Buy and expand - not as easy as I thought (part 2)

[this is a continuation of https://perrys-newsletter.beehiiv.com/p/buy-and-expand-not-as-easy-as-i-thought ]

It took probably 11 months to get these additional single-story buildings permitted. There were multiple reasons, e.g. architect was “super slow” per my project manager. But the county was the real offender.

They had gotten a little bit high-falutin’ as Destin grew over the years; they had created a lot of permitting hurdles similar to upscale Walton County next door.

This is part of a trend I’m noticing in secondary/tertiary markets; the county government is understaffed and crappy, so permitting reflects that, whereas the city is responsive and relatively smooth and fast.

Remember when I decided a geotech exploration was over the top for this project? Well, despite our pushing back, the county still made me hire a geotech firm to do borings, specifically for a “perc test” so they could analyze the soil’s ability to absorb water. So that’s another little delay.

To get the demo permit to take down the buildings out front (to be replaced by new self-storage) we had to test for asbestos. And of course they found something, so we had to do an expensive removal process. 

Below was my contractor’s original guess on the construction cost of the expansion. Note, he has built millions of square feet of storage, some of it built for some of the biggest storage developers in the Southeast. And is no stranger to north Florida. 

And here is a model based roughly on that cost, which was already much higher than expected at $67.72/sf. 

But eventually, we got our hard bids together from all subs based on the 100% completed construction docs.  The better part of a year had gone by during one of the hottest and most inflationary moments in history, and I was even more surprised than before by the numbers.

Over a million dollars higher than previously quoted, knockin’ on $90 per gross square foot. Remember this is not for a fancy building, this was for this kind of product:

Steel had gone crazy. Asphalt had gone crazy. The county imposed “green energy” requirements on these buildings, which is something you would do for a building that people live in or work in, not store their furniture in. The storm ponds we ended up having to design were monstrous compared to what I expected. I remember finally seeing the finished pond on a mid-construction site visit and thinking you could land a plane in it (video link: https://x.com/PerrySolem/status/1702053607175049422?t=VBht1YMzFwI2Z8Be6TOx2w&s=19 ). 

And, as another project manager told me recently, the area doesn’t have a broad “subcontractor base.” Some of these little redneck panhandle towns exploded too quickly for their limited pool of contractors to keep up.

Still aghast at these costs, we had another GC bid on the whole thing, and I made sure it wasn’t anyone who seemed expensive. They came in way higher.

Well, the model still worked. 

As a side note, I hesitated to reveal the cost basis in this project because anyone can view these posts and I'll be listing this one soon. But after thinking on it for a while, I actually don't care, because it's not like my basis is low. It's pretty high, and I want people to know it's high, because I don't want low offers. This exact strategy got the job done for me on my first serious exit.

The equity partners, while not thrilled, were fine with proceeding on this much higher-than-expected job, and that involved asking the bank to expand the loan. The bank agreed to, but didn’t want the commitment on their books until I was ready for it. 

When I got to a point where we were ready to start sitework, they told us to go ahead and start construction and to get back to them whenever we ran out of room on the original loan amount. I didn’t love executing a construction contract that was bigger than the loan would allow, so I split the job into two separate contracts: one for sitework and one for the buildings, and executed the sitework contract and got going [we eventually got a new appraisal and a loan mod, with no problem, as we approached fully funding the original loan].

When it was time to start demolition, I threw a little party.

[to be continued]