Episode 366

Repurpose Buildings to Storage Units with Scott Krone

Scott Krone is a Chicago native whose career in architecture began in 1991 by pursuing his Masters of Architecture from the Illinois Institute of Technology. While obtaining his degree, he also worked as a Project Manager for Optima, Inc. During his time at Optima, Krone’s responsibilities included notable projects such as the 400-unit Cormandel in Deerfield, IL, the 40-unit HedgeRow in Winnetka, IL, and the 51-unit Optima Center Wilmette in Wilmette, IL.

In 2012, Krone founded Coda Management Group – a firm who specializes in managing real estate assets. Since its inception, Coda manages a wide range of real estate including single and multi-family homes, retail, commercial warehouse and self-storage and multi-use flex athletic spaces. Currently, the platform of investments is in excess of $55 million.

Krone has authored High Performance Homes – Navigating the Green Road to Your Dream Home, a book for homeowner’s seeking to incorporate green technology into their home.

Most recently, Scott also founded a revolutionary storage business The One Stop Self Storage. It’s committed to make its members’ time of transition rewarding and strives to remove challenges and hurdles commonly found in the industry. The One Stop brand is built upon the premise of providing the best in storage solutions contained in sustainable, renewable construction and it’s located in WI, OH, KY and ME (Milwaukee, Toledo, Dayton, Ellsworth, and soon to Louisville and Chicago).

Connect with Scott Krone:

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"You can invest 10,000 hours and become an expert or learn from those who have already made that investment." - Jack

Transcript
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Welcome to the REI Mastermind Network where host Jack Hoss gathers amazing stories from leaders in real estate investing.

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In each episode, our guests will tell you what they're doing that works what they've tried that failed, and best of all, you'll learn actionable steps to take your real estate investing.

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To the next level now, here's Jack with another value packed episode.

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Well, we have.

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Scott Krohn with us here tonight.

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Scott, I really appreciate you being with us and being part of the mastermind network here.

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So, with that, I'm going to definitely send everybody to your website because you cover a lot of ground, everything from multifamily investing to storage units to.

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I mean you even have an.

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Architecture degree.

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I mean, you're you have a lot going on.

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I mean it's a.

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I got I.

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Got to admit you, you've crammed a lot in in your lifetime.

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Here already I don't know where you're going to go from here, but man alive, there's a lot of Master of Architecture, Bachelor of History, and then a length of awards that I've lost count on here.

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So, I appreciate you being a part of this here today.

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And I head over to kokodamg.com. That's EOD, amg.com, I'll make sure to have that link in the show notes so you can go to REI mastermind.net for all of Scott's links because I'll include where you can find them on a couple of socializes is there as well.

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But I really appreciate your time here tonight, Scott.

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Thanks for having me, Jack.

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I appreciate the opportunity and I was just going to say, you know, perhaps if I'm facing the other direction, you'll look a little bit older so.

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No, go ahead.

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Well, so with all of that, we're going to focus because you have such a wide range of experience, we're going to try to focus on multifamily.

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Especially storage units here tonight and so this is going to be a great exercise.

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And comparing both of those type of strategies because I think there is some synergy there, but I do have to ask, you know what attracts you with all of your experience to real estate investing.

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Well, as you pointed out, I did begin in architecture and for me that's the creative portion of there's two elements to the creativity.

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One is the design and then also the other one is.

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Creating the deal.

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Structure and to me that's why I get the most satisfaction.

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I've seen a vision come to fruition.

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You know, that's something I've always enjoyed doing is seeing.

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Being able to build something and seeing you know.

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The finished product.

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So, for me, that's one of the most tangible your rewards with being in real estate and having done both the design and the build and the development is seeing what we're what their vision coming to for fruition.

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Sure, so it sounds like you also in the process.

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Now you primarily work on multifamily investing and storage units.

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But you've also you also have a management company as well.

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Is that correct?

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It is correct?

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Well, we've stopped doing multifamily.

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I sold off the portfolio in about 17 and started just solely focusing on self-storage.

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And we created one stop self-storage in response to that as well.

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What caused you to make that decision?

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Well, we had had a major REIT fortune. You know, S&P 100 company managing our assets.

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And we were seeing, you know, not very good velocity in terms of Lisa, but expenses were increasing over 40%, including marketing and their conversion rate was just like around 22%, just horrible. And so, it was costing us more. It was not being as run the way.

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That they said they were to run.

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And we felt that we could, just, you know, literally outperform them on our own assets.

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And so, we started our own management company, and sure enough, that's what we've been doing is we've been outperforming them pretty significantly.

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So, you're focused on storage units.

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Now what decide what caused you for the most part to decide on that niche outside of you know the there's a lot less of.

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Obviously, that can go wrong there.

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It is multifamily without toilets so yes also in the middle of the night.

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Regarding, you know why my plumbing is overflowing.

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'cause I stuffed, you know, three socks down the toilet or something like that, right?

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u know the major recession of:

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Understanding what it goes.

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And over the over the last few years, we've gone back and studied self-storage over the last major recessions beginning in 79. And then we were looking at.

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The Internet bubble in the housing market crash, and each of those major recessions and self-storage continually outperforms any other asset class in in real estate.

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And so, for.

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US the fact that.

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It's predictability and it's you can model it, and it's a lot easier to manage than other asset classes.

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Yeah, it's funny.

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You say that because I, I've never thought of that up until tonight.

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I have never heard anybody refer to it anything there in that in that niche as distressed self-storage I I've never heard of such a thing.

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It's very hard to find.

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Yeah, it's got to be very hard to find.

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So, these self-storage units that you're buying are they typically mom and pop type outfits?

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Or how are you locating or sourcing these deals?

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Of all the deals that we've done, we've only bought 2 existing facilities.

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The rest of them were creating self-storage, so we buy an existing building and then then we convert it into self-storage.

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Oh, really.

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So, we are working on some land development ones, but the last two that we bought one was to expand it and the other one was to improve the management.

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So that was a first for us where there's.

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Really no design or build.

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It was a very little cap ex.

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You know, replacing the fence, replacing signage, putting you know motorized gate on it, those sorts of things.

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Otherwise, the bulk of the work that we're doing is conversions.

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Yeah, so you're converting and retrofitting existing buildings?

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Are you finding certain buildings that are better suited for that?

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I know for example, in our World, Kmart like there's a lot of Kmart, empty buildings right now, is it?

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That's a perfect goal.

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Import the challenge with those.

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Is that whether or not the local municipalities will allow the building to be rezoned into self-storage?

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Some do, some don't so.

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But that's a perfect box, you know, a big square box with a loading ramp and multiple ways to get into the building.

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Is a great.

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Box for us, but we have we have different criteria.

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So, one is we wanted to see what the local competition.

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This you know what our square foot per capita is.

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Excuse me, then.

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We also want to look at, you know what the shape of the box is, how easy is it to get into it?

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Does it have enough ceiling height?

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The construction technique in other elevators?

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What size elevators?

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Those sorts of things?

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So, we take all those things into consideration.

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We've done as high as a nine-story building, and we've done.

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As you know, one story buildings.

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So yeah, I've just noticed that more and more seeing a lot of I just sure see a lot of storage units going up in my part of the world, and a lot of what you're referring to.

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People doing these conversions and you'd think eventually you just kind of run out of opportunity, but it doesn't seem to end.

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Well, right now the American public only uses only 10% of the public. The population utilizes self-storage.

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And so overall, it's not a vastly served population so but there's pockets where there's oversaturation, so that's where we look at those demographic studies to make sure that we're going into an area that's underserved.

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Sure, so in comparison to your experience with multifamily investing and now this self-storage.

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How do running the numbers differ to make sure that it's a viable investment?

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Well, I'd say.

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The first thing is that you know.

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It was very hard to get.

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Feasibility study numbers on what future demand is within multi fab?

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But we can see that immediately within self-storage, so that's the first thing.

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So, if we're comparing the two, I have a lot better understanding of what the demand is going to be.

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ratios, multi families around:

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Shows depending on the building self-storage container would be anywhere from 25 to 35%. Thirty-five would be very high.

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Yeah, like you said.

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Like we said when we kicked off there's there isn't a lot that can actually go wrong there, right?

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Do you have any that are like climate controlled or is it all?

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All with the exception of the ones that we just bought, all the ones that.

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We have built are all climate controlled.

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So, they're all considered Class A.

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You drive up your enclosed or in the building and you can unload it and take a carton roll.

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Roll your stuff to the locker.

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So, when you first got into this, did it surprise you that people would pay to store their excess stuff like this?

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But it didn't surprise me what was surprising me is how big some of these facilities are, you know? So, the ones that we're building are between 70 and 100,000 square feet.

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And so, you know those are, you know if you think about in.

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In my mind, self-storage would be like out in the country, or you drive down a dirt road and then you turn into a gravel road, and you have some drive up lockers.

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So, the two that we bought are like that.

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But you know now they're in urban settings where they're in downtown, so you know hours are literally.

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Three blocks from baseball fields, and they're surrounded by multi family.

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So, as you've been getting into storage investing like this to give us an example of a.

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Mistake that you made.

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That you learned.

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Something that you learned from that that somebody else could make that same mistake that give them a.

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Little advice on how to avoid it.

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Well, I don't think it's necessarily just within self-storage.

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I think it's it you know overall within real estate, especially now I think now it's a very critical time in the in the marketplace and the market cycle not to overpay for something because you make your money on the purchase, not on the disposition.

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And overpaying can set back any project, so it doesn't matter if it's multifamily, self-storage or whatever.

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It may be and you know I'm seeing the apartments that are trading at like 3 and three and a half four caps.

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And it's just like where's your potential upside.

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And you know, that's one of the reasons why I sold.

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My multifamily is 'cause I was like.

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The caps can't get any better and so I did.

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And you know I was wrong.

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But I'd rather be on the front side of that bell curve than on the backside because the back sides pretty fast drop.

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Off yeah no.

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I completely agree and the last couple of years we've been really dealing with a pretty strong and hot market.

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You know, things get on the market, and they were so selling really quickly.

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And there is nothing worse than overpaying for a property and then it not performing because you don't want to have to throw in extra money to just maintain.

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You in in chatting with your assistant you they mentioned that you have 3 mind-blowing facts about self-storage.

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Well, I think we touched base on a little bit.

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One it's it is a predictable model, so we can go and study the demographics.

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So, the area that we're looking for when you when people say like Class A multifamily, they are looking at, let's just say the cream of the crop neighborhood of your local city, right?

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The best neighborhoods, but self-storage.

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It's a one-to-three-mile radius.

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I mean that's how tight the location is that we're studying, so it doesn't really matter if there's.

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10 or 20 other facilities in the city.

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We're looking at a three mile.

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Radius and so it's a.

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It's a lot more focused than I was originally aware of, and so and we can very specifically pull the demographics so we will know how many square feet of lockers per square foot we will know the demographics, the population, the median household income, what the unit price is for a 10 by 10.

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The five by 10 the five by five. We will have all this data going into it beforehand, so for me, that is dramatically different. The second is just if I compare the two. The investment is like 10%.

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So, when I was my first project that I worked on was a 400-unit development that we sold for 100,000,000.

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Dollars and you know the cost were, you know, a high percentage of that.

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In Self storage 400 lockers, I mean we just bought 343.

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For like 2.

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Point $5 million.

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And so, it's like a lot smaller investment.

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But then within that I have a lot more flexibility.

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You know, if we're doing with a multi-family, I have a very specific unit count I can't change.

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That up, but in self-storage I can remove a wall.

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I can make things change a lot simpler and easier and so for that's the second one and the third one.

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It's really a retail business as well.

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A lot of people think of it as a real state play and it is, but it's also a retail business and so you have to treat it as both and so it's.

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That's what makes it another unique thing.

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Comparing the differences between the two is it is a retail business.

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Well, when you say retail business, what are you?

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What are you selling?

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Outside of the store.

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Well, I mean we sell locks, we sell boxes we sell, wrap it, but the churn rate.

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So, you know you know some people will stay like 3 months.

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Not sure.

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But some people might say only six months, so you're constantly leasing it.

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But the difference is that I don't have to go through the massive eviction process that you have in multifamily.

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Especially like here in Chicago, where it's so onerous to be an owner of a multifamily comparing to being the tenant.

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I mean this whole you know moratorium on.

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Rent I don't know how loud multifamily owners survive because of the fact that if they weren't collecting rents, how do you pay your mortgage?

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How do you pay your taxes?

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How do you keep the lights on?

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You know we don't have that stress within self-storage because if someone stops paying, we send him a notice that they ignore the notice.

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We lock their unit.

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We gave him another notice and then eventually.

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We say goodbye, then we're done.

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Sure, well you know one of the things that you said that was interesting.

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There too is that you're dealing with the three-mile radius.

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Is that typically as far as somebody will drive for self-storage?

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Yes, so the reason why we say 3 miles is about 15 or 20 minutes. So, like if you're in like Chicago, New York, LA, that might be like one block.

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OK, yeah.

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I was going to say.

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to:

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That's the difference.

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If you're out in the country that's a little bit different race.

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Yeah, yeah, that's interest.

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Thing so.

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It's more of a time constraint versus a distance constraint.

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Correct, it's how much of a hassle is it to get to it?

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Sure, so do you focus on certain parts of the country then?

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We're focusing on the Midwest.

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We're looking at secondary markets, which are underserved.

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If you look at the demographics as the country.

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Overall, the East Coast Florida, Texas and in California and the West Coast are very saturated.

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So, like the national average of square feet.

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The locker is around 7:00 but in some of those markets we're seeing that you know approaching 13 and.

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They're still building.

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And you know to me that's just like, way too much risk.

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Sure, so you know, I gotta ask you, because I'm just downright curious if somebody is having left or you've sent them a couple notices.

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What do you do with those lockers?

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Is it?

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Is it exactly like you see on television regarding auctioning those off?

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And how much gold do you actually find in those units?

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I've never found any gold, so first of all, no.

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Second of all, it's nothing like this shows.

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I mean it.

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It's sort of like the home improvement shows where they you know totally renovate a house in a week.

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Or, you know, a month and and you know then you have clients come in and say, well.

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Why can't you do this?

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You know it's like.

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Drywall takes so long to dry.

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You know tile takes so long to set, there's you know there's only so much you can do to rush these things, but you know the I have a friend in Massachusetts, and he had.

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He gave notice to someone, and he didn't hear from him, and he kept calling and we finally called him.

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He goes hey, you know you haven't been paying your rent.

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Haven't been here in like a in a year, six months.

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He goes well.

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I got a DUI.

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It's too far out in the country.

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I can't get out there.

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You can have what's in there and he goes well.

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in there? He goes a BMW model:

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You know things that they think they might hold on later on, and usually it's not.

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Doesn't have that much value to somebody else.

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It's certainly valuable to the person who stored it, but a lot of times it's just, you know, we clean it out and moving on.

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I mean there are auctions, but you know they only yield like 3-4 or $500 you know.

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Just to cover the back.

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So, it's probably best for the most part, just clear, clear it out, get access to it again and.

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Exactly, I'd rather get the unit rented up.

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What it would?

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I think I've seen some places that there's actually some guys that are just kind of provided as a service.

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They'll come and clean it out.

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For free, if they can keep this stuff.

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Yeah, absolutely.

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Yeah, so yeah, that's really interesting.

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So, tell us like your biggest project to date, like give us the breakdown of how those numbers looked and and and or what?

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What maybe you.

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Maybe that's what you're working on right now.

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No, it is.

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It's a we found a facility down in Louisville, KY.

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The first thing we had to do is we had to learn how the local state, so they don't think they were not from there.

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But in Louisville and it's 145,000 square foot building, and we're going to put about 60% of it is self-storage and the other 40% is flex warehouse space.

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And so, we're it's actually inform buildings and we're dividing half the building in for Flex tenants and then the other 60% will be for self-storage.

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So, define flex tenants so that.

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People understand what that is.

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But it's like warehouse, but it's like nicer warehouse, so it's like could be office.

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And so, for instance, we have a company that makes safety repelling equipment in there, so they assemble it and.

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Then they sell it.

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We have a guy who restores damaged furniture, and he has an artist in there and then we have a Carpenter.

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Who uses it?

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As his workshop, so we have just a.

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Wide range of tenants and so it could be.

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Any one of those tenants you know it could be an office.

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It could be, you know, storage space for a company, it could be, you know, just however they need.

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To use it.

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So, this mixed-use model that is this the first time you've done that?

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No, we have another building that's Flex, Flex warehouse space and in that one we have a mechanic.

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We have baseball fields.

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We have an indoor field.

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We have a gym in there.

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We have golf training simulation.

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We have a physical therapy for kids' occupational therapy for children and just a wide range of tenants.

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So, what's the benefit there?

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Where you have the mixed use like that plus the storage units in the same area have you found?

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And that it does it somehow balances each other out or.

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Well, the building was too big to make it all self-storage and so we were looking at how we could best utilize the building and so that's where we tapped into our other experiences.

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Said hey, if we do this and this, we can create enough revenue to make it worthwhile for us to do this.

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Oh, I see so.

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So, with these type of project projects then and your kind of splitting the use of the of this these facilities.

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They have you also taken the time.

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To figure out that.

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But what?

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What else is underserved in that area?

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Like what other businesses would fit or do you just kind of?

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Do you have to draw people as what I'm saying asking?

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Do you have to draw tenants to that facility?

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We will, but I mean, you know there's never enough.

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I mean, here's the interesting thing in Louisville.

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Coffee shops can serve alcohol.

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You know they can serve whiskey and beer, and so there's.

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A boutique hotel across the street so we can.

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Have like a Speakeasy saloon.

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You know, in one of those spaces and so, but we have a broker to help us with those in terms of.

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What is the market?

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So, we've analyzed that product as well as the self-storage to make sure that.

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There's a marketplace for that.

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Sure, so have is this pretty much all of these investments then?

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Have they all been self-funded by you and your partners?

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Or is do you have any kind of syndications or?

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Associated with.

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We have investor pools in each one of our projects and so you know we have a group of people that we go out to, and you know learn their level of interest and the projects that we're doing.

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Well, if somebody was interested in what you're doing, would they find some information or is it not open to in that way?

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But if you.

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If they go on to our website, www.codadmesg.

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You can see some of the past projects that we've done, and then there's a place that for someone to learn more information.

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So, you know with everything here.

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You got?

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Your you're doing your self-storage and it sounds like you're completely out of the multifamily, but now you're getting into commercial rental spaces as well with all of this opportunity.

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That continues to present itself.

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Have you found it hard to find that next opportunity?

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Andy, it sounds like you and your team are pretty imaginative when it comes to finding a deal somewhere.

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Well, there's an abundance of empty buildings, so that that's not the challenge.

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The challenge is finding an empty building that meets the other criteria, and so you know we look at zoning.

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We look at population.

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We look at the building structure.

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We look at purchase price.

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All those different things so you know, we're you know we're keeping ourselves busy.

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Let's put it that way and and.

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It's I think we're self-storage does really well in a recessionary

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Markets and thrives, and so I actually deemed it recessionary resistant.

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A lot of people call in a recessionary proof.

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I don't think there's anything that's proof in real estate, but I think that the trends so that it resists recessions better than other classes.

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And so, you know, I'm feeling that there's a recession coming in the next.

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You know 12 to 18 months, and so we're setting up ourselves our business for that.

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Well, with that in mind, what have you been doing differently if you if you believe that there there's a recession, I think we all kind of see something coming.

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You can't have something without record high gas prices and record high inflation and record.

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You know we; we just can't be.

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We can't continue with that.

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With all of this without seeing something burst here soon.

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Yeah, so that's a great question.

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So, some of the things that we've been doing is, you know.

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Making sure we have our debt structure good.

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And then the second thing is also, we've been just buying other assets like the one we just purchased.

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I mean that one was third.

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The market rents were 30% below market. So, what we're going to do is just go in and raising the rents and so that's our improvement to the property.

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But when we stress tests that we looked at is, you know, we looked at 5 different models in terms of stress, testing it and each one of them came back to how its existing performing is like the worst stress test because it's so underneath the market and so that's one of the reasons why we purchased that asset.

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Yeah, so that that's interesting that you a stress test.

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I don't think I've had anybody mentioned that before, so can you explain how you stress test these properties?

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You said you had five different models.

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Is this a software or something that you've developed regarding the stress test?

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Well, my mentor always talked about.

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Think of life in best case, worst case and most what will most likely happen.

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You know in can you live with worst case, and can you live with what most likely will happen?

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So, for us the stress test is, you know, playing with the occupancy, playing with the rental rate.

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or:

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You know 90% occupied. It's been 95.90% occupied for the.

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Past 15 years.

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There's plenty of demand in the office.

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much we stressed it, you know:

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So, it was like even if we were, you know, playing with the vacancy, but had higher rental rates.

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It was still doing better than what it was currently doing now, and so that's where we just determined that the existing facility.

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If you know under the worst-case scenarios, you know we can play with the rental rates but keep the occupancy and it's still pretty performing about the same.

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OK.

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Yeah, that's an actual tip there that I think everybody should take note of stress testing your property and the finance financials and.

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Make sure that under that stress, it still performs.

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That's a really important tip.

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I appreciate that, Scott.

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My pleasure, I mean, the two major things that you know everybody knows that banks look at debt coverage ratio, but they're also looking.

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At debt yield.

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And so those are the stress tests impact both of them, so that way you can look at what the debt yield is.

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OK, well you know before I'm we're kind of running out of time, but before I let you go, I really wanted to drive everybody one more time to your website.

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Thatcodamg.com again, it's codyamg.com and but before I let you go Scott, is there a question or a thought you wish we should?

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Have covered here today.

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Well, I think we touched on it briefly in the sense of where the market is going.

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I mean, you.

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Mentioned that gas prices are high, and you know inflation is starting to rise, but you know I'm preparing for a presentation, and I was looking back to the last Great Recession which was in 79.

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And you know gas prices back then were $0.85 a gallon. Now if you put that in today's dollars, it's $2.00.

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And like $0.35 but you know, here in Chicago, it's like $5 a gallon and you know we're looking at unemployment. Exactly the same 6 million people we're looking at, you know.

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The big tail.

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Also, I know let's we looked at the amount of debt compared to the gross domestic.

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It was in:

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And so, it's like we've been printing so much money to keep us from going into a recession.

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You know it's now going to be catching up with us, and the Fed feds hands are tied in terms of what they can do.

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All they can do is raise the interest rates, which is then going to slow down Pearl state.

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You know, in terms of what people can afford, what people can buy, and all sorts of things.

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So, it's in.

::

this lot lower than it was in:

::

So, the only light bullets really keeping the economy going is real estate.

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So, if we begin attacking the real estate sector by hitting the inflation.

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You know interest rates which they have to do.

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It's going to be.

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It's going to cause a recessionary pressure.

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Yeah, and and we can now we well this this past week we already saw signs of that they've they tapped on the brakes a little bit.

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It's only a quarter point but it's going to.

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It's going to go up from there.

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So, well, I really, really appreciate your time.

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Scott again, it's coda Medcom and you're welcome back anytime.

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I hope you'll take me up on that.

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Just let me know when you I'm happy to join.

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