The AAA Storage Podcast

Every property in an AAA Storage fund has cleared a long list of reasons to say no. In this episode of The AAA Storage Podcast, Paul Bennett takes you inside the investment committee with three members of the team: lead market analyst Logan Broyles, director of development and construction Shawn Beichler, and vice president of property management David Lutz.

They explain how a site moves from raw land to a fund investment: how the market is defined and how much new supply is too much, the entitlement and utility issues that can kill a site early, and why rooftops and visibility drive lease-up. They also cover what can change in the two years before the final vote, a deal AAA killed on land it already owned, and the square-feet-per-capita test that decides whether there is demand to capture.

Ready to talk about your investment strategy? Reach out at https://www.aaastorageinvestments.com/contact?utm_source=aaa-storage&utm_medium=show-notes&utm_campaign=ep-49-investment-committee&utm_content=contact

New episodes every two weeks. Subscribe on Apple Podcasts, Spotify, or wherever you listen to podcasts, and send this to an investor in your network who needs to hear it.

Download our free guides to take your investing to the next level
Chapters
[00:00] Introduction. Why every property in a fund represents several that didn't make it.
[02:10] Two Decisions, Two Years Apart. Land banking, and the difference between buying raw land and funding a project.
[03:45] Defining the Market. Site size, trade area, demographics, and the 20% market expansion rule of thumb.
[08:39] Entitlement Risk. Road widening, sewer, water, fire protection, and permitting timelines.
[13:27] Three Committee Meetings. Letters of intent, purchase contracts, and the 45- to 90-day due diligence window.
[15:14] Rooftops, Demand Drivers, and Visibility. Schools, Costco, and Walmart as growth signals, and why visibility beats direct access.
[23:38] Deal Killers Investors Might Not Expect. New supply, delayed demand drivers, code changes, and road redesigns.
[26:48] The Final Vote. What can change in two years, and what each team member re-checks before a project goes into a fund.
[35:02] Square Feet Per Capita. Why demand can't be created, and lessons from Hutto and Cibolo, Texas.
[42:30] The Last Step. How the pro forma and projected returns decide the final investment.

Creators and Guests

Host
Paul Bennett
Managing Director at AAA Storage

What is The AAA Storage Podcast?

Investing in self storage gives you the fundamentals and growth you need to grow your portfolio. But skip the opportunities from golf buddies and gurus—invest in a real track record. Started by John Muhich in 1993, AAA Storage has delivered 20% IRR across 90 deals, totaling $450M in exits. Listen to our expert insights on investing from the AAA Storage team. See more at aaastorageinvestments.com.

Paul: There's always something
that can kill a deal that

maybe looked great on paper.

David Lutz: We realized two years after
we bought the land and were looking

to have the fund begin the process
of having that go forward, there was

just too much of of supply available.

It wasn't that way two years earlier.

It was that way two years later,
and we chose to kill the deal.

Paul: It wasn't that you couldn't
lease the property up, it was

it might take 10 years to do it.

David Lutz: We can't create demand.

We can grab demand from
another competitor.

We can try and position ourselves in
front of the rest of the pack, but

the demand in the market is the demand
in the market, I can't create it.

Paul: For every property that you
see in one of our funds, there are

multiple properties that we looked
at that didn't make it to that point.

Welcome to the AAA storage podcast,
your integrated real estate and

development partner, exploring all
things, self storage investing to

bring you diversified success.

Let's dive in.

Paul: Welcome back everybody to another
episode of the AAA Storage podcast.

I'm Paul Bennett, the president
of AAA Storage, and really

happy to be here today.

Brandon Gella, who's usually with
us, uh, is actually in the background

producing today, 'cause we've got a
whole host of folks on the podcast,

and there's not room for everybody.

So, uh, Brandon will be back soon.

Uh, today we, we're
gonna have a lot of fun.

Um, I've got three guys that I have
tremendous respect for, teammates, uh,

of ours, of mine, uh, that are critical
to what we do every day at AAA Storage.

And today we're going to talk about
the investment committee process.

You know, for every property that you
see in one of our funds, there are

multiple properties that we looked
at that didn't make it to that point.

so today we're gonna pull back the
curtain and talk about the, the

process that we run to select land
initially, and then ultimately select

projects that wind up as investments
in one of our multi-property funds.

Uh, because, you know, there, there's
always something that can kill a deal

that maybe looked great on paper.

We're gonna have some fun
today talking about that.

I wanna give you some context
before we get started, just so,

uh, you, you can sort of follow,
uh, our flow here on the podcast.

run a at least a two-step process
with every investment that we make.

Because we land bank land and get it fully
entitled before it goes into one of our

funds, the first step is when we have
a piece of raw land that we're looking

at and we're evaluating as to whether
we wanna buy it with our own capital.

Um, and that's a little bit different
look than looking at a fully designed,

costed project where we've got a
full model and projections, uh, and

making a final investment decision.

So it's a, it's a two-step process,
and today, um, we're gonna go through

that process with Logan Broyles, who's
our lead market analyst, David Lutz,

uh, who is our vice president of, of
property management on the self-storage

side, and Sean Buechler, who's our
director of development and construction.

Three critical legs of the stool,
uh, in our development process.

So, guys, I'm gonna
start with, with Logan.

Um, on the initial l- uh, land
review, Logan, before we've really

had a chance to really do any kind of
detailed design or, or costing, um,

talk a little bit about the process.

Where does it start?

And, and you really lead the
investment committee process and

inform it with a lot of market data.

So talk about the things that you're
trying to pull together as information

for David and Sean, um, and John
Mewick and Andy and I to review.

Logan: Yeah.

Yeah, absolutely.

And I appreciate the intro there, Paul.

Um, I would say, you know, when
I get a, a property come across

my desk, uh, the first thing
that I'm going to do is, is to…

My intent is to look at it
through a, kind of a blank canvas.

Um, you know, uh, with the, the intent
meaning, uh, uh, you know, does it make

sense for self-storage and/or does it
make sense for, uh, industrial biz park,

uh, flex space that we, that we develop.

Um, and really kind of look at
it through each individual, uh,

lens, um, and assess, uh, which,
which could make the most sense.

Is there a viability for
both, um, or, or neither?

Um, and, and really how, how I do
that is first, um, you know, I guess

we start by saying, you know, there's
red flags, some things that can

kind of be immediate deal killers.

And for…

The first thing for me would
be, uh, the size of the

property, the size of the site.

You know, if it's a, you know,
acre and a half, two acre site,

something of that nature, you know,
I can immediately throw it out.

Um, I would say generally, uh,
we're looking for probably a

five to 10 acre, uh, parcel.

I'd say that's kind of our sweet spot,
um, in terms of the size of the property.

So it's got to be within
that range initially.

But, uh, what, what I want
to look for first is try to

define the, uh, the market.

Um, and, and how I go about defining the
market is really, uh, about assessing,

um, the, the population density as well
as the number of quality competitors.

From a storage perspective, we're gonna
look at, uh, things like drive time.

Um, you know, 10 to 15 minutes is
probably the, the national average in

terms of, uh, tenants', uh, drive time
to a given, uh, self-storage facility.

Those are some things I'm gonna look
at initially, uh, taking into account,

you know, things, natural barriers.

Um, you know, we develop predominantly
in Texas, so, uh, we're usually not,

uh, along, uh, any, uh, immediate
coastline or, or, you know, don't,

usually don't have any mountains
or anything else like that.

But if that is the case, the lakes,
rivers, anything that's naturally

segmenting a market, those are
things we're gonna take into account.

Uh, but generally it's gonna be a
three to five-mile radius that we'll

define a market as, uh, depending.

Sometimes it can be beyond that.

Uh, we'll cast a wider net if we need to
take it further out, uh, based off the

population or the number of competitors.

But once we've defined that,
we can really kind of color in,

uh, what the market looks like.

We'll take a look at, on the storage
side, uh, things like, um, uh, household

income, renter occupan- uh, renter,
renter occupied hous- housing units,

uh, what that percentage looks like.

Um, and on the biz park side, we'll
look at, uh, things like, uh, vacancy

rate, absorption rate, uh, the, um, the
market, uh, sale rate, uh, per square

footage, um, of, of given, uh, a property,
uh, average in the market there, as

well as the, uh, market asking rents.

Um, and then across both the storage
and the biz park side, we'll also look

at things like, obviously, population
existing, but also population growth rate.

And then we'll look at things
like, uh, percentage of market

expansion and rental rate trends
on the, on, on that side as well.

Um,

Th-those are kind of s-some things
that we look at individually on the

storage side versus the biz park side,
and there's obviously some crossover

and some things that we look at
that affect both, both asset classes

Paul: Yeah.

You, you mentioned market expansion.

Just explain for a minute
what you mean by that.

That's, that's a key thing
that I know you look at

Logan: Yeah, so market expansion, what
I mean by that is basically, uh, we

look at is there any new supply coming
into the market and to what extent?

So if there's a million square feet of
existing supply in a market that is online

presently, um, and there's looking…

We're looking to, uh, there- there's
200,000, uh, square feet of additional

supply in the pipeline, whether that's
under construction, in planning, whatever

phase of development it's in, it's not,
it's not currently in the market, but it

is coming, uh, through the pipeline, um,
that would be a 20% market expansion.

Um, so that's something
that we wanna look at.

Uh, 20% is kind of a general, in my
mind, kind of a general rule of thumb.

Like 20% is, is pretty significant.

Um, any- anything beyond
that, that's something that

we wanna take a hard look at.

Um, but that…

When I say, talk about market
expansion, that's really what I mean

is how much is the market expanding
by with, uh, new supply coming in?

Paul: Yeah, and I, I know David
will talk about this probably in a

minute 'cause we chatted about it
before, uh, we started the podcast.

But you, you could also look at
things like market con- expansion in

combination with other metrics, right?

So if the market's growing at
extraordinary rates, how much expansion

there is in the market may look…

Uh, the, the comfort point may
look different than a market that's

really not growing very much at all.

So there's, there's some combination of
those metrics that ultimately, uh, make

a, m- you know, make a, a go or no-go
type decision when we're looking at land.

Sean, you're really looking at it
from a whole different standpoint, um,

particularly when we're at stage one,
which is just looking at raw land.

Um, I think at that point, you're,
you're probably less concerned about

actual construction costs because
there's no product that's been designed.

There's no really way
to know what it costs.

What are the kinds of things you're
looking at in that first step when

we're looking to acquire a piece
of land for future development?

Shawn Beichler Export: Yeah, thanks Paul.

So, uh, a number of things that we
look at for a, from a site viability

perspective for the first pass,
kind of at a 30,000 foot view.

Um, there's a lot of entitlement
risks that go with it.

That can be anywhere from, uh,
DOT asking you to widen a road

in front of your entire site.

It can be water issues, where
are you getting water from.

No availability of sewer.

Just any utilities that might, might
hinder it to, that, that make it a no-go.

We also try and do a
preliminary … sketch.

Logan mentioned

a little bit earlier that, you know, if
the site gets too small, you really can't

fit enough on there for it to be viable.

So we wanna make sure that we've got

ability to, uh, uh, not in, in a detailed
civil set or anything like that, just

a site sketch that we're laying out.

Sizes of building and parking
and, and access and all those

good things that you look at to,
to see what you can get on there.

And we will look at, uh, preliminary
costs just to get a high level

view of, uh, what's going into it.

Um, those costs can change
for a number of reasons.

Uh, they can change from, uh,
material costs changing over time

so, or, or, or, prices going up.

It depends on where we're developing this.

Um, generally speaking, as you
get into bigger cities, the, uh,

the, your costs tend to go up.

That has to do with permitting
fees and stuff that comes through

the, uh, permitting office.

As well as, um, just, just the cost of,
uh, development in, in and of itself.

So that's probably the biggest things.

If there's any deal killers in there,
it's probably one of those being there's

some utility that we can't get, such as
sewer, and we don't think the site's big

enough to support us for putting in a,
um, an onsite sewer system, um, wh- which

might, might kill the site u- upfront.

So those are kind of the 30,000 foot

view answers to that

Shawn Beichler: view answers

Paul: Yeah.

Uh, you, you mentioned sewer.

Um, what about water and availability
of water and, and, and fire protection?

Uh, does that at least factor
into what you're looking at?

Shawn Beichler Export: It does.

We look at, uh, uh, uh, where
we're getting the water from.

Is water

Shawn Beichler: even

Shawn Beichler Export: available?

Um, we've, we've, we do water tanks on
site for both fire and water when we

need to, when we're in a very rural site.

Um, you'd like to get that stuff
understood up front as much as you

can, because fire protection can be
extremely expensive if you have, to put,

bring in a f- uh, a big 270,000 gallon

unit and put a pump house on it and
all the good stuff that goes with that.

So some of that stuff can be a, a deal
killer to a deal in and of itself just

because of the cost of the project

Paul: Yeah, I was leading you there
a little bit, 'cause we, we do focus,

al- although not exclusively, we
tend to be city skirt developers.

Not in the urban areas, but more in the
outlying communities around Austin or

San Antonio or Houston or Charlotte.

Um, and in those areas, you can get
into places where you either don't have

access to water and you have to drill
a well, um, and then you have to deal

with fire protection, which in our case
involves bringing in, like you said,

a 270,000, uh, gallon tank, uh, that
probably, I don't know, you would know

better now, but has a cost of somewhere
around a quarter of a million dollars

plus that can, you know, materially
impact the overall cost of a project, so

Shawn Beichler Export: And one
other thing I didn't mention

is we also look at timelines.

So if we're in the middle of Austin,
per se, doing a site in the middle of

Austin, that we know that the permitting
timelines are gonna be elongated and, and

we know that the, the review timelines
and all that stuff are gonna be elongated.

If we're out- outside of the city
limits, outside of the TE- TJ,

and we're just dealing with a fire
district for approvals, we tend to

get through those a lot quicker.

The plans can be a lot more simpler,
so they don't cost as much to get done.

So it, it, really just have to
look at the, the area that we're

going into and, and understand how
that might, affect the timeline.

Paul: Yeah, what about, what
about things specific to the

site, like topography or rock?

Are those things that when you're,
we're looking at land, are those

things that you look at and how they
might impact construction costs?

Shawn Beichler Export: We do.

Um, it may not be as much on the
initial, uh, review just because

you're, might be out on the site just
visually inspecting it, but you can't

st- see things that are below the dirt.

So, uh, in our due diligence

process further down the road, we look
at getting environmental reports back

for phase ones and geotechnical reports
so we know what's the soil like there.

Is it suitable?

Are we gonna have to
bring in a lot of fill?

Like you said earlier, are we gonna
have to dig up a lot of rock, and

figure out what to do with that.

So it does play into it maybe a
little bit more down the road in

between step one and two, but, uh,
just a visual inspection of the site.

Uh, uh, a- as well as looking
at if there's anything there

that's, uh, we've got to demo.

We've got houses or other buildings,
you know, do they have asbestos?

Whatever else that might be, a,
a, a hindrance for us getting it

off the site so we can develop it

Paul: Yeah.

Um, you, you just reminded me, I, I
haven't shared, I haven't kind of brought

our listeners along in the sense that
when we're, when we're looking at a

piece of land, I said we have at least
two investment committee meetings.

It's actually three, at least
three, because we have an initial

meeting to see if we wanna pursue
a piece of land, and that's the

discussion we're having right now.

But then w- we sign a, a non-binding
letter of intent, and then ultimately

a purchase contract, both of which
have due diligence periods in them, um,

usually 45 to 90 days, uh, where we're
actually spending money and resources

to do further due diligence on that
site, and that's really when you get

into the geotechnical stuff, the rock,
look harder at the topo and, and that

type of stuff to either, uh, in- let it
move to the next step or eliminate it.

So th- that due diligence you're
talking about is done during, uh,

once we have it under contract but
aren't yet fully committed to it

'cause we have a- an out based on
the, the ability to do due diligence.

And I, I didn't, I didn't
make that clear for everybody

Shawn Beichler: Yes,
and we're trying to get

Shawn Beichler Export: Yes, and
we're trying to get through when we

go through that due diligence, we're
trying to get every question answered

that we can that would be something
that's gonna affect cost or time.

So is it gonna cost us
more to do this or less?

Is it gonna take us
longer to do this or less?

And we, we just like to have,

uh, all those, those questions
answered before we're actually going

out there and purchasing something.

Paul: I, I think that's a great point.

Um, Sean and, uh, David and Logan
are really looking at the project

from a different standpoint.

You're looking at it almost
exclusively through, from the

standpoint of time and money.

Can we build it for a price that
makes sense, and can we get it

done in a timeframe that supports
our objectives with our investors?

So that's, that's a great
comment on your part.

David, the buck always
stops with you, my friend.

David Luce: I know.

That's, that's…

But the beauty of that, Paul, is I,
I, I really skirt out on a lot of

all that work, that extra upfront
work that Logan and Sean are doing.

I kinda come in at the last
minute with like the cavalry

and say, "Show me what you got."

It's, it's a beautiful thing

Paul: Yeah, the, David on our
team is the one o- obviously,

ultimately, that's responsible
for delivering the projections.

And so he's sort of the
last, uh, gate, if you will.

Um, he- l- David, a- and probably David,
you play a, a really important role

in the early parts of the process when
we're looking at land, but your role is

really critical when we get to that last
approval before it goes into a fund,

and we'll talk about that in a minute.

But, um, you're leveraging the information
that Logan's developed and provided

to the investment committee and the
information that Sean's developed.

What are the things that you're looking
at from 30,000 s- feet in that very

initial review of a piece of land and in
ultimately the approval to buy the land?

David Lutz: Uh, thank you.

Yeah, that's exactly what I'm, I'm doing.

Um, and I am at a distinct advantage
because of all this data that's being

presented to our committee at that stage.

Um, I'm looking primarily at rooftops
cl- I mean, a- and the beauty of any,

everything I say to you right now,
both Logan and Sean think about it too.

I, that, it's, it's, uh…

But, but I'm looking at rooftops in the
very, the, the, the, the area, the three

to five-mile area that Logan talked about.

But not just current rooftops.

Of course, current rooftops
are super important.

But, but future potential, future rooftops
that might be coming down the pike.

Um, that's vitally important.

So that's, that's a big thing.

I, I do my own due diligence to see if
I can discover, um, any kind of hidden

sort of, what I'll say, uh, secret data
such as the, the development of Costco,

the, the, the, a Costco or, uh, a local,
uh, public school or, you know, these,

these big facility structures that get
put in place when it is deemed growth of

the, of the area is, is imminent, right?

You're not gonna build a new high school
if you don't see it, if the city doesn't

do the research, the $100,000, 300,
$500,000 research to, to see that the

market area is, the area is growing.

So if I see a high school going
in, that's a really positive sign.

If I see b- being built or in the stages
of being built, if I see a, a large

Walmart, I mean, all of those kinds of
s- they're not really subtle factors.

They really impact how we perceive,
or I personally perceive the market,

uh, as in terms of its potential for
growth in rooftops, growth in people.

Um, I try and study per capita, uh,
of the actual supply, of course, and,

and, and ev- like I said, everything
I'm talking about, they're doing too.

But the supply, you know, the, the, the
square footage of storage supply today.

And then if this building is not, this
project is not gonna be built for two

years, what is our projected view of what
the supply is gonna be two years from now?

Are there new competitor, what we call
competitors, but simply are there new

storage facilities in the pipeline?

And there's data out there that allows you
to gather that information and see if in

fact there are, uh, permitting, uh, issues
that have been submitted for new projects.

So all of that research, I'm not saying
I'm doing it all, but I'm doing it

as much as I can, and I know sh- uh,
Logan is doing all that work as well.

Um, just to, to make sure that when we
say, "Yes, we're gonna build it," but more

importantly, when Sean tosses it over the
fence to me and I catch it and it's my

job to run, um, I need to be able to lease
that baby up and lease it up quickly.

And there's only one way to do that,
and that's to have local people coming

in and, and shopping with us, so.

Paul: Yeah.

you, you mentioned Walmart,
Costco, and high schools.

kind of two pieces to that, right?

Um, one, one of those pieces is,
um, you're kind of leveraging

their market research.

You're…

There's a, a background assumption
that if Walmart thinks there are

enough rooftops to support a Walmart,
then a, a self-storage facility

is probably a pretty good idea.

On the other side, you're also…

You, you know from your 23-plus
years of experience that those kind

of facilities drive traffic, and
visibility of a site and traffic by a

site is one of the places we get more
of our tenants than anything else.

Anything you wanna say about that?

David Lutz: I, absolutely, and
I appreciate you f- reminding

me, if you will, of it.

Because access, a- accessibility to
the site is very, very important.

But I want to, I wanna separate two
things, and that is immediate turn

left into our parking lot access.

That's what a McDonald's requires,
a, a, a restaurant requires.

They need to have day in, day out door
turns every single day, all day, to

make sure they can generate revenue.

Restaurants and, and, and
strip malls and things.

And all…

And, and don't be fooled.

If we had that kind of access
to a storage facility, that's

th- the best possible option.

But that's not necessarily
required in self-storage.

We have customers that
are willing to find us.

So if we are slightly off the beaten
path but we are still visible, if we

have a location that is visible to a
highway, by at 70 miles an hour and

they see our big pole sign, and they
say, "Huh, I didn't know that was there.

I only live two miles down the street.

Let me circle back around and go stop by."

Right?

That's very powerful and positive,
uh, uh, you know, a, a very powerful

and positive position for us to be in.

Um, sure, if somebody can drive down the
road and turn right into our driveway on

a, on a road , a road that has 20,000, you
know, uh, cars a day, that's wonderful.

But that's, those, that
land is also very expensive.

And typically , know, we might wanna,
we might wanna look at other land that

might have a little lower price tag.

Of cour- I'm not the buyer of the land,
but I'm just seeing it as a anecdotally.

Um, you know, let's buy the land
that has the narrow strip on the

s- on the road, the big balloon of
the property in the back so that

we can build our store back there,
have a nice big pole sign out front.

And if it can be seen by the highway
going by, that's a trifecta right there

Paul: Well, it, it's ac- actually
really interesting and a little…

It's not funny, but
it's entertaining to me.

You just mentioned a road with 20,000
cars a day you could make a right turn

or a left turn right into our facility,
and w- I know what Sean was thinking.

Sean was thinking, "Yeah, that'd be great
except for DOT's gonna require a turn

lane and a decel lane, which I'm gonna
have to build at a cost of several hundred

thousand dollars to a million or more."

David Luce: Maybe so

Paul: th- that is sort of the
balance between the two, right?

If you can be highly visible on a
high-traffic road but not necessarily have

your ingress and egress be off that road
where you're gonna absolutely, 90% of the

time, get hit with, you know, additional
costs that are significant to put in

decel lanes and turn lanes, uh, that's
probably the best of all outcomes, so.

Sean, were you, were you sweating a
little bit over there when David was

talking about that 20,000 car a day
street that he was gonna turn off of?

Shawn Beichler: I just saw dollar

Shawn Beichler Export: I just
saw dollar signs in my eyes.

Logan: We have

a follow center

David Luce: H- here's the thing
that I will say, and, and it, I,

I will say it because I'll say it.

Customers will find you
if they want to find you.

And so, um, w- it's not that we're
a destination zone necessarily,

like a big theme park might be,
but, but customers will look for us.

And, and, and when doing the
marketing properly, they'll find us

Paul: And, and the other part of it
is you mentioned McDonald's where they

need literally hundreds or thousands
of people a day in their facility.

Our facilities don't
see that kind of daily

David Luce: No

Paul: move their stuff in and they may
come back once a month or less, depending

on what they've got stored there.

And we have some business customers and
others that are a little more in and out.

But for the most part, it's not nearly the
kind of traffic you see at a McDonald's.

Well, that, that covers what you guys
are looking at and looking for when

we're at the land acquisition stage.

Um, is there any last thing from any
of you, Logan, David, or Sean, that

you wanna kind of throw out there?

Maybe it's an unusual one that for you
would be a no vote when we're looking

at a piece of land in the early stages.

Maybe it's, it's gone
through due diligence.

We're, we're ready to go hard on the
contract where we're gonna put real

money at risk and expect to close.

Is there anything that would be a deal
killer that people listening might

not think about as being an important
aspect of a project or a piece of

land that's intended for a project?

David Luce: Well, I, I'll jump right
in and say I can think about something

that people might actually think about.

I don't wanna say they wouldn't,
but because it happened to us

with one of our recent projects.

David Lutz: We realized two years after
we bought the land and were looking

David Luce: to, to s-

David Lutz: to have the fund,

David Luce: you know,

David Lutz: begin the process
of having that go forward,

David Luce: that the
competition was just too strong.

It…

Not strong,

David Lutz: there was just too much of,

David Luce: uh, uh,

David Lutz: of supply available

David Luce: and, and

David Lutz: it wasn't that
way two years earlier.

It was that way two years later,
and we chose to kill the deal

David Luce: because supply in this
market area that Logan had identified

was just too, too much, uh, you
know, for us to try and, try and

g- you know, carve out our piece

Paul: it wasn't that you couldn't
lease the property up, it was

it might take 10 years to do it.

David Luce: Right.

That's a problem.

Paul: Yeah, that is definitely a problem

Logan: there's, uh, I guess to add onto
that, um, there's another scenario I, I

would think of in terms of, uh, there's
another property that we have that, um,

you know, based on a couple of, uh, demand
drivers that we identified in the market.

Uh, for one being, um, uh, a
resident- large residential

track, uh, nearby the site.

Um, you know, any type of delay by
that, that specific demand driver,

uh, in this case it could be any,
any driver that's been identified.

Um, a delay in that, um, can really
push a project back and cause

it to be, um, maybe not viable.

Um, you know, maybe, maybe that, you know,
demand is gonna be there 'cause you're

gonna have several thousand households
within, you know, a half mile or a mile

of a site, where in reality that's not
coming to market maybe for another,

you know, year and a half, two years.

That can really, um, kind of alter,
um, you know, projections on, on what

the market may do in the near term

Shawn Beichler Export:
I'll tag onto that as well.

I mean, it w- because it takes us
a, a while to develop a site, 18

months, two years, whatever the
case may be, you, there can be many

changes in the, in the market with
regards to competition in or out.

Um, we get, a, I got into a lot of issues
with, uh, codes changing for buildings.

So

what you thought you could build here
now for this price, they're on a new

code, which now says you've got to have
sprinklers, and so your prices just go up.

Uh, DOT is changing a road, so now, you
know, the access that they were gonna give

you gets changed or modified or removed.

So just you got to watch over time
as, uh, and continue to check on

all of these jurisdictions to make
sure that things are still where

you thought they were to begin with

Paul: We're gonna pivot now.

That's a great one, Sean.

We're gonna pivot now and talk about
the final approval before it goes

into one of our investment vehicles,
um, which is generally almost two

years after we bought the land.

A- a- after step one has been done…

We, we've sort of gone through two steps.

We looked at the land initially.

We were interested enough to put
it under contract, and then we

completed due diligence and made a
final decision to put our capital

at risk to actually buy the land.

Now, fast-forward 18 months to two
years, and we're back at the table.

You've got a fully designed project.

You've got a full financial model
with projections about what rates

are, what the lease-up rate is gonna
be, what the costs are gonna be.

Um, and we've got updated market data.

That's probably the thing that, that, that
all three of you were just talking about

that can change in that two-year period.

Like David said in his example,
when we bought the land two years

ago, the market looked great.

We came back to the table two years
later, and a number of new facilities

had been built very close to our
site, and the numbers just didn't work

anymore, 'cause two things happened.

Number one, you're not gonna get
the velocity of traffic that you

need to lease up because it's being
spread around multiple facilities.

And number two, when you get in that
environment, you can almost guarantee

that one or more operators are gonna start
cutting rates in order to get customers.

And, and even if you get to a reasonable
occupancy level, the rates are so

low it doesn't make financial sense.

So that's one of the biggest
things that can change between the

initial review and a final review.

But I wanna go back through
the final review, sort of

the same order one last time.

What do you look at, Logan, specifically
when we're getting ready to pull the

trigger on putting a, a, a project
into one of our funds, putting our own

capital at risk alongside our investors,
um, to build a project and lease it up?

What are the core things that
you wanna make sure that, that

we're looking at, and, and the
things that are most important?

And then lastly, what for you is
an absolutely no vote when we get

to that point, if something has
changed or occurred or, or, or been

revealed during that two-year process?

Logan: Yeah, I think, um, you know,
my first thought would be just kind

of what you were talking about in
terms of w- is, is the market, um…

How much has it evolved and kind
of changed over, uh, the, the

time period from when we first
purchased the land till now?

When we're ready to, to, to have the,
the, the fund purchase the property,

um, what does the site look like?

Um, you know, has there been a bunch
of new supply coming in, and it's

completely changed the dynamic?

It's gonna soften rental rates.

It's gonna prolong lease-up.

Um, you know, what, what dynamics
have changed, if any, and what does

that mean, um, to the potential
risk that's, that's in front of us?

Um, that, that's really
what, what I go back to.

So really kind of sorting, you know,
kind of sifting through the market,

uh, data once more to, to really make
sure that I'm confident in what that

picture presents, um, and, and all…

each of those, uh, metrics that I
quantified, uh, initially there in our

discussion, um, make sure that we're, uh,
confident in what those project and where

that's gonna, uh, ultimately lead us with,
uh, returns on the project long term.

Paul: Yeah, and I, I know one
of the things that you do on new

supplies, we don't just depend
on the externally available data.

When we get to that point, making that,
uh, serious a decision, you also actually

talk directly to the planning board or
the people in that local jurisdiction

to make sure that you've got an accurate
understanding of what not only is already

coming out of the ground that we may
be able to see with our eyes, but also

what's in the early stages of planning
or who've, who's approached them about

the possibility of a new facility.

You really dig pretty deep there to make
sure that we don't step in that hole

Logan: Yeah, that's correct.

Um, yeah, and, and confirming
what, you know, what our sources…

Obviously we have our own, you know,
uh, different sources that we've

tried to, um, you know, identify
that information from the outset

on, but you're absolutely right.

And, and circling back and, um, you
know, having those discussions with, you,

you mentioned the planning office, for
example, um, and, you know, quantifying

what that supply is and where those
projects are along, uh, in the process.

Are they, um, just somebody that's just
kicking tires in the market, so to speak?

Or is it something that, uh, no, that
project's coming out of the ground and

it's coming out of the ground very soon.

Uh, what does that look like?

Um, so really, uh, making sure that we're
having those conversations and the, um,

you know, kind of have the supporting,
um, you know, su-support of, of the,

the individuals that can really back
up, you know, a, a, a project's validity

and, and, and what's gonna happen there.

So yeah.

Paul: So for you, the biggest swing factor
is where is the, the, the projected market

expansion or new supply in a market?

For you, that's probably the
thing that you look at most.

Sean, you're, you're now…

You, you've now gone through a process.

Your, your project's fully designed.

It's probably late stage permitting
because before it goes in the fund,

it has to be essentially risk-free
from an entitlement standpoint.

Um, and you've got really
solid cost numbers.

What are the things that you're
looking at when, when you…

when we're at the, at that final step
making an investment decision wi-

armed with all the, the two years'
worth of work that you and your team

have done, um, to vet cost and risk?

What, what are the things that you're
looking at most, uh, m- most closely?

Shawn Beichler: Uh

Shawn Beichler Export: Yeah.

so to that point, Paul,
going into the fund, I

Shawn Beichler: in

Shawn Beichler Export: a perfect world,

Shawn Beichler: we'd like to have a site

Shawn Beichler Export: fully
entitled, fully permitted, n- no

stones unturned so that when we
buy it, we're ready to start and,

Shawn Beichler: and, c-

Shawn Beichler Export: and,

get on with it.

During that time, though, towards
the end of the, the, that two-year

period, we've got a lot of balls
in the air that we're juggling.

So Logan's got a lending
ball that he's got in there.

I've got a site

permit.

I've got building permits.

I've got, uh, different permits
that are requi- DOT permits.

They all have different timelines,
so we're trying to make sure that

we're keeping those permits in check.

Sometimes I might have to get an extension
on one, so we're just m- trying to make

sure that we keep every entitlement
piece that we've got in place, uh, valid

so that we don't have any hiccups down
the road once we've purchased the site

Paul: work in that final stage really
as much about informing all the

other aspects of it than it is…

We're not gonna go or no-go
because a project cost 110 bucks

a foot versus 100 bucks a foot.

But we are gonna go or no-go based
on the combination of what it's

gonna cost per foot, what the rental
rates are in that market, and what

kind of economics it can produce.

So it really is, y-your, your piece at
the last stage is really an input piece.

Here's what it's gonna cost.

Here are any risk or remaining
open items on the entitlement side.

And then for you to start construction,
obviously we've gotta have the equity

in place, you've gotta have permits in
hand, and we've gotta have construction

financing, uh, that's ready to close
before you can actually put bulldozers

on the site and start construction

Shawn Beichler: go out to bid

Shawn Beichler Export: We'll also
go out to bid on these projects, so

we're looking at, you know, multiple
GCs to get the best number out there.

I mean, in today's environment, those
bids are good for only a certain amount

of time, so you've gotta make sure
that you, you're, not going out to

bid too early, but you're not doing
it too late so that you're, you're,

you're, missing the boat on the on the

buy.

Um

Paul: you you juggle a lot of, like
you said, a lot of balls there at the

end of the process trying to make sure
everything's ready to go, but kind

of dependent on other things that are
beyond your control, like the equity

availability and, and the loans.

David, again, the buck
stops with you, my friend.

David Luce: That's correct

Paul: y- you're probably the most critical
voice in the room we're making a final

decision because the one that's accepting
responsibility and accountability

for delivering the projections that,
that our analyst team have, have made

based on Sean's construction cost and
timelines and Logan's market data.

Um, talk about what are you looking at,
what are the things that matter most

to you in that final decision stage?

David Luce: Of course, the ultimate
question is can the store, the site

lease up in the timeline that we
predict, that in the timeline…

And, and the answer to the question,
Paul, is per capita, uh, uh, supply.

Is square foot per capita.

I mean, you start getting in the yellow
zone into the bright orange and red

zone when you're at seven, eight,
nine square foot per capita per day.

Nine is like red zone.

Pfft, no, but if we could…

If, if it's lower than that, if it's down,
you know, to three, four, five, that's,

that's a huge factor because I can't…

You said it to me several times
in several of our conversations.

David Lutz: We can't create demand.

We can grab demand from
another competitor.

We can try and position ourselves

David Luce: in,

David Lutz: in front of the rest
of the pack, but the demand in the

market is the demand in the market,

David Luce: and I can't change h-

David Lutz: I can't create it.

David Luce: So if, if we're at a nine
or a 10 square foot per capita, there I

can't create demand to fill the store.

Paul: Yeah

David Luce: So, so that's a really

Logan: Can you

David Luce: big element.

I, I then

Paul: It

David Luce: take a look at
our, our past site, uh, uh, our

past numbers, our past stores.

We have lots of relatively new
stores that we've built in the

last three to five years, and I,
I compare the markets with those.

I look at a, a store in a small town
like Cibolo, Texas, or, or a bigger

store like San Antonio, Texas, and,
and try and find a, a match, right?

And to see what we're
looking at versus how, how…

And is there a comparison I can draw,
um, between, between what we've done

in the past, um, and, and what this is.

And, it's just then you just have
to say, "What's your gut feel?"

I've been doing this
since 2002 for 25 years,

24 years.

And you just say, "Yes, I
can lease this store up."

We said that about, uh,
the North Carolina store.

Um, things might have changed there, but
I said, "Yes, I think, I know," actually,

not think, "I can lease this store up.

Let's go forward with
it from my perspective."

and the other store in, in the local,
the small Hutto, uh, Hutto store, I, I

agreed that no, this just wasn't possible.

So some of it's gut, gut feeling.

Uh, some of it's comparison of,
of what we've done in the past.

Um, but I can't create
demand that is saturated

Paul: Yeah, yeah.

That, that's the key dynamic for you.

You, you brought up a great example.

I, I'm gonna, I'm gonna expand
on it and, and we can talk about

it for a minute if you want to.

But Fund II, our current fund,
had a property in Hutto, Texas,

and when we bought the land, the,
the site looked good for both

self-storage and small-bay industrial.

And so we designed a project on that site.

Sean was three-quarters of
the way through permitting it.

Um, the site was designed,
everything was moving forward.

And when we went back to look at the
data, the storage market was oversupplied.

And

David Luce: Yes

Paul: knew you knew, and you told
us that that wasn't a, a storage

facility that you had confidence in.

So what we did is we went back to Sean's
group, and we completely redesigned

the site as a small-bay industrial park
only because dynamic on the small-bay

side happened to be 180 degrees from
storage because of a Samsung chip plant

that's built on 3,000-plus acres, and I
think it's over a million square feet.

And our site is literally within a
eight-minute drive of that facility,

David Luce: That's right

Paul: facility had created huge demand
for small-bay space by suppliers and

vendors that were supporting Samsung.

So we actually took a project that
had been approved in the early stages

as both storage and, and, and small
bay, and flipped it into a small

bay only because the storage market,
in your opinion, just wasn't there.

David Luce: right

Paul: a, that's a, that's a good
example of how our process tries

to catch shifts in the market.

You…

Because in development, you, y- y- you
buy a piece of land today, but you know

you're not delivering a product for two
y- to actually two and a half years.

Um, I, I think we've talked about this on
the, the, on the podcast before, but our

process, it's about a four-year process
to stabilize a self-storage facility.

Four to four and a half years.

It takes Sean and his team six to eight
months to get it built on average.

Uh, and then David, it takes your team
12 to 18 months to lease it up to 70

or so percent in phase one, uh, which
is usually about half the project.

Uh, and, and then we, we
break ground on phase two.

It goes a little faster because
the site work is al- already done.

And then the ball comes back to you
to push that facility across the

final lease-up threshold where we
stabilize it and, and we can sell it.

So you've got two years of pre-development
work and four years of, of actual

construction and lease-up activity.

It's

David Luce: Yeah

Paul: window from the time we buy the
land, and lots can change and move

around in a six-year period like that

Um, any last comments on, on things that
are s- or, or jump out at you that are

really no-go, um, from a, a property
standpoint for any of the three of you?

David Lutz: Well, I, I can jump
in and say my last comment for…

I- is less about the no-go
because in me, for me, the real

no-go is, is demand in the area.

That, that's the one big factor.

Um, but I would wanna leave the
audience with this thought, that rules

and guidelines are great, and also
rules are meant to have exceptions.

And you just can't…

And, and the example specifically
is we, we, we joked with

Sean about 20,000 cars a day.

and that's a beautiful thing
if you, if you're actually

on a road s- 20,000, 15, 20.

Uh, just built a store in the middle
of 2024, opened it up in Cibolo, Texas,

in which the road traffic count on that
store's road was zero per day, right?

It's, it was at the end of a run.

The run turned.

There wa- Now, the good news is,
uh, not 100 yards up the hill was a

very large housing development that
was just 10% complete, and it was

g- I can't remember how many, how
many rooftops we were gonna see.

But clearly one factor
overrode the other factor.

Y- you just can't just assume that
if it's, if it's on a dead road,

that it's gonna be a dead site.

It's not the case.

So rules are meant to have exceptions.

That's, that's my point

Paul: Yeah, and, and that's, that's
Simplot property's in growth fund

one, um, and it's in final lease up.

And I looked at the numbers today
'cause I was working on the update for

our investors, and it's right at 50%
occupied as of the end of August, um,

David Luce: After phase two.

After phase two.

Don't be fooled.

Paul: phase

David Luce: a big difference.

Yeah, yeah

Paul: And, uh, and, and really on
track to hit that four to four and

a half year timeframe that we like
to get a property fully built,

stabilized, and, and, and sell it.

Guys, this has been fun for me.

I, I…

It's great for folks out there to
get a little bit of a glimpse of,

of how the team works together.

The last step in the, um, decision
process, however, steps away

from the three of you 'cause
it's an investment decision.

So the, the construction numbers that
Sean has put together, the market data

that David has then used to say, "I'm
comfortable with these projections.

Uh, I, I could deliver that result,
um, over the next four years," all come

together with the final step is John, and
Andy, and myself looking at the pro forma,

along with our analyst, and saying, "Given
the risk that we see, are the returns that

this property has projected to produce
acceptable to us and to our investors?"

So it, it, it starts with all of
the things that you guys have talked

about, and the end result is all those
inputs go into a financial model.

The…

How fast it leases up.

What are the rental rates
that we're projecting?

What kind of rental rate increases,
if any, are we projecting?

What was the cost?

What's the relationship
between cost and rental rates?

What's the yield on cost?

Which is something we've done entire
podcast on in terms of able to predict

and project, uh, the future profits from
developing, uh, a piece of real estate.

Um, but it, it…

The final step in the process is
really a look at the pro forma and

the returns to our investors, and do
they meet our standard and, and the,

the kind of results we produce for,
uh, investors over the last 33 years.

As we wrap up, guys, I thank
you for being with us today.

I wanna encourage you, if you'd like
to learn more about AAA Storage and

just investing in commercial real
estate in general, be sure to visit

our website, aaastorageinvestments.com.

Uh, you'll find an Insights tab there
where, uh, you can, uh, it's, there are

links to all 50 of the podcast episodes
where we've covered lots of information

over the last year, year and a half.

Uh, there's also information you
can download about c- investing

in commercial real estate and,
and how to be a better investor.

Um, so just encourage you to visit
the website, feed on that information,

and thanks again for being with us.