My first development deal - part 1

[note: this is long, feel free to skip to the end]

The first project I controlled myself that made it past DD was in a kind of shitty town called Pendleton, South Carolina. 

I’d recently sourced a site for a large, experienced storage developer elsewhere in South Carolina and was pitching him on sites in other markets he found interesting. He told me to start with Anderson, then I pivoted to the Clemson area and found out Clemson doesn’t allow storage. 

The site I landed on wasn’t a secret - it was on Loopnet for everyone to see - but it was my favorite spot in the area because it was on that main drag to Clemson and it was surrounded by activity. They only wanted ~$250,000 and it was a couple acres across from the grocery store and almost next door to a bustling QuikTrip. I looked at others that were off-market or quasi-off market but they were either inferior or unworkable.

A quick and dirty model I found from back then assumed construction costs at like $40/sf for a bi-level or split-level building and a 10% yield on cost achieved with $11 rents. Today that is just bizarre to me (ridiculously low costs, high yields, and low rents, especially compared to today), but that was 2017 and some of those numbers might’ve made some sense back then.

At the time my goal was 40-45k rentable square feet (though today I would not do that). So I had the seller’s engineer sketch out a layout that would get us to 57k gross square feet which could hopefully net us 41-44k rentable square feet. The site was sloped; that layout assumed a partial basement because I thought a full basement would eat into the hill too much.

When I finally got the big developer to the site in person, he got out of the car, walked around on the site a little bit, then said, “I don’t think this one is for me.”

I was itching to try to figure one of these out for myself, so I asked if I should try to do it myself. “Eh…I wouldn’t tell you not to.” That ringing endorsement was all I needed to hear.

I asked him what to budget for pursuit money and he said something like $45,000 (that probably was and probably still is too low, by the way). I didn’t have $45k, so I went to my coworker’s uncle (I had a full-time day job with an apartment REIT in Atlanta) and promised him some stupid percentage of the promote – I think it was more than 50%, because I didn’t know any better -  if he would help me with those initial costs.

It needed to be rezoned, but the seller had gotten a pretty significant master plan approved that wrapped around the site and was very confident in my ability to get a storage facility through.

Got through DD; time for a concept plan to submit to the town. The civil engineer who sketched out the box I asked for seemed like a great fit. But please take note: it is not necessarily a slam dunk to use the seller’s civil engineer. He was insanely slow and got me in trouble with the seller, who didn’t care which engineer I’d used.

Because we missed that first deadline, the planner ended up going back on his expected timeline of ~3 public hearings. I don’t remember why, but I suspect he was doing us a favor if we moved quickly enough, getting us through use approval with only a couple hearings. So instead, somehow this tiny town ended up putting me through seven public hearings (though the last one or two were Design Review Board which were more about cosmetics) before I could apply for a building permit.

After getting through the first couple hearings – the planning commission, but not the town council – I lost my ‘day job.’ When my wife told me not to worry about a job, and to try doing my own thing, I felt like I was hitting the ground running day 1 with a site I controlled that was arguably pretty far along.

Around this time I reconnected with an enthusiastic 30-something out-of-state developer with a few storage projects under his belt. I knew I was going to need help finding equity and satisfying the construction loan gods and he seemed young enough and small enough to be willing to ‘share the pie’ in a reasonable way.

The biggest wake-up call he threw at me was construction cost. He had hired ‘blue chip’ construction companies and ‘blue chip’ management companies for his projects, so he went and got a projection from Cubesmart and a rough construction budget from a fancy Atlanta-based GC. I remember not loving any of that, but it was part of his thesis: bringing institutional standards to a less mature market.

The cost of the building was now being modeled at $55 per gross square foot, an increase that felt like a smack in the face, but the expected rents were now higher, so it still worked – at least in the eyes of the new partner I was hoping.

Then he insisted I go get a tax opinion. Well fuck. I knew damn well how bad property taxes were in this town but I had thought we would all just work around it, so my underwritten number was overly aggressive (i.e. low).

This was dumb of me but I’d seen high taxes overcome by much larger developers in the class A multifamily space at my job.  And saw a big storage developer – who wasn’t even using other people’s equity – similarly underestimate property taxes at another site.  

Either way, the resulting tax estimate scared off my potential partner.

The rezoning was done. I was now getting design review board approval for a site I was several months into, expected to close within 60 days on the land, and hadn’t the slightest how to find even the $250,000 for the dirt.
[to be continued]