Chris Koehler: Welcome to another episode of Frantz Ward’s podcast series, Shoveling Smoke. I’m Chris Koehler, a partner at Frantz Ward, and your host for today’s podcast. From time to time, we’ve brought you guests from outside the legal arena to delve into a topic of interest in the greater Cleveland area. That’s what we’re doing today with Nick Fedor, who is the executive director of Shaker Heights Development Corporation. I’ll let Nick explain his organization and its goals in more detail in a minute, but in a nutshell, Corporation has set up a fund to allow interested people to make an investment and have a financial stake in redeveloping Shaker Heights. According to the Ohio Division of Securities, it’s the first such fund that has been registered with them. So although the backdrop of today’s story is Shaker Heights, it presents a great example of an innovative collaboration between the public and private sectors, aimed at the economic development of an area in need of an upgrade. Nick Fedor has been with the Shaker Heights Development Corporation for over six years. Before that he was the economic development director for the now-thriving Detroit Shoreway area. I’m sure you’ll take all the credit for that. Welcome, Nick.

Nick Fedor: Thank you for having me, Chris. It’s a pleasure to be here.

Chris Koehler: Sure. Also joining us, because we can’t completely ignore the legal piece of the project, is my partner Karl May. Karl started his 40-year career as an enforcement attorney with Ohio Division of Securities and has a broad-based practice at Frantz Ward, representing investment advisors, entrepreneurs, and other entities on SEC and regulatory issues. One aspect of his work is assisting clients with securities offerings, which was his involvement in Nick’s project. Thanks for joining us, Karl.

Karl May: Delighted to be here.

Chris Koehler: So Nick, before we get deeper into your organization and the Fund, can you tell us how you first got into economic development?

Nick Fedor: Sure, sure. It was a roundabout way, I never really gave much thought to what I wanted to do professionally while I was in college, and took the first job I was offered, it was in marketing and advertising. So I did that for a few years. And then 2008 happened, and as companies were slashing advertising and marketing budgets, I was laid off from my agency job, but it really was a blessing in disguise at the time, because it afforded me an opportunity to really figure out what I was passionate about professionally. And that had always been really cities and neighborhoods, and what attracts people to neighborhoods and certain parts of cities, and why businesses locate in certain parts of cities. And it really opened up a whole new world to me of urban planning, economic development, how those disciplines interface with small-business development, municipal government. And so we were living in Philadelphia at the time, and I got a job at a community development corporation in the Northwest section of the city, that’s been about 13 years ago. So I’ve been doing similar things in different places for the past 13 years.

Chris Koehler: That’s great. And that brings you to Shaker Heights, which I’m actually a resident of Shaker Heights as well. So I’m interested particularly in what is the Shaker Heights Development Corporation, and what does it do?

Nick Fedor: Yes, great. Thank you for that. So Shaker Heights Development Corporation’s mission is to enhance commercial districts here in the community. As you know, Chris, from living here, there are really two primary commercial districts and a few smaller ones. The primary ones being the greater Van Aken District and the Chagrin-Lee commercial area. And then also Shaker has portions of the large Mayor commercial district, as well as Fairmount Circle around John Carroll. SHDC’s primary focus area is the Chagrin-Lee commercial district. And our work here is really in two primary arenas. The first being supporting and working with businesses that are currently in the community. We do that by convening regular business association meetings. From time to time, and as funding allows, we offer periodic grant opportunities for small businesses. Historically, those grant opportunities have been targeted toward minority owned and women-owned business, to help support those. We also work very closely with our partners at the City of Shaker Heights to attract new businesses to the community, and help those new businesses find a location here in Shaker. The other primary arena where we work to achieve our mission is through some real-estate work. We own a few commercial properties, we manage a few commercial properties in the Chagrin-Lee area. One of them I’m talking to you now from is The Dealership. It’s a co-work and small-office facility. And there are also a couple other small commercial properties that we’re responsible for. And then the new and exciting arena that we’re moving into is with the Shaker Lee Development Fund.

Chris Koehler: Okay. And before we talk about that, I’m guessing that other cities, municipalities neighborhoods have these type of development corporations like Shaker Heights does, is that right?

Nick Fedor: Yeah. So in the City of Cleveland, most neighborhoods have a community development corporation that serves the neighborhood. And the services that those CDCs provide are really unique to each neighborhood. In the first suburbs of Cleveland, those communities that border the city, it’s a slightly different story, Shaker is one of a handful of the communities that do have a CDC, Cleveland Heights, South Euclid as well. I believe Maple Heights is getting theirs off the ground. And Lakewood probably has the longest standing and most well known of the first suburb CDCs. So it’s a tried-and-true system within the city, and more first suburbs are beginning to adopt that as well.

Chris Koehler: So maybe the Fund and what you’re doing there can translate to other CDCs as well?

Nick Fedor: Yeah.

Chris Koehler: What is the Fund? What is the Shaker Lee Development Fund?

Nick Fedor: Yeah. So the Shaker Lee Development Fund is a new initiative, but it has been years in the making. And it’s come about for a couple primary reasons that I’ll get more into, but the Chagrin-Lee area is a really unique and diverse, in many regards, a great business district. There are many long-term committed property and business owners here that have been here for a while and are doing great things. Contrast that with there are some vacant properties, there are some properties in need of upkeep and improvements, and there are some vacancies. So the Fund is really in response to those commercial properties in the district that have deferred maintenance, that are vacant, that we feel have more potential, and the business community and stakeholders here feel have more potential as well. And of course, to realize that potential, it always helps to have some money and some funds. So-

Chris Koehler: You can’t do these things for free.

Nick Fedor: Exactly. Well, we are a nonprofit, but we still do need money to do projects. So Shaker Heights Development Corporation has done two smaller projects, or similar projects, I would say, on a smaller basis in the past five or six years. The first was in 2016, 2017 timeframe, where SHDC partnered with six or seven Shaker Residents, all very civically minded and invested in the community, and the organization along with these individuals pooled our funds together to acquire a building that had been vacant for 10-plus years. It was the old Lee Road plant nursery. And our group acquired that, we made some improvements to it, and we got it ready for a new doggy daycare and boarding business called Process Canine. If there are any pet owners who are listening in the area, probably are familiar with the business, dozens of dogs go throughout that business on a daily, weekly basis. And since it opened in 2016, it had really been going gangbusters. And our initial intent with that project was that if the business was successful, and if it was growing and in a position to acquire the building, we wanted to make that happen. So like I said, they opened to a very favorable reception, business has been going well for them. And they ended up being in a position to purchase that property from our group in 2018. And so with the organization and the initial investors, essentially getting our seed investment back, we were in a position to look for potentially another opportunity. And coincidentally the property just to the north of where Process Canine is located came on the market. And so SHDC along with the same group of investors used the initial funds to acquire the property next door. When we acquired it, it only had one tenant, it’s a building with three commercial store fronts. So we were fortunate to find a couple additional tenants, one being actually Process Canine’s new training center, they expanded out of their initial footprint. And then we found a new business, a Shaker-based entrepreneur who had been in the dog-grooming industry for a number of years, wanted to go out on her own, and made that leap in January of 2020, in the midst of the pandemic, and opened a business called True Vibes Unleashed, that not only does dog grooming, but you also can go there and do yoga with your dog. And she’s also a certified Reiki practitioner. So that’s a long way of saying that this property that we acquired a couple years ago with our initial small group of investors, we were able to fully tenant, and it’s home now to minority and women-owned businesses here in Shaker. And so that’s really the genesis of the Fund. And our organization wants to be as broad based in the community as possible. We don’t necessarily want this opportunity to be only for a small group of folks, accredited investors, which is why we started talking about a broader effort and how we got connected with Karl.

Chris Koehler: Using those two initial projects as a model, and then transitioning to something a little bigger like the Fund, at any time did you have any pushback from citizens or the government, or was everybody on board?

Nick Fedor: Yeah. So that’s a great question. And I mentioned it’s been a long time in the making, part of it is due to just the current pandemic and starting it in the late winter of ’19, early ’20, but there really were a number of considerations and viewpoints and objectives and sources of friction to work out. Our organization has a board of 20 or so folks, but I mentioned, we partnered with six or seven individual investors in those first two projects, obviously getting their buy-in and their perspective was important. So I wouldn’t say it was necessarily herding cats, but it was a lot of viewpoints and lot of potential sources of friction to work through in the planning stage. From SHDC’s standpoint, we wanted this to be an initiative that could be as legally accessible to as many people as possible while still balancing that with being able to actually raise money, to have an impact on the corridor, meaning to be able to actually acquire and improve property. So we wanted to offer two options, one for higher-net-worth individuals who may be more experienced in these types of investments, and one for folks who are very civically involved and want to have a seat at the decision-making table, and be involved in this process and what we are collectively working to do on Lee Road. In terms of, you mentioned pushback from the government, we’re fortunate to have great partners at the City of Shaker Heights, from Mayor Weiss, through his departments that we work very closely with, economic development department, planning department among others, but this is something that they are fully in favor and support this initiative. We actually have carved out a non-voting seat on the Fund board for city representation, so that continued alignment and strategic priorities are met between our organization, the Fund and the city.

Chris Koehler: So it truly is private-public collaboration in all respects.

Nick Fedor: Absolutely.

Chris Koehler: So do you have investors that are both from the high-net-worth type that you described, and also from the broader community participation, that was the goal?

Nick Fedor: Yeah. So we’re working towards that goal still. We just officially registered, August 25th. So we’re about two months in. We do have some new investors who have come on board. All those new investors to date have been at the option A, the higher level, but that’s not to say that we’re not working very diligently, thoughtfully and deliberately to get that broader community base cautiously optimistic that we will during the offering period.

Chris Koehler: Karl, maybe this is a good time for you to talk about some of the nuts and bolts and what was involved in putting it together and how this was structured as an investment in, I guess, a securities offering.

Karl May: Sure. This offering, because it involved limited liability units, is a securities offering. And when you have a securities offering, you have to consider the application of both federal and state securities laws. And in this particular case, as Nick pointed out, we were going for two different classes of investors, and it’s difficult to do and it’s very rare. So the first task was to determine whether there was an exemption from registration with the SEC, because that process is terribly expensive, and this offering wasn’t anywhere near large enough to do that. And then the second was to figure out how to get it set up so that it could be offered to the lower-net-worth individuals, lower-income individuals. And that process required a registration with Ohio Division of Securities. So in working through the steps, we determined that there was a federal exemption from SEC registration, but that to do the offering as we proposed, we were going to have to register it with Ohio. That subjected us to what’s called merit review, which involves filing an application with the Division of Securities and meeting certain guidelines that the Division requires for offerings to lower-income persons. And that involved merit review, which includes various standards for investor suitability, a number of guidelines relating to fees, structuring, the disclosure document, the voting rights and membership rights of the members. It’s a very complicated process and it takes quite a while to get through, but we did it. And I have to say, the Division of securities were very, very supportive and cooperative in working with us and applying the guidelines in a way that we could accomplish our objectives, they understood what we were trying to do, and we were able to register it with the Division of Securities. I do want to say that by registering it with Ohio, they do not approve of the offering, they do not endorse it, they merely state that it meets their guidelines, but as Nick said, we were effective in late August. And so now, because of that, we’re able to go out to the public, primarily obviously in Shaker Heights, and seek investors for the Fund.

Chris Koehler: And how long did it take from conception, I guess, to the point where fundraising could actually begin?

Karl May: Nick?

Nick Fedor: Yeah, great question.

Karl May: The process took a long time, but you don’t file with the Division of Securities until you’ve got it all worked out. So we didn’t actually make the Division filing until probably, I think it was May or June of this year, but Nick, we started on this last, what, November I think, almost a year ago?

Nick Fedor: Yeah, it’s been over a year in the making. And I think you’re absolute right, Karl, we filed with the Division in May, and then that took a little while for their review process, but it’s been over a year in the works.

Chris Koehler: And Karl, I think you told me, I guess this was offline, that you thought this was unique to the Ohio Division of Securities, something they hadn’t seen before.

Karl May: Yes, they had never seen a community development corporation create a community development fund such as this. So it was a first time for them too. And it meant that applying their guidelines and working with us was a little different than working with a traditional registrar such as a real estate investment fund or an REIT. So they had to make it up as they went along with us, but as I said, they were very cooperative and understood what we were trying to do, and helped us work through the guidelines to make it fair and reasonable and fully disclosed to the potential investors.

Nick Fedor: Karl’s being a little bit modest here. And he has been nothing short of an invaluable team member with his guidance and knowledge on this, because our team was not starting from scratch, but don’t have near the experience and knowledge that Karl brought to the table. We did a few projects, and we have some attorneys on our board who know enough to be dangerous, but we were fortunate to have Karl from a security standpoint and to help interface that with all the other objectives we were trying to meet both from a community development corporation standpoint and mission standpoint, and incorporate and make it accessible to the community.

Karl May: That’s very kind of you to say, Nick. I’m not from Cleveland, I’m not even from Northeastern Ohio. So I came here and chose to live in Shaker Heights. And I have to say, I’m very glad that I did. And I’m very pleased to have had this opportunity now to give back to the community that I care deeply about.

Chris Koehler: So is something like this, it seems to be working well, both from the initial projects and now this innovative fund. Nick, and I guess Karl from a legal perspective, and Nick from a private-public-collaboration perspective, is something like this replicable in other CDCs or other cities?

Nick Fedor: I would say from a public-private-partnership standpoint, absolutely. Obviously a similar initiative would be tailored to the specific needs of that specific community, but I could certainly see this model being replicated in other communities in Northeast Ohio, or even Ohio. Unfortunately there wasn’t a very close geographic model for us to look to for best practices, we had to look all the way to California and a neighborhood in Los Angeles, that actually was about a year ahead of us in terms of timing. They launched their community based real estate fund in the summer of 2020, I believe. And so seeing what their unique objectives were for their community and how they structured their offering was helpful as we were looking at different models and options for our Shaker-based fund.

Chris Koehler: Karl, from a legal perspective, replicable somewhere else?

Karl May: The Little Tokyo Fund was helpful and gave us some guidance, it was very different and wasn’t a perfect model. So although useful, we pretty much had to create our fund out of whole cloth. I do think, I agree with Nick, this could be a model for other communities, but one thing that was very important in our process was that the Shaker Heights Development Corporation has been around for a long time, has been doing development work, and most importantly had done these two projects that Nick described. In general, the Ohio Division of Securities won’t let a novice company come in and raise money for a project, you have to show that you’ve got some experience. So if a community development fund was formed for another city without any prior history, without any experience, the Division might say, “You don’t have the experience to go out and start a fund for the first time.” So that was a very important factor in getting our registration through the Division of Securities.

Chris Koehler: So what’s the current status, Nick?

Nick Fedor: So current status is we have raised 475,000 to date, both in cash and some assets, some property assets. Our goal is 5 million, our minimum threshold when we can break escrow is 550,000, so we’re well on the way to hitting that. But again, in order to really have some of the outcomes that both the Fund and the organization, the community and the city really want to see, we certainly need north of 550,000, which is why we’re going to keep going obviously, but we’re off to a good start so far.

Chris Koehler: So what’s the investment procedure, or can you provide a link where people can find more information if they’re interested?

Nick Fedor: Yes. So the first step is really on the SHDC website, and that’s shakerdevcorp.com/thefund. We’ve got an overview and some frequently asked questions up on the website to give people a little bit more information and hopefully answer some of those questions off the bat. And if folks are interested, they can get in touch with myself or my colleague, and we can go into detail on the offering circular operating agreement and subscription agreement, and all the nitty-gritty details of the offering.

Karl May: I should mention that currently the offering’s only registered in Ohio. So we’re not allowed to take investments from persons in other states, because we haven’t registered in any other states.

Chris Koehler: Well, it sounds fantastic. The perception of people often is that government gets in the way of projects. So it’s great to see a private-public collaboration that’s actually getting something done. It’s particularly gratifying for me as a resident of Shaker Heights, but as a resident of Cuyahoga County or Northeast Ohio, and the fact that this is replicable elsewhere and hopefully will be, it means great things for the future. So Nick, thanks for your work. Karl, thanks for your work. And hopefully this takes off.

Nick Fedor: Thank you, Chris. Really appreciate it.

Chris Koehler: Sure. At the end of our podcast we usually ask our guests to leave listeners with a takeaway or two. Are there any final takeaways you’d like to give to listeners today? I’ll start with you Karl.

Karl May: Well, as a securities lawyer, I always like to get up at my soapbox and say, if you are starting a business, funding a business, raising money, selling stock, selling limited liability interests, even selling promissory notes to fund a business, you are selling securities, and you have got to make sure you comply with both the federal and state securities laws. If you don’t, the complications, and I should say the consequences, can be catastrophic. So most offerings do not require the registration process that we went through with the Shaker Lee Development Fund, but I just always like to make that statement, because this is, it’s a very treacherous area and you can get in a lot of trouble.

Chris Koehler: Nick?

Nick Fedor: I think mine might be a little bit more upbeat than Karl’s warning, but I certainly appreciate that. I would say that this was a little bit born out of necessity too, and trying to find unique creative funding streams to repurpose and develop some commercial property in a key commercial district in the community. And we are very fortunate to work with a great team, I mentioned Karl earlier, we had some other great attorneys, Ben Fowler and Adam Rosen involved as well as our board and our partnership with the city, it really was a true team effort, which is understandable given the unique nature of this and the fact that a fund like this doesn’t exist in Northeast Ohio. We’re very cautiously optimistic and excited about some of the results and outcomes from this fund.

Chris Koehler: Well, thanks Nick. So to recap, according to Karl, mind your Ps and Qs when it comes to the securities laws. And according to Nick, there are ways to make an impact in your community if everybody is working together and pulling in the same direction. So Nick and Karl, we very much appreciate you being with us today, thanks again. And this wraps up another episode of Shoveling Smoke. Thanks for checking in with us. And we hope you listen in next time. Shoveling Smoke is a production of Evergreen Podcasts. Our producer and audio engineer is Sean Rule-Hoffman. Thanks for listening.