Providing Educational Opportunities Through Real Estate with Scott Barone | Ep. 106

Providing Educational Opportunities Through Real Estate | StreetBeats Ep. 106

In this episode of StreetBeats, CrowdStreet’s Darren Powderly sits down with Scott Barone, Founder and President of Barone Management, to talk about his firm's focus on the development of charter schools in New York City. Scott talks about how the firm came across the opportunity and the impact these types of projects have on the local community.


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Darren Powderly, Co-Founder & VP Capital Markets
CrowdStreet

Darren founded CrowdStreet in 2012 after identifying the need to radically improve people's access to commercial real estate investments via technology. Over his 20+ year career, Darren has transacted billions of dollars’ worth of commercial real estate investments and enterprise software contracts. Darren is a driven leader who loves building relationships based on mutual success. In addition to building businesses, leading teams and advising a prestigious list of national clients, Darren has personally owned commercial real estate, syndicated investment groups and developed properties from the ground up.

Scott Barone, Founder and President
Barone Management

Scott Barone is the Founder and Principal of Barone Management LLC. Founded in 1999, the company was initially focused on property management and small to medium-sized fee-based construction management projects before expanding into development consulting as well. By 2005, Barone had approximately 400,000 square feet of property under its stewardship, a mix of property management and active construction. However, Mr. Barone’s earliest success arrived via a partnership with The McSam Hotel Group, in which Mr. Barone endeavored to develop a series of hotels in 2009, the first located in Manhattan’s Tribeca neighborhood at 231 Hudson Street, and the second located in downtown Brooklyn within immediate proximity to the Barclays Center at 40 Nevins Street. Both projects proved to be profitable, shifting the firm’s focus solely to developing properties for its own account with an emphasis on long term ownership. Since that time, Mr. Barone has led the strategic vision of the company while overseeing its expansion into various market sectors, including hospitality, commercial, industrial, and community facility from the approach of both ground-up development as well as acquisition and renovation. Most recently, in 2018, Mr. Barone recognized what he believed to be a substantial gap that existed within the educational facilities market and has led his eponymous firm’s foray into the niche charter school sector. Today Mr. Barone manages all aspects of the company’s financial dealings and project design, with a specific focus on creative deal-structuring and management of vital relationships among industry leaders, investors, government officials, and financial institutions.

- Hi everybody, this is Darren Powderly, welcome back to a new edition of StreetBeats. Today my guest is Scott Barone. He's the Founder and President of Urban Management, and he is joining us from the New York City Tri-State Area. Scott, welcome to StreetBeats. Please introduce yourself.

- Thanks for having me. I am Scott Barone, Founder and Principal Barone Management.

- Scott and I, our firms have done business together. Barone management sponsored a charter school. Is our first ever charter school on the CrowdStreet marketplace, and we found it to be very interesting. We didn't exactly know what the demand for charter schools or education-based offerings were going to be within the CrowdStreet community. And of course, a charter school does have an environmental social governance aspect to it or ESG as commonly known. And we were really intrigued by that because we believe in ESG at the type of projects. Hey, Scott with that leading, why don't we take one step, like tell us a little bit about yourself and the firm. And then I know we're gonna get to, you know, education and ESG as the course of the program that goes on.

- Sure. So I founded the company in 1999. We spent the next, I guess, nine years or so building ourselves into a good, but admittedly not great middle market general contractor and construction manager for others. And in 2009, we won a bid to build a residential apartment building in Lower Manhattan for a long-term family ownership that had owned the property for a number of years. And we pulled permits, three weeks later, Lehman Brothers right off the edge, bad time to be a fee-based general contractor, I would say.

- Yeah.

- It was scary. It was, you know, you remember what Lehman was like, the world was falling apart and it was never gonna be construction and development ever again, it was the end of the world. We were able to acquire the property that we were going to build under a 99 year ground lease because the particular ownership just didn't have the appetite or the experience to develop in those circumstances. I saw what felt was an opportunity at the time, probably didn't know any better and was able to put together a quick group of partners, one in particular with substantial hotel experience. And we decided we were gonna go from being general contractors for others to hotel developers for ourselves. And we put shovels in the ground on what would have been a two hotel project that was a block from site from Hudson street to Renwick in the Hudson Square neighborhood of Lower Manhattan, just north of Tribeca. By the time we had finished our first foundation, no financing, even on the horizon was still scary. At times hotel market in New York City started heating up again. Quicker even then, you know, it was taking the rest of, you know, other market sectors to bounce back. Be it residential or commercial office and we were made an offer from a private equity group, out of London, who wanted to take our two hotel project, convert it into one larger hotel and we exited, but didn't exit for lack of a better phrase on very good terms. We sold our interest in the ground lease and entered into a concurrent contract to build their building for them, all as sort of a package deal, and we did phenomenally well. And then from there we got, you know, we went from being lucky to being smart. We had a big bucket of 1031 money that needed to be spent. And we started acquiring stuff, still primarily at that time in the hotel sector, sold precious little of it, and then continued to multiply on that track record, for lack of a better phrase, where it was buy, build, hold and a couple of instances buy, build, hold, sell. But, you know, it's turned out phenomenally in those, you know, I guess 12 years, since that first project on Hudson street. We built ground up somewhere in the, I guess, million to million and a half square feet range, where asset class agnostic. We've touched pretty much everything at this point, hotel, commercial, industrial, retail. And most recently we've got a very big push over the course of the last, I wanna say four years into education space, which is what led us to CrowdStreet. You know, one of our more recent ones, our project in Elmhurst that you mentioned earlier that we funded on CrowdStreet is charter schools. We've been very big into the educational sector. We're now the, to my knowledge, the largest private landlord to charter schools in the City of New York.

- What was it that spurred your interest in the education that's what we did together. And that's something that's super unique, in the investments space today.

- Similar to the deal that led us into a development in the first place that I just spoke about, we fell backwards into it. We were introduced to a property that was for sale off market in downtown Jamaica in Queens. And it was an assemblage, was a former sort of a parochial school campus that was owned by an order of nuns. And we were introduced through a friend and we negotiated a price to purchase the property from them. And one of the buildings that was in existence on the campus was a former, a very large, not very, very large, but large enough, 70,000 foot of beautiful Gothic, architectural masterpiece of a high school. We had been approached a year or two earlier for property that we owned on Queens Boulevard in Regal Park by a nonprofit that develops for charter schools. And we didn't wind up doing the deal candidly because we didn't understand their business model well enough. And we just went a different direction with the property, but it caused me to revisit the idea of saying, Well, you know what, let's get educated on education, for lack of a better term. And we were very thankfully introduced to an attorney who specializes in that sector. Specifically, he represents a huge amount of the charter schools in the city. He gave us basically a narrative of how, you know, development is done in the sector and it wasn't being done very well. So on that first deal, we wound up doing two separate schools in one building, the way the building had been originally built by the sisters of St. Dominic over 100 years ago is they built the school. There was growth and they added an annex to it. So we put an elementary school tenants into what we call the A building, which was the original building and then a charter, a high school for what they call under credited and over-aged kids. So kids that have been challenged with the high school level, they've been kicked out of a high school for a behavioral issue where their grades weren't at a level and they have, you know, social and family challenges at home. They're basically taken these kids that haven't finished high school and getting them through. So that deal went so well that it was just, okay, how can we lather, rinse and repeat on this? And it's a very niche industry. All of these educators, you know, the school leadership teams tend to know one another. It's a very closeted community. I mean, if you think, you know, in all of New York City there are, I think, 200 charter schools. All right now, 200 sounds like a lot, but that's only 200 leadership teams. So, you know, think about it. There were only 200 people in your industry, in your city doing it. You're gonna tend to know all of them.

- What an important niche to be part of. And even though you did have a stroke of luck, not only on your first project ever, you know, but also on the ability to develop an expertise in education and charter schools. But, you know, then everyone has their big break in life. It sounds like you've had a couple,

- A couple.

- Yeah, which is really common, you know, and you're so humble about it, which is very cool. So that's awesome. And so what have you seeing that not only, you know, for yourself and your team, it clearly you're presenting a great value to your community, to community of New York City, public school systems, but what are the investors think of it?

- So, you know, the funny thing is, is that investment, capital investors, is a very new phrase to us. You know, up until 2019, we executed with our own dollars. And what led us to outside investment, which is what led us to CrowdStreet during the initial stages of the lockdown, last year I was trapping the house and reading a lot of articles and trying to figure out where the world was gonna go. And there was an article, I think it was in the Wall Street Journal, but it hadn't picked up by The Real Deal, which I read obsessive. And about, you know, the crowdfunding space and how it works, where it was successful and where it wasn't. And I did a ton of research. Alright, literally inside of, I think three or four days, I don't think I read about anything else. All right. And I said, this feels if we're gonna start growing and handling the way we do outside capital, this feels like the right way to do it. We sort of like the almost grass roots kind of feel of it where you're not going to one guy and asking him for a big check, you're presenting your wares, I guess, you know, to the CrowdStreet platform or investor group and saying, "Hey, listen, this is what we're doing. It's something we're already doing. If you'd like to be part of it. And we think we're offering a good product with a very good return." And in the instance of the schools, as an example, you know, the social impact part of it, you know, which, you know, the CrowdStreet team thought it was gonna work out well, we felt would as well. And it, like you said, it was oversubscribed. It was, you know, it was still sort of during quasi quarantine, we actually did that whole webinar from my home office. And it was like producing a little mini television commercial. It was great. We enjoyed it. We had a lot of fun with it. It worked out great. The response has been phenomenal.

- 2021 is here and, you know, we've reopened and the economy is bouncing back. And, you know, where do you see the opportunities are going forward? It sounds like, you know, continuing your expertise in charters skills, plus self-storage. And you've got some new opportunities, that you're looking at, which we look forward to seeing, but are there other opportunities that you see because of some of the change in the economy, you know, that you're looking for, that you're interested, that investors should also take note in?

- Yeah. I mean, you know, from a macro level, we feel very good about the schools themselves. We feel very robust about the strength of the sector. The demand, you know, the funny thing is Darren, you know, as a result of COVID with all of the shifts, you know, from urban to suburban, and then starting to trend back a little bit, the New York City DOE public schools actually saw a dip in enrollment of about 5%. Charter schools actually saw a spike in enrollment of 11%, you know, and that was really targeted on two separate factors. So factor one is that you had a number of parochial, primarily Catholic high schools, not high school, rather schools, that were permanently shuttered. You know, the archdiocese in New York City have been struggling to keep these things open for an extended period of time. You know, the neighborhoods shifted over time, the demographics within those neighborhoods. And, you know, the fact that, you know, it's a school, you know, a typical parochial school in New York City, not Manhattan, just the Burroughs, which is where we focused on the schools. It ranges anywhere from 4,000 a year to 12,000 a year. All right, in the Bronx and Brooklyn and, you know, Central Queens, that's not the budget for these families anymore, but they were putting their kids there because they wanted, you know, a better educational option than what the public school system was offering them. So it allowed the parochial schools to stay open for a period of time. COVID put a coffin nail in that, unfortunate to say it like but it's reality. I believe that in New York City, in the first, you know, the end of the 20 school year, there were, I think 22 different schools just at the Catholic schools levels in the archdiocese of New York that were permanently closed. Archdiocese were not reopening, that's it, it's over. So, you know, if you look at the segment of parents that had been, you know, paying money to keep their kids in a private school option, because they didn't like something or anything about the DOE system, their only option for school choice became a charter school. Then the other side of it became, as you know, candidly, the DOE did not do a phenomenal job of handling COVID. It was mired in a lot of union politics and a lot of politic, politics. Where certain parents just didn't like what they were seeing. Having their kids in a public school, then struggled to, you know, hustle to try and get them into charter school options that were there. There's not a lot. I mean, all of our schools in our portfolio citywide are over enrolled. There are wait lists that are unimaginable in some instances. So like the deal that we funded on CrowdStreet in Elmhurst is Renaissance Charter School Two. Their sister school the original one Renaissance One is only a mile away from our site. It's actually over a district boundary, into district 30, where the school we're building is in 24. So they have a wait list for Renaissance One for every year. I think they have something about 90 seats in their incoming kindergarten class, 'cause that's how you enroll. So for 90 incoming seats, I believe their current wait list is 3000 kids long. It's startling, but you know, their results are staggeringly better than most of the DOE options that are there in these districts, that school Renaissance, as an example. I believe they're a K through 12 school, which is what we're developing in Elmhurst. Their high school graduation, their graduating class, I believe has like a 95% placement, into four year colleges, which in a socially and economically challenged community in New York City, is staggering. It, you know, really think about it. They have 90 kids graduating, their 12th grade class, 95% of those kids are going on to four year schools.

- That's amazing. Scott. Hey, let me just pry on that one a little bit more. In the beginning of the show, you said that, you know, you kind of fell into the charter schools a little bit, and it wasn't because you had a real passion for, you know, higher education, but have you developed a deeper sort of like connection to it because you've seen some, you know, the outcomes of these kids, you know, kindergardeners or high school graduates. You've seen probably a lot of success stories there. How has that touched you or what have you learned, you know, from that.

- Learned a lot, you know, we've got great relationships, thankfully with all of our school leadership teams. So we've really, we don't look at it as a, and I think I just use the phrase, we, our relationships with our school leadership teams. If you strip it down to its core components, it's a landlord-tenant relationship, but we haven't treated it like that at all, which I think has given us the success that we've had in the industry so quickly, it's been incredibly rewarding. It, you know, from a professional standpoint, and a personal standpoint, probably one of the most rewarding things I've done in my career. I mean, you know, you're having real impact on these kids' lives. You're having real impact on these communities. And working with these teams, we get a far better understanding of what it is that they need to do their job as well as they do it. So, you know, these are people I joke all the time. I have three kids at home. I say, I have a hard enough time managing my three kids, how you can manage 800 or 500 or 1200 kids at one time is beyond my comprehension.

- Yeah, I think it's really admirable what this, this niche, this expertise and charter schools, and, you know, clearly there's a major need for it. You know, we've all read about kids and, you know, the quality of education in the sort of long-term decline in public schools and in certain areas, not in areas, but so to supplemented with the charter school system is awesome. And then we've all, you know, highly aware, especially as parents, you know, what kids are going through during this time of COVID and the lockdown.

- Yep.

- And to be able to, you know, provide them another source of education and different from the parochial schools of, you know, traditional alternatives to public school systems. I think it's great what you do Scott and thanks for sharing your expertise with the CrowdStreet community and look forward to seeing you on my next trip to the Tri-State Area. And you're right, so many shifts going on. So we look forward to seeing what some of your future ideas are. So thanks again.

- Right.

- Good luck.

- Thanks a lot Darren, be good.

This article was written by an employee of CrowdStreet, Inc. (“CrowdStreet”) and has been prepared solely for informational purposes. The information contained herein or presented herewith is not a recommendation of, or solicitation for, the subscription, purchase or sale of any security or offering, including but not limited to any offering which may invest in the geographic area(s) or asset type(s) mentioned herein, whether or not such offering is posted on the CrowdStreet Marketplace. Though CrowdStreet believes the information contained and compiled herein has been obtained from sources believed to be reliable, CrowdStreet makes no guarantee, warranty or representation about it. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the subject thereof. All projections, forecasts, and estimates of returns or future performance, and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions.

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