Supply Chain Real Estate Investing, With CJ Follini

With the global economy facing a supply chain crisis, there is huge demand for domestic supply chain solutions. Enterprising real estate investors can take advantage of this burgeoning opportunity offered by the current crisis, while also investing in a sector that is poised for future growth.

CJ Follini, managing principal at Noyack Capital, joins the show today to discuss supply chain real estate and a whole lot more.

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Episode Highlights

  • Where the supply chain crisis stands in Spring 2022 (and how investors can capitalize on the uncertainty).
  • Why certain types of supply chain real estate were overbought, and overvalued.
  • How e-commerce is changing the types of supply chain real estate that are in heavy demand.
  • The single sector that CJ believes represents the most compelling risk/reward equation within segment.
  • How supply chain real estate compares to multifamily, and which sector represents the better current value.
  • The advantages of a public non-traded REIT wrapper.
CJ Follini on The Alternative Investment Podcast

About The Alternative Investment Podcast

The Alternative Investment Podcast covers new trends in the alternate investment landscape. Hosts Jimmy Atkinson and Andy Hagans discuss tax-advantaged investment strategies to help you grow your wealth.

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Show Transcript

Jimmy: Welcome to The Alternative Investment podcast. I’m Jimmy Atkinson.

Andy: And I’m Andy Hagans.

Jimmy: Andy, great to be back with you again. And today, we’re talking about supply chain real estate. We’ll be diving in with CJ Follini, Principal and Chief Investment Officer at NOIA Capital. CJ is joining us today from Los Angeles. CJ, how’re you doing?

CJ: Great. Thank you. Great to be here, Jimmy. Nice to see you, Andy. Wonderful.

Jimmy: And great to have you here with us today, CJ, and welcome to the show. And I’d love for you to tell us a little bit about NOIA Capital in your introductory question here I’m going to throw your way. But the main question is, let’s talk about the supply chain crisis that’s unfolding in this country and worldwide. How would you characterize the current crisis and what solutions do you have, if any?

CJ: Okay, well, thank you, Jimmy. I’ll start with a 10-second intro. NOIA Capital is a sponsor of NOYACK Logistics Income REIT, which is what we’re here to discuss, diversified supply chain investment. NOIA Capital is a private investment platform focused on accredited investors as well as non-accredited investors and other offerings.

NOYACK Logistics Income REIT is a regulation B offering that we created last year, and it is born, the backdrop is out of a 1 billion AUM multi-family office that has been transformed into this REIT, inclusive of some of the assets that are being transferred contributed in a 721 of REIT transaction to begin the starting line of NOYACK Logistics Income REIT.

So, day one, we have $25 million of assets, net asset value, 80, 85, in gross asset value to generate cash flow day one. The reason why supply chain real estate other than it being a three-decade core competency of myself and our team is because in all the years, and again, I mean 35 years that I’ve been involved in supply chain investment, I have never seen a perfect storm, a confluence of supply and demand factors come together to validate the investment in supply chain real infrastructure, as I’ve seen in the last, starting 18 months ago, even pre-COVID, but obviously accelerating dramatically through COVID and going forward.

You have, if I may the digitalization of e-commerce, same day delivery of organic produce, the ramp up of the mRNA research and development, which requires a lot more lab space, hence the life science demand. What else? Driverless cars, which are changing the understanding of parking garages into what we term mobility hubs, next mile logistics depots that are in the center of urban infill.

So, I just mentioned a few of the asset classes, I would include healthcare, real estate and as well because we defined supply chain infrastructure as any real estate and infrastructure that supports the delivery of a good or a service. Service being research and development, service being point of spear health care delivery.

A good is obviously organic produce, grocer, pharma R&D, all types of consumer-packaged goods that require intermodal depo storage.

Jimmy: So, you’re on the bleeding edge of a lot of changing sectors within our economies, particularly the supply chain part of our economy. The current crisis that’s unfolding, any solutions to it though? So, I’m talking about like domestic onshoring of our supply chain logistics and supply chain manufacturing. CJ, we’re seeing all over the world, all over this country in particular, I mean, what’s been in the news the last couple of weeks here, we’re out of baby formula in in our stores, right?

I mean, that’s just one issue of many, one example of the issue at large. Is domestic onshoring a big part of your investment thesis, your portfolio strategy, or am I off there?

CJ: No, no, no. Well, it is one of the primary. I say the rapid adoption of digitizing ecommerce, same day delivery, all of these lifestyle trends, even wellness, organic produce, as more and more people demand organic produce for their health, that is a trend that plays into this.

But onshoring is a macro trend that cuts across all of these sort of niche movements of all of these. We’ve had two to three decades of globalization, where we’ve distributed supply chain throughout the world, to the denominator of least expensive labor. That’s really what it’s about.

Wherever in a particular supply chain labor is cheapest, that’s where it goes. For better for worse, I’m not going to politicize the issue, nor am I going to opine on it. Just from a real estate investment perspective, when you reverse 25 years of foundation in a matter of two or three, which we’re accelerating now, because of what’s happening geopolitically, it’s not going to go smoothly, it’s impossible to go smoothly.

Before we started when we did the intro, we talked about the rubber band effect. Well, this is a really big, really tight rubber band that’s snapping back. So, the demand for onshoring, the policy shift to onshore all of these supply chains is what is creating one of the things, I have to be not as declarative. It’s one of the things creating the crisis that you mentioned.

There are others, it is a perfect storm. It is a geopolitical risk, you have a once in a generation pandemic, you have the end of a 25-year movement for globalization starting pre-NAFTA. You have all the lifestyle movements I just mentioned before, same day delivery, e-commerce going bonkers, etc.

All of these things are coming together at this inflection point, which no one, probabilistically would have expected all of these major movements to happen at the same time, and domestic onshoring is just one of those, a big one of those. And that’s why we have a crisis. It’s a bit of a mix of a external, exogenous force crisis, things happen, geopolitical, Russia invades Ukraine, killing one of the largest breadbaskets of the world.

Okay, that’s not…but it’s also some manmade, you know, whether it’s, again, should we be offering same day delivery of everything? Should Amazon, especially with ESG concerns, be delivering me a toothbrush in a giant box to my house 30 miles, 40 miles away from any depot? Should that happen?

So, there are still questions that indicate we are in the very early stages of what we understand as our future in the supply chain, very early stages. I think, and you’re seeing some of the issues right now, to give you a real-time example, Andy Jassy and Amazon is coming to terms with that future. You saw there… I mean, if you haven’t, if you hadn’t seen their last earnings call, that was horrible, and they acknowledged.

They hired too fast, and they leased too many buildings. Simple mistake, they didn’t know where they’re at. So, now they’re going to modulate that and understand maybe we shouldn’t offer same day delivery of that toothbrush, 60 miles away. Maybe we should talk to people like NOYACK Logistics Income REIT, sorry, shameless plug, talk to them about should we put central bell curve logistics depots in parking lots that are under capacity, that have, you know, that have vacancy?

So, then people can drive in, open up their locker with a QR code or their own app, Amazon, pull it out, and drive out within 10 minutes, instead of that giant Amazon truck driving 60 miles to deliver that toothbrush? Maybe that’s a future iteration of the supply chain that’s going to change the crisis and ameliorate the crisis.

Andy: Yeah, that makes sense, CJ, and I would tend to agree, a lot of these crises, you know, they can be like a long running drip, drip, drip sort of a trend, and then it takes this external crisis, like a COVID lockdown or whatever. And then this tiny little snowball rolling down the hill becomes an avalanche all of a sudden, and things seem to break all of a sudden, but you can kind of see that a lot of these factors were there, but maybe they were a little bit hidden from view.

You know, talking about a crisis, I mean, for me, a crisis isn’t necessarily a bad thing as an investor, right? Because for me, that means that there’s an opportunity when there’s a crisis. So, for instance, in the Alts world, you know, we talk with a lot of sponsors for multi-family real estate. And there’s a huge housing shortage in the United States, right, so that’s a crisis, like from a societal point of view, that’s a crisis, but from an investor point of view, that means that if you can finance, you know, and develop multi-family housing, you know.

Investors stand to gain from that supply and demand mismatch. So, what’s the opportunity here? Is it that, you know, supply chain real estate, is there too much demand and too little supply? Like, is there a shortage of it or is it more a matter that it’s mismanaged that the capital needs to be reallocated and simply managed better?

So, if I’m a High Net Worth accredited investor, looking at different private placement offerings, you know, what strategies should I be looking at?

CJ: Thank you for that question and that volleyball-like setup. I appreciate it. Good question. There’s a lot to unpack. I want to go back to what you said about opportunity versus crisis. Yeah, I mean, in the short-term for the population, it could be considered a crisis, but you’re absolutely right.

And in a greater…and a comment on the greater macro reason to invest in alternatives, placid waters, equilibrium is never a good time. You need disequilibrium and equilibrium. You need imperfect information to offer opportunity. So, this crisis, which is for many a crisis is for investors in alternatives, commercial real estate in a supply chain is not a public equity, it’s considered an alternative.

I’m not going to debate the definition, right? But you need an inequilibrium to profit and to do very well, to enter well, to have a vision on that. And that is what is right now. And that is exactly the reason we started our journey, we transformed from a multi-family office of nine high net worth, ultra-high net worth families into a private investment platform, because now is that inflection point I mentioned before, that is the perfect opportunity, because there is so much disruption, not just in supply chain, but in other asset classes.

So, that’s what makes the opportunity so ideal. Now, back to the idea of, why supply chain specifically and why so many private places? Well, we said to ourselves, if we’re going to do this, there are ways to invest in industrial, both public and private.

There are ways to invest in even cold storage, less, but there are ways. What is unique, if we can advance the idea of investing in a supply chain REIT, infrastructure REIT, if we can’t bring innovation and move that idea forward, it’s just not compelling reason for us to do it. You don’t need another 500 and number, 502 number REIT, right? Well, we think we did, and our first element of that is diversification.

I had for a long time as a family office, and the family office CIO has been pitched all of these ideas on the other side of the current transaction, I have always said, single asset target. And while I understand the philosophy of focus, the world is a fluid place, and what might be an opportunity one day in a single asset class may not be an opportunity a month later, right?

Case in point, dry box industrial real estate. So, industrial is a pan definition, it’s everything from cold storage. It’s anything that’s not a human or you’re buying stuff inside that does not allow the general public to enter. So, offices do, retail do, malls do, etc, etc. Industrial does not, truly B2B. So, industrial includes a lot of dry box industrial, which is just that, is a case in point.

I would say, out of our diversification strategy, investing in dry box industrial is our worst idea. We’re not going to do it, and it’s not our focus. There will be opportunities as I can describe what is going on in the latest movement. There will be opportunities as many flee the space, but not now.

It’s overpriced, there’s the risk, is increased, all these things, they’re easier to build, which makes the supply-demand imbalance very quick to adjust and equilibrium to be found, and then you blow right past equilibrium into oversupply. There are other asset classes that we have the opportunity because we’re self-defined as diversified, the diversification mentality, that we can deploy into that whitespace.

Dry industrial is not it. So, for me, being diversified is there are no other that I have found, because I looked as a family office, a diversified, supply chain REIT, private that you can gain the 18% to 20% potential IRR at the end of its lifespan, there is no other I found.

So, I said why not do that then? Because we’re not going to be 1 of 50, we’re going to be 1 of 1. And if right now the worst idea is to go into a very overpriced, potentially bubble, dry industrial market, well, that’s why we have cold storage to focus on. That’s why we are repurposing garages with a value-add strategy, making them mobility hubs as I described.

Healthcare, healthcare was a core asset holding for a long time, then the Affordable Care Act created uncertainty, the prices dropped dramatically, that is all flushed out of the system, uncertainty is dropping, but yet the prices are still very attractive as an entry point for medical office buildings and acute care centers and long-term acute care centers.

I actually think with cold storage, probably the best idea in the infrastructure pie. If dry industrial is the worst, healthcare and cold storage are the two best.

Andy: I like that. So, you have this whole wide segment that, you know, to an investor like myself or to an RIA, it might sound like a pretty niche segment, but in actuality, you’re looking at it like it’s this big, broad universe with, you know, all these different opportunities. And by having this diversified fund, it allows you to be opportunistic, you know, and invest where, you know, you see the highest, you know, future return.

And, you know, on that question, because you mentioned pricing, and how, you know, with the dry industrial wasn’t necessarily attractive pricing, it wasn’t necessarily an attractive supply and demand ratio, you know, we’ve seen in the multi-family world and really across almost every segment of real estate, cap rates have just compressed incredibly to the point where, to me, it starts to look like it’s not cash that’s even trying to get a great return, it’s like cash that’s trying to hide, it’s trying to not get destroyed in the bond market.

It’s just trying to go somewhere, right? So, you know, in supply chain real estate, do you think that those valuations are more attractive than, let’s say multi-family or some of these other major sectors? Or, is it a case that all of these cap rates have compressed and you’re just able to find little pockets of opportunity?

CJ: It was as a right down the middle fastball for me until you included multi-family as a comparison, so I might have to do that in two parts.

Andy: Foreseen fastball, foreseen fastball.

CJ: Yeah, yeah, it dipped at the end. Very tricky, very tricky. Like Luis Severino for you Yankee fans. Okay, so yes, I want to speak to the first part of your question. And thank you, a great question.

You’re absolutely right, the cap rate has got to a point that obviously it belied that these were not real estate investors seeking discounted cash flow over a period of time to achieve an attractive IRR risk adjustment. Those were not the people doing this. This was large pools of capital utilizing the largest all firms as allocation and proxy for bonds.

That’s exactly what it was. I can go into detail, I can say anecdotes, but I am fairly confident given what’s happening now, the reverse, that that’s exactly what’s been going on for about two and a half years. So, because dry industrial specifically is a low management expertise, it’s a low touch asset class, you have triple net leases of tenants who take care of the building, they take care of the roof, they’re tilt-up boxes, the easiest thing on the planet to build, that because of that low management required, that low expertise requirement, there’s no moat.

And when the German bund as a capital parking element dropped to negative 25 points, where you’re paying the central bank to hold your money in a German bund, in the U.S… – Wait, was that a nominal, that was a nominal raise?

Andy: That was a nominal, that was a nominal raise, yes. Good Lord.

CJ: Yeah, that was at the peak, it was late, early 2021. Late 2020 to early 2021, you can look at it. That’s no longer the case. Same thing, U.S. Treasuries, because of, tragically, the pandemic went to zero. So yes, there’s no risk, but then there was also discussion, well, are we going to go negative like the German bund? Which means then you have all these large pools of capital getting very concerned.

Where is their risk-free trade? Well, when they call up the largest players and say, what can you find me that has the lowest beta, lowest risk beta with any return? Because I’m getting zero. So, it was a case of alternatives. If I can get zero and it’s risk free, which may go negative, right? What can you get me with a lower risk, obviously, it’s not risk free, but a low beta, reasonable shot, that gets me some returns?

Well, we can get you, if you buy at a high price, we can get you a billion-dollar portfolio because these are large buildings, they come with high average purchase prices, 50 million, 150 million. You know, they’re a million square foot dry boxes, so you can move a lot of capital into them fairly easily, especially if it’s in the portfolio.

Well, when you’re doing that at a three-cap, which is what I’ve seen at the highest, maybe, I may have seen, it may have cracked three at the craziest, but it was three. I saw many deals that were sub four. You know, I bid and I never go down, so I was making offers on acquisitions and I was essentially laughed out of the room, because they said, CJ, you’re not even within 200 basis points.

I’m like, really, I just paid the highest price because it’s a wonderful intermodal location, Raleigh, Columbus. I just bid the highest price we’ve ever bid, and you’re telling me you can’t even present it because I’m like 15 out of 25 bidders? They said, “Yes, that’s what I’m telling you.” I said, all right, well, that is not a real estate play, that is something else. And that’s when I figured this out, that I’m not competing against real estate, I’m competing against Saudis.

I’m competing against the Malaysian Sovereign Wealth Fund. I’m competing against their intermediaries, which is Blackstone, BlackRock, Carlyle, Ares, that are just parking money, they’re not looking at real estate returns, because I was. So, now having diversified, I can ignore that thing, I don’t have to play in that space. But if you’re Prologis, sorry PLD, I’m going to have to do this to you, if you’re Prologis and you have a self-defined category of dry box, and you’re saying, all right, well our dividend right now is three and a half, but we’re buying it at three, how are we going to sustain that?

If we’re buying a three capital, we’re throwing out dividend and cash to shareholders 90%, by law, free cash flow, and it’s three and a half and four, how are we going to sustain that dividend when we’re buying at 3% cap rates with the insanity of the pricing? We can’t buy cold storage, like CJ, we can’t buy, you know, mobility hubs and repurpose them and value add them up, we can’t do any of that because we’re Prologis, we do dry warehouse.

Andy: Yeah.

CJ: Well, that self-definition seems risky to me. When you’re saying I can only do this in this little box, and by the way, the world wants to also do that thing, where’s the counter intuitiveness in that?

Andy: So, in some of these other sub-sectors in supply chain, the cap rates never compressed quite down to that basement of 300 basis points or…

CJ: No. I’ll tell you why. Because they require management and underwriting expertise. Our team is a real estate expert team, they’re not capital allocators, they’re real estate experts.

So, we know how to underwrite, we know how to properly assess the valuation, we know how to manage them, and then we know how to pick the right time to terminate… to liquidate either the REIT or the portfolio or the building, whatever that decision is. If you’re just looking to move funds, well, those things become problematic for you. Because if you have to go to Indianapolis to fix a 150,000-square-foot cold storage facility because the foundation cracked, because they used the wrong kind of frozen gas, well, who’s going to do that from Blackrock?

Who’s going to do that from Blackstone, right? And then if you do, the essential risk-free proxy is blown out of the water, because now you’re managing something, now your pro-forma is blown out because you had a problem in the management and the facility, so now you have to spend money in capital expenditure, and that’s no longer a risk-free trade. So, they don’t go into things like that.

Same thing, healthcare, you’re dealing with doctors, you’re dealing with people, you’re not dealing with faceless boxes, right. And people require high-touch management.

Andy: Yeah.

CJ: Especially doctors, I love you, but you know all know, you know, and you’re geniuses, but you know, you do like to get what you want and you should. So, these are moats. In the real estate world, these are moats. I want to get back, I’m not going to ignore your cross asset class comparison question about multi-family. I’m going to say, I can’t give you any, you know, cogent insight because I am not a multi-family expert.

I don’t pretend to be, and when we first of all are from our former multi-family, they were, I mean our multi-family office, they were, which is why we didn’t traffic in it, because we had some of the biggest experts and they didn’t need my exposure or my expertise to give them exposure to multi-family. Now, we may.

I am cautious about multi-family because it is influenced by many factors that are outside of underwriting probabilistic analysis, like political agendas. Political agendas, subsidies, rent stabilization, rent control, movements in the societal, you know, the socio-economic landscape…

Andy: Who knew the CDC had emergency powers to regulate multi-family housing?

I’m still not convinced they do.

CJ: I’m trying to stay away from that one but thank you for bringing it up. I was trying to chart a middle course on that, referenced the pandemic and the CDC, but it’s exactly what I was referring to, exactly. So, imagine you’re a new reader who’s investing in multi-family, and you just made a big move in there with a lot of capital, and all of a sudden CDC says, guess what, they don’t have to pay you anymore, they don’t have to pay you for as long as we say, oh, but you have to keep paying the banks by the way.

Your lenders, yeah, you got to keep paying them. But your customers, no, they’re not going to pay you anymore.

Andy: And we’re not going to reimburse you either.

CJ: And we’re not going to reimburse you. And by the way, they’re not leaving, imagine that. So, this has been my concern about multi-family, for right now, of course I didn’t anticipate the pandemic, but yeah, I should be in a different business if I did. And, but there’s always something like that. Multi-family affects something more essential and it cuts across a different lifecycle of investment when you’re touching that many people, and it bleeds into political, socio-economic and other agendas that there is no way, I don’t care how smart you are as a real estate investor, that you can quantify the risks.

So, I see, I have always seen that as a black swan risk. And surely, it came true during the epidemic.

Andy: I think I agree with you, and I would say, I know Jimmy has a follow up here, but I would say I do see a trend of more and more investors, regardless of their politics, but more investors and sponsors just investing in red estates, just you know, there’s still risks, there’s always political policy, legislative risk, but, you know… Like, I know, for instance, a developer in Chicago, who loves Chicago, big Chicago guy, and he’s building multi-family all over the country, top tier company, top tier execution, everything.

He wouldn’t invest or develop in the state of Illinois in a million years. He wouldn’t even think about it. You know, he’d laugh at you if you proposed it to him.

CJ: It’s funny, I have found an office that’s the exact same, maybe they’re the same one, who knows, we should compare notes on the name. Exact same situation, they were a large multi-family and office, and office developer in Chicago for many years, they’re now investing in supply chain because they said, CJ, we can’t invest multi-family in states that we don’t know where…we can’t underwrite. We can’t underwrite black swan geopolitical risk, or even, you know, domestic political risk, you know, we can’t underwrite that.

So, how do you go into an investment that you know is going to be either 10 or multigenerational, how can you do that? Now, maybe if it’s a 50-year investment, you just let it all happen and it all plays, and all sort of washes out over 50 years. But not a lot of us are multigenerational investors when you’re looking for an IRR in the 18% to 20% or greater, right?

So, it’s a five to seven, eight-year-old. And if you can’t assess the risk of the government, I find that to be essentially uninvestable. So, I get it, you said red states, a lot of people now on their collateral are calling them smile states, because, you know, if you look at the smile across the country, everything below that.

As soon as someone, as soon as it’s on a podcast like this, and by the way, this is a very innovative and cutting-edge podcast, but as soon as you and I are talking about that concept, that’s makes me think maybe there is an opportunity in the counterintuitive approach. I don’t know what it is. I don’t know what it is. But when it becomes a zeitgeist moment, like we just discussed it, there has to be a trade on the other side.

Jimmy: Yeah.

CJ: I haven’t identified it yet, so…

Jimmy: That’s a really good point, CJ. As a matter of fact, about an hour ago, I was on another podcast with my friend Scott Hawksworth at multi-familyinvestor.com, and we were talking about this very issue, a lot of development, a lot more investor-friendly, landlord-friendly in red states. You see what New York City is trying to pass through their …or I think it’s New York State is trying to pass that new rent control legislation, and I just think that does nobody any good in the long run.

I think it’s meant to relieve renters, but I think even it negatively impacts renters in the long run unless you happen to be one of the lucky few who are looking to rent-controlled space for however long, but it really cramps supply in the long run. I was hoping we could shift gears a little bit though, I don’t want to make this all about multi-family investing.

Well, I’m pulling up your website here over on my screen over here, and just kind of looking through it. Before we got on, CJ, it shows that you guys at NOIA Capital believe that our nation’s supply chain infrastructure is undervalued relative to the demand of e-commerce, I was hoping we could talk a little bit of e-commerce here for the next few minutes.

CJ: Great.

Jimmy: Why is that the case though, why do you say that, and how does eCommerce enhance the value of this specific sector?

CJ: Because when a country of 332 million people at the 2021 census, I believe I’m close, all of a sudden they decide that they want things the same day and they want it delivered to them no matter what the quantity is, and they’re not going to go to the stores on a weekly basis or they’re not going…they’re going to change behavior on a significant scale, when a country of this size does that, well then there’s unintended consequences of that decision.

And the unintended consequence is that it has to get to you, it has to be somewhere first. Oh, by the way, if it’s organic or perishable, it has to be cold all the way along the way. So, when you make that decision for large scale infrastructure and you make a lifestyle, behavioral decision in two, three years, what is the span of all of this same day delivery and, you know, all of Amazon delivery and everyone, right?

It’s only a three or five-year occurrence? Well, these are 10-year cycles, or 20-year cycles on building this infrastructure. Therein lies the inequilibrium. So, for example, more specific example, same day delivery of organic produce which has to stay cold, you have about 45 minutes, an hour, even if you’re using a cold box truck, well, you have to be in that area.

Unless you have dispersed depot cold, hard to do, but it can be done. What if parking garages served that function for next mile, you know, the last repopulation? So, you move into cold, 40 minutes, then you’re outside the city, that’s the outer ring, and then when you’re delivering to the individuals, that perishable item went to a parking garage which the top floor served as a cold storage relay depot, and then it was dispersed because all of those parking garages are in urban infill locations.

They’re great, they’re fantastically located for next mile delivery. So, what if this was…if there was a new understanding of this cold chain that sort of popped along the way, keeping it at never more than 40 minutes in transit, especially depending on…right? That is sort of what you’re going to have a very decentralized supply chain, especially in the cold storage supply chain, very much so.

We went from super regional million-square foot boxes to then delivery over time. That is not going to function the same way with the way e-commerce is offering services. If they pull back those services, okay, maybe we go back to the past, in the way that the supply chain functions.

Doesn’t look that way. Walmart Direct, Walmart buying Jet, jet.com, another giant entrant into the same day, tomorrow delivery concept, right? Even the smaller Kroger, Erewhon, Ralph’s, Publix, regionally grocers, they’re like, well, if we’re going to compete with whole foods owned by Amazon, we got to get it there the same day. In fact, there’s now cloud kitchens that will get it to you, the top 50 SKUs of the grocery, you know, supermarket, they’ll get you the top 50 SKUs in 20 minutes.

How do you do that with…? Yeah, right, cloud kitchens are actually delivering food, but there’s cloud delivery services, they’re like, all right, just pick the eggs, milk, etc. Top 50 SKUs for that market, put them into a little ground floor, retail facility, go dark on the front, so it’s not people facing, and we go in and out, 15 minutes we deliver to the population.

That’s the business, it’s a hard business. And one of the reasons it’s hard is all these startups didn’t realize the cold chain is really hard to manage. It’s really hard to build and manage, and you need it to be cold. So, for me, cold, the reason I’m reiterating that over and over, and mobility hubs as a complementary, the cold chain in this country is at least a five to one demand-supply imbalance.

Dry boxes that I mentioned before is not that anymore. In fact, it may be going in the other side, the side that the owners of these boxes don’t want it to go. And we might be approaching oversupply in the dry boxes because people are functioning, they’re working differently, more decentralized, more dispersed, more perishable items, etc.

And faster, faster demand of delivery. So, I think there’s too many big dry boxes and not enough small cold boxes. Our mantra for NOYACK, one our best ideas, smaller, closer, colder. Smaller, closer, colder.

That’s the idea that we’re going to be focused on for the next two years.

Andy: I love that. And, you know, Jimmy is signaling to me that I only have time for one more question here on my end, and so…

CJ: I barely saw his shoulder twitch when he did that.

Andy: I wanted to ask about the wrapper here. Jimmy and I you know, we’re all about the wrappers, he’s a big Ozzy fun guy, and you know, at AltsDb we cover DSTs, REITs, we cover all sorts of wrappers. So, I always like to ask, you know, why, you know, for your product, for NLI, why did you choose the public non-traded REIT wrapper were there specific tax advantages, were there cost advantages?

I mean, obviously, there were. So, what, I guess what benefits does this give you as a sponsor, does this give to investors by using the public non-traded REIT wrapper?

CJ: Andy, thank you again, for that question. I wanted the public to know, we did not set these questions up, we spoke five minutes before this. And that is an awesome question because that is a significant difference, one I didn’t know we were going to get into because it’s a little esoteric, and I know we’re pressed for a bit of time. So, that is exactly the reason. So, the public yet non-traded model is a next iterative step of the syndication club, closed family office model of LLC.

When you securitize under the 1933 Investment Act, updated by the Obama JOBS Act, you now create a fractional currency. By doing that, the optionality for the investors grows exponentially. One of which is, let’s say you’re a family office that has a property, and you want to contribute under a 721-upgrade exchange, you can’t do that in the old legacy LLC, let’s all get together and buy this.

You either take a check, pay the capital gains and move on. Now, you can contribute, get 721 convertible warrants, you get all the benefits of the share as in pro rata distribution, maybe you manage it, because you know it better, just maintain the pride of ownership, and you can partially monetize the family member who wants to go their own way.

Those are all things that would not have been available. I hate to say this, seven out of the nine families in our family office had inter-family lawsuits for that very situation. When we speak to family offices, that is the number one pain point that we are helping to solve, is they don’t all want to go the same way.

So, having the ability to fractionalize in this private way, one maintains the potential for long-term attractive [inaudible], not the risk in the public market that all of a sudden it’s a fickle world, even if your company is great, Apple is great, Prologis is great, but guess what, the people may just say, well, today, I don’t want them, and then your value, not intrinsic, but your stated value of that share price goes down, because all of a sudden, it’s a new day.

You’re affected by external forces, exogenous forces that have nothing to do with the value of that real estate or the business, right? We don’t want to be subject to those vagaries, so we get the optionality of a security without the fickleness of public markets and the tremendous excess costs of, you know, Dodd-Frank in the public markets.

So, we get that. DST, not many people, that’s interesting, Delaware Statutory Trust, which is an interim vehicle that allows 1031 exchanges, another great option with a public non-traded REIT. You sell a property and you have a significant gain, especially if you’re like the people we talk to, our IRAs, family offices, those are our core investors, it works.

I’m a family office who seeded, who contributed very valuable, thematic links, supply chain assets. I am putting my warrants, which are priced at the current valuation independently appraise into a 401k. I happen to be aligned on my age, 55, and in 7 to 9 years of this hold, I’ll approach the redemption, whereby that gain of these 7 years will come out tax-free.

That’s tremendous boost to the overall internal rate of return, tremendous. Or, I have two sons under two, #oldfather. You know, there is also a step up in basis where you can transfer to another generation through that 401k of shares.

You cannot do any of this under the LLC family office model, you can’t do any of this. Roth IRA even more compelling if you qualify for a Roth, sometimes a lot of our people that we invest as we speak to do not, but you can still have a lot of this complimentary strategies with, you know, corporate defined benefit pension plans, another great use for public shares that are non-traded, tremendous ability.

Stable income depending on the strategy, supply chain, real estate of stabilized assets. Stable income, tax advantaged with the terminus over time. So, that’s why in a Delaware Statutory Trust to put a coda is that you can exchange a sale of a property, the boot gain, the capital gain goes to a qualified intermediary.

That qualified intermediary buys the Delaware Statutory Trust shares, which owns, the Delaware Statutory Trust owns the shares of this REIT. It’s a third-party derivative ownership of the shares, all of which is tax deferred on the gain of your initial sale.

So, rather than having to have a deadline and find another property…and so many people don’t meet that deadline, and then it’s bust, this is a tremendous if understood, a tremendous flexibility for those 1031 sellers, seeker into this REIT, and they get the diversified supply chain strategy, with tax deferment.

Andy: Yeah.

CJ: So, thank you for bringing that question up, those are, all of this optionality and flexibility and tax advantaged strategies are the reason we did this primarily.

Jimmy: That’s great, CJ. And yeah, no, we love the DST structure over here at AltsDb, we think it’s great. And gives somebody who has been doing 1031s and managing properties actively a chance to essentially perform another 1031, but finally, they’re a passive investor, and they get access to some institutional quality real estate that maybe they wouldn’t otherwise be able to access, because it’s fractionalized through that DST structure and, you know, you’re providing that, I think that’s tremendous.

But I think we are…

CJ: Jimmy, I want to say.

Jimmy: Go ahead.

CJ: I want to say the last thing, I have to say that the fact that you brought that up, I can’t…I’m not just…you know, this is not idle flattery, but it is such an underutilized strategy, it is so misunderstood. In fact, ironically, or coincidentally, we’re having a two-hour meeting with accountants and tax lawyers today for us to explain it to them, you know, just today, about the Delaware Statutory Trust and our plan to utilize it for 1031 exchanges.

Think about all the tick deals, attendant and common deals that attorneys and accountants and all these people went in that are unwinding. Well, they don’t want to just pay a tax and crush their IRR, but they also are not operators, they’re not managers. Well, if they can’t find as a group a like-kind exchange, they’re done, and the chance of that happening is probably less than 5%.

This is an opportunity for all of those tick deals that were all the rage in the late 90s and mid-aughts that are coming to fruition now to exchange in a passive way, just as you said, into a real estate-centric tax-deferred way. I think that the Delaware Statutory Trust is going to be incredibly discussed much more in the next 5 to 10 years, especially if the Biden administration changes the 1031 laws.

Jimmy: Oh, yeah.

CJ: Especially.

Jimmy: No, for sure, I think the tick party, it looks like the party is coming to an end and DSTs might be the new hot thing out there, the place to be. And I know, maybe you don’t like opportunity zones as much as I do, but I still think opportunity zones are another good option if DSTs may not be right for you for one reason or another, opportunity zones are a good plug for them.

CJ: Jimmy, I was actually with John Metairie, I was actually on the National Advisory Council to create with the Maryland Senator, I helped write the National Opportunity Zone Legislation. My problem, I love the idea as a job creation, it is the best, and you’re right, you’re to espouse it, and you’re right to advocate for it.

How it’s being utilized is on individuals, not on the people who sponsored it. That’s a different story for another podcast.

Jimmy: Yeah, we’ll have to save that for another time. CJ, our time has run out for today, we’re going to have you back on at some point down the road, I’m sure. I’ll be looking forward to that. Before I cut you loose though, CJ, where can our listeners and viewers go to learn more about you and NOIACapital?

CJ: Thank you. Our REIT is NOYACK Logistics Income REIT, the website is noyacklogistics, N-O-Y-A-C-K like my backdrop, logistics.com. And we’re happy to talk. And if you go to my LinkedIn, my telephone number is right there, give me a call, and I’ll explain everything in detail as I just did today.

Jimmy: Terrific. Thanks, CJ. And for our listeners and viewers out there today, if you want links to all of the resources we discussed on today’s episode, if you want access to CJ’s cell phone number, his LinkedIn account, you can access our show notes for today’s episode at altsdb.com/podcast. And don’t forget to subscribe to the show on YouTube and on your favorite podcasting platform, so you’ll be sure to receive new episodes as we release them.

CJ, again, thanks for being here today. I really appreciate your time.

CJ: Wonderful to be here. I loved the conversation. Thank you, gentlemen.