My first development deal - part 2

^{[part 1 here]}
I’d basically asked everyone in (and many outside of) my network who I thought could personally invest a meaningful amount or could help lead me to the whole capital stack. And I was ending up with maybe $50k worth of commitments for a ~$250k site (not to mention the several-million dollar project).

As I got closer to closing, I was resigning myself to losing this one and having to come up with a way to eventually pay back the friend’s uncle who’d helped with pursuit dollars. 

Feeling like a fuckup, I was picking up a friend to carpool to a real estate networking event and telling him how sickened I was by this stupid misadventure. I wasn’t asking him to help as I had given up, but long story short, he found it interesting (or wanted to return a favor I had recently done him) and very quickly jumped into action.

We got a final extension to the land contract and he syndicated the amount of the purchase price from his own network in a couple weeks and all of a sudden I was the owner of an entitled self-storage development site in South Carolina six months after losing my job.

This was of course no time to rest. We’d told the investors we would build it ourselves with an SBA loan, but the deeper my new partner got into that conversation, the more he realized what a time-consuming endeavor it would become and decided we should try to flip it for a reasonable profit after all the value I had added. So we listed it for $500,000 with a storage broker I liked.

Amusingly, the storage broker came back and said every damn storage developer in the Southeast had already seen it – no surprise, as I’d already hunted them all down when seeking a partner. But there was one who I had talked to before who did come to the table with a $500k LOI. And then another I’d spoken to before who did the same. These were proof that I wasn’t crazy for seeing something in this site.

At the same time, thanks to an incredibly generous introduction, I had fallen ass backward into a midwestern family office who wanted to back me on more than one of these/a bunch of these. They said “hey let’s do that Clemson one too, you still got that one?” So I apologized to the storage broker for wasting his time and we bought out the land investors for $500k. Like 120 days after they purchased it for ~half.

It was time to kick off an architect. My new backer had me hire a 3^rd party project manager who dove in to help push things along. I told him I really wanted to use the fancy Atlanta-based GC; they had helped me with some basic dumb things like fixing my DRB renderings (too much brick) and getting us to a full basement instead of a partial one. I liked the guys, felt like I owed them and had somehow concluded I was unlikely to save much by using a smaller contractor. So we signed a design-build agreement saying they would create cost-conscious architectural drawings, but if I went forward with construction, I was required to use them as contractor.

Months went by and I was tired of asking if the original $55/sf we’d discussed was still realistic, so I stopped asking. Then, finally, their “big day” came where you visit their office, they pull out a huge book of bids and present the final cost. And goddamn it that day pissed me off.

I remember walking in and looking at their SOV and having to go straight to the bottom of the page for the total, and then frantically dividing that number by the gross square footage in my phone’s calculator. I was like “what the fuck!” It was $63/sf. 14% higher than what we had talked about. “Why??”

There were a few things we could tweak, but the biggest thing was the monster of the concrete detention system they had designed without telling me. I was so fucking pissed at these guys. There was supposed to be a normal ‘earthen pond’ there. Instead this thing had multiple parallel concrete walls, some of them like 24’ tall! I had TRIED to be in the weeds early on in the design process, e.g. asking them what the cut and fill calculations were starting to look like, but that annoyed them. That was an early taste of how these guys worked.

I informed my new backer of this update, but they didn’t tell me they had a problem with it. Move forward, I guess.

Getting the debt turned out to be harder than I thought even with a substantial guarantor/cosigner, which I now had. Banks in Atlanta wanted nothing to do with a small town in South Carolina, and banks in South Carolina didn’t know me. I still struggle with this exact issue several years later. Remind me again why I do this shit?

I finally went begging to the same developer who’d told me this site could be an Ok project. He sounded slightly annoyed and was like, “Why can’t you find a bank loan if you have this 9-figure guarantor?” I was so ashamed. But he then was kind enough to share the banker who did his project 100 miles from this one. And THAT is the one who did it, because this guy’s management company would be running this facility during lease-up. That taught me what matters to bankers.

As we teed up the construction loan, here’s what the appraiser’s pro forma looked like, which I saw as pretty accurate:

This is basically a 7% yield on cost relative to the final project cost. At the time, for a guy coming from class A multifamily development, that was a fine yield on cost if you’re building something large enough, well-located and nice-looking that a number of national buyers would come in and want to own in a relatively low-cap rate asset class. Maybe not in 2025 but then it was normal. In fact, I remember a mentor of mine saying, “yes, I’ve done projects in the 7s recently – when I liked the other deal points.” 

So I still believed in it and it was going to get built.

We all met on site on a freezing day that winter; “we” meaning my project manager and a bunch of people from the design-build firm. I also, by the way, drove nervously that day past a small-ish competitor under construction (an inferior location and mostly different product type; still something I least expected in that spot). Our project was now permitted and they were repeatedly begging me to cut them loose to start clearing trees.  And believe me, I wanted to, but I told them that we hadn’t gotten to a true binding commitment letter yet from the bank.

They didn’t give a fuck. They trusted me and it was time to roll. I got the go ahead from my backer to sign the full construction contract and mobilize. 

Then something called covid-19 started creeping across the US.