Investing in Undeveloped Land Secret Strategies

**SPEAKER_1** (0:01)
Welcome to the Money Tree Investing Podcast. Stock market, wealth, personal finance, value stocks. Invest in your life.

**Kirk Chisholm** (0:10)
Hello, Smart Money Tree Podcast listeners. Welcome to this week's show. My name is Kirk Chisholm, and I'll be your host. So today, I'm joined with David Baker. How are you doing today, David?

**David Baker** (0:18)
Good. Thank you for having me, Kirk.

**Kirk Chisholm** (0:20)
Glad to have you on. So David, before we dive right in here, tell the listeners a little bit about your background.

**David Baker** (0:25)
My background originally is as a hedge fund manager. That's how I started my career after receiving a law degree, and I ran three small cap micro cap funds over the course of 20 years. I also took a left turn from the capital markets after that, and got into the self-storage business, where I bought facilities that no one would buy. Everything they teach you to do in business school, I would not do, and everything they taught you not to do, I would do. So we bought facilities in bad locations, poor condition, low occupancy, and turned them around.
I also spent some time doing some reverse mergers and alternative going public transactions during my career until the regulators made that not possible in terms of depositing securities. And then eventually I ran a tech company for five years, and then got into the land and water business.

**Kirk Chisholm** (1:24)
You focused on a lot of different areas over your career, but why water?

**David Baker** (1:29)
Well, water is the most precious resource on the planet, and there's a scarcity issue that's affecting the entire world, and water runs with the land. So originally, when we started this business, we got into land and realized that the water component, the creation of water rights itself is one of the most valuable parts of land and the investment return profile.

**Kirk Chisholm** (1:55)
How does it work with water and water rights?
You know, I know there's a lot of farms and a lot of parts of the country where water is a bigger deal than others. So talk about how that all works to start. Like how do water rights work? Where's the value there?

**David Baker** (2:11)
So water rights are different in every state. The prioritization of water rights, the process of getting water rights, the process of using water, it varies in every state. And in Montana, we look at two types of water rights, two main types. One is groundwater rights, which is drilling wells and then acquiring the rights through filing some administrative paperwork with the Department of Natural Resources and Conservation. And then there's surface water rights, which can be more complicated. So that's creeks, rivers, streams, lakes. And there's a process for that too.
And Montana is a headwater state. So our water situation is better than most states, if not every state in the United States. But still, people want water. So there is a process.

**Kirk Chisholm** (3:03)
What do you mean a headwater state? What does that mean?

**David Baker** (3:06)
So a lot of water in the Western United States starts in Montana. So literally, if you're driving along the mountain ranges, you can see the crevices and ravines that come off the mountains and they're actually feeding the rivers. You can actually watch the water coming down the mountain and feeding the rivers. And so a lot of the water starts here in Montana that feeds the Western United States.

**Kirk Chisholm** (3:29)
I know watching the series Yellowstone, one of the issues was the water rights and people damming up their properties so they could keep the water instead of flowing it. How does that work between different property owners? I imagine if it's that valuable, people don't want to share it and they want to keep it for themselves.
How does that work in Montana?

**David Baker** (3:49)
Nobody can legally dam up their property for water without filing for water rights. In this case, it would be surface water rights. Again, you have to go through a bureaucratic process. Now, there are things like springs and things like that, but still, the proper way to do it is to go through an administrative process and nobody owns the water in Montana. People can use it, but nobody owns it, and that's why there's this process.
Even for things like data center properties, so properties where data centers are being built, they have to acquire the water rights to use that water. Sometimes, you'll find properties, often we do, in our business, we'll find properties that have waterfalls, that have one or more creeks going through it, that have a river going through it. The water can be used, but again, to do it properly, there's a process. But of course, everybody wants to keep their water. If you look at our analysis, our research that has emanated from our business, there's a 4X return on water infrastructure. So it's actually much higher in some places. It can be 100X in New York, where landowners have sold the water from their property to the city of New York, but in any event, at a minimum 4X. So that means if you drill a well and you put in a pump and you put in a pump station and you build cisterns for underground storage, for every dollar you spend, you'll get $4 back. So that's also a big incentive for people to develop water infrastructure and it's easier than, let's say, surface rights, a lake, a river, etc.