All Forum Posts by: Christopher Brown

Thanks Scott.  Yes, that all makes sense and, as you suggest, is more "scientific" than I think the seller is imagining - he's just put a 10 cap on his really ambitious pro forma to arrive at his number, best I can tell.  And forget about trailing 12, they don't even have a trailing 1 yet!

So that I understand right, when you say:

you are suggesting that the lender will INCLUDE the cost of future improvements (adding it to the value of the income stream and the value of the land) to arrive at a total valuation for underwriting? So a hypothetical storage that is producing a trailing 12 $100k NOI with 6 acres unimproved land and permits in place to double the sf might be underwritten as follows:

($100k x 10 cap) + (6 acres x $50k/acre) + ($30/sf construction cost x 20,000sf) = 

$1m + $300k + $600k = $1.9m current valuation

I've started reaching out to my local lenders to see what they think about underwriting this (currently) non-existent NOI. Anyone have any self-storage specific lenders that they'd recommend for me?

Thanks all!

I appreciate everybody's advice. So is the takeaway for un-stabilized properties (both storage and otherwise) just getting to a place where you are comfortable that the discount off some future stabilized valuation makes up for the risk/time it'll take to get there? Or is there is more scientific way to value the projected income over time? In other words, how does one value - now - a property that projects as follows (these are for the sake of conversation, though the $165k and $330k (after 100% unit expansion) seem roughly right for stabilized NOI on this property):

Year 1: NOI $25k

Year 2: NOI $75k

Year 3: NOI $165k

Year 4: NOI $165k (stabilized) (at an 8-10 cap = $1.65 - $2.05m valuation)

Year 5: NOI $165k (stabilized)

Year 6: Capital Improvements of $500k; NOI $200k

Year 7: NOI $265k

Year 8: NOI $330k

Year 9: NOI $330k (stabilized) (at an 8-10 cap = $3.3 - $4.1m valuation)

Year 10: NOI $330k (stabilized)

That's a 5 yr NOI of $595k or $119k/yr, and a 10yr NOI of $2.05m, or $205k/yr, with an additional $500k capital investment at Year 6.

And I suppose for the purposes of negotiation, what is the difference between how I value it and how a listing agent values it?

Thank you gentlemen...

I met with the broker at the site today.  22,000sf, 154 units, of which 50 are climate controlled.  Approved permits to build an additional (identical) 22,000sf building, but no infrastructure in place for that yet (no pad or sewer, etc.).  They also have approval to have long-term parking storage on "permeable surfaces" - gravel or something like that - which they have just started to fence in.  

They started leasing on Sept. 10 and have leased 26 units so far at an average of $7.62/sf.  So that makes 100% economic occupancy = $167k or so in gross income, not including the parking spaces or the additional build-out possibilities.  There are 2 other much older storage business within 1 mile that are 100% occupied; no others within 3 miles.  This a growing commuter suburb for Winston Salem, NC, with a new highway being built with an exit less than a mile from the site, and lots of new residential construction.  I don't know the population density yet.

I pushed the broker on how he arrived at his valuation and I think they pretty much made it up. He hasn't sold self storage before; he told me he'd looked around at cap rates for different self-storage comps, but he didn't have any comps for places that hadn't yet stabilized. (He said they "worked backwards" to arrive at their 16% cap, which I think is to say they came up with an asking price, then divided it by a pretty optimistic NOI of about ~$250k.) $167k gross income - 30% operating costs gets me a rough stabilized NOI of $117k. At between a 5 and 10 cap, that's anywhere from a $1.1 to 2.2m valuation once it's leased out and seasoned. Seems hard to believe that they should get anywhere close to that before it's hardly even leased at all?

And I haven't even asked about financing yet.  I've got plenty of cash and could finance up to about 50% of the current ask, but would anyone even lend on this before it's got an established income history?  Anybody have any lenders they work with who specialize in storage?  

Thanks!

I've got some proceeds from a 1031 sale that I'm considering investing in a new self storage project that just opened to renters last month; I don't know yet what the current occupancy looks like but I assume it's pretty close to zero, and I don't yet know how long I should expect it to take to stabilize. I haven't gotten any due diligence materials from the seller yet, so not a lot of details. I'm interested in a knowing a bit more how to value these properties before they've stabilized. The broker has it valued with a CAP in the high teens on projected NOI of ~$250k. 20,000 sf with approvals to build an identical 20,000sf on the 8 acre property. It's in a tertiary market with 2 other storage places within a mile (both of which seem to be close to full occupancy).

What are the rough cap rates for valuing stabilized self-storage? And how does the industry discount that valuation pre-stabilization? And how does it value the future development/NOI potential?

Appreciate any advice...

I'm evaluating a portfolio of 40+ section 8 SFHs in C/D neighborhoods in a tertiary market, all of which are 50+ yrs old.  Occupancy is 100%.  No real comps for a portfolio of this size in the area.  Right now the asking price is about $75k/unit based on a cap of 10% against three years of gross income (supported by P&Ls).  Any input on this valuation?  Other markets seeing valuations for these kind of neighborhoods and units in the same ballpark?  

Thanks for any input...

I'd love another set of eyes on this deal. The portfolio is in a tertiary market, mostly C/D properties and all Section 8. 100% occupancy and multiyear leases in place on all the units. I've always been an A/B buy and hold investor, but I've got an opportunity here with management in place and about a 10% cap to cash flow really well. I'd expect OPEX to be a bigger % of gross rents - closer to 50% than the ~30% I'm seeing here. Are OPEX generally lower as a % of rents with this class of properties? Trash is included in the real estate taxes. The actuals/pro forma that I have don't break out any CAPEX, and many of the homes are 50+ yrs old, so I'll have to see some hard numbers on what that cost has been. Any other cost categories (either here on the table or that aren't included) that raise any eyebrows?

Thanks for any feedback...

I have an opportunity to invest in a buy-and-hold project with a contractor whose work and track record I know well.  I'm closing on the sale of one of my investment properties and I'm trying to figure out if there's a way to make a build-to-suit 1031 work.  Usually the way the builder works with his regular partner is that the partner fronts the cost of the purchase, the contractor does the rehab, and they split the proceeds on the flip accordingly.  I want to see if there's a way to work a slightly different scenario where the improvements that the contractor makes are rolled into a 1031 exchange and we keep the property as a rental.

Let's say for rough numbers I'm selling an investment property for $1.5m (proceeds of $1m and paying off $500k debt).  And the new property is a $1m purchase price and it needs $500k capital improvements.  So a pretty straightforward build to suit 1031.  Now let's say that the contractor and I agree that I'll front the purchase price and he will be responsible for the labor/materials for the improvements.  If we meet the build to suit reqt's - the improvements are completed within the 180 days, we hold title to the property in the same way I held my previous investment, we keep the property as a rental for at least 2yrs, etc. - does that satisfy my $1.5m purchase requirement?  Does the contractor act in the same way that any conventional lender would in this scenario?  Or does the QI have to actually have all $1.5m from the beginning and disburse the cost of the improvements along the way?  Do I have to have a formal $500k debt relationship with the contractor, and what would that look like?  Can we simply agree to a 2/3-1/3 split of the rent and eventual sale proceeds?  

Anybody done anything like this before?  Or have any other strategies to share capital investment with a contractor-partner on a buy-and-rehab-and-hold that will satisfy the rules of a 1031 exchange?

(I'm also curious how, in the scenario I'm proposing, the "labor" provided by the contractor actual gets valued by the 1031 "improvements" rules, when I'm not paying for it and he's not really billing it to anyone because it's part of his "capital" contribution to the project.  Seems like an obvious way to fudge the numbers on what the improvements could be worth and a reason I would imagine the IRS would have difficulty with this plan...)

I've done one other build-to-suit 1031 but it was 10 years ago and the QI I used then is no longer around.  I'd love some input from some of you experienced QIs and CPAs about strategies here!  Thanks for any help.

I am preparing to sell a condo that I've owned and rented out for the last 15 yrs in NYC. It has appreciated quite a bit, but the cash flow is just ok, and I think that I would like to deploy all the appreciated equity into some better cash flowing properties - probably SFH or MFR. The problem is that I make a pretty modest annual income between my wife and I, which won't be able to support the DTI on new debt for any new investment properties. (We make about $75k/yr. We are also in the midst of relocating to Winston-Salem, NC for a new job and buying a new home down there, which is where I would expect we will search for new rental properties.)

Rough numbers: $400k purchase price with quite a bit of depreciation for a tax basis around $200k.  Sale price around $1.4m.  Current debt is about $500k, and I'll have about $800k in equity proceeds (after brokerage commissions and ny transfer taxes) to roll into new properties.  

I'd obviously take a huge hit in taxes if I don't roll that debt into new properties. I've looked into going the commercial 1031 route (NNN, etc.) where we'd have better luck securing debt, but that market seems so compressed right now and I wouldn't get the cash flow I'll be able to get with residential rentals. DSTs seem similarly frothy. I don't want to 1031 into something without a great exit just to save the taxes.

Any creative ideas for how to take on the required debt when conventional lenders aren't going to fund me and it'll be two years or so before any new cash flow will qualify me to refinance?  Will portfolio lenders take me on?  Does finding an equity partner make the most sense?  Seems like too much money and too long a time for hard money/p2p lending?  I've got quite a bit of experience renovating and renting out both long and short term rentals, but with my new job I'm not quite sure how much I want to take on at the moment.  Appreciate any advice...