The AAA Storage Podcast

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: If you're considering investing
with us and you've got a list of questions

that you really weren't sure how to ask,
today's episode is gonna be for you.

Today, we're gonna cover 15
questions that we get asked super

frequently by investors who are,
are taking a look at Growth Fund 2.

Um, and by the end of the episode, you'll
know how the fund works, what the risks

are, how the money flows, and everything
that you need to make a decision about

whether Growth Fund 2 is a fit for you.

Brandon Giella: All right,
so let's get into it.

15 questions on the
clock, lightning round.

Paul, question number one is: how
do you actually make money in a

deal like this with Grow Fund 2?

And

Paul: whole strategy of Growth Fund
2 is to develop, stabilize, and then

sell at stabilization self-storage
facilities at small-bay industrial parks.

And there is a significant value
creation in the development process.

Uh, I won't dig into it.

Brandon, you can give them the, uh,
former episode that kinda covers that.

But, but the difference between what
it costs to build a facility and what

the cash flow streams, uh, it do-
it provides once it's stabilized,

the difference in the value of
those two things is pretty profound.

Um, and it's really
what drives the returns.

And you, you make money because
we develop these properties and

then sell them, usually within a
four, four and a half year period.

Um, and that's really where the profits
come from, uh, in Growth Fund 2.

Brandon Giella: that is yield on cost.

Y- yield on cost.

That is

Paul: my friend.

That's exactly right.

I, I, I wasn't gonna … I couldn't
… You know, with two minutes I can't

dive into how it … You know, that.

So I wa-

Brandon Giella: I

Paul: I, I … But you can refer
them to the episode that we d-

we dove deep on yield on cost,

Brandon Giella: Yeah, there's
another episode where I learned

all the math behind this, this

Paul: so.

Brandon Giella: Uh, it is called
"Understanding Cap Rates, Yield on

Cost, Development Spread, and IRR
Cap Rates," where we talk about

all the math that goes into that.

So, uh, we'll link that in the show
notes, but, uh, please go listen to that.

That will explain everything
Paul just explained there.

All right.

Number two, similar question.

why develop ground-up instead of
just buying an existing facility?

That's a question you get a lot.

Paul: Yeah, it is.

Um, uh, I think investors who are
building a portfolio of, of passive

real estate investments probably
should … Not probably, sh-

definitely should invest in both.

It's really not an either/or question.

Um, so if you're considering Growth
Fund 2 and all you've ever done is

invest in, in funds or partnerships
that are acquiring existing assets,

you ought to think seriously about
adding ground-up development.

Ground-up development Outpaces inflation,
where buying existing assets will

generally keep pace with inflation.

And for me personally, I want a part of
my portfolio that's increasing the buying

power of my dollars, not just maintaining
the buying power of my dollars.

That's a fundamental reason.

And there, there are other reasons.

Uh, although there is incremental
risk in ground-up development,

it does provide higher returns.

Um, and those higher returns and
the, the yield on cost and the

basic dynamics of value creation in
development provide a buffer that can

help absorb negative market influences
in terms of real estate market.

Where as acquiring an existing piece
of real estate really doesn't have any

margin for error if cap rates expand
or there's oversupply and, and rental

rates are forced downward because
of that supply-demand imbalance.

Brandon Giella: That's helpful.

It, it, it absorbs mistakes.

I

Paul: I mean…

Brandon Giella: way.

Paul: So, you know, it, it, it is a…

I- I'll give you an example.

We'll go along on this
question just for a second.

Brandon Giella: Yeah.

Paul: of the world.

Those same development deals, de- deals
that were developed during that ti-

time period that saw longer hold periods
or longer lease-up periods, will not

provide the returns that the investors
or the sponsor expected in most cases.

But instead of a mid-20s IRR, it may
be a mid-teens IRR or te- or 12% IRR.

Um, and so we're not underwater,
uh, i- i- i- you know, if you

look at it from that standpoint.

That's where it can absorb some of
those negative market influences.

Brandon Giella: That's helpful.

That's, uh…

We've got a whole nother episode
again, uh, you know, all the

math and logic behind all that.

Uh, this episode, you can go back to it,
is why invest in ground-up development,

and you can find that on our website
or YouTube, Spotify, et cetera, uh,

Paul: Yeah, and,

Brandon Giella: You'll find
all that kind of information.

Paul: And Brandon, I'll mention,
we do, uh, I don't know what

the date of the next one is, but
if you go to aaainvestments.com

and go to the info or the Events
tab, you'll see we have, we do a

webinar on that very same topic,
just like we did the podcast.

And it's a 30, 40-minute webinar that
kind of really dives deep on, on why

ground-up development makes so much sense.

And there's one coming up
in the next few weeks, so.

Brandon Giella: a couple weeks, I
think, uh, June 4th is when we scheduled

Paul: Okay

Brandon Giella: go, go schedule that.

Yeah, that's perfect.

Perfect.

related question, again, I think, uh,
is, is Growth Fund 2 a passive income

play or a growth play, and why does that

Paul: Yeah.

P-- um, very much a growth play and
not an income, uh, oriented investment.

And if you're looking
for, you know, pass…

quarterly checks in the mailbox,
if that's where you are in terms of

your investment objectives, this is
probably not the right fit for you.

Um, because we're doing ground up
development, there is no cash flow,

obviously, during construction.

And until we get properties at the
seventy, seventy-five percent leased,

um, point in their evolution, they really
don't generate any excess cash flow, and

that's exactly the point where we're gonna
start marketing that property for sale.

So if we're on strategy, um,
we're gonna be selling a property

about the time it would normally
start to produce excess cash flow.

However, we do provide what we
call lumpy cash flow, and that is

we distribute the cash from each
exit as we sell those properties.

We would expect the first exit in
year four, um, and then a series

of exits th-through the balance of
year four, years five, year six.

So all your cash starts coming back to you
in year four as we sell off properties.

And our, our objective is to liquidate
the entire fund and get all the cash and

profit back to everybody by year six.

We…

To be conservative, we tell people six to
eight years, but we really shoot for six.

Brandon Giella: Uh, this is kind of a
follow-up question here, but, um, uh,

how do you know if you are looking for an
income investment or a growth investment?

Maybe there's some investors
that are listening that…

Just give them 30 seconds on what, what
is a distinct-- how, how do I make that

Paul: Well, uh, uh, most, most
income-oriented real estate

investments involve, um, the
acquisition of an existing stabilized

asset that is generating cash flow.

Um, and so investors that invest in
that environment are typically investing

because they want the appreciation over
time in the real estate, but they also

want those quarterly dividend checks
that come from the excess operating

cash flow ast-after debt service.

Um, and so if, if, you know, if, if
you're at a point in your investing life

where you're transitioning from W2 income
to living off the assets that you've

accumulated, more than likely, that type
of investment is a good fit for you.

You want your capital to,
to keep pace with inflation.

You don't wanna take any, um, outsized
risk, and you need income to help,

you know, cover your lifestyle.

Um, uh, but I, I'm, I'm not a proponent…

I'm, I'm a pro- I'm not a proponent
of people in their 30s, 40s, 50s, and

even early 60s sort of abandoning the
idea of growing their capital, um,

and settling for a portfolio that's
totally built around existing assets

with limited upside may be a little
harsh, but l- l- less attractive true

growth in the value of their capital.

Brandon Giella: Yeah.

as a 35-year-old, I'll take that
advice and I'll, I'll carry on.

Uh, okay.

So we've got another episode on
understanding the waterfall, so

understanding some of those mechanics.

Uh,

Paul: Yeah.

Brandon Giella: Paul explains
a lot of that for us.

So related question number four, talking
about a 7% return, a preferred return.

Does that mean that somebody gets
7% every year from their investment?

Paul: probably one of the most
common questions we get, Brandon,

just in terms of people trying
to understand what to expect.

Um, that 7% preferred return is accrued.

It is not paid out.

Again, remember, we're,
we're ground-up developing.

On day one, we own a bunch of dirt
and, you know, we got a, a, you know…

It's not producing any income.

Brandon Giella: Yeah.

Paul: and it won't produce
income that could be distributed

at an individual property for
three and a half to four years.

Um, the 7% preferred is a,
a foundational piece in the

waterfall that works like this.

When we sell a property, our
investors get 100% of their capital

that was allocated to that project.

Um, and, and that's the first step in
the waterfall, the first thing that

happens once we have the money in
the bank from the sale of a property.

The second thing that happens is
they get the 7% annual preferred

return, um, for the life of the time
or the entire time their capital

was invested in that property.

So if, if we held that property exactly
four years, they would get 100% of

the capital from that property, and
then they would get an amount equal

to 28% of their original capital,
which is 7% times four years.

And those two things occur before,
as a sponsor, we get a dime.

So what the pref is really meant to be
is downside protection to the investors.

The worst the investors can do … Well,
that, that's not stated correctly.

I, I mean, obviously, theoretically,
it's possible they could lose money.

In 33 years, we've never
lost an investor a dollar.

But, but theoretically, what it's
meant to do is make sure they get all

their money back, plus a 7% annual
return before any other money is

distributed, and that's really the
purpose of the, of the preferred return.

Uh, it is not paid actively, and it
is confusing to a lot of investors

Brandon Giella: Yeah.

So again, that waterfall episode,
just t-type into our, our website, uh,

aaas storageinvestments.com/waterfall,

and you'll, you'll see some

Paul: Yeah.

There, there are two more steps
in our waterfall beyond that.

We have a very simple waterfall.

There are four steps in the whole thing.

Those are the first two, the
two that we talked about.

Um, and the last one's the one everybody
really cares about, which is how all

the profits after the pref and our
catch-up on the pref are distributed, so.

Brandon Giella: Mm-hmm.

Okay.

That's helpful.

question number five, I think
you've already answered.

When do I actually see money
come back after investing?

You're saying typically
around year four up to

Paul: Yeah,

Brandon Giella: eight.

Paul: yeah.

So fund, fund two has 11 projects in it.

There's no way we can start
11 projects at one time.

So those 11 starts are spread over the
first 24 or so months of the fund's life.

On average, a small-bay project takes
three to three and a half years to go

through the construction and lease-up
cycle, and a self-storage facility

takes four to four and a half years.

About a year longer.

So if we start a project, project one
should be ready to sell in year four.

Project two should be ready
to sell later in year four.

Project three should be, well,
uh, you know, it, it's sequential.

And so you start exiting at
year four, and you've started

everything over a two-year period.

Assuming they all hit that sort of average
four, four and a half year period, then

you're exiting from year four through
year six, and that's really how it works.

And, um, you know, you might
say, "Well, how do you know it's

only gonna take four years?"

'Cause we've built 120 of these.

And, um, and that's…

that would be, you know, a very typical
hold period from start of construction,

um, to, uh, the stabilization and
ready-to-sell, um, state for a property.

So it's, it's really based on
what we've done over 33 years.

Brandon Giella: right.

You've been doing this a long time.

You got the process down pretty good.

So let's, let's start…

Let's go back to the beginning of this
process, this next question, number six.

do you decide whether a deal
is actually worth doing?

Paul: Hmm.

Um, when we…

So, uh, I think this is, uh, probably
one of the questions later, so

I, I'll try not to answer it now.

But we land bank all the land.

We'll talk more about
that maybe in a minute.

Um, so we're holding the
land with our own capital.

We get it des- the project designed,
permitted, all the civil work

done, all the engineering work.

Um, but we underwrite a
project at least twice.

We do it when we buy the land.

Uh, we look at that market.

We go in detail.

I think we've probably done at least one
podcast with Logan on underwriting and

all the different things that we look at.

And if we determine that we think the
supply-demand balance in that market and

the rates that people are able to charge,
uh, and all the factors that matter, from

traffic count in front of the site to- The
square foot per capita, uh, that exists

in that market, uh, then we buy the land.

We go through a process.

It takes a year to a year and a half.

As it approaches the completion of the
pre-development process, we then ten-

um, tentatively assign it to a fund
based on timing, and it goes back through

our investment committee with updated
market data, cost data, everything

updated, and returns, projected returns.

It has to go back through the
investment committee a second

time because it has to meet…

The market has to be there.

The, the, the, the projections and
assumptions have to be reasonable

in that environment, and the
returns have to meet the criteria

that we set, which is essentially
a minimum of a twenty percent IRR.

Um, so it's underwritten
twice in our process.

And once it passes that second
underwriting, it's formally assigned

to a fund, and then as that fund…

And then we build the, the schedule
from there, depending on a variety

of things within a fund, so.

Brandon Giella: We do have an, an
episode on that, uh, about the,

the details of, of underwriting.

It's called "How We Underwrite a
Storage Deal, Start to Finish."

And our director of marketing says
it's our most downloaded episode ever.

so definitely go check that out.

It's with Logan Broyles, who's our
senior market analyst, and, uh, he, he

walks us through that whole process in a

Paul: Yeah.

Brandon Giella: It's really great.

Paul: a great guy.

Brandon Giella: That's great.

Okay, so question seven.

We gotta speed this up, Paul.

We're taking forever.

Uh, what do sophisticated investors
like family offices and high net worth

individuals look for before they commit?

Hmm.

Paul: Um, they're looking for a sponsor.

B- uh, first, they're looking for
a fit to their allocation plan.

Um, family offices and larger investors
tend to be more sophisticated in terms

of how they plan to deploy capital.

So the first bar you have to cross
is do they have a bucket of capital

they're gonna deploy in self-storage,
in our case, in small-bay.

Uh, and, and also ground-up
development versus existing.

Um, the, the second thing they look for
is a sponsor who is financially sound,

experienced, um, and deal terms, uh,
that, that, um, meet their criteria.

It's not uncommon, particularly
because the people that you

named are larger check writers.

A lot of them won't even look at, at
an opportunity unless they can deploy

more than, you know, a million dollars.

And when they're gonna invest that
kind of money, they expect, um, to

get terms that reflect the level
of investment they're making, so.

Uh, but the biggest things are,
um, the quality of the sponsor, the

financial stability of the sponsor,
the experience of the sponsor, and

then smaller things like reporting.

Um, you know, how well do you report?

Um, how, uh, how- Informed.

I, I think we had Van, um, Isley on
our, uh, on our podcast, who runs

Isley Family Of- Isley Ventures,
which is their family office.

And, um, you know, one of the things
he said on the podcast was, "If we

have to call you to find out how
things are going, that's a problem."

And, um, and, and so, yeah,
that's, those are the kinds of

things they typically look for.

Brandon Giella: Yeah, I love that.

Yeah, that episode is what family offices
want in an investment and how we deliver.

And so Van talks about his whole
story and how you guys got connected

and what he was looking for when,
when working with AAA Storage.

So great episode of an, an actual

Paul: M- m-

Brandon Giella: somebody

Paul: favorite, my favorite
thing about that whole episode

is Van's journey and Van's story.

Um, you know,

Brandon Giella: Yeah.

Paul: guy that went to East Carolina
and wasn't anything special, grew

up on a farm, and, um, built a,
uh, build a materials business

that was doing well north of 700
million in revenue when he sold it.

So great

Just a great entrepreneurial story.

Brandon Giella: Yeah, amazing
American dream story right there,

Paul: Yeah, it really is.

And he, and he's

Brandon Giella: their kids.

Paul: be a better guy than Van either.

He's just a great human being, so.

Brandon Giella: Yeah.

Yeah, incredible.

Yeah, definitely go check that out.

Okay, question eight, how much of your own
money do you actually have in this fund?

Paul: Hmm.

That is a common question.

Um, th- th- two answers.

Number one, we've been the largest
single investor in every investment

we've ever offered to the public.

Um, second of all, specifically in
Growth Fund 2 today we have a $6

million commitment of our own capital.

That would make us 13% of the total
capital, which we anticipate being

about $46 million this, um, for
this fund, uh, for this portfolio.

Our plan is to increase
our commitment to $10.2

million, which will put us at about 22% of
total capital, um, and we'll be by far the

largest single investor in the fund, so.

We, we … I, I think I said this
before, Because I'm an old country

boy from North Carolina, we eat
our own cooking around here.

Um, and, and the fact of the matter
is, Brandon , that we, um, we, we

are more real estate investors and
developers than we are fund sponsors.

Um, the, the whole effort to raise capital
is something we're trying to learn to do.

There are a lot of guys out there
that are capital allocators, and

they're slick, and they raise lots of
money, but they really don't have the,

the true subject matter expertise.

Uh, they just depend on sponsors
who do, and, um, we're the,

we're the opposite of that.

We really are.

Our, our first love … The reason
we're raising capital is because when

we combine our capital with investors'
capital, we can actually do more,

and that's, that's our objective.

Brandon Giella: Mm-hmm.

I like that.

I like that.

Eat our own cooking.

All right, another question
you get a lot, question nine.

from investors and the
perspective of an investor.

How do you ever come, uh, could
you ever come back and ask me for

more than I originally committed?

Paul: The answer to that
in Growth Fund 2 is no.

Um, we specifically wrote into the,
the the private placement memorandum

and the, uh LLC agreement that we
are not allowed to, uh, have capital

calls beyond people's commitments.

So if you make a $100,000 commitment
to Growth Fund 2, that's your

commitment and, um, and we can't
come ask you for more money.

That's an easy one.

Brandon Giella: Great.

Where does my capital actually go?

Is it one specific project or
across the whole portfolio?

Paul: Yeah.

You, you can't really track a single
dollar, um, i- in terms of where it goes.

It's not…

You know, once it goes into
the fund, it, it's, it, it,

it, it's just not that linear.

Uh, but what does happen is…

I, I'm gonna make up an example.

If it were a $10 million fund and you
were a $1 million investor or 10% of the

total fund, you would effe- in effect
own 10% of every project in the fund.

Um, it really isn't about where your
dollars go because where they go may

depend on when you come into the fund and
what's under construction at that point.

But when you invest in the fund,
you are a member in the LLC, and

you have a pro rata interest in
all the assets that the fund owns.

Um, so when you invest with us,
you're truly investing in 11

different projects, and you have the
opportunity to benefit from, uh, the

success of, of all 11 projects, so.

Brandon Giella: love that.

That's great.

It's like real partnership.

Yeah, I love that.

Uh, okay, next question is what…

And this is, is a lot of
unique stuff going on here.

It's kind of a new structure, but
what's a fund of funds, and how does

investing through one actually work?

Paul: Oh, that's a whole
podcast in itself, right?

'Cause we already did one on it.

Brandon Giella: We do.

We do have

Paul: yeah.

Fund of funds traditionally was an
institutional vehicle where a sponsor

would raise capital and then invest
it with a myriad of different, um,

s- other fund sponsors in an attempt
to create a blended or balanced

return profile that may cover
multiple assets or types of assets.

The modern version of it has become
… is, has really become popular, and

it's where average, ordinary, everyday
people, uh, who have a network of people

who know, like, and trust them, uh,
and who are accredited investors, can

become a fund manager We have a partner
called, a company called TriVest that

provides a compliant platform and all
of the fund administration so that

anybody listening to this podcast, um,
could become a fund manager, form a

fund with TriVest and our assistance,
go out and raise a million dollars, um,

and invest it with us as a single LP.

Uh, and the way the fund, the fund
structures work is because that entity

is writing us one large check, and
we're only getting one LP, we're able

to discount the terms for them, just
like I said a minute ago about family

offices and institutional investors.

It's an expectation when you're
writing a million-dollar check.

Um, and that spread between our
standard terms and the terms we

give them become the fund manager's
compensation, while at the same time

his investors or her investors are
at parity with our direct investors.

So they're at no disadvantage.

There's no extra cost, no
extra fees, um, for them.

They're at parity with our direct
investors, and that spread between

our standard terms and what we
allow for a fund manager is, is, is

the compensation that goes to the
fund manager for making the effort

to go out and raise the capital.

That's a really short explanation
of a more complex picture,

but hopefully that's helpful.

Brandon Giella: Yes, yes.

There's a whole episode about that
to, to dive into those details.

It's called "Behind the Fund of
Funds Curtain: Fees, Alignment,

and When It's Worth It."

And we talk to the other Brandon, uh,
who's, uh, heading up Tribe Vest in that.

So he's really great.

Paul: Yeah, and, and for most people
on this, uh, that might be listening to

this podcast, that really doesn't matter.

Um, but there may be a few people out
there that say, "Hey, you know what?

I'm pretty well connected with guys
that like to invest in things."

And I believe the fund-to-funds concept
is a win-win-win because we get capital

we would never have seen because it's
coming from people we don't know.

The fund-to-fund manager can make
$125,000 for raising a million

dollars, and the investors that
he brings have the opportunity to

see an o- see something that they
would have never other- otherwise

seen had he not taken it to them.

So I think everybody wins in that concept.

Brandon Giella: Yeah,
I think that's awesome.

That's really great.

Uh, okay, so question number 12: What
happens if construction costs spike,

and how do you protect against that?

And I'm thinking, what comes to mind
is a couple of years ago, lumber went

through the roof, and then steel went
through the roof, and yeah, what do

you do in that kind of situation?

Paul: Yeah, so I ran some data
recently, um, and I, I won't be

able to recall all of it, but I
had this question from an investor.

Um, they were, you know, concerned about
tariffs and that type of thing, and the

reality is when you break it down, I wish
I had the numbers in front of me, but

the actual material costs are about 30%
of the total cost of the self-storage.

The rest is land, soft costs like
engineering and architectural,

um, uh- Labor, other components.

So only about 30%.

So when you run the numbers,
a 15% increase in the cost of

materials, and I mean all materials.

If concrete, steel, which is basically
the two materials that are in our

projects, uh, both went up 15%, you're
looking at about a 6% increase in the

total cost of a project, which, if
you wanna go full circle, would lower

your yield on cost from a minimum
of nine and a half to about 9.1,

um, which is not a good thing,
but doesn't destroy returns.

Brandon Giella: Yeah,
that's a great point.

Okay.

Look at it in isolation and
then put it all together.

It's not that big.

I like that.

Paul: Well, a- and let's, let's
be honest, Brandon, if you stop

and think about it, um, that…

those cost increases would be
representative of inflation.

And absent negative supply-demand dynamics
in a market, inflation would generally

give us the ability to raise rates.

Brandon Giella: Mm.

Paul: And r- the higher
rates simply cover…

it takes you right back to your
nine and a half plus yield on cost.

Now, if you, if you're in a
market that's oversupplied and

there's pressure on rates, then
that doesn't necessarily apply.

But in a balanced market, um, if it
costs us more to build, we have the

right to charge more for it, and the
market will bear it because, you know,

it's a rising tide floats all boats.

I mean, that is, in effect,
what inflation is, right?

When s- things start to go up, other
things start to go up, and that's

where you get the, you know, the
whole dynamic of inflation, so.

Brandon Giella: Yep.

Yeah, yeah.

And there's a-- You guys do a lot
of work on the underwriting and the

analysis on hyper-local markets and
knowing what different markets can bear.

There's another great episode on that.

I, I don't have that in my
notes, but the hyper-local, uh,

Paul: Yeah.

Brandon Giella: we did was really,
really great to help isolate this

is how we think about looking at the
supply-demand dynamics and competition

and all that within a region.

Super

Paul: Yeah, I, I mean, I, I,
I'm not trying to dismiss it.

Cost increases are not a, a positive
thing in any way, shape, or form.

Brandon Giella: Yeah.

Paul: but, but it's not
something that should, should…

Uh, uh, let me put it this way.

If we build a facility today and we
have got, you know, 15% increases in

the cost of materials, um, somewhere
down the road, somebody else is gonna

be building one, and we're at 2026
cost basis, and they're at 2029 cost

basis, and their costs are more dire.

So it, it, it's, you know.

Brandon Giella: Yeah.

That makes sense.

That makes sense.

Okay, question 13.

Let's talk about taxes.

What's the tax story?

What does investing in this fund
actually do for me at tax time?

Paul: So we will be claiming
bonus depreciation in fund two,

two, excuse me- Uh, in Fund II,
which means that not in, not…

That some in year one, because the
fund started construction of its first

three projects not long after the
first of the year, so they should be

placed in service i- in this year, uh,
which is the requirement before you…

You have to claim the bonus depreciation
the year the asset's put in service.

Um, so there'll be some
excess losses this year.

Um, probably more in years two and three.

Our losses tend to be spread out
because, uh, we build in phases.

So, you know, a $6 million project,
we're building 3 million of it this

year and 3 million of it two years
from now once we stabilize phase one.

So everything gets a
little more spread out.

Uh, but we anticipate somewhere in
the neighborhood of 35 to 40% of

any investor's investment amount
would come back to them in the form

of, of excess losses that they can
offset other passive gains with.

One of the things people miss, uh, i-
is in 1986, the Tax Reform Act changed

how real estate investors can use
depreciation losses or losses in general.

Passive losses can only be used to
offset other passive income or gains.

Most people don't have passive losses
from other investments in a given year.

If you do, then you're a sophisticated
investor, and good for you.

But most don't.

Um, and so where they really become
useful is you can, you can roll them

forward and start to use them to offset
the passive gains that we create in Fund

II when we start ex- exiting properties.

And every chance in the world
that if you roll that…

If you don't take it in the year it
occurs, but why would you take it?

You can't use it against W2 income.

So if you don't have any passive
losses or, or income, there's no reason

to take it, so you roll it forward.

You get to year four, we sell
the first couple of properties

and you've got a gain.

You use those unused passive losses to
offset that gain, and now your exit,

the first exit or two is tax-free.

And that's really probably the most
reasonable use of the losses that

we can generate in Growth Fund II.

Brandon Giella: Sure.

At least a few people
listening understood that.

kidding.

That stuff is complicated.

Now, this should be probably
a disclaimer somewhere.

You're not a tax accountant, but
you work with great accountants.

You've got all the paperwork lined
up for investors to work with

their accountants to, to sort

Paul: Yeah, and the, the, the, the…

I mean, we'll do a cost segregation
study, which is required to

claim the bonus depreciation.

The accountants will decide
what the amounts are.

I won't have anything to do with that.

Brandon Giella: yeah.

Paul: the losses will appear on
your K1, uh, the, at year-end,

which your accountant then
uses to, to do your taxes with.

So,

Brandon Giella: right.

Paul: I can talk about the concepts
all day long, but I'm no, I'm

no tax advisor or CPA for sure

Brandon Giella: same.

Taxes are so wild for me.

Uh, yeah, so, uh, and I think on one
of our earliest episodes we did, we

talked about a lot of the documentation
that you provide to investors, so

that's a, a really handy resource to
kind of walk through all that kind

of information, 'cause you will get
a stack of papers you need to talk to

your accountant about at some point.

Uh, okay, number 14: What does the
debt look like at the property level?

Paul: Yeah, I had that question
today from an investor.

They, they wanted to, they wanted to know
what the debt in the fund looks like.

The only debt in the fund
is at the property level.

Brandon Giella: Okay.

Paul: really only makes
sense if you use leverage.

Uh, you wouldn't develop for all…

I mean, I guess you could, but I
don't know anybody in my thirty-five

years, forty years of doing this
that has developed with cash.

And, and construction financing, w-
we're borrowing today at Wall Street

Journal Prime plus zero in a five to
seven-year note with thirty to thirty-six

months of interest-only payments at the
beginning of the loan, um, and then a

twenty-five-year amortization thereafter.

Um, and that's what the debt looks like.

It's personally guaranteed, uh, by us.

Um, construction loans generally
require a personal guarantee.

So in addition to our equity
investment, we'll have guaranteed

about seventy million dollars worth of
loans, um, in, uh, in Growth Fund 2.

Um, and we finance everything we
do with local and regional banks.

Um, we've talked to
the private debt funds.

We've looked at opportunities to get one,
uh, credit facility that would, that would

take care of all the properties in a fund.

We've looked at syndicated debt.

We've looked at, um, at the larger banks.

Uh, we consistently get the best
terms you can get in the market

by simply underwriting and then
originating loans on a one-by-one

basis with local and regional banks.

Brandon Giella: I- I'm
not an expert in this.

I know you are, but that, those seem
like pretty good terms, what you just

Paul: Yeah.

Brandon Giella: as far…

Uh,

Paul: In, in today's market,
they are pretty good terms.

Brandon Giella: Yeah, that's

Paul: yeah.

They're…

I mean, it's…

We, we borrow a lot of money, and we've
repaid it all, um, for thirty-three years.

So it makes us a good risk.

Brandon Giella: 800.

Yeah, they're super happy with

Paul: Yeah.

Brandon Giella: That's great.

Awesome.

Okay, very cool.

I didn't know that.

Uh, question number 15, last
question: What happens if something

doesn't go to plan on a project?

Because as we all know, plans work
out exactly as we imagine them.

Paul: Yeah, the only thing I can
guarantee you about most plans

is that reality will be a little
different than whatever your plan was.

Um, so a couple things.

Number one, we account…

W- we, we build, um, construction,
a 10% contingency into all our

construction cost estimates.

Um, we, we do fairly tight projections
on a month-by-month basis for the entire

anticipated holding period of a property.

Um, and we project working capital needs,
which would principally be driven by

the most common risk, which is a longer
than expected lease-up term, right?

So you've got this debt that you have
to pay every month, interest only

for the first 36 months, and then,
then you're amortizing that debt.

Um, and if it takes longer to
lease a property up than, than you

planned, the result is more negative
cash flow than you planned for.

Um, so we, we do very, very tight
budgeting for these projects.

We try to, to work in some
additional working capital in

terms of how we, um, size the fund.

Um, and those projections are actually
tied to our accounting system,

so the current month's update…

Uh, so I can look at real time
and say, "Here's the history.

Here's what we've got
projected to it going forward.

Does that look like it, it's a smooth
curve, or, or are our projections off and

need to be adjusted so we can see again?"

Um, so, but at the end of
the day, we plan for that.

Uh, we, we build contingencies in,
and that's really how we handle, um,

you know, those unforeseen events.

In a significant or dire…

Not, dire would be the wrong word, but in
a, in a major miss, we have the financial,

uh, ability to loan the fund money to
make sure that it can get through that

slower than expected lease-up, um, and,
uh, and get the property to a point

where we can sell it and, you know,
give a return back to the investors.

That's certainly not, um, what we,
uh, expect to do, but we're, we

have done it in the past and we're
capable of doing it, and that's…

Because we don't have the ability
to call capital from investors,

that's our backup solution in the
worst of worst case s- scenarios.

Brandon Giella: So you are
a well-capitalized sponsor.

Don't worry about it.

Paul: Yeah,

Brandon Giella: We

Paul: that's…

Brandon Giella: of.

Paul: Yeah.

Brandon Giella: I

Paul: Yeah, that, that would…

That's…

I probably…

See, you're so much better
with words than I am.

That was a 30-second answer and
I gave a three-minute answer, but

Brandon Giella: No, I love your answers.

let me try to sum all this up.

So it's 15 questions.

Paul, you were on the hot seat.

Thank you.

So here's me summing this up.

Check me if I'm wrong.

This is a growth fund, not an income fund.

Capital goes in, it gets deployed across
a diversified portfolio of ground-up

self-storage and industrial projects.

It works for four to five years, and
you get it back at the exit around

that four to six to eight-year period
with your accrued preferred return and

your share of the profits pro rata.

not get quarterly checks.

You will not be able to pull your
money out early, but you know your

maximum exposure before you sign.

This is on the dotted line.

This is how much I'm gonna give.

Nothing more than that.

You guys have $6 million of
own money in the same fund.

Every project goes through 100
pages of due diligence before

the dollars are committed.

And when something goes sideways, you,
the sponsor, calls the investor first.

You guys work this out.

Um, and is that, is that a fair summary

Paul: Yeah, I think that's
a really good summary.

Yeah.

Brandon Giella: right.

Paul: Yeah, it's a good summary.

Brandon Giella: if this is the kind of
investment that somebody listening is

looking for, please give a call to Paul.

Uh, you guys would be, uh,
well taken care of by the team.

There's tons of resources.

You guys are very transparent about
what you, what you do and how you do it.

We've done, what, 37, 38 podcasts
now and all kinds of articles

and, and social media and lots
of contact info for the team.

Like please reach out to them.

Webinar coming up soon to ask your
questions, but I'm hoping, uh, for those

listening, if there's-- this is a good
fit, this is the kind of investment you

wanna make, that you would be a, a good

Paul: Yeah, and peop-people can
absolutely reach out to me directly.

The easiest way is to go to
tr-- aaastorageinvestments,

that's with an S, .com,

and there's a contact form there.

You fill it out.

It actually goes directly to
Andrew Frawley, our Director

of Investor Relations.

And within twenty-four hours, uh,
Andrew will send you some basic

information on the fund and invite
you to schedule a call with me to get

questions answered once you digest that.

That's really the sim-- If you
have interest, that's really

the simplest pathway, uh, to us.

Uh, but you can, you know…

I think my phone number's
probably on the website, so you

can just call me if you want to.

That's good too.

Yeah.

Brandon Giella: It is.

That's great too.

Thanks, Paul, so much.

Uh, I know you guys work
hard on, on all this.

You get tons of questions.

You host webinars, and so there's lots
more questions that people have, and, uh,

you're a very welcome to discuss these

Paul: Yeah,

Brandon Giella: So

Paul: that's the other thing.

We do a live webinar every other week.

Um, and, uh, you could jump on
the webinar, sort of see the whole

presentation, and then we open
it up at the end to questions

and, um, there's no bad question.

So, um, attend one of the webinars.

Brandon Giella: That's right.

Amen.

All right, Paul, thank you very much.

We will see you on the

Paul: Thanks, buddy.