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The Tax Loophole Billionaire Developers Use - Scott Yauck · The Hannah Hammond Show

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For those who are maybe looking to get in development or scale
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their development company and get into large deals like this
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that are hundreds of millions of dollars, what advice would you
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give to them? I think I did.
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I probably went too big, but it turned out to be OK.
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But development is always what I wanted to do.
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I don't really know why. I just have an attraction to
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that. Efficiency is important in
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everything you do, right? So real estate development is
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about efficiencies, about numbers.
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It's about, you know, creating positive outcomes.
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The more levels you open, the more you realize there's more
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levels. Welcome back to the Hannah
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Hammond show. I am here with my friend Scott
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Yauch from Milwaukee, WI. Are you?
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You live in Milwaukee, right? Born and raised.
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And you also are on Lake Minocqua and?
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We are, yeah, Northern Wisconsin.
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Great place and not point Stevens, but not Point Stevens,
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Stevens boy And Akon, I just got the pleasure of meeting you last
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night and you have an absolutely incredible story.
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And I was like, you know what? I'm interviewing Mark Shapiro
1:00
today. I need to interview you and you
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need to Share your story with the world.
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So thanks for being on. Turn it around and and and I
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should interview but. No, no, no, no.
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You're like everything that I aspire to be.
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And you know, that's what the show is all about.
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It's just always pushing ourselves to our highest
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potential and helping other people get there as well.
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And that's something that you've done.
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And I just, I learned a little bit about you last night and
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you're not one of these big social media guys that's putting
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everything out. Online social media guy.
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Do you even? Have social media?
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I really don't know. Yeah, but that might all change
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after today. But Chachi BT knew who you were
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and knew a lot about you. So yeah, all good things, but.
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Artificial intelligence, you know, Yeah, it's.
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Not real. I think it's real, but I mean,
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just for the audience. Scott Yauch is one of the
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biggest, if not the biggest commercial developer in
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Wisconsin. He's developed entire city
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blocks. We share a similar background of
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engineering. And then he went to law school
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and, you know, had came from very, very humble beginnings.
2:02
And he's done and in the process of still doing projects and
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he's, it's all funded pretty much everything.
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And you've used a very creative strategy called a.
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Tax in criminal finance. Yep.
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TIF, A TIF tax. Yeah.
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And so it's just really cool. It's fascinating.
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I had never heard of it. And I mean, these projects that
2:25
you're doing are hundreds of millions of dollars and.
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Public private partnerships and kind of, you know, have a vision
2:33
for redeveloping a portion of the city.
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Yeah. So take us through that journey,
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like where I know we don't have a lot of time today, but where,
2:40
where did you come from? What got you into real estate?
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And for those who are maybe looking to get in development or
2:46
scale their development company and get into large deals like
2:49
this that are hundreds of millions of dollars, what advice
2:51
would you give to them? Yeah, I, you know, I probably
2:54
didn't know better, right? So naive.
2:56
And I jumped in some things that you know, to the comments from
2:59
Mark Shapiro earlier today. Go bigger.
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I think I did. I probably went too big, but it
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turned out to be OK. But development is always what I
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want to do. I don't really know why I just
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had an attraction to that. I, I ended up going to
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engineering school again. I, my first, one of my family go
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to college. I'm the first of four oldest of
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four siblings. So first of four siblings to go
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to, to go to college. First of my family go to
3:24
college. And so I didn't know a lot about
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I didn't have a lot of guidance for my parents.
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They were great people. They did everything, just didn't
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have that experience in that background.
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So I ended up going to engineering school, not unlike
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you at all, in fact, industrial engineering.
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So we're all about efficiency and and I think that's served us
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well, particularly within, you know, the business environment,
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right? That engineering background is a
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great skill and efficiency is important in everything we do,
3:49
right? So real estate development is
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about efficiency, it's about numbers, it's about, you know,
3:54
creating positive outcomes. So I think there's a, there's a
3:57
correlation there. I worked in engineering for a
3:59
while and realized I wanted to do something outside of that.
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Ended up going to law school, practice real estate law and
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some corporate law. I left that to buy a
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manufacturing company because I couldn't get into development.
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It really takes, you know, some capital as you know, right.
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It's a, it's a tough road to get started, particularly in
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development because the payoff isn't immediate necessarily,
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especially in a bigger project. So I ended up buying a
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manufacturing company, grew that from about 30 employees to about
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300, sold that in five years and I created some working capital.
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And then that was in 2005, which I took those proceeds and jumped
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into buying about a 60 acre assemblage of various parcels.
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And then 2008 came and I'm like, well, that was a bad idea
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because the banks were financing.
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No, no, no, you asked me out last night too.
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No, we didn't lose it. What did you do?
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Well, I mean, we got stuck. We got stuck and it, it, the
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project extended and we had, we had a contract with one seller
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that I extended 13 times over the course of about four years.
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He was patient. He had an operating company.
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So he was, he wasn't trying to go anywhere.
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And part of his family really didn't want them to sell it.
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It was an RV dealership. This was along an Interstate,
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again about 60 acres. It was a challenging project.
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It had contamination, you know, environmental issues.
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It had wetlands to be mitigated. We had, like I said, industrial
5:20
buildings that had to be demolished and new
5:22
infrastructure. So it was a big project as a
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first undertaking, one that most people would wonder, you know,
5:27
how and why we did. And it was really myself and an
5:30
assistant. And so a big national developer
5:33
came to town and, you know, met with the village and was
5:37
interested in the project. And the village really preferred
5:39
to have them. And I didn't understand why I do
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today, right? They're a billion dollar company
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and based on a Minneapolis that, you know, does a lot of projects
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like this. So they they came along and and
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proposed, you know, a deal that certainly made sense to the
5:53
village, but not to us. And I said no.
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And the village didn't like that.
5:57
The village tried to squeeze us out for a little bit and prolong
5:59
negotiations, but I, you know, kind of hung in there.
6:03
We came back all through the great plan.
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Costco came along and want to be there.
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So they love that. And Costco kicked off really the
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balance of the retail and made the development success.
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So it was a great, I mean, in the end it was a very successful
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development, a lot of challenges, but it also kind of
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put us on the map. So other community started to
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call us and that's where it how it grew.
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It isn't easy how we did it. The tax incremental financing
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piece that we talked about is really became the equity.
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So I didn't raise other equity. I had some equity, you know, I
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had a few $1,000,000 to put into this.
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It's a big deal. And but the village put in
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almost $40 million. You know, it was metered as the
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project progressed, but we knew we had we had that kind of
6:42
component in the project. So it was just keep things
6:45
rolling, keep all the pieces together, you know, deal with 20
6:48
different owners, relocate them and so forth.
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But but we got there. So what gave you the idea to
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assemble? What was it like 60 parcels or
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60? Acres.
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As your very first development project.
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Well, so the manufacturing company I talked about was was
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based here. So this was right kind of in the
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center of that development. So I had, you know, probably 10
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acres site of that 60, but what really kicked it off was another
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parcel adjacent came available and the broker for that
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representing that, you know, that listing approached me and I
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said, well, this makes some sense.
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Again, I wanted to do real estate.
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I had the real estate background.
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This was after law school, so I was looking to do it.
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It just wasn't easy to do. So I assembled, you know, about
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that piece and then started working with the village on a
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master plan, started approaching other land owners in the area
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and kind of went from there. And then how did you learn about
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the tax incremental? Financing go with TIFF we're
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going to call it TIFF TIFF TIF well through law practice really
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was you know I mean there it's a it's a it's an ordinance again I
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it's in most states. It may not be, you know, it may
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or may not be in Arizona, but I hope it is.
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But it's, it's a great tool. It's really one of the only
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tools municipalities have to really finance projects.
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And it's really, it's, it's using the incremental tax,
8:07
property taxes created through the development to, to, to put
8:11
into the project, right? So in a way, it's a tax
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abatement situation, tax refund. So if we create, we take a
8:17
development that has a an existing parcel of land that has
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a value real simple terms right as $1,000,000 evaluation and we
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we through the development raise it to $21 million.
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We created 20 million of increment.
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The taxes in that incremental 20 millionaire used over a term
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typically it's up to 27 years at least in Wisconsin.
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So that 27 years of that additional tax amount can fund
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the project. So it can be monetized and
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financed, you know, through either bonding that the that the
8:47
municipality issue or through a private bond that we might
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issue. And you were able to do that on
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your very first project? We did.
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Yeah, we did. I'm not sure how, right.
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Let me think back some of the stuff I didn't know better,
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right? I mean, I knew enough.
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I knew enough to kind of be dangerous, right.
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So we could be in there and I could, I had some of the
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credibility having been a lawyer at the second largest firm in
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the city. So that that helped.
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But you know, I didn't really have the experience and I
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learned as I went, and I wouldn't change it.
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I went to it differently. So if you're somebody like you
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didn't have development experience, you had real estate
9:18
and law background, of course. But if you're for instance, me,
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I've always wanted to be in development.
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I love development. I know tons of fund managers
9:25
that do development and tons of clients that do development.
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But I'm not a developer. I'm not construct.
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I mean, I own 3 construction companies, but we didn't do
9:34
ground up. We did value add and renovations
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and things like that. Nor is it my expertise.
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So how have you identified and partnered with the right
9:41
operations operators to bring in on these deals?
9:43
You mentioned the city wanted this big developer in in the
9:46
dealer, What not like, I guess what's your advice?
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If you have a vision and you're a visionary and you're looking
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for your integrator operator who has that development experience,
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how do you vet people out and how do you structure projects
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with them to make it a win win and and not, you know, get
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upside down on the dealer? You've got great questions.
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I know the answer to all, you know, it's not easy, right?
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I mean, finding that right blend of personality, right and trust
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and just the ability to to sort of engage and click right is
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important. And I've been fortunate to have
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that in the manufacturing company I had that I met the
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person who became really the integrator and in the term of,
10:26
you know, in terms of kind of the context of the book
10:28
traction, right, visionary integrator.
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And, you know, I met him over the course of a couple hours and
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we made a deal and went through into this manufacturing business
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and we never over five years, we had a partnership agreement,
10:38
never pulled it out, never looked at it.
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And I did my part. He did his part with a great
10:42
success. And that, you know, was just
10:45
luck that that happened to be the case, right?
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I didn't vet him. He happened to be working for
10:49
the company that that I acquired.
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So he was there. He's like a brother to me today.
10:54
I have three sisters. I have no brothers.
10:55
And he's, he's like my brother. I had the same situation in the
10:59
real estate development firm and it was a guy who called me.
11:02
He was looking for a job. He was, he's a CPAI mean it was
11:05
one of the big accounting firms then worked in development with
11:09
a, with a company that ended up going to receivership
11:11
bankruptcy. Nothing that he did.
11:13
It was just kind of what happened in 2008 and he was
11:17
looking, he called me and I didn't call him back.
11:19
He called me again. I'm like, well, he's persistent.
11:20
So I called him, I didn't have any other employees at the time
11:24
and I had an assistant but nobody else, you know, at a more
11:28
executive level. So I hired him on a consulting
11:31
basis for 60 days. I said let's see how things go
11:33
and it was great. He's with us today and you know,
11:36
really first employee and I just promoted him to president of all
11:40
of our commercial real estate platform.
11:42
So you know, it just happened. I'm not sure.
11:45
We recently hired somebody who started 2 days ago in a chief
11:48
administrative role that when I worked through Headhunter to
11:51
find and she's been great. But you know, it's just been
11:55
luck. I think that it's worked out
11:57
that way. But I think if you get out
11:58
there, you and I have talked about this, right?
12:00
If you get out there, you network, I mean you're going to,
12:02
you're going to help 'cause those things to happen.
12:04
I mean, if you sit back and and don't get out there and engage
12:07
and communicate and, you know, network with other people, it's
12:11
less likely to happen. And it's obvious.
12:12
I think that's an obvious statement, but I think that's
12:14
how it works. Yeah, being in a magnet to
12:17
talent and then just being a good person.
12:19
Yeah, good person, right? Treat them right.
12:20
I mean, we, we treat everybody fairly.
12:22
There's, I mean, I think we've got a great reputation.
12:25
Nobody's left, we've fired one person, nobody's ever left our
12:27
company and and we treat them well.
12:30
We, you know, we take trips every year.
12:32
We do a lot of things together. And so I think building that
12:34
environment, being a good person, having a good reputation
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in our business, particular when we deal with municipalities, you
12:39
know, they're, it can be challenges.
12:41
And if things don't go well, whether it's something that we
12:44
did or not, you know, their perception often is that, you
12:47
know, it's our issue, right? So things really get in the
12:49
press because the municipalities, there's a little
12:51
more, there's a little bit more scrutiny when these are tax
12:55
dollars being used, right? So we'll have situations where
12:59
one of the communities that residents filed a lawsuit
13:01
against the village saying they shouldn't be doing, you know, a
13:04
TIF deal with anybody. They just think tax dollars
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shouldn't, you know, flow back into these projects.
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And there is policy discussions you can have and philosophical
13:15
discussions about that. But they filed A lawsuit, right?
13:18
So our name kind of gets associated with it, right?
13:20
It wasn't, they weren't suing us.
13:21
They were suing the municipality.
13:22
But it's a lawsuit that get filed.
13:24
So, you know, you got to watch those things reputationally.
13:27
So that doesn't affect us in other communities.
13:31
And you so your company's called Cobalt Capital or Cobalt
13:35
Partners. Cobalt companies, now we've got
13:37
cobalt CRE and then we've got a kind of cobalt specialty
13:40
businesses which are kind of ancillary.
13:43
I can't call them all part of the built environment.
13:45
So we're into hospitality with some hotels.
13:47
We've got out of home advertising in the form of
13:49
billboards and we've got a property technology company
13:53
that's kind of a launching right now, but Cobalt Companies is
13:56
kind of the overarching. Company OK.
13:58
And you're you've been mostly self funded all these years if
14:01
that's correct. You're just.
14:03
Starting to fund? Now, yeah, we haven't
14:04
syndicated, I mean we, you know, it's, it's a different
14:08
environment when you do that. We've avoided being sort of a
14:10
fee based kind of waterfall type structure developer, right.
14:15
Only because early on I didn't understand those structures, you
14:17
know, so I didn't understand it. I didn't know how they worked
14:19
and again, the way I started, there weren't others involved.
14:22
So I always figured I got to have the, you know, equity to do
14:26
the deal, right? I'm like how these people do
14:28
this equity. So I mean, I just learned as I
14:30
went, right. So we, I was fortunate to, you
14:32
know, through the manufacturing company, I had some money to put
14:34
in, but you can't do that forever, right?
14:36
I mean, as we're doing these deals that are, you know, fifty,
14:39
100 million a $150 million, you need the equity.
14:41
But the municipalities became our partners.
14:44
I mean, the TIF structure can really have that serve as a big
14:47
chunk of the equity. So that helped quite a bit.
14:52
Yeah. I mean, if they're putting in 30
14:53
million and you're putting in three or whatever, like that's
14:56
pretty. Insane.
14:57
Yeah. And that's probably overly
14:58
simplified. They do less of that these days.
15:00
But we've had, we've had, you know, these the first two
15:04
projects, 110 million, maybe 150 million was the first project
15:08
they talked about was kind of the development value, what the
15:11
ultimate development cost was. The second one that really
15:13
followed from that was about 250 million.
15:17
But I mean our total equity investment in those was less
15:20
than $7,000,000 in those two products.
15:22
So 300 million was less than 7,000,000.
15:23
Yeah. But it's tougher to do that
15:26
today than it was then. Yeah.
15:28
So what it What's the most amount of money you've made on a
15:30
development project? On an well, on a project, on an
15:38
overall development. So this thing about a mixed-use
15:41
project like this, right, it's multi years and it's multiple
15:43
buildings. So we bring together 4050 acres
15:46
and we might build 10 or 15 different with that without
15:49
multifamily. We've got medical, we've got
15:52
retail, the restaurants we're opening up this week, a
15:54
Starbucks at Chipotle, not this week, but in the next few few
15:58
months in a Cooper's Hawk restaurant.
16:00
I think we talked about that. All of those together, right?
16:02
Those are all individual parcels, you know, they'll
16:04
individually be deals. We've got no debt of the land
16:08
put in the land is the equity. We build the building and then
16:10
we'll sell those assets. We used to, you know, I used to
16:14
think we should hold everything. We've been fortunate and kind of
16:17
some of the timing in our exits, but I didn't answer your
16:21
question. I mean, a project like that
16:23
might make $50 million over the duration of 10 years, right, on
16:27
an individual project, I mean, we've had some in excess of $20
16:30
million, so and with little equity, right.
16:34
So, but I'm not telling you that he's not telling.
16:35
It happens all the time. It's a lot.
16:37
It's a lot harder right now than it was, but it's it's possible.
16:41
But you're still able to make it happen right now.
16:43
Yeah, just more difficult. Yeah.
16:45
I mean you bridge the gap in theory with TIFF, you know you
16:47
you're bridging the gap to so the municipalities are willing
16:50
to accept the level of internal right of return, right.
16:53
So in a five year, 7 year old we'll look at what the IRS.
16:56
So you know, we'll shoot for 15 to 20%, right?
16:59
They'll, we'll tend to try to get around 17% IRR and we've got
17:03
fees in there and everything else that that's part of the
17:05
deal. So they'll look at our pro
17:07
forma. We got to be open book.
17:08
We show them the numbers, but they're willing to accept that
17:11
level of return. So if, if our project is only
17:13
producing 7 or 8%, they'll fund the gap that gets us up to say
17:17
that 15 to 17% return. I had a call today exactly on
17:20
that topic in, in one of the municipalities working on a
17:24
project with them, there's a, they're rebuilding a transit
17:26
center. It's about a $25 million rebuild
17:28
of kind of their bus station. They went out to RFP.
17:31
We were selected on the project. We're building 250 units on top
17:35
of that, 12 stories above it. And so the numbers are tough to
17:38
make work right now. So we showed them to get to
17:40
where we need to be, we need 5 million up front as part of this
17:43
tiff. And then an ongoing stream of
17:45
payments over about 25 years, which is all from the tax
17:48
revenue generated by this. They're not digging into their
17:50
pockets. They're foregoing receipt of
17:52
those tax returns. But if we don't, if we don't
17:55
develop this, there aren't, there are, there's no taxable
17:58
income right to be received. The theory is this, but for
18:01
concept, right? But for the TIF, this
18:03
development would happen. So meaning, you know, they don't
18:06
there's, there's not a pot of 15,000,000 they're giving to us.
18:09
There is no money, right? There's just the existing taxes,
18:12
which is tax exempt today. So it generates no income.
18:15
It's just a bus terminal. So when we're done, we'll have a
18:18
$60 million building. It'll, it'll pay, you know,
18:21
whatever 1,000,003 in taxes that million three is, is the bulk of
18:26
it's flowing back to us to give us the returns we need until
18:28
such time as we've gotten to those level returns, then it
18:31
reverts back to the tax rolls. Yeah.
18:34
I'm still hung up on the $50 million on one.
18:36
Deal. Well, don't it's not.
18:37
But that's a $250 million deal. And I mean, there's people done
18:40
better and but, but. But you what?
18:43
I said there's people done that for.
18:44
Sure. Oh my God.
18:45
There are. There are, yeah.
18:47
I mean, again, there's always new levels to the game and the
18:51
the more levels you open, the more you realize there's more
18:54
levels and it never ends. Absolutely never ends.
18:57
And we've typically had a single partner on a project.
18:59
So we don't syndicate, but that particular project we had a, we
19:02
had a, a general contracting firm that was really their kind
19:06
of a earth moving grading contract.
19:08
We had a ton of that work to do. I went to college with, with the
19:13
one of the members of that family.
19:15
And so they want to be involved the work.
19:17
They also like to invest in deals.
19:18
They came to us. So they put in 4 million, I put
19:21
in a million spit 5 million. So my million was 50% of the
19:24
deal, which then became, you know, the returns.
19:26
We talked about another deal we're doing right now.
19:31
We've got a partner as a high net worth individual who's a
19:33
great guy, as a mentor, a friend and you know, great partner and
19:37
he's been the bulk of the equity kind of 7525.
19:40
So we've done that, but we don't syndicate and not that we won't
19:44
and we're going to start to look at that.
19:46
We have to and go out and you know raise a fund.
19:48
You and I talked about a fund, we're working on a fund
19:50
specifically within the tax incremental financing space and
19:54
TIF space, because municipalities don't want to go
19:56
out and borrow the money to make available for these projects,
19:59
but they'll turn the revenue over each year as it's received.
20:02
That's a problem for developers because sometimes they need the
20:04
money upfront. So we, there's, there's only one
20:08
or two other funds we're aware of that do this.
20:09
So we're forming on fund to do it and, and really understand
20:13
that space. Well, so if you've got a project
20:16
like this right, where you're going to create 20 million of of
20:18
new development, it's going to generate, you know, whatever
20:21
500,000 a year of tax revenue. And the municipalities, we only
20:24
give you 400 that back every year for 20 years.
20:27
That may help you. But if you can monetize that and
20:29
get 7,000,000 today, that may make a bigger difference,
20:32
reduces your equity requirement, drives your IRR up.
20:35
And so you'd come to us, we'd provide, you know that
20:38
financing. So it's a debt fund is what it
20:40
is. That's amazing.
20:42
I I know I definitely want to dive into to tips and look into
20:46
it. And we're going to talk more
20:47
about that. Yeah, it probably won't be today
20:49
because you're going to get. Caught pretty.
20:50
I know, I know. So I want to talk about, we'll
20:54
keep going as long as we can, but I want to talk about how
20:56
you, you know, these are long projects in five years, 10
20:59
years, What's I don't know, what's your longest?
21:01
Project. Yeah, well, the one I just
21:03
talked about that was the the second of our large projects
21:07
started in 2015 and we're just finishing the last few
21:11
buildings. But the bulk bite within, gosh,
21:14
that was crazy. We bought, we bought 43 parcels
21:19
comprising 48 acres, 35 houses, people living in all of them.
21:23
And this is, I mean, people like, how are you going to do
21:24
this, right? This was, we went from the first
21:26
project they talked about to the second one.
21:29
And the mayor approached me through I was on a board of a
21:34
nonprofit organization with him. He said, would you look at this?
21:36
They had a school that was surplus school that they were no
21:39
longer operating it for the city school district.
21:42
And he said, would you be interested?
21:43
I said we would, but we want to buy this entire neighborhood.
21:45
He said, I'd love that idea, right?
21:46
It was an area that was really sort of not heist and best use.
21:50
The housing stock was aged and it was decent housing.
21:53
But you know, the average price and this was in 2014 was, you
21:56
know, $250,000. So what kind of, you know, just
21:59
a, you know, decent house, but nothing that was, you know, it
22:05
that the stock was aging and it wasn't real well maintained.
22:09
So we bought 35 houses, but that was a that was an interesting
22:13
undertaking. So you just made.
22:14
Cash offers, we made cash offers.
22:16
We said we'll pay all the closing costs.
22:17
There's no brokerage fees. And the way we did it was we
22:21
offered a premium. So we said, you know, we'll give
22:22
you 140% of your fair market value on the tax rolls, right?
22:26
So that was attractive. And the scheme of things, that
22:28
premium totaled, you know, maybe a million and a half dollars.
22:31
So in the scheme of a $200 million project, it's not real
22:35
significant. But we also created this
22:39
incentive so that if everybody came together by date certain
22:42
and agreed to get a 10% premium. So that created peer pressure
22:46
within, you know, the neighborhood.
22:47
Not a bad way, right? But we didn't have to worry that
22:49
somebody tried to be a holdout.