Many of us in the self storage business work with investors.

We use their money to buy self storage, and give them returns on their money in exchange for the use of it.

We often agree to return all their money within a certain time period plus any unpaid “Preferred Return.”  (A Preferred Return is a minimum promised return which the investors get before anyone else receives any money.)

It looks nice on paper, but I’m sure you, as well as potential investors, wonder how it looks in reality.

This week I want to walk through one real-life example.

We purchased a facility in late December 2012.  At the time of purchase, the facility had around 101,000 square feet of self storage and 227 parking spaces.  It was a monster!  We purchased it for %6.5 million which represented about an 8% CAP Rate for the existing Net Operating Income (NOI).

It had grossed $870,942 the year before we purchased it and was well on its way to earning around $930,000 the year we purchased it.

Most people lose sleep hoping it will close. I start worrying after we closed because the numbers were so much higher than anything I had ever been responsible for.

We started making our changes to the project by improving the property and adding additional cash flows. This was the last self storage project we were able to purchase without having to do an expansion. (We will discuss an expansion case study in a couple of weeks.)

When we closed, the facility was 88% occupied earning $7.50 psf (including parking in the square foot total).

We started making improvements to the look of the property, added truck rental, put in place better management practices.  All the things we do to hit the numbers in our Proforma.

At the end of year one, we had the income up to $7.62 psf and occupancy at 92%. We also had added retail sales and truck rental. Our gross income was $1,021,510.

Now here is the thing: nothing we did was over the top.

We were able to get our income up a few cents per square foot, get the occupancy rate up a few percentages, and add a few new income streams.

And we keep raising the rents every chance we could. Never a lot at once, just 2% or 3% here and there.

This turned out to be a killer location for truck rental. One year we ended up with over $66,000 in truck rental commission income. It is by far the best truck rental facility we have ever owned.

Four years later, we were earning over $8 psf income and we had a gross income of $1,377,806 with an NOI of $676,707. I figured at an 8% CAP rate we could get an appraisal for between $8.4 and $8.5 million and cause the conversion of the loan.

So we went back to the bank where we got the original loan and asked them to start the process. The only issue with this property is that it has a land lease. The NOI I quoted includes the land lease payment, so I saw no issue. We had run it well and things were going great.

The appraisal came back at $7.6 million due to an increased CAP rate to adjust for the land lease. We needed at least $8.5 million to cause our conversion.

I was very disappointed and it threw me for a loop. Had I made a big mistake underestimating the impact of the land lease?

The Solution:

I had not applied for a non-recourse conduit loan because I thought I needed a higher Loan-to-Value to loan than they offer in order to complete the conversion.  But at this point, I had nothing to lose.  I contacted a loan broker on of my partners suggested

He reviewed everything and was positive we could get a loan we needed. I started the process all over again, appraisal and all.

We ended up getting a term sheet back which blew me away. He felt we could get a 6% CAP rate appraisal (over $11 million).

I said let’s proceed.

It took almost 6 months, and we didn’t get the 6% CAP rate, but we did end up with a $10.4 appraisal. Only one problem, we had to extend the land lease to get the loan.

I called the land lease owner and they were not inclined to extend. Their attorney was advising against it.

Again, I was kicking myself and wondering how big a mistake I had made.

But I just started throwing numbers at them.

With an appraisal like the one we had, we were going to be able to cause the conversion (where I give all their investment back), plus had a lot of money left to distribute. Perhaps I take some of that money and offer it to the land lease owner to ex

tend.

The number was $100,000. That got their attention.

It was worth it to us to pay it, and apparently worth it to them as well.

We said at the refinance we would pay them and they would execute the extension.

We had been paying the preferred return all along and had actually accelerated it, so we had no unpaid preferred return to pay at the point of the refinance (we often do have some on expansions). So that left us with about $695,000 distributable cash on top the initial investment repaid and the money to the land lease owner.

Here is what I want to leave you with. It may not look exactly like you thought it might, but if you do the right things, like keeping your eyes on the NOI going up and the potential value of the property at any given moment; and if you are willing to keep trying plan B or plan C when plan A fails, you will be surprised what you can do in the self storage business.

We made no big moves here.

We just kept increasing the rents every possible chance we could and adding any additional small income stream we could (i.e. truck rentals, retail sales, and later tenant insurance).

We also had some luck and a good appraisal (eventually).

Just keep focused on the small incremental improvements and they can turn into millions of dollars in this fantastic business of self storage. And believe me, if we can do it, making all the mistakes I make along the way, you will most certainly be able to.