My first development deal - part 3

[part 2 here]

So:  a project underway, already showing weaknesses, and I had mobilized without a construction loan. I’d gone full retard.

Our loan officer swore we’d be fine. It took time due to PPP loan activity, but it sailed through committee, and we closed seamlessly.  Before closing, a partner suggested a swap, dropping our interest rate to around 3%.  I couldn’t believe I was closing a several-million dollar construction loan at 3% for a ‘speculative’ project.

My then-backer started asking about subcontractor pricing. They weren’t actually worried about covid hurting my projects; they wanted to know if I was leaving money on the table by not renegotiating construction costs.

I suspected it was a horrible idea.  My construction contact was vague when asked, and I could tell nothing would happen unless I totally cancelled construction. And god damn I’m glad we didn’t. Demand for contractors across the Sunbelt went through the roof during covid.

Rain massively slowed construction. It’s funny that the developer I brought to the site at the very beginning had commented immediately about how ‘Georgia red clay’ holds water. The whole thing took 14 months.

As opening approached I insisted, to the property management company, on interviewing the final candidates for on-site manager.  That was an easy call between the fat lethargic one and the energetic one.

Once open, I went all out on marketing—handing out Starbucks gift cards, posting flyers, and even setting up a blimp, which promptly drew sheriff visits and threatened code violations until we took it down.

A local radio station invited small businesses to record short promos.  I asked if I could make a jingle instead.  The DJ loved it, so I rushed to my neighbor’s house, borrowed recording equipment, and wrote/recorded a dumb jingle in five minutes.

They played it for weeks, just for laughs.

In the meantime, a lot of the housing growth I had been promised had come to life. Cheap new tract homes without basements in every direction. And that growth has continued years later, by the way, as these apartments got built eventually wrapping around the facility.

The first few months of lease-up knocked my socks off. As you can see, we were up in the 70s two months after opening.

A lot of them were students, of course, as you can see many move right back out, but MOST of those move-ins stayed and that initial pop was all we needed to put a huge savings in our pocket regarding carry costs. Those are brutal in self-storage and we barely used any of that money.

Somehow that competing facility with the inferior location didn’t put a dent in anything.

So we ended up getting this thing to a point where it was covering debt service and we did it way under budget thanks to those carry cost savings.

Then someone came a’knockin. A broker I kind of knew, representing a buyer I definitely knew about, said they had bought a competitor down the street (but farther from Clemson) and could pay a good price for mine because of expected operating efficiencies.

At the time I didn’t know any better than to think that selling off-market was for suckers. Also, I still wasn’t stabilized, so why rush? 

I also didn’t want them wasting anyone’s time, and in my mind we had built this thing at a higher basis than they probably thought. So I straight-up told him, “This bitch cost us $115/rsf. We will sell but we need to make a good profit.”

He came back with an $8.8m offer, dead-on with what I had underwritten and several hundred thousand higher than what the appraiser projected. An experienced storage broker happened to cold-call me about listing it right around this time, so I told him the truth, and he said he’d do a BOV – same result.

I wasn’t willing to gamble by holding. Too many critics I wanted to prove wrong, high property taxes, and I had not yet posted a 7-figure exit in my career so it was time to put a W on the board.

We went under contract while my wife and I were in Texas adopting our new baby.  I stayed up late in the Airbnb compiling DD items (this was one of those closings that involved 30 people … finance types, expensive lawyers, etc copied on an endless email thread). Closing went off without a hitch.

We had generated hundreds of thousands in cash from operations to disburse and got hundreds of thousands more by unwinding a very ‘in the money’ swap.

The one project I had gone off the deep end with, the one that everybody seemed to hate on, was a fucking killer in my eyes. A 2.3x gross equity multiple and a 45% gross IRR.

And where I was just a boy a few months earlier, I was finally a man with an exit on his track record. Thank you God.