All Forum Posts by: Henry Clark

Would prefer to write a post on how we cleared 8 to 12 inches of snow at 4 locations in 4 hours, but that's not going to happen. Have about 3 inches on the ground in the last 3 hours. The rest is supposed to fall through now, 12:30 pm to 6 am. All of the equipment is filled up. Skid steer engine heater is plugged in. Literally just waiting for snow to fall. So writing a post on Cost Segregation related to Self Storage. This is just the basics. Read a lot of other posts on Cost Segregation, but never saw any detail or summary statements/break downs.

Basics.- Anyone wanting to get real technical, please write a separate detailed post. KISS- Keep it simple.

Cost Segregation- Dissecting an asset into its different cost components as you will see below. (Fence, Storage buildings, electric/lights, roads, etc.)

Why?- This is to take advantage of IRS early depreciation tax write-offs. Example: If we had $15,000 of security equipment, versus depreciating it over x years, we write it off in year one.

Which Assets can we take Early depreciation?- Below are the IRS asset class life's. Any asset with a life of 15 years or less can take Early depreciation. We will be more descriptive in the Self Storage analysis below.

A. 3 year/5 year/7 year/10 year/15 year

B. 20 year/27½ year Residential rental property/ 39 year Nonresidential real property

Benefit?- Making the math easy, so disregard incongruities. Say the above $15,000 had a 10 year life (KISS). Then your depreciation would be $15,000 divided by 10 years (KISS- not bringing in accelerated tax methods of depreciation); then your first year depreciation expense would be $1,500. With early write off, it would be $15,000. In year 1 you get to take an additional $13,500 ($15,000 - $1,500) of excess depreciation. If your tax rate is 30% (KISS), then you saved $4,050 tax/cash ($13,500 x 30%).

Carryforward- If you don't have the applicable income to utilize all of the $13,500 excess expenses, you can carry forward the tax benefit into future years to use.

Recapture- If you sell this property early, then you may have to recapture some of the excess early depreciation taken in prior years.

Cash Flow- Self Storage is usually Cash poor in the first year or two, and then Cash rich in later years. By taking this early depreciation thru Cost Segregation, you are reducing your income tax payments (Cash) in the early years, and you are increasing your Taxable income in later years since you will have less depreciation expense then (when you have more cash to pay taxes).

Date Placed in Service- If your developing a project and want to do Cost Segregation for the Current year, have a discussion with your Tax Accountant as to the date your assets are "Placed in Service" and when you can do the early depreciation write off. Not all projects get completed based on 12/31 tax year.



We will use the following Budget numbers for a Self Storage Development.
We will come back to an existing Self Storage location's "Purchase":


Self Storage Development:

Key- have your vendor or vendors bill you separately by asset type.

Keep in mind, Cost segregation is already performed if you are building a new location and have the Vendor/Vendors bill you separately by asset type. It becomes a Tax accounting exercise after that.

A few discussion points:
a. Land- is not depreciable, thus not part of the discussion.
b. Magnitude of order- Landscaping below is $5,000; and the Concrete Roads are $676,000. Both can be written off with early depreciation. Keep the integrity and conciseness of your documentation at a higher level for your larger magnitude write offs.
c. Buildings- Material, foundation and Erection components cannot be separated and are all classified under the same asset and same life.
Use the below list and expand on it with your Tax accountant, to help with your segregating the costs.

Self Storage Purchase:

Same situation as above, but we are purchasing a pre-existing Storage location. All of the items below, you should discuss with your Tax advisor, there are more implications, than just the topic of Cost Segregation.

A. Try to purchase the "Assets" and not the Business. This gives you a chance to segregate the assets of the business and gives you a little more IRS credibility on Cost segregation.

B. Try to put in a Non-Compete agreement. This can be amortized/depreciated for tax purposes. Work to move less value out of "Land"- not depreciable or Buildings- Longer lives.

C. Create Assets from the Total purchase price. Example: Accounts Receivable is normally just part of the purchase price and not considered other than cutoff date. Same for existing Lawn mowers, furniture, etc. Create Assets to absorb more of the purchase price so that less of the value goes to the Long Life assets that can't have early depreciation write off. Forget the impact to the Seller, they need to catch that.

D. Whether you purchase the "Assets" or the "Business"; you might still decide to do a Cost Segregation Study. Look at the different line items above and consider their "Order of Magnitude ($)" and then think of the time/Cost it might take for a Cost Segregation study. For example: if you give the same amount of due diligence to establish a value for Concrete Roads ($676,000) versus Landscaping ($5,000); it would actually take more time to do the Landscaping. Make sure you specify the degree to which you do/don't want to capture these segregation items; and the degree to which you want support should you meet an IRS challenge with your Professional.

Well it's lunchtime and I'm going to plow some snow before it gets to deep.

@Alesandro Breguez

Without getting to much deeper into this post.

One of the reasons we picked Belize is because it is tied 2bzd/1usd to the US dollar, to your point on FX.  You can also see my comments on inflation above, which is also tied to FX/government.

Regulations is another reason, we picked Belize, its land laws were developed under the British Common law system, which is similar if not the same to the US's.  Due diligence and you own the property.

I believe @Mike Lambert and I are looking at the same thing and have two different views/approaches.  Because we are using two different sets of values.  We looked for a spot within easy flying (2 hours to Houston, versus 11 hours to Maui, relatives there).  Low cost of agriculture land, Teak plantation.  Easy access to both Ocean and inland.  And value add propositions.  @Mike mentioned Belize does not have a ready Real Estate market and I totally 100% agree with him.  For our approach this is good.  No where in the US can I buy a pristine piece of ground on a clear blue/green river for $4,000 per acre, yet be near the cities.  Was on the market for 15 years.  Or buy 5 miles away 100 acres of nice farm/timber ground for $35,000 per acre.  Local side deal.  Can't do that in Costa Rica/Panama near the towns or in the countryside.  We are not looking for Condos or Houses to flip or as investments or Air BNB's.  Our investment time Horizon is 25 to 35 years, three way proposition.  We are not looking to make money off the local citizens, because it isn't there.  Belize is "Rough" which is what I am looking for, from this investment.  For refined or city, Montreal is great, Seoul is wonderful, Nice-France is fun, Northern Italy relaxing, actually Uruguay per @Mike mention looks like a very interesting place.  These aren't my investment arenas.

Steel prices:

We do Self Storage and surface RV/Boat/Vehicle storage.  Steel prices have gone up.  This is a covid issue.  You could wait till trade fully resumes.  Luckily Steel is only a portion of your costs.  Concrete, land, Erection costs, fence, electric, security; keep your building steel cost down as a percentage of the total.  In other words your total project isn't going up 20%.  For us, the steel increase is not enough of a financial factor.

In your shoes: (don't know if this is a general question, or just in relation to the steel price), but I will answer generally:

There is always a market for RV/Boat storage, its just hard to make the numbers work.  Plus you have a location that is expensive/good location, even if you own it, it has a higher $ usage.  Surface parking is a good "Hold" strategy subject to finding a higher paying usage.

Break the RV market down between RV's around $30k to $50k; and then ones over $150k.

Your enclosed storage will take a rent of $250 to $350 per month to work.  Your lower end RV units won't pay that much.  Your higher end RV's will also be bigger, taking up more space and also more road.  Example a 50 foot enclosed bay for a Class A Mobile unit will require at least a 65 foot drive way, parking at a 90 degree.  Thus your actually giving up more ground for less "total" sq foot rent, with a higher investment up front. Also these folks will want a remote entry fob, which will require about a $3,500 panel door, versus a chain pull up Roll up door.

Surface parking do at 60 degree angles with driver left shoulder back up for all spots.

General comments:

Zoning obviously.

Can you do rock roads and are you required to put Footings on the enclosed.  If you have to do hard surface roads which would be concrete (asphalt won't work) and footings, the cost gets a lot higher.

Also check to see if you have to put in a Storm retention pond.  This will cut down on your 9 acres and the placement/drainage of the pond might impact where your buildings go.

Surface parking on Rock, is a low risk, add as you need, removable product.  Good "hold" strategy.  Takes a long time to break even or pay off (if you include your land cost and don't call it free).

Enclosed or canopy parking, takes up a lot more space because you are dealing with a larger size unit.  Have to commit a lot more investment up front and in larger and not incremental segments like surface parking.

I would look at doing Contractor bays for Electricians, Plumbers, HVAC up front.  Doing mechanics, landscapers, tow truck operators, welding in back.  Take advantage of your central location and easy highway on/off for them.  Along with Surface parking in back.  See if you can do Cargo Containers for storage.  No property taxes.  Add as you need.  Put some rock at the front and back to get them about 4 inches off the ground.  They are expensive now, due to less trade.  Used 20 footers.

You should be able to get $1 per square foot for Subcontractors and less driveway requirements than Enclosed RV.  RV at a small 12w x 50L with at least 14 ft height doors would be 600 sq feet at the top end $350 equals $.58/sq ft plus a large 65 foot driveway.  Subcontractors would be $1.00 per sqft with smaller drive way.  Building would be more expensive.

Below are some notes. Did not update for your situation.

CONSIDERATIONS FOR RV OR VEHICLE STORAGE

A. Pull through- The front, pull as far forward as possible, gives the person next to you an easier angle to turn into, from behind you. Align your front with the fronts of all other vehicles. Be courteous and leave enough room on the Driver side, so that RV can open their doors.

B. Back to back parking- our locations are set up at 60 degree parking. Also, they are setup for the driver to back in on their side, so they can use the lot next to them for alignment. This way you only have one blind side on the right side backing in. Otherwise you have two blind sides.

We have 20/30/40 foot parking at our location at 26763 Highway 34, Glenwood, IA. Each size has a different width due to how hard it is to park a longer unit at the very front angle of their turn in. 20’s- 10 wide; 30’s- 12 wide; 40’s- 15 wide. Although you could park an RV in any of these sizes, it is easier with a wider width to make the “front” turn. Or ask for an end parking spot, so you are doing a 90 degree parking, but have the whole drive way to back in with, without a turn.

C. Canopy- same issues as others, depending on if 60 degree or 90 degree parking.

D. Enclosed- Really a matter of width and depth. Keep in mind all measurements for storage are relative. For example: A 10 wide x 20 deep x 8 tall unit, with studs, roll up door and door jambs; is really 9 wide x 19 ft 6 inch deep x 7 ½ foot tall. Also if you have a 20 ft boat or Camper, its really 22/23/24 ft depending on Propeller, bumper or front hitch.

E. Surface- Rock or hard surface (concrete/asphalt); If on rock/asphalt put your tongue leg or stabilizer pads on wider pads to spread the weight out. These pads are needed on Asphalt since in hot weather they will sink into the asphalt.

F. Pest control- we put mouse bait out along the fence lines and under the units, mow excess weeds and grass. You should put both rodent and bug control in your unit. Dispose of all food sources, for long term storage. If you want to be really diligent with pest control, don’t park next to overhead lights. They attract bugs at night and then mice underneath. Put scented drier sheets in all compartments and rooms. Open all cabinets and doors.

G. Stabilizers- if doing long term storage put you stabilizers down. Most parking is in an open area and the units can rock and move with the wind. This will also help with taking pressure off your tires so they last longer.

H. Security- Put a lock on the hitch. Although you are in a secure location, RV’s and trailers are the easiest storage to break into or take without notice. Recommend you put in motion sensors or GPS tracking security. Check your vehicle at least twice a month. Most Security systems only maintain footage for 2 weeks due to camera memory capacity.

I. Propane Fuel Tanks- disconnect and store if leaving for long term storage.

J. Electronic Lifts- disconnect the battery if leaving for long term storage.

K. Insurance- most storage unit insurance policies do not cover vehicles. Keep your insurance, just have them adjust your automobile to fewer miles or just comprehensive coverage. Wind, Flood, tornado, Hail, or third party damage or theft can still occur. Traditional insurance coverage, RV’s normally stay a flat rate throughout the year, thus you will still need to maintain full coverage. Or, if you seek out a specific RV or rec vehicle insurance company, you can move in and out of winterization rates.

L. Pricing- use a 30 foot vehicle as an example:

-In the country about a $1 per foot on rock.

-With Paved access and parking spot, this might run $60 to $90

- Enclosed parking this will cost about $120 to $170 for a 30 foot.

- Enclosed parking for a 50 foot, might cost $225 to $350.

The price extremes are the cost of the concrete/asphalt road and the storage bay. Also the longer the unit the price goes up significantly because it takes more driveway width to park and the type of door changes in both size and type (remote operated). A 50 ft RV will require about a 70 foot wide driveway to back in.

We are only addressing the long term Parking portion of storage. Other items are specific to each vehicle such as water clean out, Tire/window shades, etc.

Quick non Parking list:

Wheel/tire covers; Vehicle cover.

Remove and store your tires.

Store with a full fuel tank to prevent condensation

Add fuel stabilizers

Place RV completely off the ground to prevent flat spots on your tires, if left for a long time.

Cover your HVAC, skylights, vents and windows to prevent exposure to sun and breakdown.

Boats leave your plug out, whether covered or not.

@Jason Turgeon

Forgot your $200k into it comment.  We footed the $200k in cash.  SBA 10% could have been $2mm loan.  But we only needed around $1.6mm.

Everyone has a great deal they did or that they passed on story.

This was a great deal story.  Was looking for land, had 3 spots I had identified with a realtor.  Came back to their office and I wasn't really excited by any of them.  The owner of the realty company sat down with me and the realtor as we went through the 3 properties.  He said, I have a property you need to see, its not even listed yet, just came in yesterday.  It was not in the location I wanted.  He told me the price, 8 acres for $200,000.  I said let me drive over right now.  Came back 30 minutes later and said we will take it.

3 siblings in their 80's decided to sell their old homesite.  No house on it, just 5 acres of soybeans and 3 acres of mid growth timber and brush.  Wanted to sell it quick.

Bought the land for $25,000 per acre.  See appraised notes above.  About 2 years later after we cleared land, put in 2 acres of Self Storage, and added all utilities, the same appraiser, appraised the land at $145,000 per acre.  So we end up with a lot of appraised collateral, which we can use on our next projects, with only having put the original $200k in to begin with.

Part of the big discrepancy, is when they originally appraised the land, he only appraised for about $28,000 per acre.  I argued it should be in the $100k comparable, but he said since I just bought it for $25k, no way could he go that high.  Maybe a year or two later.  Which he finally brought it up to comps.

Key is a lot of chainsaw and bulldozer work; bringing utilities up, really increased the value of an agricultural property.

Our land is bordered on one side by Iguana Creek, and the front is the Belize River. Actually have 5 to 7 foot big Iguanas.

Haven't seen them, but my contractor says we have 7 foot crocodiles.

@Jason Turgeon

Thanks for the detailed response.  Just because of that and you said you went near Philadelphia.

Please check out these three properties; researched that area for another post person, who never responded.

Loopnet:

240 Sickle Lane, Woodbury, NJ

105 Cedar Brook Rd, Sickerville, NJ

Bldg 801, 300 Thomas Ave, Williamstown, NJ

Not in my area and I am done opening new locations.  With the high storage rents in that area, and high population, I would be looking at these types of properties.  Realize you have to turn over 10 boulders to find gold, but I like the looks of these three, from several angles.

I see regular Self Storage, Large storage units, inside/outside vehicle storage, lay down yard, MFH, Wedding/Reception hall, subdivision lots, Contractor bays, etc.

$200,000 gets you into any of these with build out.  SBA 10% on a $2mm loan.  They won't do contractor bays.

Hey, I need a big Iguana art piece for our property down in Belize.  Is it cheaper to ship it from Maine, to ship you down there to build?  ha ha.

Again, thanks for input.

Material came in, to do the Siding. This property is zoned PC or Planned Community. In Industrial zoning you can do whatever you want. In PC, you have to get approval for everything. In our instance, for any building side facing the street we had to have a Siding on the bottom skirt or wainscot. Some of our buildings where we could, we put end units so we didn't have to do the Siding. The fence we will need to do ornamental bar rails versus chain link.

We picked a plastic molded product to keep the price down. They would not allow us to do a different color metal for the wainscot. This application will cost about $20,000 more than just sheet metal. If we had gone with the false stone or brick face, it would have cost around $40,000; which we had already run into cost over runs on some other areas, so I took the least expensive route.

Basically it takes a few more metal ribs, we screwed treated Plywood on, so it wouldn't rot, then you fit and screw down the molding. All of our buildings are now buttoned up. Just need to finish out the Office.

Had a new investor ask how to avoid large REIT competition when selecting their first Storage location.

Lets understand their "normal" business model first:
a. Onsite management, lowers their margins and causes increased prices.
b. Climate controlled, which is cheaper if you build multi level versus single. Also because the land is more expensive in larger cities.
c. Now lets work back wards. Lets say a location for them has to be at least 350 units to make it worth it.  Change the number as you see fit.
d. I use a ratio of 6 units per 100 population, not houses.
e. Minimum 350 units at 6 per 100 people = 350/6x100= 5,800 people. That assumes no one has built there already.
f. Problem with a town of 5,800 people is that market does not want or need controlled climate at those prices. In a large city they are forced there because the land is too expensive to build one story drive up. So even though the math says 5,800 minimum size that isn't correct.
g. Now at what price does the land become so high, that: 1. You are forced to build multi story (not $50,000 per acre, because I'm happy to build drive up at that price. $100,000 per acre, I would still build drive up.) Lets leave it at $100,000 per acre city property.; 2. REIT Customer base has to be willing to pay around 10x10 $110; 10 x15 $140 per unit. The city has to be large enough to where they can't drive easily beyond 1 to 2 miles to get to drive up storage. To me that is a town of around 100,000 people.
h. There is your answer. Look for towns of less than 100,000 people which is a market for 6,000 units. And Commercial/Industrial land prices of $100,000 or less for 2 acres or more.

Now lets test that approach:
1. Go to sparefoot and pull up a town of 100,000 to 50,000; don't worry about below, REITS won't get to 25,000 population towns. See which large National or Regional REITS are there. Sort by Distance. Storage 5 miles away is not your competition.
2. Do the same thing using Google search for self storage in that town. Look by distance also.

Look for large locals. Same impact as REITS in a smaller city/town. Also just because there is not a REIT there, there could be too many local locations. I love REITS, can beat them on price, convenience (drive up versus elevator), "larger" size offering, different product (climate versus non-climate) and location. Don't play their business model.  Don't be a castle (large customer base or circle needed), be agile and mobile.  If you can buy the land/zoning; if there are 4 large National or Regional REITS within a mile of each other and they are stabilized at 70% full, build between them; its a great location.  You will be at 90% occupancy.

But as many have said, know your numbers. It's about you, not them.

"Start small and Make Your Big Mistakes Early"

@Mark Brown

@Jerel Ehlert

Not trying to out anyone commission.  We found the property on our own.  Also along the way we found a realtor we might do  business with in the future.  After we had already engaged individually on the property we are looking at.

The reason I am bringing the point up, is both the Texas standard offer letter really stresses the differentiation between owner and buyer realtor, the Seller rep really stressed it.  So I came back with why all of the Point stressing, is there some Texas process that I am not seeing.

Read my beginning comments, in light of that.

Sounds like no one has any input as to the need for a Buyers Realtor, beyond the normal course of Purchasing property.  There is nothing special about doing business in Texas from a Realtor standpoint.

Thank you.

@Christian Sidaros

Christian lets see where you at first, before you head down the path.

You need three things:

1.  How much money or Collateral 60% of asset value; can you bring to the table?  

2.  What finance method are you going to use?  This will determine how much equity you have to put in.  Example:  SBA 10% of value; Traditional 25%; Traditional 40%.  You need to see if you qualify.  SBA will not do loans where you do not have at least 51% of the occupancy for your own business.

3.  Your investment track history.

Adjust the figures as you see fit:

Lets say you have $100,000 cash or Collateral at 65% of value:

SBA 10%  means a $1,000,000 project, with you investing $100,000

Trad 25%  $400,000 with you at $100,000

Trad 40%   $250,000 with you at $100,000

You need to start with the above or your wasting your time, if you go it alone.  

If you partner, and don't have the money, you have to bring something to the table.  Sweat equity, live on premise, management, etc.

Limitations-  Do you have a business to house in this investment, 51% of sqft?  If not, then SBA can't be used.  Unless your doing something like Self Storage (what I invest in).

As mentioned above, look out on Loopnet for Raleigh.  Use commercial or industrial.  Use the sort key and sort from lowest to highest.  Where your number hits, are the properties you "might" be able to do a project.  Keep in mind you can't go all in with your cash.  There are always issues.  Slow to rent up.  Rent levels you thought are to high.  Added repairs.  Client build out requirements.  Etc.

Catch us up on your status.  Based on that we might be able to bring more options to the table.

The above will set your expectations, and give you more focus on your efforts to get started.

"Start small and Make Your Big Mistakes Early"