Podcast Episode 82 Transcript

Episode 82: Transforming Self Storage Investing With Scott Krone

Are you ready to bring your real estate game to the next level? My name is James Prendamano. I'm the CEO and founder of PreReal. And over the past 25 years, I've closed over a billion dollars in transactional real estate. Each week, a meeting with outstanding investors, investors, highperforming individuals and visionaries operating in the real estate space. These are the people that are actually out there in the real estate game right now. Getting it done. This podcast aims at bringing anyone's game to the next level. This is the Prereal Podcast. Welcome, everyone, to The Prereal Podcast. I'm your host, James Prendamano, and we are joined today by Scott Krone. Scott's a principal at Coda Management Group. They are focused on and he's the co founder of One Stop Self Storage, obviously focused on the self storage space. And there's a lot of neat tie ins here, folks. We're going to get into today. Self storage is something that has really taken off in the Northeast and certainly here in New York City. So it is serendipitous timing. Scott, thank you so much for joining us today.

Thanks for having me, James. I appreciate the opportunity. Oh, it's absolutely my pleasure. So is it the Chicagoan what do they call Chicago folks? Yeah, maybe stupid these days. I don't know. Well, we'll dive into that. So let's talk about background. Scott, how did you end up in the self storage space and in the real estate space? I ended up in the real estate space because my parents showed up my senior year of College and asked me what I intended to do. And considering I was fourth generation in the family business, I figured I'd be the one going into the family business. And they told me I wouldn't be. I was like, oh, man, who did I really piss off? But they said no one was selling the family business. And so that was a milestone, a big shift. And I had considered architecture as an undergraduate, but I wanted to play College sports. And so I pursued that. And then I thought I closed off the door, but I found out that there were other opportunities to get a Masters in architecture. And so that's how I got into real estate. And then how we got into self storage was when I was pursuing my Masters in architecture. I got connected with a developer who was my professor and teacher, and he was also an architect and a general contractor. So I got to learn to understand the development and the business side of things. And then in 98, I started our own business doing development. We were in predominantly the residential side, so either in single family, multifamily or mixed use. And then the crash came and that altered everything. And that's when I was, as a consultant, asked to try to find and locate a distressed self storage. And I couldn't find it. And I began studying self storage all the way back through each of the last recessions, and I couldn't find one that I couldn't find a pattern where the market tremendously dropped out underneath self storage like you see in commercial or multifamily or residential. So that's what began parking our interest. And we actually developed a self storage facility in conjunction with that client, and we flipped it. And that was my introduction into self storage. Since then, we've unloaded all of our multi family, and we've been pursuing as an investment only self storage. So we covered a lot of ground there. Let's take it back a bit. Where did you go to school? I got my Masters from Illinois Institute of Technology. And you said you had played sports. What type of sports? I went initially playing soccer, and after three elbow surgeries, I made the natural, logical transition to football. So I became the place kicker and punter on the football team. Okay. So at this point, you're anticipating family business. What was the family business? Diecasting. So we made parts for for Schwenn, Ludwig Drums, the army and Ford and Harley Davidson, those sorts of things. Got it. Now the portfolio I know at one point was really diverse from single families, multifamily retail, commercial warehouse. I think you had even some athletic flex spaces in the portfolio. Have you skinned that up entirely now to self storage, or are you still diversified? We have one building that's flex that's remaining, but the rest of it is all self storage. Okay. And you start making this transition. You had noted, I assume when you started to dig in and look at the models, you found self storage to be fairly resilient, incredibly resilient. In fact, we charted and we compared the gross domestic product, which is the leading indicator for a recession, and when there's major drops, to the Occupancy level of self storage and in each major recessionary market, from inflation to the Internet bust to the housing market. And Covet wasn't really a recession in the sense we only had one downward month as opposed to two consecutive quarters. But the drop was just as significant that we saw Occupancy drop maybe a point and then rebound two or three or four points. And so it's been consistently around 90% throughout that period of time. Let's educate the audience a bit. You had said GDP is a lead indicator and tying to and predicting, I would assume, recessions. What specifically are you looking for? What are the telltale signs of recession? Yes, as it relates to the GDP? Well, it's two consecutive quarters of downward trend or negative trend. And so that's the definition of recession, which why in 2020 it technically wasn't because we didn't have that consistent two quarters of downward trend. But in all the other ones we saw either downward or stable, where it wasn't growing back up. I'm just taking what the economists say is the definition of a recession. Okay. I wasn't sure if there were any other indicators or things you were looking behind the numbers that are indicative of market shifts? No, we were just looking specifically at those dates. We were trying to find the dates of the recession. And then what was the correlating occupancy level of self storage at that point in time? So 90% is ludicrously high number. And I would suspect that you tried to get behind the numbers a little bit. What were your findings? Why is it that self storage is so unbelievably resilient? Why is it that it's held the way it's held in the face of so many other categories, either losing ground or getting completely annihilated? Well, I think I'll answer this in twofold because I think things have dramatically changed in the last year. Let's just take prior to the Pandemic, self storage is a vehicle to help people transition through difficult times. So whether that be a divorce, a death, you're getting displaced like kids having to move out of College for a period of time or they're being dislocated. And you don't have the time or the ability to address all of your physical goods or possessions that you own. And self storage offers a relief valve to address those sorts of situations in life so you don't have to address them right away. You can take your time to do that. So that used to be like the major leading indicators of why people use self storage, but that doesn't take into account businesses. So, for instance, 50% of our business is done through commercial as opposed to retail or residential buyers. Within the Pandemic, the way in which we use our homes has dramatically changed. Our homes have now become our gym. They've become our classroom, they become our office, they become our conference room. And so in order to carve out those spaces and you see these pictures of people like down in the basement hitting their head on pipes this and that, they needed more space.

And self storage offers a relief valve to do that. So as the cost of housing increases, self storage is an economical and some would argue and I would argue a green option because you don't have to buy a bigger house, you don't have to relocate. You don't have to do those things. You can just put your seasonal things and rotate it in a self storage facility. In terms of supply chain issues that we've had, a lot of commercial vendors are using it to buffer their inventory to make sure that they stay in business. So it's become a viable option in terms of both residential and commercial clients. It's fascinating stuff. You would think at first blush, it feels counterintuitive, right? The first thing to go is usually the credit cards. That's the first thing people stop paying. And then as you go down the list of what are my essentials and non essentials on the surface, again, you would think self storage just wouldn't make the cut. But we're seeing now time and time again. It does. It's an incredibly resilient product. So you guys are operating a company that has investments in a number of different asset typologies, really enjoyed the stability and the asset class, what it had to offer that prompted you to go so heavy into this category, or was it in part some of the challenges that come along with the other typologies that drove the shift? I think it's both. I think they go hand in hand with one another because of the fact that, for instance, self storage is a predictable model. We can look at the demographics, we can study the demographics and understand supply and demand within the marketplace.

That's one aspect of it. When we're doing multifamily or single family, it was like the field of dreams approach, build it and see if they will come with self storage. We can know if a market is good for it or not good for it. There's been plenty of times we've looked at a market and saw that it was way over saturated and we pulled back. There was no point on us going forward with that.

Go ahead. So in determining market viability, is there a direct calculation or correlation? Is it 10 sqft. Per individual or what are the metrics you look at in determining there's demand and there's need here it is, square foot of lockers per capita. And so generally speaking, the market average is seven, where saturation is where supply equals demand. But we've seen like in the left coast and for East Coast down to the Florida, and we always refer to as the east and west or the left and right in terms of on the map. But California is heavily saturated as well, Texas, and we're seeing the market climb up to eleven. In Florida, we're seeing it climb up to 13 people developing and building in the 13 sqft. Of lockers per capita. So there's heavy saturation in there. And those are the type of markets that we're not running to.

People bring us an opportunity, we'll evaluate it. But we're looking at generally if you see where we are, we're predominantly in the Midwest of flyover States where our Chicago one we bought at 1.6 or one in Ohio, we bought it two or two and a half. So there's plenty of growth within that marketplace. And that's some of the things that we look for. And let's talk about the demography of the location. I would assume that it's not necessarily geographic boundaries, meaning one, three, five and ten cocentric circles. I'm assuming it doesn't necessarily matter the physical distance between it's just straight up numbers. Right. So when you're looking at those numbers, is there a particular demographic that hits the sweet spot for the consumer? Well, we do look at those radiuses. That is important. Now, if we are in more rural area, people aren't going to be willing to drive more than 20 minutes. Now in the country, that could be 20 miles. Right, right. But in New York City, I think that's what one block.

Yeah. So I think a lot of it depends on what the market is to determine what that radius is going to be. And that's where if we're looking at a heavily saturated market like Chicago or New York, we're not even considering five. It's one and three that we're really considering because otherwise no one is going to drive 5 miles when they could go to someplace else. That's half a mile away. It doesn't matter what the rate is. It's just too much difficulty getting there. But when we look at the average income of the household, that will dictate the size of the lockers so that we can match it up in terms of what the buying pattern is. So the more affluent the community is, they're willing to pay a higher price per square foot for larger ones and the lower of the demographic. In terms of medium household income, they're willing to pay a higher price per square foot. So give us a sample, an ideal market. What are you looking for for median household income? Well, we can do anything.

We've looked at markets anywhere from 30 to over 71. In Chicago, it was closer to 40 45. And so we made the locker smaller on average, instead of average of 90 sq. Ft. They are closer to 75. And we find that people are willing to pay a higher price for the smaller ones because of the fact that there's a bigger premium on that space. Our facility, which is in a very affluent community, we couldn't sell out the ten X ten s, but all of our ten X 20s were sold out. So what we did is we took out the center wall and converted our ten X ten X ten s into ten X 20s, and then they all sold up. So as you're doing this analysis, it's interesting what seems like a benign Delta of 15 sqft. Sounds like that makes all the difference in the world, right. I guess it's all relative to the size. If you're only dealing with 75 versus 9015 is 1718 19%, and you're seeing with such a small change in the square footage overall, it really does make a difference in the saturation. It doesn't make a difference in the saturation.

It makes a difference in the velocity in the lease. For instance, the more affluent community, when they were renting, they're remodeling their home so they would take everything out of their home, have the movers back up the moving truck to the facility and unload it into eight lockers, all ten by 20s, and they would have it for a year. And then when the construction was done, they would unload them and take them back to their home. That's not the case for someone who's, let's say in 1000 square foot apartment, and they need an extra 50 sq. Ft. Of storage. That's not their type of situation. So that's why they only need 50 sqft and that's what they're willing to pay for.

Do you have the capability and not the capability? Are you building vertical as well as these are drive up units? Are they five story buildings? What is the typical product look like? The ones that we've converted. They are drive in facilities with both a Loading dock interior as well as an exterior Loading dock. We have one building that is predominantly one story. It does have three stories in total, but 60% of it is on the ground level. Our tallest building is ten storeys, so we've done anything in between. Wow. Okay, so the typical deal, right? And I know that there is no typical deal.

Everything has got its own flavor and feel to it. We have a property out here in Staten Island where the zoning allows for retail just as it will allow for storage. The way the zoning is written, basically, as you go to the maximum use and then any use group within that maximum use, you can waterfall down and put any of those uses in there. So we found a property that has turned out to be a really productive retail site, but there's quite a bit of far floor area ratio or square footage leftover that we are looking at and saying, Gee, we're bound by the constraints of parking out here. Parking is where it all starts and stops. While we have the ability to add 150 or 160,000 sqft. The challenge is for every 300 sqft that we're building, we need to add an additional parking space and there's only so much you can fit on the paper as you're sketching these things out. Absolutely. What we were contemplating is going vertical. Let's fold into the center. A self storage facility. The way we saw this and tell me if I'm on the right track or not. It felt like self storage is becoming changing a bit and it felt like there would be a place for a self storage facility in a relatively busy retail center where it almost becomes part of the pattern. You need something from the locker, you're going to go pick up whatever it is. Are you going to go have dinner or you're going to do whatever it is in the retail center? It almost felt like part of the pattern.

Are you starting to see these facilities emerge out of these retail complexes or is this completely off the wall? I wouldn't say it's completely off the wall. I mean, there's a lot of big boxes that are going dark and as a result of that, self source is a natural fit because of the column spacing, the heights, the HVAC, the lighting, there's not a lot to convert there. The bigger challenge is whether or not the local municipality will allow it. Both Toledo and Dayton were not in favor of us putting self storage in the downtown markets, which is counterintuitive to us because of the fact that they're heavy density of townhomes and condominiums and apartments and the two go hand in hand self storage and apartments, that's like peanut butter and jelly. I mean, they just go together. Right. But they didn't want the stigma of that in their minds, the stigma of self storage. And as I pointed out and you drive into the city of Chicago and you come over the Ohio Street bridge into the downtown Loop area, the first building you see is a self storage building with the exact configuration that you're talking about retail down below and self storage up above. Now I will say that the major REITs that are looking to buy them, they don't want to have or typically have a building that has mixed uses in it.

They would want to have a standalone type facility because it's easier for them to operate it's in their business. But I think if you can condominiumize it or separate it and distinguish it, then that's a way of solving that problem. That's precisely what the intention was. We wanted to condo off that portion. And we came up against a few different challenges. It wasn't so much municipality. They got it and they were on board. And again, it was as of. Right. The zoning allowed for it where we came up against issues where as we began engaging with self storage companies and we went from the mom and pop operator right on up to some of the largest in the country, the model, there was no assurance nobody wanted to have any skin in the game, if you will, at the onset, the market is very strong. It's the second highest Council district for household median income. I think at this point it's up around $127,000. It's a good market. It's a very well traffic. It's got center. It's got great visibility. It checks a lot of boxes. But we struggled with do we go and build this facility, which could be relatively expensive here and fall on our faces? We weren't experts in this. So I'm wondering, is there a place I know you're not currently in New York, but is that something where folks that are listening could contemplate? For a company like yours, is that something you would engage in and be a party to? How would that evaluation play out? Yeah, absolutely.

We're doing that in Florida. We're actually designing and building facilities for a client in Florida. We've done different things. We've strictly been hired. We've partnered or we've just acquired it and done it ourselves. So we've done all three of those things. And I assume part of the package is operations. Right. You're running the operations of the facility. We would like to let's put it this way, the main reason why we started one Stop self storage this past year was because we were noticing that one of the major reps that we had hired, we launched four buildings in 2020. And the distinction of trying to launch four in the midst of the pandemic was quite a challenge.

But in each of those in the first three, we hired one of the top three weeks in the country. And what we saw was just massive under performance. We were seeing in two of our facilities, no growth in the Occupancy. We were seeing increase in cost or labor by over 40%, as well as our marketing. But our conversions rates were in the 20s, 20%, just horrible statistics. And then the other one where we did have Occupancy, they were under market in terms of the dollar amount, and our costs were 40% higher than projected. And so the fourth one that we opened, we opened it on our own, and we immediately took off. And being outperforming the other three buildings, and that's where we determine that it's just not sustainable to maintain that marketplace with vastly underperformance and increasing in costs. So that was the reason why we started one stop sell storage. But it's not our major business. We do it to enhance our portfolio. We're not doing it as a major revenue source. So that's why we'll do it for our own facilities, but we don't do it for others. And just to be super clear, we're talking about it's the operations. Right. That was the difference. When you're operationally, you're running the facility. That was the magic ingredient of why one was performing and the other three were not. Yes. For instance, I'd get an invoice from the reach and we owe them $30,000. And I would say, well, why? And they said, well, because of the signage that we got an invoice for the signage, it's $30,000. And I said, well, in the contract, it says, I'm supposed to get $20,000 allowance from you to put the signs on the building. And the fact the contract was only $18,000 and only 13 has been installed. So why am I paying $30,000? That would imply that I'm $30,000 over the 18. And they said, well, we have an invoice, so it's accurate. And I said, well, why don't you send me that? And they said, well, we're a Fortune 500 company. It's accurate. I said, again, send it to me. And they sent it to me. And they paid off an original proposal. They didn't pay off an invoice.

They paid off a, quote, an estimate. And it was like that level of scrutiny was not there. And so it was just like. So when we asked them for the bills, they wouldn't provide us any of the bills to verify what was going on. It's that level of scrutiny that as an operator, if you see your expenses dramatically increasing and there's no justification for them, that's a major red flag. Yeah. Unfortunately, a lot of times you'll find in those bigger institutions, there's admin fees that are lumped on top of the actual hard costs. Right.

We have found in a number of assets that we've looked at. Sometimes it's 15%, 20% tapped on top of the actual work that's being done just for administering the work. It's fascinating to me that sometimes even the biggest and the best, it's just rife with inconsistencies inaccuracies, and people are not paying attention quite the way they should. Absolutely scary stuff. When we live in a world of abundance, and we're certainly in a world of abundance, there's a propensity for those things to be magnified. Right? Because it just seems like there's an endless well and an endless supply, sometimes of cash on the other end of these transactions, and it just breeds an incredible amount of inefficiency. So what does a typical transaction look like for you guys? If I want to be involved, I want to invest. Walk me through what this looks like. Well, the first part is when someone brings us a property, whether it's a broker attorney or someone who's looking at self storage, whatever it may be, however it comes into our funnel, we have lots of different ways that we get the funnels from wholesalers to brokers to, you name it. We're beginning our due diligence process right off the bat. So we're looking at market saturation. We're looking at the demographics, we're looking at what the competition is, what is the price point of the lockers, the units, all those sorts of things, and trying to get an understanding of what the market or the neighborhood will warrant. And then we began looking at the viability of that actual property. And so, for instance, the property that we're going to be closing on here shortly in Michigan, it was vastly underpriced in terms of the rental price. We're not doing any development on it. So it's very atypical for us. We're just coming in and we're managing it more efficiently and improving the performance through that way. But if we're looking at the development, then we're also looking at what's it going to take to convert this building over. And so we begin that process.

And if we check enough boxes, then we'll go to contract and we'll begin the due diligence at that point in time that will actually present our modeling to our investors. And we have a portal where all investors are, and we'll put it out there, and we'll typically do like a webinar Zoom call to run everybody through the deal. But in each of those cases, at that point in time, we've already done a feasibility report. We've already done an extensive amount of due diligence that we're confident that we're going to be going through this deal. And so that's what we'll do. And as we're finalizing the equity and the debt, we get prepared to close it. And then we're off to the races after that point in time. So your sweet spot is in the ground up. The development not necessarily ground up. I mean, a lot of times the buildings that we bought when we say distress are underperforming. And so we've been able to buy them below replacement costs and improve the building significantly below what it would cost to build a new one. In other cases, we are building new, and then in other cases, we're just strictly improving them or expanding them. So once your projects are complete, what is the appetite been like? Who's buying these deals at the end of the day? Who's buying them from us? Yeah. Are you bundling them up and selling off portfolios or that is our goal. So when we initially established that, we say we want to develop a portfolio of self storage assets in excess of $100 million, and we deemed that that would be at least ten facilities. So we're going to be going between 100 and $200 million, and there's mid level REITs that are buying them.

We can sell them off as a package or we can sell them off individually. But we're seeing, for instance, like Warren Buffett, Bill Gates, Blackstone, Berkshire Hathaway, they've all been moving into the market because they see that how recessionary proof it is. I'm not trying to be Debbie Downer here, but I think we're heading towards a recession right now. There's a lot of indicators that are pushing us in that direction, especially with the massive inflation that we've got going on and the unemployment situation. There are a couple of major drivers which are, I think are putting negative pressure on the economy. And the Feds got the interest rate way down tight. So there's only so much you can do when inflation is growing. They're going to have to release the interest rate, which is then going to slow down the housing market. And it could have a ripple effect. Yeah, well, it will have a ripple effect. You're not being a Debbie Down or you're being a realist. And I appreciate the candor in the approach there's. People forget these are cycles. And it's interesting, as we do the show once a week, folks didn't want to talk about the prospect of inflation and increasing rates and the economy slowing down. And it's been a process where slowly more and more guests are starting to open up to that possibility and the prospect of that. And it's interesting to me because there's opportunity in all markets. Sometimes there's more opportunity when the markets kind of get cleaned up and cleaned out. And I think without question, there's some choppy waters ahead. We've gone now as long as we've ever gone in the history of the country, with rates being suppressed as far as they've been for as long as they have. And we've now bred almost entire generations of folks that don't know what real interest rates look like. Right. When I graduated from College, they were close to, if not above 10%. Yeah. My first home, I started investing at a very young age. I think it was 12.5%. These things happen. And there's an ebb and a flow to them. And there's a way to hedge.

And I think that self storage is absolutely one of those hedges. I assume you guys, as you're taking down your debt packages. Well, let me not assume let me ask typical debt structure on one of your assets. Is it short term, mid, long term fixed rate variable? What does that look like on your side? Well, as we're going through construction, it's interest only, and we're building it up. And then our longest term that we have is we have a 25 year term that began during construction, which is unheard of. I mean, that was just phenomenal terms that we got. And so that's why we chose it. But typically it's like three to five years, depending on the asset class. We do have an SBA, which is longer term. So we've done SBAS. We've done longer term banks. When the markets were tight, we had to go through more of the private markets rather than the local banks. And so in each of those cases, then it's a shorter term loan where we're doing it for construction and then getting a bridge and then a perm to find once we get them stabilized. And we're looking to do a CMB type loan, insurance backed or collateral mortgage backed loan, which is incredibly low interest rates and long return. So are you finding that when you're dealing with forget about the private market on the institutional side, are the banks willing to finance the construction like an IO for construction and then roll it over into a fixed rate? Are you having to go to two different providers, or are the lenders converting to fixed rate once the product is delivered? Both. I mean, we've seen it both ways. Our one in Dayton is a long term relationship. We have, and that was great. In Toledo, it was designed to be that way. But we're looking at restructuring that one because they didn't give us the bridge component, like right before closing. They took out the lease up component, so it makes it harder to operate. It interesting you're also involved in some green technologies and development of sustainable practices. Is that part of the plan here as well? It is. I mean, that is my background. We've been doing sustainability for probably 20 years now, and we've built both sustainable commercial and residential properties. And we've won awards we've won international design awards for combining design with sustainability. And we've even written a book about sustainability in terms of how to do that in residential marketplace. But if you think about it, the fact that we're taking underperforming commercial buildings, we're not putting them in the landfills, we're reutilizing the buildings, we're improving the buildings, but we're raising up the energy performance of the buildings. That's how we've been able to qualify for Pace financing, which is a Department of Energy program. And so the fact that we put in better efficiency equipment, plus awesome motion sensor and lights that are on timers and more efficient elevators and HVAC equipment. We've been able to improve these buildings tremendously and controlling the envelope. So better insulation and taking out windows. And people might not like the look of corrugated metal or some sort of covering over the windows, but if I can put foam insulation on the backside of that and have a more stable environment, you certainly don't want to see what's inside of a locker. That's not attractive. So it's like we can control that environment better, then we're going to have a better overall economic performance of the building. So you mentioned Pace financing. Can you talk a little bit about that? Yeah. It's the Property Assess Clean Energy Act. And so if you have a building is performing at this level of efficiency, and you go and improve it. The money that you spend on that can be qualified or used with Pace financing, which is a form of equity in the sense that the interest payments and the repayment of that is spread out over the amateurization life of the asset. So an HVAC system, if it lasts 20 years, then that will be amortized over 20 years. But instead of it being under below the line item in terms of an interest payment, it gets applied to your real estate taxes as a special assessment. And so we can carry that forward to the person who buys it or it can be paid off. And so therefore, it's considered above the line item and not considered by equity by banks.

That's fascinating. And we don't hear much about it. And real estate taxes out here have become completely unmanageable. The real estate taxes are absolutely out of control. So it almost functions, it seems, as an abatement of sorts, where when they're determining this, is there a certain Lead certifications or anything that you have to achieve to be eligible for it? Yeah. Lead is actually very hard to obtain in terms of conversion or things like that, because in order to get enough points from Lead, you have to have duplicity and redundancies built into your sustainable efforts. The answer to that is no. You just have to show, like, if your HVAC system is performing at this level, let's say it's 70% efficiency, and it's costing you this much money and you raise it to a 90% efficiency, then you qualify if and it saves you money. So you have to have an energy assessment done, and if you can show that you're improving the energy performance of your building, you qualify. And have you done this in multiple States? Is this a federal thing or a state thing? It's a federal program implemented at the state level, facilitated by the local municipality. Okay. And what markets are you operating in today? So we did it in Toledo and dad, and then we were offered it in Kentucky, and we chose not to do it and offered it by the municipality or by a tax professional or who the municipality was pushing it. They wanted us to do it. Really very interesting. So just out of curiosity, what are the drawbacks? Why would you not be interested in just because the investment didn't warrant the updating of the system's? Efficiencies at that point? It clearly did. I mean, there's no air conditioning in the building, in portions of the building, so we're taking it from zero to very high. It was more our lender didn't want it. And so the fact that not every lender wants it. So you have to find lenders that are Pace compatible. Got it? That's a great tidbit there, folks, as we all find ways to try and combat and battle back these taxes that seem to have gotten completely out of control.

So there's really two mechanisms by which Pace is implemented. It's either through the local Port authority or there's privately funded Pace programs. And so in the two that we did in Ohio, they were privately funded, and that's the way in which dating was withholding our facility is that they were withholding our Pace finance because they wanted retail on the ground floor versus self storage. Got it. So we were zoned as of. Right. But they were withholding a program that we were legally entitled to, and all they had to do was sign off on it. They weren't processing it. It was just like we're going to pass this through and pay them on the real estate taxes, and they wouldn't do that. So this is becoming a common theme on the show, and I try to stay away from the redundancy where I can, but in our market, we can't. When you're doing your analysis of where you're looking to make the investments and where you're looking to build these facilities out how much of a role does the legislative risk or the legislative body play in determining where you're investing big role, because that's obviously going to be impacting demographics. Right. We're seeing the migration outside of Illinois. We're seeing people we've lost the second largest city in Illinois to people leaving the state. So those are definitely factors that we take into consideration. I know we covered it before we went live, but what markets are you currently in now? We're in Milwaukee, we're in Chicago. We have Toledo, Dayton, Louisville, Kentucky.

We just closed on one in Lynchburg, Virginia. We have in Maine, and we're inquiring one in central Michigan. Any markets on the rise in that you have your eye on, you're interested in pursuing? We're just completing a lot of those transactions. So we have a lot of our place. So we're also going to be building in Florida, and we're also helping to build in North Carolina. And I would assume as you're identifying these markets, is the population shift that's occurring now that's been very well documented. Is that playing a large role in your analysis, or is it more of a snapshot of what's there today, and that's what you're underwriting it based on? No, we look at the trends. When we were first brought to Lido and Damon, we thought like those seem like very repressed economies, and we found out that they're actually growing. And so the fact that they are growing what attracted us and like Louisville, has had 20% growth rate over the last 10% growth rate in the last 20 years. So for us, that was a very strong market, and that's why we went into that market. So we're always looking to make sure that the market is growing versus regressing. And as emerging markets continue to be just part of kind of the common, you know, it seems like everybody's talking about them and everyone's exploring them. Is there a software or a program or anything in particular that you rely on when analyzing a market, or is it more of like a homegrown formula and you have your own way of doing that? No, we're definitely relying upon software and programs that do that, and then Conversely, those programs rely upon other demographic programs that are specific. So when we look at it, we're looking at square foot per capita, which also has the demographics, which also has a growth rate, which is pulling data from a bunch of different sources. And then obviously our feasibility experts, they're pulling from their sources as well. So our reports will have both the demographics in terms of growth as well as the saturation levels.

Interesting. So this doesn't seem to be I mean, I guess it's been pressure tested enough times to accept that self storage, it really is an incredibly resilient typology as we contemplate. Where do we go as inflation is coming and it's here, right? Where do we place our assets and our investments, folks? And self storage just seems to be one of those great places to invest. Self storage was doing quite a bit of work out here in New York, Scott, and we found two years ago then Governor Cuomo removed the tax abatement eligibility from the state budget for self storage facilities. Kind of took a lot of people by surprise and put a real dent in the pipeline. Have you seen any type of legislation like that in other States where they are selectively trying to slow this down, or has it been overwhelmingly or predominantly supportive? I wouldn't say it's been predominantly supportive. Like I said, we ran into pressures in Toledo and Dayton. I think New York is very aggressive and not only was that tax, but then also taxing on I believe it was IRA or the time of removing the opportunity zone. I will say that over 50% of our investors are investing with us because of the tax strategy between opportunity zones that we've offered historic tax credits and then cost segregation, as well as IRA investment. Those are the main components of which a lot of our investors are utilizing to shelter cash to shelter their capital gains. Not only are we appreciating and growing, but we're also offering them the tax incentives on the backside. So, folks, what Scott's talking about is we've talked about the opportunity zone enough on the show for people to have a good understanding of it. New York actually decoupled from the federal benefit. So one of the absolute pillars of the program were some of the benefits with the tax deferral end downstream if you're in it for ten years or longer. Yes. Not just deferral, complete removal. Yeah. They've decoupled from the federal benefit, which the program was created to spur investment in demographic areas that really would have benefited from it. And self storage was one of those asset classes that was performing very well. And New York City just pulled out of the program, not sure even still quite how they did it, but they've decoupled from the program. And what we've seen for the folks out there that are listening and have the ability to influence this should be revisited because we are seeing a significant amount of Q ozb's and Q? Ozfs that have just shifted strategy and moved their investments to other States because they're welcoming them with open arms. And I didn't realize, Scott, that you guys are taking qualified money.

And also as part of the investment strategy, we found it to be a great program. Absolutely. We've implemented on three of our projects. So that'd be Toledo, Dayton and Louisville. And I know how they did it. They just said that you don't get the tax advantage on your personal tax returns if you're in New York, which is stifling, because what I don't really get is this was created in the Obama administration and not implemented. And then Trump basically took the exact same program and implemented it, got credit for it. But then because people hated Trump, they began attacking the program, even though it was a Democratic program and it was the most bipartisan act that was passed. It was like equally supported on both sides of the aisle. And then when Biden was coming in, he began looking at attacking it as well.

And I was like, hold on. If you're attacking 1031, you're attacking opportunity zones, you're attacking IRAs, and you're raising your capital gain tax, you're taking away every single form of investment in the real estate market. And if we're not heading towards a recession that will massively push us into recession, these are the foundational pillars of real estate investing. And if you're going after all those four pillars, you're just going to kill the market. Yeah. So not a lot of folks know that. But Scott is spot on. This was a program I believe it was Kane out of was it South Carolina or North Carolina? South Carolina was one of the original authors of the bill. And this was an Obama initiative. And I think that for just political reasons, it was attacked. And unfortunately, it has led to just through our little shop, we know of hundreds and hundreds of millions of dollars that are being shifted out of the state just so that they could take advantage of the program, which again, it wasn't one party or the other. As Scott had said, this was widely received and recognized as one of the most bipartisan initiatives to come out in quite some time. And unfortunately, it became a bit of a political football and folks are paying the price for it at this point. Yeah. The author of it was his name is actually Steve Lickman and he was working in the Obama administration. And as he said, I was twiddling my thumbs because it wasn't going anywhere. And until Trump haphazardly referred to it and to Dodge a question, according to Glichman, who's the biggest anti Trump person out there, these are his words, not my words. And he goes, I hate Trump on everything except for this. This. I love him. Everything else I couldn't agree with him on.

And when Trump mentioned it in an interview or Q amp a session, his phone lit off the hook and it just got legs and it was passed and was implemented. It's one of the first things that was passed that was passed in November. And we closed on our facility in September of next year, which we implemented in Oz. And so we were literally calling the IRS to find out how they are going to implement the program. So that's how we got involved with it. Wow. So this is not a political statement. It's not a political show. There's nothing to do with it. It's just that's how government is supposed to work, where programs like this jumpstart initiatives, especially in places that need the investments most. And again, hopefully someone's out there is listening. We screamed and yelled about it, but it was too late out here. The ship has sailed, as they say, on that initiative. But look, it's a new day. There's new leadership. Perhaps there's an opportunity to revisit it. Scott, how do folks get in touch with you? I think this is a super exciting program. I love what you're doing. How do folks find you? I appreciate that, James. So you can reach out to us at Info at

Coda codeamg for Managementgop.com, that's info@codamg.com. And if someone emails us or references the show and we will then send them a free feasibility report that we've dead on our Dayton project. So it's not something where it's completed. We're open, we're running it just historical report that we have that we can show people why to get involved in self storage and why we chose that specific market. And we're happy to give that to anybody who references the show. That's amazing, folks. You'll find the links down below. Please take them up on it. This is a heck of an interesting way to hedge and get ahead, if you can, on some of the things that we think may be coming down the pipe. Scott.

Thank you so much for the time today. It was a great guest. Super informative. I really appreciate your time. Thanks very much for having me. Oh my absolute pleasure as always out there. Everybody please stay safe.