Self Storage- Deal 13 Los Angeles development

[Henry Clark]

Someone asked me to look at the surrounding Los Angeles area for potential Commercial Deals.  They were wanting to get into Commercial.   I enjoy the challenge sometimes of the Hunt, especially when I don't have to do the follow-up work.  

Zoning is always the first key question on any Commercial development.

Found a piece of bare land.  4 acres for $250,000.  I am more than happy to pay $100,000 per acre to be in or next to a city.

Zoned Industrial- they would have to check on zoning.

Location- next to freeway with intersections/on/off ramps before and after it.

Location- All of the competition is on the other side of the freeway.

Rates- drive up access10 x 20 in the $250 to $300 range; we are at $130 and think it's great.

Construction costs- subject to any local differences, such as permitting or planning, costs will be about the same as ours to develop. Same costs, but almost Double the Rent rate. Means NOI net operating income will be way higher than ours; relative to the same CAP rates as our properties, means it will be double the value.

Financials:

Can do about 300 units on 4 acres.  Around $3.5mm all in.  If you did a Conventional Construction loan Interest only for Construction period and rent up phase of 18 months or 65% occupancy.  10% down since you will convert to SBA loan long-term or $350,000 cash in.  Day one this will appraise around $5mm upon completion.  At 40% occupancy appraise around $6mm.  Will go up slightly from there.

Sounds too good to be true.  Probably is.  Always need Boots on the Ground.

What is wrong with the land?  Will planning and zoning allow it?  Other??????????? 

If this doesn't work, you keep turning the rocks overlooking for gold. After all it is California.

Start small and Make Your Big Mistakes Early.

Hard to do in the Los Angeles market.  Most existing storage locations start at $5mm and go up to $20mm; with 100% occupancy.

[Henry Clark]

The 18 months is the Rent up Phase period to get to 65% or cash flow breakeven.  However, that is wrong.  The rent is so high there, the cashflow breakeven will be around 40%.

The concern on the Construction phase carrying cost.  Would address as follows:

Do you budget with the following periods and interest costs.

Let's use Rons months above.:

1.  Cost of land and acquisition cost.  Interest.  Run the full 36 months above.

2.  Land prep:  Run the 24 months above.

3.  Building and erection run for 9 months.

Most of your Interest cost during construction will be in the Building and Erection since that is where most of your borrowing will occur.  Build this into your loan package if your lender will allow.  All about relationships.