Self-Storage Deal Structure Advice. Land Lease? Buy?

[Andrew David]

Hi All! 

I am a commercial general contractor in the Southern New Jersey Region. We primarily construct commercial, medical, and industrial buildings with a strong history in pre-engineered metal buildings. My goal is to build a two-phase self-storage project for my investment portfolio. My focus at the moment is Phase 1. Phase 1 is a 45,280 SF/235 unit project. 

I have done some preliminary site planning and cost analysis on constructing the facility on a property that is owned by a client I work for. The client is a real estate investor by profession and we have a strong relationship.  

The property Owner had prior approvals for a retail project that never took off back in 2008 and the site (7 ACRES) and has been vacant since. In order to minimize the hard costs up-front I would like to propose to the Owner a land lease agreement with an option to buy in the future. To encourage a partnership I am considering offering him an equity position in the self-storage business. Possibly the monthly land lease could be a percentage lease in that he receives a portion of the total rental income based on occupancy. The land value is approximately $600,000. He has had it listed for years with no real takers. 

Acting as the developer, I would pay for and secure the approvals and complete the architecture & engineering.  My construction firm would build the project. I have two equity investors lined up to capitalize 35% of the total construction costs. 

I am looking for some opinions on how to structure the lease (deal) OR should I secure the capital to buy now and take him out of the equation? To me, it seems if he would be OK with coming along as a partner and positioning his land as equity in the deal it limits my upfront costs. 

I am open to hearing your thoughts! I thank you for your consideration and opinions.