A Winning Team

Mike Parham and Jeff Eckols Comments
Posted in Articles, Development
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There is something very motivating about a success story. A quick trip to any local Barnes & Noble (or an evening viewing of "Biography" on the A & E channel) will verify there is no shortage of stories documenting the lives of people from Warren Buffet and Bill Gates to Pat Riley and Tiger Woods. One common principle that can be gleaned from these fascinating tales is many successful people attribute much of their achievement to the fact that they surround themselves with excellent advisors and a quality organization. Believe it or not, this principle is equally true when considering the site selection, development and construction of a self-storage project.

Before you scoff at applying any principle of "Buffetology" to the real world of self- storage, consider what is really involved in the site selection, development and construction of a successful project. First, site selection is not just finding "cheap dirt" on which the city will allow you to build, but determining an optimally feasible site with respect to location, competition and the overall market. Development includes the facilitation of all government entitlements and permits, building plans and financing, while construction is the execution of all site work and improvements within budget and in a timely manner. Properly performing these functions is a tall order for any one person--without a quality network of people working together toward a common goal.

The People Side of Site Selection

To develop a successful self-storage project, proper site selection is critical, yet often misunderstood by aspiring developers. An experienced commercial real estate broker can be a tremendous help, but be very selective. Be sure the broker has several years experience dealing exclusively in commercial real estate (as opposed to residential), preferably with an emphasis in the retail/raw land sector.

Remember that self-storage is a retail business; you are not looking for an industrial location. Don't be afraid to ask whether the broker has been involved in the purchase or sale of any self-storage sites or facilities. If you are planning to do a single-story facility, explain to the broker that you are looking for 3 to 4 acres in a retail location with good visibility (i.e., a minimum of 100 feet of frontage), population density and traffic count. Particularly ask the broker to keep in mind that self-storage can accommodate a flag-shaped site that may wrap around other retail pads.

Unfortunately, many of the quality retail sites you will encounter will have to be rezoned. A good commercial broker will have a feel for whether the property has a decent chance of being rezoned. In addition, you may want to visit the city's planning and zoning department to inquire on the possibility, but if you encounter resistance, don't be discouraged until you are sure you know who the final decision-makers are. Ask your commercial broker to refer you to a politically connected zoning attorney/consultant. This person can likely give you an indication about whether the rezoning is worth pursuing. If it is reasonably feasible, the consultant can help you with the necessary homeowners-association, planning-and-zoning, and city-council meetings. Remember that the more difficult sites are often the most rewarding!

In conjunction with the commercial real estate broker, you may also want to enlist the help of a self-storage consultant, especially if you are fairly new to site selection. The consultant should be able to help you prepare a market and demand analysis, which takes into account the competition in the area, population demographics and prevailing rents to determine the "net demand" that is yet to be built in that area. In other words, you want to be sure that "If you build it, they will come."

Furthermore, the consultant should be able to assist you in putting together the proper unit mix that will lease up in a timely manner and provide the optimal return. From this information, you and/or the consultant should be able to prepare an entire financial feasibility package, complete with pictures of the site and competition and financial projections, that you may use to obtain financing for the proposed project.

To determine and plan for the soil's bearing capacity, a soil engineer should perform soil borings and make foundation and drive recommendations before you close on the purchase of the site. Be forewarned that because of liability fears, many soil engineers will make recommendations amounting to extreme overkill. The general contractor should have a feel for whether the recommendations are reasonable. In addition to the soils report, the bank will likely require an Environmental Phase I Report prepared by an environmental engineering firm, which provides an analysis of the environmental risks, if any, associated with the site and neighboring properties.

The People Side of Development

Although we are dealing with site selection and development separately, site selection is really a preliminary step of development, and there is a great deal of overlap. For example, in the development phase, one of the first professionals engaged is an experienced civil engineer who can assist with boundary and topographical surveying, preliminary site planning, storm water and utilities, grading, highway-department approvals and other jurisdictional approvals. But in many instances, it is wise to have the engineer spend just a couple of hours looking into the above issues during the site-selection phase to anticipate and avoid major pitfalls during development. If he determines in advance that it will be costly to bring utilities to the property or underground detention will be required for a particular site, the savvy developer can seek a reduction in the purchase price or otherwise budget accordingly; or he can pass on the site and move on to one that doesn't have such problems.

Also early in the development phase, an experienced architect should be engaged to assist with site planning, unit mix, zoning and site-plan approval submittals, floor plans, elevations, detail plans, and finish schedules. Out of all the professionals one must work with during site selection, development and construction, it is extremely important the architect (and general contractor discussed below) have specific self-storage experience.

The site plan and unit mix are critical to optimizing the return on investment. For example, one can build two separate self-storage projects with identical building footprints but different unit mixes, and the fair market value of the two projects at 90 percent occupancy may differ by several hundred thousand dollars! Also, the strategic sizing and layout of the individual buildings by an experienced architect can have a dramatic impact on coverage. In short, engage an architect with self-storage experience to help with these critical issues; don't trip over dollars to save a nickel.

The structural engineer, MEP engineer and landscape architect will complete your design team. As the names imply, the structural engineer handles storm-drainage details, foundations and framing issues. The MEP engineer handles mechanical (HVAC), electrical and plumbing design; and the landscape architect handles landscape and irrigation design. Many MEP subcontractors and landscape companies have engineering/design teams in-house, which can provide some savings in these areas.

The qualified professionals you assemble as your design team will be the essential support that helps you maneuver through the requirements of the city planning department. The planning department is usually comprised of various sections such as zoning, platting, water and sewer, drainage, traffic and sidewalk, landscape/tree, building, electrical, mechanical, plumbing, and fire. To obtain the necessary entitlements and permits, you and your design team must meet the requirements of each and every section of the city planning department. While the approval of each section is necessary, drainage and fire can be two of the more difficult through which to maneuver. While a good design team cannot eliminate all potential problems, a poor design team will almost ensure there will be multiple hang-ups that will cost time and money.

Another characteristic of a successful self-storage developer is the ability to handle multiple tasks at the same time. For example, while supervising the design team and plan submittals, an often consuming task, you must also be coordinating the lender, appraiser, title company and closing attorneys. There is no substitute for building long-term relationships with the financial and legal professionals. The more familiar they are with the developer and each other, the smoother the closing.

The People Side of Construction

Now that you have selected a feasible site, assembled a design team, produced plans and maneuvered through the entitlement process, how do you get the project built? Here, again, professional and qualified contractors can take you to the finish line or, alternatively, disorganized and inexperienced contractors can break you.

With respect to your search for a general contractor, specific self-storage construction experience is extremely important. Many novice developers have put their financial future in the hands of a "home-builder friend" or "friend who builds warehouses" despite the fact these well-meaning friends have never built a self-storage project. These novices don't understand the basics (much less the complexities) of unit mix and building layout, and don't have established relationships and buying arrangements with the quality light-steel, door and security contractors. Since the steel and doors will represent roughly 40 percent of the cost of the project, a neophyte self-storage builder can easily be several hundred thousand dollars over budget due to excessive middlemen and lack of buying power.

The experienced general contractor should excel at estimating, purchasing goods and services, quality control, inventory control, production management and field management. He should also engage qualified contractors and oversee contract administration between the owner, design team and contractors to include change orders, monthly-draw applications and quality-control inspections.

In addition to building according to plans, a good self-storage contractor will provide "value engineering" by analyzing preliminary conceptual plans to determine alternate design and construction methods that may reduce the overall construction cost and/or improve the marketability of the project. With respect to inspections, the general contractor should provide qualified personnel to inspect and report the progress of construction, percentage completions, quality control and any other activity necessary to ensure the contract and loan documents are satisfied.

Working with an experienced general contractor will increase the likelihood of completing the proposed project as planned, within cost constraints, on time and with a minimal amount of stress. Such a contractor will also increase the likelihood of obtaining the necessary equity and debt financing, as lenders and investors will certainly investigate the builder's background and experience. In short, the best general contractors in the self-storage business provide quality turnkey development and design/build services in-house or, at a minimum, have all of the strategic relationships in place to contract for the best products and services.

A Word to the Wise

Would-be owner/developers who are determined to "do it all themselves" typically pay the highest price. We have yet to see the Renaissance Man who is the best commercial real estate broker, self-storage consultant, zoning consultant, soils/environmental/civil/ structural/MEP engineer, architect, planning-department liason, banker, transaction attorney, and general/metal-building/door/security contractor all rolled into one. However, those who are determined to do their homework to 1) assemble a qualified and experienced team or 2) engage a professional and reputable development/design/build team will discover the secret to developing and building a successful self-storage project with the maximum return on investment is really an age-old investor's axiom: "In the long run, you can never go wrong when you invest in good people."

Mike Parham has been involved in the development and construction of nearly 200 self-storage projects and is founder and president of Noah's G.P. Inc., a self-storage development company that develops the Noah's Ark Self Storage chain. Jeff Eckols is a real estate attorney and senior vice president of Noah's G.P. For more information, visit www.noahsgp.com.

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