As I discussed last week, I love doing self storage expansions.
But sometimes, as I analyze an expansion and run a preliminary analysis figuring out how much additional self storage I can get on the excess land, the numbers still don’t work very well.
It’s not a deal we want to do.
Or the deal may work, but barely, and it is questionable whether there is enough upside to take the risk. If we get any surprises, and we usually do, the deal could quickly go south.
This doesn’t work every time, but we have used this strategy several times to turn what seemed like a marginal expansion on paper into a good one.
We construct a two-story expansion instead of a single-story one.
This can work if you are contemplating the expansion to be all or mostly climate-controlled space and if the feasibility report indicates there is enough demand for that amount of storage space.
Case Study
We were considering purchasing a single-story, 100% climate-controlled building with 30,875 sq. ft. of net rentable space.
There was about half an acre for the expansion.
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As we ran the preliminary numbers, and it just didn’t work.
I asked the storage fabrication company if we put a two-story expansion on the site, what the square footage we could get, and how much more it would cost us.
At the time, the cost was going to go up about $10 PSF for the overall expansion by adding the second story. However, with the additional climate-controlled income we were getting, the deal now appeared to generate the returns we needed to:
- Pay our investors their preferred return.
- Have enough margin to cover any unexpected expenses.
- Generate enough upside to take the risk.
We then asked the engineer if there would be any issues getting a two-story building approved, and they indicated that could be allowed.
We put the existing single story under contract, built the expansion, and ultimately sold it to a publically traded REIT.
We are only limited by our thinking.
