In part two of our interview with Glenn Kukla, CEO of Kukla Capital Partners, Glenn answers audience questions about pivoting his business during the 2008 recession, the most creative ways he’s found deals, and his ultimate strategy for networking.
Listen to part one of this series here: JF2729: 2 Effective Ways to Work with Lenders During a Recession ft. Glenn Kukla
Glenn Kukla | Real Estate Background
- CEO of Kukla Capital Partners, a real estate development company and investment fund.
- Portfolio: $4M in net value. Over $50M in real estate projects he has developed and/or financed.
- Grown and privately held his investment fund over 40% annually since 2009.
- Based in: Cincinnati, OH
- Say hi to him at: LinkedIn
Click here to know more about our sponsors:
.png?width=300&name=Deal-Maker-Mentoring-Logo-300x300%20(1).png){kind=logo}
.png?width=300&name=PassiveInvesting.com-1-300x167%20(1).png)
.png?width=300&name=Screen_Shot_2016-09-16_at_12.52.43_PM-300x97%20(1).png)
TRANSCRIPTION
Slocomb Reed: Best Ever listeners, welcome back to Cincinnati’s Best Ever Real Estate Investor Mastermind. We are here for part two with Glenn Kukla. This is a Skillset Saturday. We’re going to talk about the skills that helped him in his commercial development business to get through the Great Recession. We’ll also have some Q&A for those people who are here, attending the meetup live, in this episode as well. Glenn, let’s dive right in.
All the Best Ever listeners just heard you discuss your career on the whole, with some of the highlights and probably low lights of the Great Recession. We talked about the clear skill that you have developed in building relationships with key partners and critical people, that have not only brought you deals, both buyers and sellers for your deals, but also helped you get through some of the properties during the Great Recession that went cashflow-negative when you weren’t able to make your mortgage payments. Tell us more about how you went about building relationships with commercial lenders for those development deals, ’04, ’05, ’06, that brought two-thirds of them to want to keep working with you when they weren’t getting their payments.
Glenn Kukla: Sure. There’s the old saying that there’s only one thing in this life that you have complete control over, and that’s your integrity. I believe if you conduct yourself in a manner of integrity, early on in the process, middle of the process, later in the process, eventually you will catch up and pay dividends. I feel that when we were putting together these real estate deals and requesting money from these different lenders, it was building on our portfolio of previous properties and showing that we were doing good work, we were being honest, we were being good partners in the community, developing good real estate that was good for the community, bringing in good tenants – that helped build the character of our company and that’s what allowed lenders to keep coming back and giving us money. That’s also what allowed us to get a lot better cooperation when we did have to default on some mortgages. So it’s that transparency when you talk to those people.
Slocomb Reed: What else were you doing to demonstrate that integrity to potential lenders for your deals? Is it really just transparency, open your books, show them everything? Is that the secret, or were there other things that were required of you to build these relationships?
Glenn Kukla: Networking is a big part of it. Before I was a real estate developer, I was actually a commercial loan officer with Cincinnati Development Fund. They’re still around to this day, they’re a great private nonprofit lender, based downtown, and they pull money from other lenders to do deals that each lender wouldn’t do individually. These lenders like Fifth Third Bank and PNC pull their money to take on risks they don’t want to individually take. When I worked for that bank, I got to meet a lot of these commercial lenders; so when I went to private development, I already have a relationship with those commercial lenders. So just getting out there, again, just networking… Even if you network by means of having a different career, but that career pivots you into what you ultimately want to do.
A lot of people start out as realtors, which is a great way to network, and they end up becoming very successful landlords. I’ve met some realtors here tonight, and that’s a great way to build that network and prove your integrity to the community. Some of it also, honestly, is just the quality of the work that you do. These lenders have gone through and done construction inspections, and when you borrow money and they want to see the work in progress, they can kind of tell… Cincinnati is a big city, but every community is small, whether it’s the building inspector, the construction inspector, or even just subcontractors, they figure out pretty much right away if you’re a shitbird or if you’re a good guy. And the good guys seem to be the ones that keep getting the good deals, and word gets out. So again, it’s just conducting yourself in a good way and doing good work… But also just being outgoing, and going to things like these meetups, and listening to Slocomb’s podcast every week. I had lunch with Ash Patel about a month ago, and every time I have lunch with him, I feel like I’ve networked with 10,000 people. Just don’t be afraid to open your wallet and buy lunch for people; I’ll buy you a beer, I’ll buy you lunch, I’ll buy you coffee.
Slocomb Reed: Did Ash let you pay for lunch?
Glenn Kukla: No, he didn’t, although he should have, because I offered. But always offer to pay for lunch; just bribe people to go out with you for beers and lunches and having that kind of connection. If you’re an introvert, it’s going to be harder. There are other ways to build wealth and build a portfolio of real estate if you’re an introvert. But if you’re an extrovert, whether you’re naturally an extrovert or you can fake it, it helps; I’m not going to lie.
Slocomb Reed: Yeah. If you’re an introvert, fill the tank at home and then go network. Another piece to integrity that you talked about in our last conversation – I’m paraphrasing you, Glenn, so correct me here… Part of operating with integrity and valuing your relationships is confronting your problems. When you know that you’re not going to be able to come correct in a business relationship, you haven’t shied away from that. You said there were times when you wanted a property to take the keys back, because you didn’t see a future of cash flow. But when you knew that you weren’t going to be able to perform sufficiently for your lenders, to be able to make your payments to your lenders, a part of your success came from approaching those lenders to say, “We’re not going to make it. We still believe that we’re the best person to operate this asset. [unintelligible [00:08:15].17] still in best hands with us, even when we’re not making our payments.”
Glenn Kukla: That’s exactly what we do. We were proactive. The moment that we knew we couldn’t pay the mortgage, we went to them right away and said, “This is why, and here’s all the bookkeeping, here’s the P&L, and the balance sheet.” Not just in real estate, but in life – if you cause a problem, but you’re the first one to say “I own this problem,” you’re going to get a lot more forgiveness from the other side than if you try to run and hide and then they bust you trying to cover up and lie about it. There are times where you time the information that you want to get out. You don’t want to be so transparent that you’re explicit with information that would be better timed if you waited for a day or two or something to change.
I’m not saying that you have to be transparent about everything all the time; sometimes you do need to be discreet. But in terms of problems, the best way to resolve financial problems is to own them, and you immediately get a lot more cooperation out of the other side. The same thing for contracting. If you hire a contractor and the contractor is not doing a good job because it’s something you caused, and you go to them and say “I’m sorry, I caused this.” I feel like you cand get a lot more cooperation from that contractor and they’re going to be a lot more flexible working with you, versus getting into that blame game thing.
Slocomb Reed: You shared previously about a development deal in Newport, Kentucky, which is just across the river from downtown Cincinnati, where the cost to develop a warehouse into 41 apartments and a bunch of retail was like 5 million, and you ended up being able to buy the note on the property for 2.5. Talk us through the steps in that process. The building is developed, partially occupied, not cash-flowing, you had to go back to the bank, Chase Bank, they agreed to let you continue in operation and make partial payments, and then they sold the note for… Take over from there.
Glenn Kukla: We never found out, but I think they sold the note for about 25 cents on the dollar.
Slocomb Reed: Was it a $4 million note?
Glenn Kukla: Well, there were a couple of lenders involved, so I think some of the lenders just wrote off their piece. But everything got bundled, I think, by Chase, and they sold the whole deal to a private capital company called Silver Point out of the East Coast somewhere. We don’t know what they sold it to them for; we’re guessing 20 cents on the dollar or 30 cents on the dollar.
After we defaulted on the loan, but told Chase Bank that we wanted to work through this and we still wanted to manage the property, they said “Yes, you can manage the property. Just send in your P&L, your profit loss statement, and send it in 92% of your cash flow.” They then sold it to the private capital company who basically was our new lender, so we started sending them the mortgage payment.
They actually adjusted the mortgage down, they said, “Okay, now your mortgage is 2.5 million, so your payment is only $8,000 a month, not $12,000.” At that point, rents were going back up and we were like “Great. We can start doing the full monthly payment of $8,000, now that the payment is lower. So we got in their good graces and we communicated with them very well. We were always in contact with them, sharing all of our financials, letting them inspect the property. And then I think it was just kind of luck. After about a year and a half, they said, “Well, if you want to just go ahead and buy the note from us, you can buy the note. It’s 2.5 million bucks.”
Slocomb Reed: How did you finance the purchase of the note?
Glenn Kukla: We went through First Financial Bank, which is a great lender. First Financial Bank is like one of those lenders, I think, that they’re big that they can do big deals, but they’re based in Hamilton, so you’re dealing with local folks. First Financial Bank did the refinance to take out Silver Point Capital.
Slocomb Reed: And what did that debt look like?
Glenn Kukla: That was about 2.5 million bucks, and I think it was like a 20-year amortization; I can’t remember the rate back then, but it was probably 4.5%.
Slocomb Reed: So you got 100% financing to buy off the note?
Glenn Kukla: Yeah, we did get 100% financing, because at that point, the building had then started slowly appreciating back, so maybe it was worth 3.2 million. We got 80% loan to value, it worked out great. I think maybe we put a couple hundred thousand dollars of cash in, and we built up a little bit of money, putting it back in those deals.
Slocomb Reed: Hopefully, all of our Best Ever listeners and all of you here at the Best Ever Mastermind have learned something about the value of building relationships. We are going to take questions. If any of you would like to get up and go to the mic… Anything that’s come from either of our conversations with Glenn that you want to ask about, feel free to go ahead and get up and ask. And feel free, also, if you want to introduce yourself, just your name should do it.
Todd Kelsey: Todd Kelsey, thank you for your time. I appreciate the insight tonight. Slocomb mentioned most of us are here are residential investors. Could you give us some insight on holding costs and expenses when you’re waiting for that unicorn tenant, as you said, for the school or the other property, that you did when you’re developing those?
Glenn Kukla: You have to budget for those, you have to factor that in because you’re going to pay for those costs as you go in. A lot of times you defer those costs because you don’t put money in until the unicorn comes along, and then you build to suit. So for the storefronts that we would develop, we didn’t do a full development, we’d do a white box, which means you’re essentially turning it into a white box. You’re cleaning it out, you’re putting up some basic drywall, painting in white; you’re not installing a furnace, you’re not installing plumbing, maybe you’re bringing plumbing into the building. So you lower your carrying costs. Your carrying cost is as low as possible until you get that unicorn tenant, and then you build it out to what they need. But other than that, you do have to pay; you can’t go to the bank too early in the process and say “I don’t have any money.” You have to wait until they’re on, when you truly don’t have the money.
Slocomb Reed: Glenn, a follow-up question on that. You find an opportunity to buy a unique property that’s going to require a unicorn tenant. How do you determine how much you’re willing to pay for that property upfront?
Glenn Kukla: As little as possible. Really, sometimes it comes down to the deal, but…
Slocomb Reed: You’re the one with the background in finance; do you have a ceiling for this? Do you have a way to calculate how much you’d be willing to pay? I’m not asking for exact dollar amounts, because it’s possible that someone who’s listening would be a seller. But is there a formula? Do you have calculations for figuring out how much you pay for unicorn properties?
Glenn Kukla: Sure. The three approaches to valuation. There are comparable sales, there’s the income approach, and there’s the replacement value. I think generally you would look at either the comparable sales or the income approach, and you say “Okay, if one’s just like this building are selling for 300,000, 300,000, 300,000, maybe I’ll offer them 250,000.”
Break: [00:14:24] – [00:16:20]
Slocomb Reed: Did you have a lot of sales comps for a school building in an economically depressed part of Cincinnati?
Glenn Kukla: Not many. That’s why I offer very little. But if I were to come across a nicer school building…
Slocomb Reed: You actually paid 20,000 times more than the asking price for that property.
Glenn Kukla: I did, it was very foolish.
Slocomb Reed: For anyone who didn’t listen to the first episode…
Glenn Kukla: They offered to sell it for $1 and I countered with 20,000. Why did I do that…?
Slocomb Reed: So when you don’t have sales comps, and you don’t know what the income is going to be, because you’re waiting on a unicorn, the first thought that comes to my head is, if I’m buying this, it needs to be cash that I have sitting in an account that doesn’t require anybody else to trust in me, that doesn’t require me to borrowing any money… It’s just a personal gamble that I’m taking, and I know that I’m going to want to keep it small. But I don’t know how to size that bet. So when you don’t have the income approach, when you don’t have sales comps, are you just going with your gut? Are you just keeping the numbers as low as you can? Is it just about, “Okay, for $20,000, I can have some fun putting this together?” What is it?
Glenn Kukla: Sometimes, for $20,000, “It’s fun, I can put it together, so why not just take a chance?” Other times it is, if you don’t know what it’s worth, but you’ve got a motivated seller – that’s when I like to do the pay now some and pay some later, where I’m going to pay you whatever it is you need now to pay off your bills and keep your wife happy and whatnot, but we’re going to share some of the equity on the upside. We don’t know what that upside is. So I’m sharing some of that unknown with the seller.
In a situation like that, I don’t know how much the commercial building is worth but I know the seller is motivated. I’m going to fight like hell to get you to agree to the “I’m going to pay you some now and we’re going to share profit later.” I think that’s almost the only way you can carve out that deal. If you don’t know what the comparable sales are, you can’t do the income approach, because you don’t have a tenant yet, you really don’t know what the building is worth, but they want to sell it, they want to do something with it, then you do the partnership thing.
Slocomb Reed: Have you ever had a situation like that? I’m imagining some of my own residential-like single-family investment deals… The seller wasn’t willing to just do it on a handshake, so there was some sort of seller carry-back financing. So I like these terms, but I want a lien on the property for X amount. Has that ever come up?
Glenn Kukla: No, it has not. It could come up, and it would, but I usually talk them out of it. I like to be in control, and that’s the key, because the property’s in my name and I’ve paid cash. Sure, if you want to put a seller-held financing on it or something, that’s fine. You can get around — I don’t want to say get around that, but you can say “Well, let’s do an operating agreement.” When I did a deal with Jim Carmichael and [unintelligible [00:18:48], put together an interest in the fund that I used to buy the property. So they’ve got some recourse, they’ve got some sort of way to claw back that money if I’ve screwed them over. So they didn’t have the title of the property or the lien on the property, but they had an interest in the money that I used to buy that property, if that makes sense. That got them comfortable.
Slocomb Reed: That also makes more sense, effectively sharing a portion of the company, selling a portion of the company, or giving a portion of the company that purchased the property. It makes a lot more sense too if what you’re offering is a percentage of the profits from your sale, because their profits would just equal their percentage ownership of the company. So that makes way more sense than my idea. Thank you, Glenn.
Glenn Kukla: You don’t need to be on the side, let’s not worry about that. It’s called the ownership of beneficial interests. It’s a legally binding document that protects that person. And you want to get the other person comfortable. You want to say, “Hey, look, I truly have your back. We’re going to make money together. I’m going to give you a little bit of money now, but let me do my thing, and then we’re all going to have a big pile of money at the end of the rainbow. How we get there, we don’t know. It may take one year, it may take three years, it may take five years, but you’re going to be protected and we can put in writing with the beneficial interest document.”
Part of it is just negotiating and selling like, “Look, trust me. I want to be your buddy. We’re going to make money together.” There’s a little bit of puffing up like, “This can be great if we just all play together nicely.”
Garth: Hi, Glenn.
Glenn Kukla: Hi, Garth.
Garth: Building relationships is important, dealing with city people and the government is a different animal… So give us some advice on how you approach building relationships with mayors and those kinds of people. Because you’ve done a great job in Covington and Newport. And obviously, dealing with those people is a little different. Great job with tonight, by the way.
Glenn Kukla: We can break it down into two buckets, at least. Let’s start off with building inspectors first. I’m sure some of you have had building inspectors you tried to deal with. If anybody can smell bull, it’s a building inspector. And once you get on their radar, you’re never going to get off it. So if you’ve got to do things right, it’s with a building inspector. I hate to say it; we hate building inspectors that make us do things we don’t want to do, and it doesn’t make sense half the time. But my God, if you get on their bad side, it takes forever to get back on their good side. So you’d better just go ahead and do the right thing. I think a lot of people get in trouble with building inspectors because they don’t hire an architect and they should have, or they didn’t get a permit and they should have. I know where the gray area is and I’ve pushed it to the gray area, but I’ve never pushed it so far where it pissed off a building inspector. So make sure you treat those people right.
The other bucket would be elected officials. A great way to network with elected officials is to contribute to their election campaign. It’s not bribery, but you’re giving them money. [laughter] Again, this also gets back to networking. If you want to network with people, go to a fundraiser for a candidate and contribute to their campaign by writing a check when you enter that fundraiser. Meet their people, meet that official; they might get elected, and then you know them. So again, that’s the power networking, but it also comes with writing a check. Our lender was famous for it; if there were nine people running for city council, it didn’t matter what party they were in, they all got $50,000, because he wanted them to pick up the phone when five of them got elected.
Slocomb Reed: How has your networking with politicians been advantageous to your development deals?
Glenn Kukla: It’s not like you’ve got people in your back pocket, it’s just you’re putting your networking out there. Whether you’re networking with politicians or just people you meet at a meetup, it’s just one more layer of getting out there and networking. So I wouldn’t say that networking politicians give you some kind of special favors or any kind of magical powers, it’s just one other layer of people you’re networking with, who are keeping their ears open for deals for you. And if you ever need to call them, you get a call back, because politicians are just like other people. Most politicians don’t make enough money to retire on this. Most politicians, especially local city council people, local city mayors, it’s [unintelligible [00:22:31].00] volunteer.
Slocomb Reed: Does anyone else have a question they’d like to ask?
Participant: Thank you for tonight. Question – how did you stay motivated through that whole downturn of 2008? Can you talk a little about that, and how you just kept going? Because it was, obviously, a rough point for everyone.
Glenn Kukla: Honestly, I had nothing else going on. I mean, I had no other alternatives. Part of it is you get emotionally invested. When you own a house or you renovate a building, and you’ve gone through that creative process, now it’s your baby; you don’t want to let go of your baby. There is kind of an emotional attachment. I would say the emotional attachment kept me going. And also just knowing that if you stick to it, things will work out. I’ve read The Art of The Deal by Donald Trump and he talked about that sometimes you actually do want to go through bankruptcy, because then you can renegotiate better terms. So maybe in the back of my mind I was like, “Okay, somehow this chaos is going to bring some kind of opportunity. As long as I’m in the middle of the chaos and not completely checked out of it.” Part of it is just you have to always be tenacious, you have to practice being tenacious by never giving up.
Darren: Hi, Glenn.
Glenn Kukla: Hi Darren.
Darren: We talked a lot about networking and building relationships, so I was curious about the most creative way you’ve ever actually found or gotten a property.
Glenn Kukla: There are a lot of creative ways I’ve gotten properties. One story I like to share was the guy that would cut my hair told me that a house had burned down in Kenton Hills, which is a beautiful neighborhood right by [unintelligible [00:23:53].23] Woods, great view overlooking the city. This guy burned down his house, nobody can get hold of him, the neighborhood is all mad… So I found out who the owner was, and he was this crazy recluse. I went to his house to knock on his door and make him an offer. It was like Silence of the Lambs. It was like, “Hello?” Actually, he wouldn’t even answer the door, but there were about 300 beer cans in his front yard. He would just drink his Busch Light and chuck it out the window. I looked in his window and he was a hoarder. He had these pathways through the garbage in his house.
I saw the back of his head, he was watching TV. I’m knocking on his door, “You better answer, because I want to make an offer on your house”, and he wouldn’t answer, he wouldn’t answer, he wouldn’t answer. I left. So I bought a 30-case Busch Light, and I hired DHL or CityDash to courier it over. But before I sent it over, I typed up a letter and I put it in a weatherproof sheet protector, because I didn’t know it was going to rain that day. The letter said, “Dear Mr. Corman, I’m interested in your house at 1111 sunset. I would like to make you a generous offer.” I used the word “generous”, because it’s ambiguous enough… Generous in favor of who? I don’t know, but it’s going to be a generous offer.
So I had city dash deliver the 30-case Bush Light, and I think it was around December 20th, because he called me back on December 21st and said, “Glenn Kukla?” I said, “Yeah.” He goes, “This is Robert Corman.” I was like, “Oh, I’ve been trying to get a hold of you.” He goes, “Thanks for the Christmas present. Let’s talk about selling my house.” So that’s how I got his attention. He was literally a recluse that nobody could get hold of him because he didn’t want to talk to anybody. But I found the one thing that got his attention.
Now, he also went dark about a few weeks after that, because again, he just was in and out. So I bought the tax liens on the property, knowing that if he ever tried to sell it to someone else, at least I’d have some kind of way of getting hold of him, at least later on in the process. I really wanted that property.
I also got hold of his brother, and again, this is kind of a relationship thing. I didn’t know his brother, but I knew he had a brother who was an investment advisor and lived in a nice part of town. I got hold of his brother and said, “Your brother is going to go to jail, because he’s neglecting this property. It’s burning down, it’s got tax liens, it’s got work orders against it. I will buy it from him and make this problem go away. I will take away all his problems and all your family problems if you just tell your brother to sell it to me.” So the sane brother called the insane brother and said, “Sell the property to Glenn.” The insane brother sold it to me. Part of it is just getting to know the people around the seller, befriending them, and saying “Look, I have a solution to your problem.” The solution is money. But it’s also taking away all that pain.
Slocomb Reed: Awesome. Well, thank you, Glenn, and thank you Best Ever listeners for tuning in to our part two with Glenn Kukla at Cincinnati’s Best Ever Real Estate Investor Mastermind. If you liked this episode, please do follow our show and subscribe, leave us a five-star review and share this and part one with someone who you think could gain a lot of value out of learning how Glenn Kukla has built his real estate development empire through building relationships. Thank you and have a Best Ever day.
Website disclaimer
This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.
The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.
No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.
Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.
Oral Disclaimer
The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.
