Episode 174: Breaking Ground: The Next Steps in Self Storage Site Development

Announcer (00:07):

This is the Self- Storage Podcast where we share the knowledge and skills from the industry’s leading investors, developers, and operators to help you launch and grow your Self- storage business. Your host, Scott Meyers, over the past 18 years has acquired, developed, converted and syndicated nearly 5 million square feet of self-storage nationwide with the help of his incredible team@Selfstorageinvesting.com, who has helped thousands of people achieve greatness in Self-storage.

Scott Meyers (00:44):

Hello everyone and welcome back to the Self- Storage Podcast. I’m your host at Scott Meyers and we are going to be in this session covering part two in a series on self-storage site selections. So focusing on development or even our sites in which we are going to, we have maybe found a facility, we have found a commercial building in which we can convert into self-storage and what are all the elements that we need to determine that it is truly a good site and one that we are going to move up forward on. And so where we left off last is that we were talking about how to approach a planning and zoning the zoning board and the commission board is to make sure that your site gets approved and the order in which we do so as we are scouring markets first, lemme take a step back.

(01:26):

There are many ways that we look at getting into the development side of the business. Some folks have a piece of ground that they already own, they may have inherited or they found they ran across that somebody has that they can pick up on the cheap and it appears it seems to be a good site for cell storage. Well, in order for that to happen, there’s a whole lot of steps that need to occur before that, before we just determine because of our gut feeling or instinct that this is a good site and those are all covered in part one. And so if you haven’t listened to part one, go back and talk where we talk about, go back and listen to that where we talk about the importance of feasibility studies and why you need to perform one, whether it be in-house as well as hiring a third party consultant or company to do that to determine truly if a site makes sense or sell storage in terms of what is the supply index in the market, what are the rental rates in the market?

(02:17):

Who is the competition? What do they look like? How formidable are they? Is there room for you to be able to build a site before we just begin to oversupply a particular market, meaning a three or a five mile trade area with a site? Just because you take it’s going to work and perhaps maybe an appraisal and or a lender will give you the money to do so, doesn’t mean it is a good idea to move forward with a project until you’ve done your homework. And so let’s determine now let’s assume that we’ve gone through all those steps. We’ve found that the market indeed is ripe. We found a piece of ground that is perfect for what we were looking to build, which is approximately a 100,000 square foot facility. It’s going to be climate controlled. That’s going to be multi-story. We’ve got our construction costs roughly.

(03:03):

We have an idea what it’s going to cost to build this. We had a feasibility study done on it that corroborates that we’ve seen the rental rates in the market are strong. So now as we are getting ready to write an offer, there is a few other items that we need to know before we move forward. This isn’t the same as an acquisition where it’s already an operating self-storage, it’s already an operating business and that we are buying it and it is transferring over. The title is transferring over and that means that the real estate and the operating business itself, when we’re starting from scratch, there’s a few more hoops that we need to go through. And that means going to zoning and planning. So first of all, what is the zoning of the site itself? Is it already zoned commercial? It is already zoned for self-storage.

(03:45):

If it’s just zoned for commercial or industrial, what is it going to take in this particular municipality at this location within this particular parcel to be able to get a permitted use or a variance to sell storage? So in order to determine whether we can build a site here, well it involves going down to the planning and zoning office. And I know that may sound daunting for folks, but it’s better to do it now than to put a purchase agreement in place and get down the path where there’s a non-refundable artist money deposit in place and only to find out that zoning won’t allow this or you, heaven forbid. What I’ve seen some folks do is it’s zoned commercial and either their ignorance or their optimism, one of the two, sometimes one in the same allowed them to just move forward with the acquisition. And they didn’t really have zoning in place for storage and it was not a permitted use.

(04:33):

It was not granted or there was no way that storage was going to be allowed because there was a moratorium in this market and this developer didn’t bother to talk to the zoning board and the planning commission to determine whether they could build here if they even wanted self-storage in this market. So it evolves going down and having a discussion with those folks and stating, this is a parcel that I’m looking to buy. I have a letter of intent on it and I’m planning to build a self-storage facility here. Is that a permitted use under the zoning designation right now or have you had other self-storage developers coming into this market or this area or looking at this particular piece of ground? Have you granted permission to those? Some? What is this zoning board and this commission and this administration within this town’s stance on self-storage?

(05:19):

Are they opposed to it? Is there a moratorium been placed? Are they heading towards that? Are they pro self-storage? Are they anti self-storage? The recent votes that have come up, what have you seen? Is it a 50 50 split of the storage projects that have come up onto the ballot versus those that haven’t? Give me an idea of the probability of success of me purchasing the site and then getting it approved for self-storage. So really what we’re looking to do is to gain permission to get the approval before we close on the project. And now sometimes it takes a while to get to that place by way of having these discussions with the zoning board and then of course presenting a plan to them that shows them what it is that we’re going to build. How big is it going to be?

(05:59):

Having the architectural drawings and sometimes a 3D rendering to go into that zoning meeting in which you are looking to get a permitted user of variance if storage isn’t already allowed and putting your best foot forward. That takes a little bit of time to gather all the data, the information, and to go in and present to the city. And again, it helps to understand what is the neighborhood that I’m going into? Think of this site. There is going to be a public hearing on this site if they’re going to change the use of it and allowing self-storage. And so there may be a remonstrance from the neighbors who, the nimbyism that we fight in self-storage all the time, which is the not in my backyard. We don’t want those ugly sheds and they’re not filled with nothing but drug addicts and homeless people and there’s crime.

(06:44):

And I’ve seen what happens on TV and there was a show about a dead body and one on CSI at one time and all the horrible things that happened, the one in truly one in a million occurrences that may happen at a self-storage facility. Well, they’ve seen it and they don’t want it in their backyard only to then realize that once we go into the zoning board meetings and let them know that self-storage by the way is a very quiet neighbor. It has a very low impact on the neighborhood. There are no utilities. I mean we run some electricity there, but there’s not an impact on the water or anything else. Traffic is lighter than almost any other asset class that we could put in here into this neighborhood, and so we don’t have to have additional traffic lanes. It’s not going to clog up the highways because people come, they rent a unit and we don’t see ’em for a year.

(07:32):

This is not a retail business, this is not a restaurant, this is not anything else that has a significantly detrimental impact on a neighborhood. We are a quiet neighbor. We will put a wall and a fence up around the site so you don’t have to look at these unsightly garage doors even though I think they’re beautiful. We will do everything possible to make it look aesthetically pleasing and to blend into the neighborhood. And by the way, this is the neighborhood that you want as opposed to some of these other businesses that could move in here like a used car lot, which is currently zoned for. And letting the associations and the folks, the homeowners that may be opposed to this project, educating them on why they want self-storage to truly be located in this location and why they want them to be a neighbor of theirs because that allows people to get their junk out of their backyards, out of their front yards, off of their porches and into a storage facility and actually providing a service to the neighborhood.

(08:29):

I want to ask all these questions upfront. And by the way, here’s the most important point. So do not close on this facility unless you have the zoning in place. And if that is not the highest and best use, it comes back from a feasibility study, then it’s time to move on to the next parcel. Now let’s say that it is approved for storage and it already falls under the zoning or that they’re going to approve it. There are some other considerations that we want to know about. First of all, what is the height? If you have planned it’s a small parcel, say we’re going to put as many units on this two and a half to three acre parcel as possible. Well, to reach a maximum square footage that you want to be able to have management efficiencies, you want to go vertical and you’re going to want to build a two or a three story facility, but is there a height restriction?

(09:09):

Is there a square footage restriction or is there going to be a draw in terms of the water detention on that site that doesn’t permit you to have a footprint large enough to get the amount of square footage that you want on the site? What are the requirements that the city has for you in terms of a water detention, landscaping, the size of the buildings. If you’re going to have a multiple, say it is a four or five acre parcel, how many buildings can you put on it? What are their sizes and the dry aisles and the amount of asphalt or concrete driveways that you have in place? Do they require everything to be sprinkled? Most likely that is the case. Well, will they allow for signage and if so, if they’ll allow for a lot, great, we’re going to put a lot on and that comes within an additional expense.

(09:49):

Or if there’s very little is that going to hurt us in the long run? There’s many considerations in terms of just getting approval from the zoning board to build a self-storage facility. But then how restrictive is it? Are they going to require you to build dirt mounds and have fencing all around it? What type of fencing is it? Have to be split block and match the feel of the neighborhood, which in some cases, if you’ve been to some of these masterplan communities where literally you go into a retail area and all the buildings look the same, I mean the same color, they’re built with the same type of a facade, split block or concrete masonry and it’s all painted a tan color. And the only way you could tell the difference between one business to the next is by the sign the signage that is on it, the neon sign that is located on the building up high.

(10:39):

Otherwise they all look exactly the same. And so if that is the case, the fit and finish to the exterior and the facade, it may be so expensive that it doesn’t cover the cost of the entire project to build it out to that city standards for a self-storage facility. So just be mindful of that, which is also going to factor into your projections and the amount of capital that’s that is going to be needed for the project. And then the amount of time it’s going to take to be able to get to a cashflow positive situation and to be able to reach not only your goals but your investor goals as well. So we all know in real estate the three most important things for any investment is yes, location, location, location. And so the problem that we run into these days is that, okay, I can find a parcel that’s maybe zoned for storage or it’s going to be little resistance to the zoning board to get a zone, but it’s so far out, it’s nowhere near neighborhoods, it’s nowhere near the path to progress.

(11:32):

It’s in an industrial park tucked way back in. And it’s going to be hard for people to get to and it’s going to be difficult for them to be able to find, they’re going to look at it on their map on their phone when they’re looking for storage and recognize that, oh, I know where that is and that seems to be too much of a hassle, too much of a bother to get back to, or it’s located along the railroad yards or it’s back in a part of town that’s industrial and I just don’t want to be there. It’s not in my path of progress or travel. And so are we going to be out located by our competitors? Well, the competitors maybe already gobbled up the good sites. If you’re coming into an infill location or if you’re in the path of progress, are you going to be able to find something that is affordable that also allows the deal to pencil out without overpaying too much in order to get that most competitive site?

(12:17):

And then there are no guarantees that your competitors are going to come along and grab another site because they can afford to and maybe some of the REITs that have a deeper pockets or you could just at the end of the day, just get to out located by your competition for one reason or another. So how do we determine, how do we guarantee that whatever site that we have is going to be absolutely the best site in the market? And then how do we put a moat around it to make sure that our competitors that don’t come in, well what appears to be a great site today might not be next week. And that is just one of the challenges and that’s one of the only things that you can count on and rely on is the best strategy is to once again, to be first to market first movers usually get rewarded for that and establish yourself, but there is no guarantee that competition isn’t going to come along.

(13:05):

And so to the extent that you can see that it is a strong area in terms of demographics and all the other numbers in terms of median income and the things that we point to to be a good and sustainable site from, and that will be once again proven in a feasibility study. There are no guarantees. So putting your best foot forward comes from lots of homework, lots of due diligence, relying on consultants, but also just having the awareness that you’re going to pay a little bit more for a premium site. But if that warrants doing so in order to keep your competition at an arm’s length, it’s going to make more sense to do that than it is to try to let a market come around to site that you’ve already identified as a cheap site. The cost per acre is low or you’ve just got it for free or inherited it or it’s located on a building that it’s located on a parcel in which you already own of the building.

(13:57):

And so this is just going to be a side business or an afterthought. Those aren’t the ones that necessarily work out. So you should always be seeking to find the premium site. And then also that means that perhaps I’m even paying for that premium site as well. And then of course, going back to looking at the size of the particular parcel that you may be looking for, what is in your buy box? Well, that’s going to depend on a couple of factors. One, what is the cost it’s going to take to build a single story facility on a five acre parcel? And can you find a five acre parcel, four or five acre parcel, or if all that is available in this particular side of town or the location in which you’re looking to launch your self-storage business are two and three acre parcels.

(14:42):

If you’re going to have to go vertical to get to that 60, 70, 80,000 square foot that you’re looking for maybe a hundred, then what is the cost of going up? There is a considerable increase in cost of going up vertical and then building a multi-story climate control facility than there is in a number of single story buildings that’s maybe temperature or maybe not temperature controlled. However, there’s going to be additional concrete costs and there’s water detention costs the factor into that as well. So it starts with not compromising in your business model in terms of square footage, and we find that above 60,000 square foot, that is where you get the economies of scale across operations and management and really allows you to get to the place where you can afford to handle the amenities and to manage it properly and staff a facility properly.

(15:29):

And that’s also a number of which the regional players and the national players are interested in a facility. When you get below 60,000 square foot, you have a fewer number of buyers and a smaller pool of buyers. And the folks that are buying are more the local folks and they’re not looking to add to or pay a premium to fold in a facility or two or three that you have into their already existing up portfolio. We want our exit strategy to be one in which we are selling to the national players or the REITs because that allows us or affords us the ability to sell at a little higher premium. We always want to be able to put ourselves in a position to be able to sell to the REITs and offering a larger facility to the marketplace because there’s where you get a premium and it is easier for them to be able to pay a little bit more for a facility or a group of facilities to be able to fold it into their existing portfolio in the mix of where they already have marketing in place where they already have regional managers in that location.

(16:24):

And so for a small amount, just the acquisition of the property, the infrastructure is already in place. And so that is the reason why we’re seeking these larger sites. Also, in terms of going back to the design expectations. If you have a certain brand, if you have a certain model and you’re trying to build a portfolio of facilities that all look and feel the same, will the design expectations that the city has match your brand? And if you’re going to exit as a group of facilities and they all look the same and have the branding the same, well, will they allow you to be able to brand your facility? Will that be in line with what your existing facilities and the brand and your brand identity already has in place? Then we turn to probably the most important piece, which is your operational and management expectations.

(17:08):

So if you’re going to run an unmanned facility, do you have the ability to do so at this location? Is it set up for that? Are the demographics in place for this particular market? Can you run it unmanned? Will you be able to lease it up that way? Or are all the other facilities in the market, do they have an office, an active office where there are individuals assisting people with their rentals in this market? Is it going to be tough competition? Is it going to be formidable? Are you going to be introducing a style of management that is not common in this market and it’s going to be an uphill battle and it’s going to be a pull strategy rather than a push strategy out into the marketplace? So we found a site, we’ve ticked the boxes in some of these areas now hopefully we’re not surprised by the condition of the site once we begin to literally dig into the site.

(17:59):

And so we’re going to have a number of consultants out there on site looking around at the soils to determine not just a phase one, which is standard practice, looking for any environmental issues, a phase one environmental study to determine if there’s anything that is leaked into the ground or underground or if there’s anything that was on the site of the past. Heaven forbid, any gas stations, dry cleaners nearby, automotive paint stores and the like. Those are the usual culprits that they’re sometimes close to. Or there was old railroad beds where crea soap is soaked down in if it was at nearby and they’ve had other environmental issues and it’s not always just these chemicals that have spilled in. We have one site, a development site that we’re working on right now. And this, I think we need to do a case study on this one particular site because once we do, as I say, not as I do, but we jumped through all the hoops of getting it to zone for self-storage, getting it changed over to the zoning of for self-storage after we gotten a little further down the path.

(19:00):

But we were successful in all of this and appeasing up the neighborhood and getting ready to build that. We knew that there was going to be a challenge on the site because with nine acres we had a lot to work with, but to the back part of the property, it kind of dropped off. And so there wasn’t a lot of usable square footage there. And we also had power lines that are running through it, and so we couldn’t be within 75 feet of the power lines. And so our buildable acreage was about four and a half. It was really about half of that nine acres. Well, after we purchased the facility as we were then going through and preparing, getting the civil engineer out for the development, what we found was an abandoned waterline. Not only was it not abandoned, it was never put into use.

(19:37):

They found an interceptor, a water interceptor in which the water lines came out from and were used in a particular direction heading south. Not that matters to you, but then it was designed to also head north and northwest and they laid this ground or laid this pipe and put it into the ground and it had diagonal in a diagonal fashion. And so basically it bisected the last bit, our four and a half acres of the facility, we couldn’t build over top of it. So now it cut that in half. So we had to redesign and we even looked to then maybe utilize portables that we could movable storage units so that we could put under the power lines so that we couldn’t build within 75 feet at the center of the par lines, but we thought we could put the movable units on or we defined that the city said no, that was not allowed on this site for the zoning.

(20:26):

When we got it changed over that we couldn’t have movable, which means under their zoning designation it meant like storage sheds or anything else. So as we’re beginning to move things around, we’re getting the rest of our tests done. Now we’re doing not only the phase one testing, but the soil testing and the impact studies. And once they started digging down, what they found is that this is located near a highway at the corner of a highway and a major road. There was an intersection there, but they built a bridge across the highway and when they were done building the bridge, well, they decided to just put the rest of the materials concrete and some steel equipment, maybe an old crane who knows what into the hole and then just covered up when they were done with the construction site. And so we’ve got all this junk down to the bottom of our ground that it isn’t made to be compacted and it would hold up the weight.

(21:15):

At least the developers have felt to beacon building on top of this. And so this is a site that has still been a challenge for us that we’ve been working on for a little time now. It’s called a pet project now because it’s been around for a little while and we’ll still make money on it, we’ll still build on it. We just haven’t determined exactly what we’re going to do with it. So the building is not for the faint of heart as you can see, and we’ve run into many other situations. We know somebody who bought a site and there was an underground river. Yeah, yeah, an underground river that was running through it that they were unaware of until after they closed and began working on it. And then of course there’s other challenges and issues we run into where we’ve had to move turtles in Florida, some very rare types of turtles, and we have to rehome them, rehouse them, and then they get to go to a beautiful piece of ground, basically a turtle resort, and it costs us for that.

(22:07):

We found some areas that we didn’t know were but found later that they were wetlands. And so we’ve had to, if we’re going to displace those wetlands, let’s say we’ve got an acre that we found we thought was just vegetation only to find out that it was wetland even though it wasn’t wet at the time, if we were going to replace that now and mow that over or bulldoze it, that we had to replace sometimes one-to-one or sometimes one to two. In other words, if we’re going to displace an acre of wetlands here, depending upon that area, we have to plant and pay for in a wetland farm over here, a piece of ground, two acres worth and pay for that in a wetland mitigation bank. And so these are some of the things, some of the challenges that we are facing as we look at a development site and then of course retaining walls for moving land around and making buildable areas and water retention.

(22:57):

When the civil engineer comes out to determine how much are you even a gravel, they won’t count for drainage in some areas. So if you’re going to put buildings in and concrete pads and asphalt drives or concrete drives, how much of that permeable ground are you taking away now that you have put the asphalt on and the building’s on? And if it’s now if you created some impervious services, now you have to go build water retaining. Now you have to account for water retention, and that means either a place for it all to go above surface. And if there’s not enough room in the site, then you have to do it underground. That is not even more costly. So those are some of the major, I don’t even want to say pitfalls or gotcha, but the considerations once you get your civil engineer out to be able to take a look at a site, what are the things that you’re going to be facing which may reduce the overall buildable area, but more importantly, what is the cost to get that site ready to be able to build on it?

(23:50):

And so you start there and then you add on your cost per square footage of the buildings that you’re going to get from your general contractor once the architect has created the drawings. So I’m going to point back to the market study again now that you have all of this information, that you have all this information, you’ve gotten a little further down the road and now you have a good idea of the total impact and the total cost of a project from the site work in addition to the cost per square foot of the buildings, you’re going to go back to the market study and you’re not going to do this yourself. I mentioned on the first episode of this two-part series that we have a feasibility study done by a consultant and we back up that data with our own, and we do this internally.

(24:30):

Well, I’ve been doing this for a number of years, almost 20 years now. And so we know what to look for, we know what the costs are, we know what our averages are, and we know from market to market what this looks like. But we work in still in conjunction with, and we come alongside of the consultants and we’re just adding information to what they already have in terms of their study. So this isn’t something that you’re going to do yourself and then turn it over to a lender or a consultant to say, Hey, would you just bless this for my lender to make it work? You have to have the solid data from a consultant in order for the lender to take you seriously. And also if you’re raising private equity on these sites, you have to have that third party unbiased stamp of approval that yes, from a feasibility study, which means just that it is feasible to build a self-storage facility at this site.

(25:10):

It’s going to cost x, here’s the rental rates, here’s how much it’s going to cost to build, when it should be built, when it’s going to break even approximately, and then the best time to exit and or when it is stabilized and all of your concessions have burned off. And if it doesn’t, well don’t get too attached to a site. And if you’ve gotten a little further down the road and you’ve got some money invested, well, you can’t make a bad site work. It’s better to get out now and this is the cost of playing the game. You do have to pay to play and you do have to spend some money and some time doing your due diligence on a site. My goal is to show you the best ways to get to a no as quickly as possible with the least amount of money possible.

(25:50):

I ran across, there’s somebody in our space who’s is actually an influencer and teaches people about self-storage. And somebody sent me one of his tweets who said, we just recently pulled out of a site after we spent $500,000 doing our due diligence and doing our homework only to realize that the site wasn’t going to work. And the person who said it to me was kind of a applauding him for being able to say no. And I’m thinking, good grief. I can’t imagine getting to that place where I was $500,000 down the road of my own money, my company’s money, or heaven forbid our equity partner’s money before I decided to pull the plug on a project. But that also does speak a little bit to the inexperience of some of the folks out there that are calling themselves self-storage gurus or experts in any fashion.

(26:39):

But I can tell you that if we spend more than $50,000 before we come to a no, then I’m going to be disappointed because we should have considerably less than that. But again, that does speak to my team’s experience and being able to, we’ve been at this for a while, we can see a little further down the road and when to say no, and yes, 10 grand hertz, 20 grand hertz, 50 grand hertz, but it is better to that than to get further down the road than a project that doesn’t work. And then you’ve got a foreclosure on your hands and you’ve lost your money, your investments, your down payment or your private equity partner’s down payment, which is even worse. And so the idea is to get to a no sooner than later and don’t put a square peg in a round hole or just assume that or take the approach that, well, this one isn’t a grand slam.

(27:23):

As a matter of fact, it looks more like a bun and I got on first and it’s maybe going to be a break even in three years and I’ll make it up on the next one. This one’s just for experience that is never the reason, as you’ve heard me say probably many, many times before, that is not the reason to get into an acquisition or certainly into a development project because you will find that it’ll be more costly and it is not going to be a breakeven by the time you are done with it. And you may find yourself in a situation in which you never had expected to be in. And if you would’ve just taken disciplined approach and saying no sooner, you wouldn’t find yourself in that position as well. And how do you get to that place is again, by employing the consultants.

(28:00):

You need someone with no financial motive to see that the site does not work and to tell you that the site is not going to work. It’s important to note also that in the environment that we find ourselves in right now, a new development is a very short-term capital intensive, and it is more difficult to borrow money for new construction than an existing facility. And the environment that we’re in right now, lenders are not looking so much and so favorably on speculative type of projects or development projects where you go in and let them know that you have a piece of dirt that you’re going to buy or that you already own and you’re going to build a self-storage facility on it and it’s going to be fantastic. And three years from now, it’s going to be all leased up and it’s going to be stabilized and we’re all going to make money together.

(28:39):

Well, it is a little more difficult for lenders in this current environment to be able to see that and to bite off on something speculative in the interest rate environment that we’re in versus bringing in an existing facility that has a historical track record. And there they can see right now that it is cashflowing and here are the rental rates in this market and here is the breakeven, and if you’re going to buy it at X amount or at X price, then here’s the debt service coverage ratio and at today’s interest rate and it pencils out and it does cashflow, they can point to that they have historical numbers that they can look back on versus a development which is nothing but projections. And you were just projecting even with the help of a consultant as to where it’s going to be, they’re less likely to bite off on that.

(29:20):

And that’s why we’re seeing right now a little lower loan to value, a little lower LTVs that we’re seeing in development maybe around 50% for a construction project, meaning you’re going to have to come to the table with the additional 50% or 40% and the lender’s only biting off for 50 or 60, which means that you either use up more of your own cash and or you’re bringing in private equity, which is more expensive than bank debt. And so now it begins to put a stress on the project and it may not pencil out if your capital stack is too intensive on relying on other people’s money that you have to pay a premium for because they are now in a riskier position or in second or third position, the capital stack as gains and layers. It also accrues a higher cost of capital, and sometimes that alone just kills the deal.

(30:05):

Banks are also going to, in a development project, they’re also going to require higher equity thresholds, meaning you’re going to have to have more reserves, lease up reserves, interest rate reserves because it doesn’t cashflow for the year that you’re building it and for a year and a half to two years while you’re stabilizing it. And so you’re going to have to borrow more money either from the lender or from your private equity partners, which again adds to the capital stack, which puts a little more stress on a project. And so you have to brace for that, lease up capital reserve depletion and understand that you’ve got to have a handle on operations and to have a good solid management company or if you’re self or if you’re self-managing at this facility, that you have to have some rockstar managers behind the counter at the site level.

(30:45):

But then also really good oversight from a regional manager or a district manager that is running all of the marketing and responsible for the overall performance of this up facility. Because remember, there’s lots of moving parts and there are lots of room for air in a development project versus an existing facility that you’re just stepping into, whether it’s a well oiled machine or a machine that needs a little lubricant either way, this is vastly different when you’re creating something from scratch. So why do we do this? Well, because there’s a higher return. Typically if you do things correctly, if you’ve done your homework and you do your due diligence, you lean into what we’re talking about in this two part series, but then also in the other resources that we have available to you for learning how to develop a self-storage facility or to convert an existing building into self-storage.

(31:31):

Because when you start with an existing facility and a business that’s already in place and there’s room for improvement, yes, we are all about value add. It’s easier to get into and we know what lever set to pull to be able to make a facility sing, if you will, and to optimize a facility that is not a running at capacity. However, if you know what you’re doing on the development side and on the operation side, when you start with a piece of dirt and then you put a building on it and then you put an income stream on it, well, typically there are higher returns for that risk. And from starting with nothing and creating a business and creating an income stream, you are rewarded many times, much more handsomely than if you bought an existing facility. And that just turned it around and incrementally it made it to operate a little bit to better or optimize it coming from a standpoint of already doing fairly well.

(32:20):

The flip side of that is that most of those profits are realized on the sale or on a refi. And so there is that delay gratification. So while you’re building it, you’re doing an awful lot and you may be drawing a paycheck in terms of a developer’s fee, a project manager’s fee, the acquisition fee or due diligence fees along the way. But remember, the more the fees that you take along the way, the longer it takes to be able to get to a break even and the lower the returns for your investment partners and the lender may have something to say about you taking a lot of fees on the front end as well. And so you have to be prepared with your exit strategy heading into this. If you are relying on private equity and you’re going to give them a certain internal rate of return in your projections, that big pot of money only comes from a sale.

(33:01):

You can’t leave some of the equity tied up in a refinance and do an 80% LTV loan with 20% of your equity tied up by your investment partners. They never get their money back, which means they don’t get the returns that they want or expect. So your exit strategy may have to be a sale that allows you to tap into 100% of the equity that you created to give your investors the returns that you had promised to them as well as the returns to you. There may not be enough room in a refinance to be able to offer an attractive internal rate of return to get them to invest with you in the first place. And so your only option for this project, that may be an exit strategy, and if you’re looking to build a portfolio of income producing assets and you have to continue to sell ’em off, well then this may not be the route to go.

(33:45):

Or you may look at building an investor pool that is okay with lower returns and staying in the deal longer or staying in still for a short amount of time, but then you refinance the project and move them out, and then you keep the property even though they have a little lower return. So it just depends upon the pool of investors that you find and what is deemed an acceptable return to those folks that you bring alongside of you. So those are just some of the many facets to a self-storage development project. And we just touched on the front end, which is a truly site selection, what makes a really good site and what makes a site, and not only what makes it a really good site, but what makes a site profitable and feasible. We never let the excitement of a deal trump the viability of a project, which means that I know many people are out there excited to get into the self-storage business, they want to become developers and builders because it’s the next step and maybe there’s some ego behind that or whatever that looks like.

(34:40):

Don’t let excitement of any deal for any reason trump the viability, and you never want to come into a project and get further down the road only to determine that we wasted a whole lot of money before we said no, maybe too much money because our ego was tied up into it, or we decided an even worse scenario to move forward. And at best, this is a breakeven and we’ll make it up on the next one. That is also not the way to approach this asset class or any investment period in this developer’s opinion. So with that, I’ve given you just the basic ground level foundation, no pun intended, for site selection, for a development project. And if you are interested in going down this path, and we are very bullish not only on self-storage right now, but on a building we are converting.

(35:25):

We have a conversion fund right now that we are filling up with conversion projects. Now we do have ground up developments we are active in, are in developing ground up facilities and conversions right now at pace, as well as buying existing facilities even at today’s market environment and at today’s interest rates, because this is the time to be able to build that portfolio of facilities up. And if it’s already stress tested by today’s interest rates that we know that we are going to be in good shape and the markets that we’re operating in and the projects that we’re taking on when interest rates come down and the cap rates come down, and then we become either refinancers or sellers at those new interest rates and those new cap rates. So if you want to know more, if you want to follow a little bit closer as to what we’re doing, then look in the show notes, click on the link that is in the show notes that’ll give you access to more of our resources on how to develop self-storage facilities from the ground up or conversions.

(36:19):

We’ve been holding events, we’ve been teaching ground up development for better than 12 years now. We have a three day events that are based on workshops that are based on how to go from A to Z in developing a facility or converting it. And we would love to come alongside of you on this journey about developing and the building self-storage of facilities as you build your portfolio as well, because once again, this is where what we’ve seen are the highest returns are taking a piece of dirt or an old building and then putting a business, putting income stream on top of it with that storage nation. Thanks for tuning in. Once again, as I share with you the asset class that I love so much and the strategy, the tactic that we’re utilizing that is, in my opinion, the most fun, which is building the development side of the business and taking something, a piece of ground or a building that has nothing on it and then turning it into self-storage.

(37:07):

Well, that’s what gets us all fired up around here. So tune in next time and we are going to have another special guest on and how they are approaching the market. You do not want to have this, but in the meantime, I look forward to seeing you on another not only podcast episode, but I look forward to seeing you at our developers academy, our self-storage Academy, and for those of you that are already into the business that I would invite you to come to the Self-storage Mastermind, the nation’s oldest, the very first, the industry’s first self-storage mastermind where we have dozens of developers and syndicators that are doing just what we’ve talked about and doing it at scale. And we would love to have you come alongside and take part in that as well. So with that gang, I look forward to seeing you all on the next one. Take care everyone.

Announcer (37:51):

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