Buy and expand - not as easy as I thought

A bird-dog I have a relationship with brought this to me; it wasn't technically off-market, but it was not listed by a storage broker and felt poorly marketed. And I wasn't the first to see it, as a couple other bigger players had passed on it, but I saw value.

Two drive-up facilities four miles apart on kind of opposite sides of town, in an MSA I had built in recently - and in a submarket I liked, but didn’t like quite enough to do a whole new ground-up project in. 

Both were sub-25k rentable square feet, but each of them had room to get to that golden 40k RSF dividing line that I imagined existing between "REIT-sized" and "small." 

They wanted $3.25 million for both, which was about a 6-cap in-place and only $88 per square foot of storage (and that square footage denominator excluded some occupied/income-producing retail as well). 

That 6-cap didn't have much room to grow, so it wasn't something I would've pursued without the expansion.

I got a quick concept plan done for each location and told my engineer to add 25k square feet of climate-controlled buildings to the ‘north side’ location and 35k square feet of climate-controlled buildings to the ‘south side’ location. By my math, this would get each location to 40,000+ rentable square feet, and I chose to add only climate-controlled stuff because the market had more drive-up storage than climate – and because I figured the climate-controlled rents, which were much higher, would make the whole thing easier to underwrite.

Despite having room, I didn’t want to add more than that, because I could do well with less risk by keeping it modest. 

There were a few ‘single tenant retail’ buildings out front that would be, well, deleted from the layout to make room for these buildings (they were all month-to-month tenants), but I told them to keep the freestanding pharmacy if there was room left, because it was a high-rent tenant and a nice-looking building.  Storage was behind the retail, which I’d seen before and will see for the rest of my career.

And said after all that, if there was any room left, to put in non-covered boat/rv spots. If the next guy wanted to add more storage buildings, he could boot the boat/rv tenants and could be assured that the property would have adequate stormdrain for additional units.

I would also put a leasing office at both locations, just in case I wanted to sell them one at a time. Looking back, I’m glad I did, even if just for leasing purposes, because I am starting to observe a possible difference in lease-up between various stores with part-time hours and stores with full-time hours.

This is, of course, a development deal in disguise, but we were expected to close under a normal timeline, as the facility was full (at good rents), it was clean and in good physical shape, and was being managed nicely. 

I kept DD minimal during the contract period; title/survey/phase I – I was thrilled to not have to get a $10,000 geotech for once. Single-story self-storage involves a much thinner “load factor” than the multistory stuff I had built, and most of the property had already been built on in some way/shape/form (e.g. there was an old ranch-style house that had been used as the leasing office, there was a little building occupied by a florist, etc.).

My structural engineer said I could skip the soil analysis entirely, but I played it safe and had some test pits done by my likely sitework guy. 

Physical inspection consisted of my GC doing a quick drive-through through each of the facilities. “Looks good!”

Funny side note. My capital partner was bringing a small town bank relationship, and I found out like the day before closing that they would fund “debt first,” meaning equity would come in later. Great for your IRR, because your most expensive capital is deployed for a shorter amount of time, but very annoying from an “interest reserve” standpoint if you didn’t plan for it. I had assumed debt would come in later when budgeting for carry costs. A friend of mine agreed to put a small amount of money in and kept asking when it would be needed; I think it ended up not being needed until after construction.

So we closed. Time to get designed and permitted – which ended up being a BITCH of a process.

[to be continued]