to get around this. They're trying to be self serving." What I think some people forget to think about is how important consistency is. That's where reputations are built.
When we have concerns about items not related to our specific project, such as new code adoption or revisions to this or that, our apprehension, if we have apprehension on certain things, it's not because we're afraid to change. We're willing to change when it makes sense. But every time you add more rules, every time you add more red tape, you add delays and you lose timelines.
If they can't give good, solid advice because maybe this code's new and nobody really knows how to interpret it exactly yet. Or there's a gray area and it's a remodel vs. a new build. All it does is weigh your backpack down and slow down the process. As a citizen of Cape Girardeau, per se, when you have a meeting about sales tax revenues diminishing and at the same time on the other side you're thinking, "We can't get projects approved fast enough for new builds, which would help offset some of that sales tax revenue, why are we not working on how to speed up the process?"
Just think if you could drive up and order your cheeseburger, as long as you did what you needed to do, you were going to get it in 2 minutes. And guess what, if you're order is bigger or let's say the restaurant is busy, "Hey sir, can you please pull up to the front. We're experiencing this. We're going to have it right out to you. Thanks so much for using us. And thanks so much for coming today." It's a great relationship and you go back, even though you had to pull ahead and sit and let the next person go. It's totally fine because you have an understanding and an appreciation of them communicating well.
That's where I think there's a huge disconnect. I don't know if it's interpreted as a power thing, or an entitlement thing, just maybe a control thing. But I certainly don't want to be judged at the end of the day by how I navigate working with municipalities. I want to be judged by, are our buildings well done? Is our community proud of what we've put in place? Are our tenants happy and proud to be in our properties?
You gave the example of the restaurant and how you can go to a different restaurant. But in this you really only have one restaurant. You have to work with the municipality.
Rhodes: Or you choose not to build that with them.
So how do you think our "restaurant" [city] is doing?
Coalter: I read an article this morning that was talking about good leadership. And it says a poor leader tells everybody else what they need to do. Tells everybody else how they need to evolve, that they need to do that and whatever.
A great leader jumps to the front of the line like Rudolph the Reindeer did and leads the team. If municipalities were being Rudolph and saying, "How do we help you accomplish your goals?" If I was a municipality and came to Scott and said, "How can I help you get your project done three weeks earlier?" If that was the mindset, Scott would eat out of my hand. Because if he gets his project done three weeks earlier, his tenants are occupying it three weeks earlier. I say: Service your customer so your developer can service their customer.
I know the city has started to meet regularly with developers. How has that worked?
Rhodes: The city does meet with developers, I don't know if it's every month or every six weeks. I liken it to running a business and you take surveys and you get all these survey cards and you don't do anything with them. There's no reason, other than saying you did the survey, there's no reason to do it. To be effective, you have to take comments back and you have to make changes. And sometimes you have to make changes on changes until you get it right. That's one of those deals that cannot be done by committee.
Here is a simple example. A trash corral over here at the Marriot Courtyard. A trash corral, you've seen in back of properties, they're usually built out of fence or concrete block with gates on them. And you put the trash dumpster in there. There's no air conditioning. There's no plumbing. There's no electric. There's really no structural. There's no life safety. There's not even a roof. It's a very basic structure. But it took us over five weeks to get one approved. It's these kinds of deals that cause constant heartburn among contractors and developers. I don't doubt that the city is busy. But at what point do they need to add more staff? I know they have a budget issue. I know city staff is not rewarded on production, like the private sector is. I know they don't have the budget for overtime. But this kind of delay really hinders development. Until somebody has the ability to make changes, it will continue to get worse.
The other day they voted they were not giving raises to city staff. I think it's a very big misfortune. If you do not reward the people who are pulling the plow, you're going to struggle keeping and maintaining leaders and people who pull the plow.
Coalter: It just goes back to what I deem as some common sense. If you're servicing your customer, you should want your customer's feedback. And if you want your customer's feedback, you should be able to accept and work on the outcome of that feedback. If Cape Girardeau became known as a fast place to get projects built, that would be positive for everyone.
Are you suggesting adding more people? Would this move the needle for the city?
Coalter: Just adding more people doesn't solve anything. We could have 40 more police officers in Cape Girardeau, but if there's no plan and there's no cohesion, they're ineffective. I feel the same way about municipalities.
One thing about Scott and I, we have operating businesses completely unrelated to development, and they are service-based businesses. When we come in and we're engaged in conversations with anybody about our experiences about this or that, we're utilizing all our experience that we've gained from our community, from our retail businesses, our service businesses, our development businesses, our rental businesses. It isn't like, "Here's my developer opinion." We've got to manage our own staff. We've got to understand what makes them tick. We've got to understand how they have to perform for their customer. That is what motivates our comments.
Rhodes: I agree, adding more people is not necessarily the right solution. Adding the right people or empowering the right people is the solution. And having dynamic leadership, that's what makes or breaks an organization. There will always be code issues. There will always be code items that are not applicable to certain projects or that do not make sense. But there has to be somebody who makes that decision and says, "This doesn't make sense on this project, and we're going to variate." But that takes a competent person, who is reasonable and who has the power to make that decision.
Labor costs are going to continue to go up. It's going to become more competitive. And everybody in business that employs people are going to have to deal with it. People are not going to make less. Unemployment is at a near all-time low. You got to do something to attract the right people.
Coalter: That goes back to developing the right culture. If the cheeseburger is taking too long, next time I'm going down the street. With a municipality that's focused on service, I think you would see a lot of progress and a lot more growth.
Let me shift to other development tools. There are TDDs (Transportation Development Districts), CIDs (Community Improvement Districts), TIFs (Tax Increment Financing). What do you think about those types of tools?
Rhodes: A lot of cities have been successful with the TDDs and the CIDs. They all have good and bad, and they all have a place. Finding the right place and the right application for them is the challenge, and for them not to be overused or abused.
Coalter: To spur startup, to spur blighted areas, to get back to the roots of where a lot of these communities started, as long as these tools are utilized in an appropriate manner, and they're implemented where otherwise it would be cost prohibitive, it can make sense. For example, to do a $2 million project on a property that would appraise for $1.5 million. How do you get somebody to take that risk?
Sometimes, it's that last little bit that makes the difference whether a project is viable or not. Ultimately, done right, the community is going to reap the sales tax benefit and the long-term benefit.
Can you give us an example of a process or something someone has done in that process that was especially helpful?
Rhodes: We did a project in St. Peters where we purchased a property that was somewhat blighted. The director of development, her name is Julie Power, went out of her way, I mean really championed the project and helped make it happen. She would be the poster child for a community development person. She didn't do us any favors. When I talk about all these items, I'm not asking for favors. I'm asking people to show us how to get it done. She was able to do that.
What keeps you two up at night? And what gets you up in the morning and ready to go?
Rhodes: I sleep really well, because I have a clear conscience. What keeps me up in the morning? I have two little kids I got to feed. I enjoy what I do. It's a challenge. I get to work with friends. If it's a contractor, or someone in the field, a foreman in the field, or if it's a banker -- kind of loosely refer to bankers as friends, and you can print that -- the challenge of meeting with city staff and hammering out how we're going to make something work. That's fun.
Coalter: I normally sleep really peacefully. When I don't sleep it's normally because there is something new and I'm really on fire for it. I love being a part of something. I love driving by and seeing [our customers'] sign on the building.