Analyze My Deal - First Time Commercial Investment

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Analyze My Deal - First Time Commercial Investment

Karen Devlin
Member since 2018 · 11 posts · 6 votes

I've been renting SFRs for about 15 years now and I'd like to step up to a larger commercial investment. I'm working with a local broker and he's presented me with this deal: 

Self-storage facility located in Oregon. Price is $1,315,000. 

I have $370K cash that I need to reinvest from a 1031 that I just completed. The plan is to use that plus $30K cash from savings as a down payment of $400K and finance the additional $915K @ 4.25 for 25 yrs. 

Here are the details: 

1-acre lot with approximately 19,000 sq ft across 8 steel buildings. 151 storage units total.

Built in 1986, new roofs and exterior paint in 2015

Includes office with bathroom/sink

On-site manager will likely stay on as an employee

Sale includes additional .22 acre lot. Opportunity to develop the lot to support 30 additional storage units (estimated cost $75K).

2018: NOI = $77,331.34

2019: NOI = $78,472.83

2020 to 7/31: NOI = $44,824.19

Storage rental rates are currently 10% below market value. Plan would be to develop additional lot with 30 storage units and bring rents up to market value starting with a 5% increase.

Thoughts on questions I should be asking? All advice is appreciated. 

2Reply
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Israel Garavito
Investor · Woodbury, MN · Member since 2019 · 41 posts · 33 votes
5y

@Karen Devlin that seems a pretty tight due diligence period. Have you built any extensions to your contract?

Let me step back and ask you if the PA was put together by your attorney or by the seller? A non negotiable for us is that we provide the PA in a commercial deal.

In due diligence make sure you (this is off the top of my head):

1. Review all leases, compare to rent rolls and bank accounts to verify income, regardless of what the tax returns say (this is why it’s a tight DD period, and we usually take a team on site to get through it in a week). Make sure you get a good pulse on the business and how and when the cash flows in. This includes delinquencies, late payments, evictions, etc. what do you do with stuff when you evict and they just leave it there, and do you have that underwritten properly?

2. Review all structural

3. Permits

4. City inspections and COs

5. All contracts and utilities

6. Can you open all units? Not sure how that works with storage, but I’d like to see all units. Every single one.

7. Licensing: make sure those are up to date and if they are up for renewal, make sure the cost is underwritten. Not sure the licenses needed to operate a storage facility.

8. Property tax increases

9. Easements

10. Any debts in property taxes? Utilities?

Etc.

And don’t do this by yourself. Take a GC or whatever or whenever you work with and have them give you a quote or an opinion. Example: are you 100% sure that adding those extra units will cost what you think it will?

And then you and your team come back with all this info, polish your underwriting, and re assess.

8Reply
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  • Karen Devlin
    OP
    Member since 2018 · 11 posts · 6 votes
    5y

    NOI is from the business…

    0Reply
  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    5y
    Originally posted by @Karen Devlin:

    NOI is from the business…

    Correct. That’s how storage is analyzed. It’s a retail business. You do not value the property separately unless you have surplus land to develop. The main thing is to make sure to verify the numbers with tax returns. Also make sure you know true demand and supply in process with new development in the pipeline. 

    6Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    5y

    @Karen Devlin even 74k NOI is awfully thin for that price and it's not performing well. I don't know that sector but the number isn't appealing in the abstract

    3Reply
  • Karen Devlin
    OP
    Member since 2018 · 11 posts · 6 votes
    5y

    @Jonathan R McLaughlin, thanks for the input. What NOI would you consider to be performing well for 1.3MM?

    0Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    5y

    @Karen Devlin OK, kind of fun to go in blind: Feel free to PM me if there are non public details again i don't know the sector and I don't know your financing or what the pure land value is without the storage etc. So this is either complete ignorance or a clear set of eyes your choice:). We own industrial NNN assets but no self storage.

    1) CAP rate is about 5.6% which is low and usually accompanies to A-/B+ assets. If you check out colliers sector reports or similar they have industrials at around 7% and I think they have a self-storage category. I know its been doing well but thats a premium rate, and AGAIN, there is no guarantee you can get it back to 74K from the 48K

    2) If your financing is in the 4-5% range you have next to no "spread" to make money--i.e. the difference between your assets return and your cost of money. Whats your projected return on the 370K. 

    3) this isn't turnkey, you are now running a business, complete with an employee and all that entails. Do you want that job? I'd make sure marketing expenses are in there--and you will need to spend some money to make money

    4) the ability to add units is good, and I'm not sure how to price it, but you aren't running at capacity now (the 48K vs. the 74K) so its not going to be an immediate gain and may not be useful at all. 

    5) How did you find this broker and how long has this place been on the market?

    6) at the very least put a few more properties on your 1031 list before going all in on this.

    4Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    5y

    @Karen Devlin quick google indicates thats a premium price for a less than premium asset. If the link doesn't work just loook up Cushman and Wakefield Self Storage report 2020 file:///Users/user/Downloads/2020SelfStorageInvestor-Survey.pdf

    1Reply
  • Karen Devlin
    OP
    Member since 2018 · 11 posts · 6 votes
    5y

    @Jonathan R McLaughlin did you see that the $45K NOI is only through July 2020?

    0Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    5y

    @Karen Devlin yes I did, sorry was reading quickly. Doesn't change my point about the overall numbers at 74K etc. Did you see the Cushman and Wakefield report?

    2Reply
  • Karen Devlin
    OP
    Member since 2018 · 11 posts · 6 votes
    5y

    @Jonathan R McLaughlin, yes I did see the Cushman and Wakefield report. It looks like I should be getting a B building given that the cap rate is currently 6%. 

    @John Erlanger, thanks for clarifying that the land and the business are separate analyses. 

    And @Greg Dickerson, great tips re: verifying tax returns and pipeline development. That is something I haven't considered yet, but I do know that the current vacancy rate at the facility I'm interested in is only 3% (5 vacant units out of 151 total). So that is promising! 

    0Reply
  • Nick Robinson
    Rental Property Investor · Murrieta, CA · Member since 2020 · 338 posts · 343 votes
    5y

    @Karen Devlin

    NOI= $78,000

    915k loan @ 4.25% for 25 years = $4956.90/mo

    $59,482.80/yr

    $18,517.20 putting down $400k that’s a 4.6% CoCr

    2Reply
  • Karen Devlin
    OP
    Member since 2018 · 11 posts · 6 votes
    5y

    Well, we are under contract! I have until Monday afternoon to perform due diligence. 

    Here's another question: 

    the counter offer from the seller stipulates that the seller will not provide estoppel certificates for each tenant. Anyone run across this before? Is this an unusual request? 

    1Reply
  • Account Closed
    San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
    5y
    Originally posted by @Karen Devlin:

    Well, we are under contract! I have until Monday afternoon to perform due diligence. 

    Here's another question: 

    the counter offer from the seller stipulates that the seller will not provide estoppel certificates for each tenant. Anyone run across this before? Is this an unusual request? 

    I don't know anything about buying a commercial property like this.  But, why on earth wouldn't the seller want to give you info that proves his numbers are what he says they are?  For me, in any kind of contract situation, this would be a deal killer.  Just talking generally about any contract negotiation here. 

    1Reply
  • Jason Leavitt
    Rental Property Investor · Portland, OR · Member since 2019 · 73 posts · 49 votes
    5y

    I’ve never invested in this type of asset either but I can’t imagine that someone would go out and try to obtain 150 estoppel certificates from storage rental tenants. They’ll mail out all those letters and hardly anyone will respond… But seeing that’s what they are can’t the seller just provide copies of the rental agreements for each unit? That would be signed by the tenants anyways right?

    6Reply
  • Karen Devlin
    OP
    Member since 2018 · 11 posts · 6 votes
    5y

    Yes @Jason Leavitt, the seller is providing documentation of rental agreements for all units. 

    0Reply
  • Israel Garavito
    Investor · Woodbury, MN · Member since 2019 · 41 posts · 33 votes
    5y

    @Karen Devlin that seems a pretty tight due diligence period. Have you built any extensions to your contract?

    Let me step back and ask you if the PA was put together by your attorney or by the seller? A non negotiable for us is that we provide the PA in a commercial deal.

    In due diligence make sure you (this is off the top of my head):

    1. Review all leases, compare to rent rolls and bank accounts to verify income, regardless of what the tax returns say (this is why it’s a tight DD period, and we usually take a team on site to get through it in a week). Make sure you get a good pulse on the business and how and when the cash flows in. This includes delinquencies, late payments, evictions, etc. what do you do with stuff when you evict and they just leave it there, and do you have that underwritten properly?

    2. Review all structural

    3. Permits

    4. City inspections and COs

    5. All contracts and utilities

    6. Can you open all units? Not sure how that works with storage, but I’d like to see all units. Every single one.

    7. Licensing: make sure those are up to date and if they are up for renewal, make sure the cost is underwritten. Not sure the licenses needed to operate a storage facility.

    8. Property tax increases

    9. Easements

    10. Any debts in property taxes? Utilities?

    Etc.

    And don’t do this by yourself. Take a GC or whatever or whenever you work with and have them give you a quote or an opinion. Example: are you 100% sure that adding those extra units will cost what you think it will?

    And then you and your team come back with all this info, polish your underwriting, and re assess.

    8Reply
  • Israel Garavito
    Investor · Woodbury, MN · Member since 2019 · 41 posts · 33 votes
    5y

    @Karen Devlin and good luck!

    1Reply
  • Karen Devlin
    OP
    Member since 2018 · 11 posts · 6 votes
    5y

    @Israel Garavito, thank you! Great advice all around. Re: DD period - yes, technically I have 20 days for inspections... I just meant that I have until Monday EOD for contract review. 

    I really appreciate your list of things to review. In fact, I'm going to print this off and take it with me when I visit the facility! I will also insist on seeing every unit. It might take a few hours, but it's better than being on an episode of Unsolved Mysteries one day! 

    1Reply
  • Israel Garavito
    Investor · Woodbury, MN · Member since 2019 · 41 posts · 33 votes
    5y

    @Karen Devlin if you need a full list of what we review let me know. Glad to share

    5Reply
  • Karen Devlin
    OP
    Member since 2018 · 11 posts · 6 votes
    5y

    @Israel Garavito, I'd love the full list. Feel free to PM me! Thank you in advance. :) 

    0Reply
  • Vic Reddy
    Real Estate Agent · Dallas - Fort Worth, TX · Member since 2015 · 89 posts · 33 votes
    5y

    @Israel Garavito - pls share ur due diligence check list? Do u ask for Tax returns and bank statements?

    0Reply
  • Israel Garavito
    Investor · Woodbury, MN · Member since 2019 · 41 posts · 33 votes
    5y

    @Vic Reddy can you see my email address in my profile? Send me an email and I’ll respond with the PDF.

    And we do ask for tax returns and tax statements. The list is pretty long and sometimes sellers don’t have everything. The point is to get an accurate pulse on the business, minimize surprises, and eliminate any BIG issues that may come up after closing.

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    5y

    My instincts say margins are thin and it seems rushed.

    A 1031 can make you feel under the gun and settle for less on the replacement side.

    Is the facility near you or out of area? 

    2Reply
  • Zach Quick
    Investor · Bentonville, AR · Member since 2014 · 759 posts · 379 votes
    5y

    @Karen Devlin a few questions.

    -is there any new competition coming down the pipe? check with planning and zoning.

    -How is the existing 3 mile radius competition doing? Do you get the sense that they are operated well? What kind of occupancy are the existing near ones?

    -Has the expansion been pre-approved by city/county?

    -Is there opportunity for admin fees/late fees/tenant protection plans?

    -what kind of condition is the existing property?

    -How is the employee? Not very many square feet for a full-time employee.

    I don’t need the answers, those are things I’d be thinking thru as I consider the property.

    2Reply
  • Matt Skog
    Minneapolis, MN · Member since 2016 · 60 posts · 18 votes
    5y

    @Karen Devlin I am in agreement with others here who say to not put all of your eggs ($370K from 1031 proceeds) into one basket (ONE self storage facility).

    It would be far more prudent to spreading the $370K over smaller (5-12 unit) apartments. The "like-kind" requirements only apply to equal *money* being exchanged, all within the same *class* of property. Not just one property for another single property.

    Another idea gaining traction is in the seldom used section of commercial property, Mobile Home Parks. When seeking this type of commercial property, often what is sought after is a higher *cash upfront* investment, with little left for traditional financing. Most times, newer or less sophisticated buyers (usually under $1MM) seek out "mom & pop" Parks that keep poor financial records. All in the hopes of keeping better track of records after buying low, with non-traditional financing; and selling higher, with conventional terms.

    0Reply
  • Matt Skog
    Minneapolis, MN · Member since 2016 · 60 posts · 18 votes
    5y

    @Israel Garavito I would love to pick your brain. I'm in Coon Rapids. Respond here, or look me up on Messenger.

    I look forward to hearing from you soon. Thanks

    0Reply
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