Self Storage- Deal 16, Great Market analysis, thought I was retiring

[Henry Clark]

Had my eye on some land for about 2 years which has been for sale, but have been very hesitant about the economy, us retiring enjoying life/travel, and our personal financial risk tolerance.  This would be about a $3.5mm total cost location.  Around 300 cargo units, 200 regular storage units and about 250 parking spots.  In 3 phases to reduce risk.  Phase 1 would be profitable but not a deal I would do on its own.  Phase 2 where you leverage the land, fence, and interior road/parking costs becomes really profitable, and Phase 3 is wonderful, but not necessary.  Phase 3- I actually don't like large storage locations, since your more exposed to competition.  I would rather build another location.

About 300 of the units would be Cargo Containers, another 200 in traditional buildings, the rest in parking.  Looking at Cargo containers because their prices are far down, about the same as 10 years ago.  Versus traditional has almost doubled in the last 5 years.  Cargo containers also don't get property tax, are easily resold with very little loss in value, can be added as needed.  Basically, the Risk level is very low with them.  Insurance would be under Personal property and not as a Building.  Financing is a little more difficult since Containers are treated as equipment versus Buildings.    We already use cargo containers and have/had around 80 of them and they work great.

Zoned Industrial, although I would need to get a Special Use permit for Self-Storage.  Containers are a lot more difficult since most zoning does not allow them.  But Industrial they are permitted.  Performed a market analysis and demand is definitely there, competition is full, rates are high, competition has no area to expand, zoning and land availability is difficult for any future developments.  On the Market analysis we have an unfair advantage.  We have a location about 15 miles away, and using the Customer Map, we can tell we are pulling from this market, meaning lack of supply.  Although this might impact our location 15 miles away, we have other competition in our area, which they would also be pulling from that market.  In our market 15 miles away, there is double the amount of storage that should be in our market and all of us are full and raising rents.  This explains that.

Potential resale of developed location- Talking with our Self Storage broker, he said as an example, if the location used a cap rate of 7 for regular units, use an 8 for Containers. Potential buyers would pay less. Which is okay. Since Containers get no Property Tax, lower maintenance, and also lower Insurance costs, the NOI- Net Operating Income portion of the Cap rate would be more favorable and offset the lower Cap rate of 8.

Potential Capital Gains:  Phase 1 $700k; Phase 2 $2mm; Phase 3 $3.2mm.  This is if we sold.  Does not include monthly cashflow while we hold.

Start small and Make Your Big Mistakes Early.

A separate post later on risk and why if we are retiring.

[Henry Clark]

Financing:

Just talked with our banker this morning.  He has been analyzing this new development.  He is actually excited about it, after showing him how we do our market analysis.  They have done another Storage location with us before, so we have a solid relationship.

A.  The containers are treated as equipment; thus, he is watching the 5-year rates versus the normal 10-year rates for Commerical loans.  Today at 7.4%; two weeks ago, at 6.5%.  The Land and Roads would be based on 10-year rates and have a longer Amort period than the Containers.

B.  I also asked him to come up with a plan to get us 1% point lower, using other collateral or Cash equivalent (CD) deposits at his bank.  Options we went thru to get 1% lower:

1.  Deposit into a money market.  Would only make about .75%.  Would be a Liquid position, thus they won't pay more.  We could take anytime we wanted.  

2.  Deposit into a CD, which the bank will control for 3 or 5 years.  This return would be market rates.  We could not withdraw the funds.  Depending on the dollar amount we moved to their bank, this would achieve 1% point lower loan, plus our Cash we would need to bring to the deal would be reduced by about $30,000.

3.  Stocks at a Financial advisers-  They don't tie loans to Stocks at other companies any more due to the lack of control and fluctuations.

C.  Loan Agreement- for his bank all loans over $1mm require a loan agreement.  We have always had "Loans" with all of our banks.  But this "Agreement" would have if our Loan to Value ratio went below XX, we would have to bring Cash to the deal to Level up.  I don't like this, since it is the same as an Option/Trading Call.  I prefer to all aspects of the deal locked in, so I just have to worry about rental occupancy.

D.  Loan type- Working or Construction line of credit, versus a full loan.  Decided to go with a full loan since this project will come to fruition very quickly.  I did not budget Construction Interest costs into the equation, which I would normally do in a long 1 1/2 year project.  Normally I would ask for Interest only for the first 18 months or till we hit 60% so the project is cash flowing.  This loan we would get 6 months interest only, then switch to P/I.  More risk.  We are in Iowa.  If we miss the rental seasons due to the winter, we could use up the 6 months interest only say from November to March and have very few renters once P/I full payments started.

The Loan Agreement level up feature is a non issue to us, as long as our occupancy and Rent up phases are on target.

Decided not to use any of the financing features above.  The 1% interest savings which is about $10,000 per year isn't worth it.  The $30,000 less Cash to the Deal up front isn't worth it.  My view of the world economy is still shaky.  Would rather keep our Cash equivalents on hand so we can take advantage of huge Stock market swings or local land deals.

Risk- forgot on the previous post.  Yesterday at our County Board of Supervisors our 75-acre Country Subdivision was approved.  We only sell lots with Road and Utilities.  This has reduced our Risk, since we can start to market these lots.  Thus, we are ok taking on more Risk with this Self Storage development project.

Note:  Any decisions or actions we take, might not be good for you.  This is a combination of our Experience, market analysis, Risk Tolerance, and financial exposure.

Next steps:  Get the Loan approved.  Then make an offer on the property, Subject to getting a Special Use permit.