Trent Cotney - Economy, Politics and Roofing - PODCAST TRANSCRIPTION

Editor's note: The following is the transcript of a live interview with Trent Cotney from Adams & Reese. You can read the interview below or listen to the podcast.

Megan Ellsworth: Welcome to Roofing Road Trips with Heidi. Explore the roofing industry through the eyes of a long-term professional within the trade. Listen for insights, interviews, and exciting news in the roofing industry today.

Heidi J. Ellsworth: Hello and welcome to another Roofing Road Trips from RoofersCoffeeShop. My name is Heidi Ellsworth and I have to tell you today we have a return guest who hasn't been here for a while, and is one of my dearest friends in roofing, and that is Trent Cotney. Trent, welcome back to Roofing Road Trips.

Trent Cotney: I know, Heidi, this is great to be here. It's good to see you again.

Heidi J. Ellsworth: Oh my gosh, I love this. There's so much to talk about coming off of IRE so we thought we would just make this podcast on what's hot, what's happening, what you heard at IRE, what we see coming. So before we get to that, introduce yourself for those who don't know you, and introduce Adams and Reese too, please.

Trent Cotney: Sure. My name's Trent Cotney. I am a partner and construction team leader at the law firm of Adams and Reese. Adams and Reese is a national law firm in the construction space. We are full service. We do everything from typical construction law to employment, immigration, trademarks, intellectual property, mergers and acquisitions, you name it.

I also serve as NRCA general counsel and General Counsel for Western States, FRSA and a bunch of other associations. I love roofing. I echo your sentiment, Heidi. I consider you a close friend and it's always good to see. I know we just saw each other briefly at IRE, but didn't have a lot of time to hang out so we can do it now.

Heidi J. Ellsworth: We can do it now. I tell you, IRE was so busy and I didn't get to see even close to all the people that I wanted to or spending any time. It was kind of like, "Hey,: passing in the aisles. But speaking of IRE, let's talk about that, Trent. What were some of the big issues, topics, trends that you kind of saw coming out of IRE?

Trent Cotney: Yeah, it was, like you said, it was jam-packed and I spoke, but I also had a booth, and the booth was a great way for me to get questions from not only NRCA members, but from people that are just walking the floor. So it really helps me keep my ear to the ground. And I can tell you some of the topics that I kept hearing about was concerns about payment in particular. There are provisions called pay-if-paid clauses or contingent payment clauses, which means that a roofing subcontractor doesn't get paid until the general contractor gets paid by the owner, which surprisingly probably got four or five questions about that, a lot of concerns, OSHA plan, OSHA defense, that kind of thing.

A lot of questions about sub labor. I think more and more contractors are using sub labor, so a ton of questions about how to use them, what kind of documentation you should have, how do you protect yourself, what's legal, what's not legal, that kind of stuff. And then a handful of insurance storm restoration type questions. How does that work? What are the requirements? So a ton of different things. It was good mix of questions and like you said it was nonstop. It's all a blur at this point, but definitely a great time, a lot of people.

Heidi J. Ellsworth: I want to kind of hit on that one point about sub crews. 10, 15 years ago, this wasn't even a topic. I mean, people thought, "Oh, [inaudible 00:03:08] use sub crew." That wasn't even a good business model. Today, it has been flipped upside down. It is not only do you have a lot of new contractors, roofing contractors coming into the industry who are using 100% sub crews, but you also have a lot of established companies out there due to the labor shortage that are starting to use a lot more sub crews.

So what are some of the things that you're saying to people on what they should be really aware of as they kind of change their business models with using subs?

Trent Cotney: Yeah. I think the stats that I've seen, and I think pretty much jive with what I'm familiar with is that 85% of residential roofing contractors use sub labor, and roughly 40 to 50% of commercial does. And the reason why that's gone up so much, Heidi, is because you can't find skilled labor. There's not enough employees to do the work so you end up subbing it out. And I want the listeners to understand there's a big difference between a subcontractor and sub labor.

So many of our listeners may act as subcontractors for general contractors, and they're insured, they're licensed, they're got all the bells and whistles. That's different a lot of times than what you see from sub labor, which they're strictly doing labor, and they're not providing any materials. And there's a variety of issues there. The biggest issue is what's known as misclassification. So if you have a sub labor crew that only works for you, that doesn't work for anybody else, that doesn't advertise, that doesn't market, that wears your gear, they're really your employees, you're just not paying them correctly.

So that raises tax issues I-9 and immigration issues, wage and hour issues, OSHA issues, a variety of things there. And that's the big risk is it's a sliding scale. It's gotten even more difficult under the current administration. They've changed some of the analysis, but the key thing is is make sure you start off with a strong subcontract agreement that if you are using sub labor it looks a lot better to pay your checks to a company that it does, paying it to an individual. That's not the end-all, be-all, but I can just tell you there's an appearance there that it looks better.

Figuring out those ways to create that independence, have them work for other people, have them operate separately, all those types of things is becoming a bigger and bigger issue. Here's the key thing, Heidi, and this is the one thing that I want to hit home. If you're using sub labor, please do a subcontractor's checklist, it's a SOP.

What I try to do on those types of checklists is to cover everything that could be important from licensure to insurance. Don't just rely on the certificate of insurance, it's a one-page document. You can fake that in about five seconds and their policies may be expired. So get the actual policy, confirm it's still in existence, and calendar the expiration dates. It's workers' comp, commercial general liability, those two in particular. It's like everything in construction, it's not a problem until it's a problem [inaudible 00:06:02].

Heidi J. Ellsworth: Yeah, and if you don't have the documentation, it's an even bigger problem.

Trent Cotney: Exactly.

Heidi J. Ellsworth: Yeah. Well, okay, so along that lines, what we're also seeing is a lot of companies out there that are getting approached by private equity. At the IRE, I actually had a number of folks come by our booth asking questions and talking about investing into roofing. What were some of the things you heard along that lines At IRE?

Trent Cotney: Yeah, I had the same amount of people, three or four different groups come up and talk to me about it. And then I've had several conversations since those same people and private equity has flooded roofing for several years now. The reason why private equity is looking at roofing in other companies. It started because there was no good investment vehicle available for people that had disposable income basically. So real estate prices were all-time high. The stock market was fairly static. Interest rates were fairly low, so that resulted in a lot of private equity flooding the market because they were looking for alternative forms of investment to hopefully diversify what they have and increase their gains on their portfolio.

This created some unique opportunities, a lot of mergers and acquisitions. We did ton in '22 and '21, but it also created some challenges. A lot of times private equity gets into a space if they're strictly to invest, it works great. If they want to start taking over things operationally, and they don't have any experience in roofing, I've seen it go horribly.

So it's about creating the right partner, making sure that you're teaming up with somebody that you know has got your business interest in mind and selecting it that way. It's still very strong. The private equity market is still strong. It's not as strong as it was because the cost of money has changed. Fed's just raised the interest rates again, a quarter point yesterday. So I was looking at maybe moving, and I checked the mortgage rates. It's a lot different than it was this time last year. I was like, "Ooh, okay."

Heidi J. Ellsworth: Yeah, I'll wait.

Trent Cotney: Yep. Yeah, a little wake-up call there, but it's still here, and there's still a lot of opportunity. I would also recognize for our listeners that if you're interested in selling, there's a lot of things that you need to do to kind of prepare yourself for that. A lot of internal due diligence, the valuation of an insurance and storm or restoration company has been difficult for a lot of private equity investors because they're almost 100% sub labor.

Heidi J. Ellsworth: Right.

Trent Cotney: So I've seen a lot of PE go closer to retail model because it's a more traditional platform. Priming yourself so that you make yourself approachable and appealable to private equity is an art, and it requires a lot of forethought in order to get that done.

Heidi J. Ellsworth: So true. And I'm just hearing about it across ... In fact, we're going to have a Coffee Conversation on this in a couple weeks so we're going to really dive into this with you and Ken Kelly because it's just top mind and people need to know. I love that. How to prepare, what to be aware of, how to pick your partners. There's so much that goes into it.

And we've been through this cycle before. I mean, I remember, I'm aging myself, but I remember in the late '90s, early 2000s there was quite a bit of rollups and that same type of activity going on so.

Trent Cotney: Absolutely. Yeah, it goes in cycles. It goes in waves and it's just interesting. It's not surprising given the trends that we saw coming out of COVID, but it's going to be here for a little bit. Even with the escalating interest rates I think it'll be here for the rest of this year and next year for sure.

Heidi J. Ellsworth: Yeah, I think so. Yeah, it feels that way. And just for everyone out there, I know I keep saying IRE, International Roofing Expo, just in case it is the largest roofing expo during the year where kind of everything happens. And going on with this, one of the big buzzes that I heard, Trent, during that time was people talking about the mergers and acquisitions of distribution and manufacturing, especially with a big announcement just a little while ago with Holcim purchasing Duro-Last. They already have the Firestone brand, which is now Elevate and Malarkey.

There was a lot of chatter about that like how's this going to affect contractors? What's going to happen? What's some of the things you're seeing along those lines with these distributor manufacturer mergers?

Trent Cotney: Obviously through associations and going to shows and things like that, I've made a lot of really great contacts, good friends within manufacturing and distribution. And I had a chance to talk to them about some of the stuff, especially the recent stuff with Duro-Last. And the consolidation I think is something that you'll continue to see in European investment. The European companies are focusing more and more on diversifying their current holdings and trying to gain a foothold in US markets where they might not have dominated before.

So I think it's going to have less and less smaller players, and I think you're going to continue to see this. I mean, we can rattle off probably half a dozen or more manufacturer or distribution purchases. I think you'll end up with a handful of so of each, and that's going to be kind of where we see it for I'd say the next five years, maybe even as much as 10. But that's also cyclical. You start getting smaller distributors, smaller shops, smaller manufacturers open up with different lines, and then it kind of grows from there so.

Heidi J. Ellsworth: And then it happens all over again, we've seen it many times. One of the conversations that or several conversations I had while we were there, too, was just on how contractors can navigate this. And I'm only heard positive things too, just to put that out there. It's been very positive, but I've heard contractors say, "Well, is that going to change what I have when it comes to warranties or my loyalty programs, or how is this going to work?" Any thoughts on that?

Trent Cotney: Most of it that I've heard, I mean, obviously I have to deal with the warranty side of things. Most of it is absorbed as a liability for whatever the purchasing company is, and they continue on without interruption, that's what's stated. In the past, there have been some blips, some things lost in the shuffle, but generally speaking, most of those obligations are honored.

That isn't as big a concern as far. As loyalty and how things work, there is some trade over there, but what's interesting is you may be a top dog at a smaller manufacturer. If you get bought by a bigger manufacturer, your top dog status goes to middle of the road, right?

Heidi J. Ellsworth: Yeah, it just happens.

Trent Cotney: There are some contractors that are having to navigate that and say, "Okay, well, I was big fish in a small pond. Now I'm a medium fish in a huge pond" so.

Heidi J. Ellsworth: Yeah. I think a big part of that plays in to too it's the acquiring company keeps the brand. And we've seen that with Holcim that for other reasons. We now have Elevate, Malarkey, Duro-Last, they seem to be very standalone strong on their brands.

But then we've seen other acquisitions out there where it's just kind of brought in and the brand goes away. It's really a combination of both for good reasons within each of the companies, but I think that makes a big difference too on that loyalty play.

Trent Cotney: Yeah, yeah, if they're keeping stuff as is like we've seen here recently, that's a lot easier to kind of carry that over. There's usually three phases in an acquisition. There's the first phase, which is everything's rosy and great, and here's what we're going to do, and everything's fantastic, and everything's the same business as usual. There's the second phase which happens a couple years out, which is, "All right, here are the next changes that we're doing," which change things up.

And then there's sort of the final phase, which is, "This is really where we want to be. It just took us this long to get there, and now this is the new normal." Right?

Heidi J. Ellsworth: Yeah.

Trent Cotney: So I think contractors should expect it will be business as usual for a while, but I anticipate there's going to be changes. So it's just part of being efficient so.

Heidi J. Ellsworth: Yeah. And we're seeing it on the technology side too. We just had Leap acquire JobProgress. They're making a big announcement this week on their changing platform, and how it's going to work, and branding, and everything. So yeah, I think everybody's seeing it across the board no matter what type of company it is. A lot of people were talking about the economy, and the banking problems that just have happened.

And it's really interesting to me is that this has been a conversation now for all the way through COVID. We're going to go into recession, we're going to go recession. And the US economy just seems to be kind of defiant on that. But now with the banks and stuff, what are you seeing and what should contractors? You talked about the payables at the beginning, what are some of the things the contractors should be thinking about?

Trent Cotney: I'm a big believer in history, and I think the past helps predict the future. So we live through the '09-10 collapse, this is nothing like that. This is a slow burn. And the reason is because the Fed is slowly cranking those interest rates. There was some suggestion that even with these recent bank failures they might stop that, but they're continuing to do that because inflation still continues to outpace where it's supposed to be. So that slow burn, it takes a while to catch up.

Roofing won't see it in 2023 probably, but backlogs I think are decreasing. The cost of money is more, so new development, new con is getting hit. There are things like that that contractors should be aware of. 2023 is going to be fine. I think we'll continue to remain resilient even if the economy collapsed just because of the demand that's available. You need something, you need a roof. Whether it's service work or repairs or whatever it might be.

But I do think that this one is not going to be an overnight kind of thing. It's going to slowly accumulate because that's how they're doing it. They're slowly cranking it. It'll be interesting to see what this time next year looks like, right?

Heidi J. Ellsworth: Right.

Trent Cotney: So there's some canaries in the coal mine type stuff that you see out there that suggest that that's some problems. But yeah, as far as roofing goes, I think we'll be fine. I'm not concerned about where we'll be as a whole. There's other industries I think there's probably should be a little bit more worried.

Heidi J. Ellsworth: Right, right. Well, and especially coming, I mean, it's unprecedented in what we went through with, and everybody hates that word unprecedented. But what we went through with COVID and then the material shortage, and so it's just created this perfect storm that's just no one really can protect a whole lot that's going on.

But I do think it's interesting when you talk about, just like you said earlier, we were thinking about maybe, "Do we want to buy a new home or do we want to move?" And then all of a sudden you're looking at that and you're saying, "Ooh, maybe we'll just stick tight here for a little while." So it's going to change some of those dynamics. Not totally bad for the home improvement because you're probably going to be putting more money into your home and into improving what you have, but it's a different dynamic.

Trent Cotney: Absolutely. And decisions are made based off of that. And when that cost of money goes up, it affects everything from mortgages to credit cards to equity lines to you name it. And it acts as a chilling mechanism for sales, and purchases, and other things so it will cool the economy. That's the point, right?

Heidi J. Ellsworth: Yeah, yeah.

Trent Cotney: And with that comes some pain, but it's just part of the process. It'll equalize at some point and part of it is beneficial because material availability is back closer to where it needs to be. I think part of that demand has gone down as a result of PPP loans, and COVID-19 payments, and that kind of stuff so.

Heidi J. Ellsworth: Yeah, it's also interesting. I just went to an economist on metal this last week and I just thought, "I never know." I mean, seriously, if you would've asked me 20 years ago to say, "Heidi, you're really excited about going to talk to economists?" Oh, I love listening to, they're so great 'cause everybody's different. Everybody has a different spin to it.

Okay, last thing. Let's talk just a little bit about what's happening, both on the state and DC with regulations. You are a lobbyist, a certified lobbyist if that's right, a licensed lobbyist. And you're always very much have your fingers in that. What are you seeing out there that contractors should be aware of when it comes to regulations?

Trent Cotney: A lot. Just a lot going on, both on the state and the federal level. I'll tackle state first. California just announced earlier this week that they are going to have a lead standard that is the most aggressive lead standard ever created for exposure to lead. Obviously in construction, any older building there's going to be lead paint, there's going to be other stuff like that. The permissible exposure limit is so low that it's going to require enhanced safety and enhanced disposal. So watching that very closely, it's just starting to come to fruition.

Florida has had nonstop insurance reform, two special sessions last year. Just had another thing past the House if that thing goes through. I'm having to change. I've changed my Florida residential insurance contract five times in the last seven months. That's how quickly it's changing because I know personally, the cost of my homeowner's insurance doubled, and it'll probably double again because no insurers want to insure homes in Florida.

The hurricane was cataclysmic and we get hit every year. So it's created a weird environment and roofers are specifically targeted. There's a task force that's been created by Governor DeSantis specifically looking for fraught within roofing and the storm restoration business. So this is the battleground for all storm-related stuff is right here in Florida.

On the federal level, also very active. The stuff that I'm watching that I know affects a lot of contractors deals primarily with executive agency action. OSHA has been very aggressive in rulemaking, new heat injury and illness standards getting ready to come out, electronic recordkeeping.

They also put out some guidance that increases their enforcement. So a couple of things that caught my attention, one was they're now doing instance by instance citations, which means if you've got four guys on a roof without fall protection, that could be a citation for each of those people. And it's not just one for all four.

Heidi J. Ellsworth: Yeah. Wow.

Trent Cotney: So that dramatically increases the dollar amounts of the potential citations. The other thing is they said OSHA has the capability to give crew members visas, they're either U visas or T visas. And those visas are for cooperation and in investigation. So they could have a potential where they go to a crew member and say, "Hey, I've run your Social. I see you're illegal. This isn't right. You have a choice of getting deported or you can assist me and show me that your employer is obstructing justice, and hasn't provided the correct safety documentation. Dangerous.

Heidi J. Ellsworth: Wow.

Trent Cotney: It's a dangerous incentive there. And it concerns me when those kind of tools are there from a defense standpoint, because you never know whether or not that's twisting the truth a little bit. It [inaudible 00:21:17].

The other thing that I'm watching out for, Heidi, is the Federal Trade Commission indicated some rulemaking with regard to completely banning non-competes nationwide. A lot of states allow it. California doesn't, but Florida does. Other states do. It's the kind of thing where if you've got a C level person and you've given them additional compensation to sign a non-compete, and now you're told that it's no longer valid, does that employee have to give their money back? There are a lot of issues.

It's the most Heavily litigated issue in employment law is non-competes. So that is going to be very interesting to see if that goes away. It doesn't mean that other things like confidentiality and non-solicitation of your customers, you can still have that stuff. But saying that you can't go to a competitor within a certain amount of time, they may ban that completely so.

Heidi J. Ellsworth: Wow.

Trent Cotney: We're keeping our eye on it.

Heidi J. Ellsworth: That will change some things.

Trent Cotney: Yes.

Heidi J. Ellsworth: Geez.

Trent Cotney: For sure.

Heidi J. Ellsworth: Trent, this is cool stuff. Thank you. And it's kind of nice, we had a whole conversation there and we hardly talked about labor shortage or material shortage.

Trent Cotney: Right, right.

Heidi J. Ellsworth: That's all we talked about for the last two years. So we've got some new topics now. Thank you so much. Any last thoughts for all the listeners out there on what they should be watching out for?

Trent Cotney: I would just tell everybody, I always go to RoofersCoffeeShop. I mean, no joke. Obviously, I am subscribed on social media, all my channels, Facebook, Instagram, LinkedIn, you name it. But I go to the website as well and I just check out what's going on because that gives me whatever the latest news is. I mean, a lot of what I have to do is stay in tune with the latest issues and best place for me to go is RoofersCoffeeShop so.

Heidi J. Ellsworth: Well, and you do amazing articles. You've provided us with great insights and we so appreciate all of everything that you send us. On the one you just had out on Florida with Governor DeSantis I thought was great. And so thank you so much for helping us all stay with our finger on the pulse of what's going on and what's affecting our industry. So thank you, Trent.

Trent Cotney: My pleasure. Absolutely.

Heidi J. Ellsworth: Thank you. And we'll see you again in a couple weeks for Coffee Conversations and we'll really dive into acquisitions and mergers. So everyone, be sure to register for that or watch it on demand depending on when you listen to this podcast. Thank you again, Trent, and thank all of you for being here today. Thank you for listening.

You can get all this information, you can see all of Trent's articles in the directory of Adams and Reese on RoofersCoffeeShop. So be sure to check it out. I mean, such great information that is coming out all the time there. And of course, you can hear all of our podcasts under the Read Listen Watch navigation under podcasts and Roofing Road Trips.

So don't miss a single episode. You should also be subscribing on your favorite podcast channel and hitting those notifications. So we will see you next time on Roofing Road Trips.

Megan Ellsworth: Make sure to subscribe to our channel and leave a review. Thanks for listening. This has been Roofing Road Trips with Heidi from the rooferscoffeeshop.com.