Dan Kroetz, The Commonwealth Companies, Talks Development + Construction Process

Introduction

Adam: This WiLL Cast was with Dan from
Commonwealth Companies. Commonwealth is a construction and development
operation — we see a lot of their work here in Fond du Lac. Dan is based out of
Madison. It was really interesting to get to know the development side of their
business. As a lighting company, we’re pretty far downstream of a lot of the
efforts that developers go through to make projects happen. It was interesting
to learn about their specialty and their angle on the market, and also better
understand some of the projects here in Fond du Lac.

Becca: They’re also on Brook Street.
They’ve been a huge part of the revitalization of Brook Street here in Fond du
Lac. Not only are they located in a historic building that they renovated and
retrofitted, but they’re also working on another former factory — an old casket
factory — helping convert that into apartments. One of the interesting things
we talked about after the WiLL Cast was this misconception of low-income
housing. Dan thinks it’s misnamed. It’s more of a branding issue — it’s
affordable housing.

Becca: When I was looking to live
downtown Milwaukee after Marquette, a lot of what I qualified for was
considered low-income housing, but in fact it was really affordable housing
designed for people just like me — young professionals with student debt, not
making a ton of money. There were a lot of apartments that looked really nice,
newer apartments and historic buildings, that had a rent cap based on your
income level. I think low-income housing has a bad rap, but in fact it’s really
helped bring young families and young professionals and attract talent to
different areas.

Adam: It was cool to learn about their
philosophy on how they get these projects, the tax credits involved. As a
lighting company, we supply a component, not necessarily for this type of
business, but there are always developers, general contractors, and specialty
contractors involved. It’s cool to learn more about the leading edge of a
project and how they are years in the making. Enjoy this one with Dan from
Commonwealth Companies.

Commonwealth’s Business Model

Adam: You guys have an office down in
Middleton?

Dan: On the development side, we’re a
full-service real estate development company. That’s the straw that really
stirs Commonwealth’s drink. The construction team is a related business, along
with our design group. The development team’s focus is primarily originations
of new deals, new projects. I have a team of seven developers scattered around
the country, one of which is here in Wisconsin. We’re in 21 to 25 different
states chasing opportunities to develop multi-family housing, affordable
housing.

Adam: Development and construction —
are those typically separate or part of the same operation?

Dan: It’s very common for a
development company to have a construction arm. It’s also common for developers
to hire third-party GCs. Vertical integration is something we lean on when
we’re meeting with municipalities. We’re a one-stop shop for development, construction,
design, and management. You’re really dealing with Commonwealth through the
whole process. Developers that don’t have that luxury are bringing in other
third-party team members that might not be as on the same page as our guys.

Adam: That was a big component of the
decision we made when we picked a contractor for our new building across the
street. We went with Keller Builders — the whole design-build process, being
able to work with the same team through the whole process, was pretty
appealing.

Brook Street: Historic Rehabs

Dan: One of our niches — Louie’s niche
— has been to develop or save historic buildings. Our office building at 24
South Brook is an example of that. The old casket factory that’s under
construction now is a project we’ve attempted to secure the funding for three,
four years at this point, multiple times over. Finally got it closed earlier
this summer and got it under construction. I was actually in town last week and
toured it, and it looks wildly different from the last time I was in there.

Adam: It’s amazing the amount of
deterioration that went on with that property in a short period of time. Just
in a couple of years, the water that was able to get in, vandalism — it
deteriorated very quickly. Is the building mostly steel and brick?

Dan: It’s a combination. Very large
wood trusses and beams that are being replaced right now — expensive work to
do. But when it’s all said and done, those units are going to be fantastic.
There’s a lot of natural light, big windows in that building. We expect it’s
going to lease up pretty quick. It’ll be a great change for that part of Brook
Street.

Adam: The historic rehabs are
obviously favorites of the development team, because it isn’t the cookie cutter
that some of the new construction tends to be. It allows you to do creative
things.

Dan’s Background: 20 Years in Affordable Housing

Adam: What’s your role, and what does
the sales and development process look like?

Dan: Think of it as originations —
that’s what my guys pride themselves on. They’re scattered around the country.
We go out and try to secure new deals and then secure the funding to get them
done. We call on municipalities, nonprofit partners, housing authorities, and
the like — groups that are interested in the product we bring or have made
known that they would like to see affordable housing in their community.

Adam: What’s a typical deal timeline
from initial opportunity to a signed contract?

Dan: The affordable space is a little
challenging given that the funding sources we chase are different than typical
market-rate apartment development. It’s very cyclical and very competitive. If
you miss a deadline, chances are you’re pushed for another 12 months. It can
run three to five years from concept to completion.

Dan: I’ve been with Commonwealth for
about four years. I’m based in our Madison office. I’ve personally been in the
affordable space for about 20 years in varying roles, dating back to UW–Madison
as an intern with a competing developer. My experience spans a wide variety of
development types — new construction, acquisition rehab, adaptive and historic
reuse, permanent supportive housing, and mixed-income development. Over the
course of 20 years, I’ve been involved with about 75 affordable housing
projects, maybe exceeding that, totaling somewhere in the neighborhood of 6,000
units and maybe a billion dollars of total development cost.

Dan: Commonwealth was founded in 2001
by Louis Lang, who’s local to Fond du Lac. He’s done a lot of great things
here. We just celebrated 20 years last September. They merged with
Madison-based Mirus Partners back in 2018, and that was really a move to strengthen
our capabilities and accelerate our growth. Our tagline is to improve lives and
enhance communities by providing high-quality affordable housing.

Tax Credits: How Affordable Housing Gets Funded

Adam: What does the funding model look
like?

Dan: The tax credits are the primary
source of funding that we apply to the state for — the Wisconsin Housing and
Economic Development Authority, or WHEDA. You utilize those tax credits to
basically be the equity down stroke in your project, which allows you to have a
reduced mortgage amount. Therefore you’re not servicing as much debt, and you
have the ability to charge a lesser rent than you typically would.

Dan: We have an equity investor
partner. There’s a group of investors nationally that have a niche in buying
these tax credits — typically banks or institutional investors. In a typical
market-rate deal, equity runs somewhere in the 25–30% range of your overall
capital stack. In a low-income housing tax credit deal, that gets flipped —
equity is about 70–75% of the deal. Your mortgage amount or debt is much
smaller. Therefore you can charge a lesser rent. That’s the whole premise of
the program. The tax credit program has been in place since 1986 — it’s an IRS
program. A very good example of public-private partnership. It’s got bipartisan
support.

Adam: That doesn’t often happen.

Dan: No, it’s managed to survive
because there’s a good lobbying effort and generally speaking bipartisan
support. Housing is an ongoing concern for both sides.

Supply Chain & Switchgear Headaches

Adam: Getting parts and raw materials
— yeah, it’s been a lot of fun the last two or three years.

Dan: Supply chain has been extremely
difficult. Our latest headache — we’ve got a project just outside of Fargo,
North Dakota, that for all intents and purposes is complete as of October. But
we’ve been unable to get our hands on the switchgear to turn the power on. So
we have a building that’s going to sit vacant, otherwise ready to be leased,
through one of the harshest winters the country has to offer — that will have
to be heated and secured. Our understanding is that switchgear is going to show
up in like March or April.

Adam: I’ve heard switchgear lead times
are still a couple years out in some cases. Have you been able to talk to your
customers on approving alternate parts?

Dan: That’s one thing we’ve done a lot
of. I feel like half of our time the last two years has been spent on
alternates, trying to find components. Our RPMs and our construction team are
constantly looking for alternatives. It’s predominantly run by two very large
suppliers — Eaton, Schneider. In this situation in North Dakota, we’re trying
to find an alternative way to get the meter bank set up so we can turn the
power on sooner than March or April.

Adam: A lot of what’s happened the
last couple years is going to incentivize more alternates, more onshoring, more
vertical integration. Part of the reason we’re putting our building in is to
control more of our manufacturing process. This idea that everything can be
outsourced all the time — I think there’s going to be a wave headed back the
other direction.

Labor Shortage & Subcontractor Availability

Dan: We’ve got a project backlog.
Another problem recently is subcontractor availability. We’re deferring closing
deals to the first part of next year that would have otherwise started this
fall. That’s problematic for a variety of reasons on the funding side. Our
timelines related to our funding sources are definite. In the affordable space,
trying to wait a whole other budget cycle if the contract doesn’t get signed —
there are cliffs related to our financing sources, and you don’t want to
understand what those penalties look like.

Adam: How do you think companies
change the labor shortage trends? For every five people getting out of the
trades, there’s only a couple getting in.

Dan: I wish I had the magic answer.
Our construction guys would tell you they’re scratching their heads in terms of
where these people have gone that have left the trades. You end up paying up
for experience that doesn’t really exist, and as a result you wind up with a
product that’s less desirable. The hope is that some of the other macroeconomic
factors start to come into play that will push construction pricing down and
reduce the demand, and people start to fall back into the trades. But for the
foreseeable future, we’re definitely concerned about it.

Adam: Do you see any automation
happening on job sites to offset the decline?

Dan: Some of our competitors are
putting out stuff that’s built in the factory and shipped to the site —
panelized construction, that type of thing. Honestly, we’re not doing a ton of
that. It’s relatively new, and the stitching process once it’s on site — when
you factor in the logistics of getting it there and putting it together, the
savings in our experience have not really added up. It just doesn’t make a ton
of sense in our eyes at the moment.

Brook Street Lofts: 62 Units

Adam: How many developments do you
guys have on Brook Street?

Dan: Louie’s done a lot of these deals
prior to my involvement at Commonwealth, but there’s a lot of affordable
housing right here in Fond du Lac. Brook Street Lofts is the combination of the
casket factory and then the old cheese factory, Winnebago, right behind it.
There’ll be 52 units in the casket factory and then 10 units in the cheese
factory when it’s all said and done, with adequate green space and parking for
residents. Advocap is going to have space on site to provide services to
residents a few times a week. And then a bunch of amenity space within the
casket factory. Fantastic project when it’s done.

Adam: Joe Moore was on the podcast —
the Fond du Lac city manager — and he was talking about the housing shortage
and how more housing could really accelerate things from a workforce
standpoint.

Dan: Absolutely. We’ve been working
pretty closely with the city. The City of Fond du Lac has been fantastic.
Working with Diane Benson predominantly on the development team at the city —
on that project, but we’ve been approached about other things they’re taking a
look at. We’ll continue to entertain them as long as they make sense and we can
find a way to lease them up.

Wisconsin Lighting Lab Overview

Dan: Tell me a little bit about you
guys.

Adam: Wisconsin Lighting Lab as an
entity was founded in 2017. We more or less brought together a couple small
businesses. One was NAFCO, an aluminum fabrication shop that my dad and grandpa
started back in the ’70s and ’80s. The second was 10/30 Interactive, a web
development business my cousin and I started in college. The third was Light
Poles Plus, an online distribution business buying light poles from my dad’s
shop and packaging them with light fixture companies to sell on the internet.
We were running in different directions for a while, so we said, why don’t we
bring everything together? In 2017 we started Wisconsin Lighting Lab. It
acquired the businesses, and now we’re under one roof. We do a lot of sports
lighting, parking lots, decorative lighting, lighting control systems,
color-changing LEDs on sports applications. It’s a lot of custom projects.
Average age at Wisconsin Lighting Lab is 33 years old, which is pretty young
for manufacturing.

Adam: We only have 2% of our business
in Wisconsin — almost everything is outside the state. We’ve done some in the
Caribbean, the Middle East. We did Bagram Air Force Base before they shut it
down — all of the 2,000 perimeter lights.

Dan: Very well lit.

Adam: Not anymore. Yeah, a lot of them
were taken down. But primarily outside the state. We have a direct channel and
an indirect strategic channel through lighting agencies. We also have a
lumberjack competition every year — the Ledge Games. Last Saturday of September,
next year September 30th. All money made goes to support local technology,
manufacturing, and trades education and causes. We’ve given away close to
$80,000 in scholarships over the years. LedgeGames.com.

Historic vs. New Construction

Adam: You mentioned you guys like to
do a lot of historic renovations and new builds. What’s the breakdown?

Dan: It varies. State to state, each
state gets an allocation of those tax credits from the feds, and they can
determine what their housing priorities are. They give the developers a set of
guidelines — a scoring criteria called a QAP. You’ve got to know that QAP
forwards and backwards and then chase a deal that fits within their priorities.
Wisconsin happened to be a state that gave a preference for historic deals.
They waffled a little bit recently but they’re back to it. Louis picked up on
that. If you were to go on our website, you’ll see renovations of old schools —
we did one in Horicon, just recently completed one in Sparta. In terms of new
construction versus historic or adaptive reuse, it’s probably 80/20 or 90/10.
The majority of what we’re doing is new construction.

Adam: What about sports fields?

Dan: To date, we have not. But if you
ever come across something, let us know.

Adam: Our guys are constantly coming
up with creative things. You never know where we might find a way to work
together. Well, cool. Man, thank you very much for the trip out. We’ll be in
touch. Thanks for all you’re doing in Fond du Lac.

Dan: Yeah, appreciate it.