Here is a subject not talked about too often in the world of self storage, land leases.
Most people waive them off with the flick of a hand and say, “I’m not interested.”
That is fine with me. However, one of our most successful projects has a land lease, and I was able to acquire that project such that I did not need to do an expansion or conversion to generate the returns I needed.
But that is not the focus of this episode.
Although land leases can present challenges with financing and disposition (remember, some people just wave their hands and say no), I have discovered a unique program we are figuring out how we may work it into our growth plan.
I hesitated writing about it because I like to only write about things I have done or experimented with as a rule. In a way, I have experimented with land leases by not resisting them and understanding at the end of the day, I am buying and generating cash flows, but I could not help myself in sharing this and would be interested in how you may see using this.
We are all interested in utilizing creative ideas like 1031 exchanges, cost segregation, enterprise zones, etc. I equate this land lease program in that world.
It happened when I read an article on a website (I can’t’ remember which one now). It talked about a company, Twain Financial Partners, and a program they have. Found here.
I immediately saw the possibilities.
Land Lease Program
This isn’t for everyone and cannot work in every deal, but I can see many places where this can work.
In essence, what they are willing to do, if the project meets certain criteria as listed below, is to pay you approximately 30% of the “stabilized value of the project” for your land, lease it back to you on a 99-year lease (very important this long term for financing).
They will also give you a buyback option after a certain time period, a minimum of three years, I think.
From what I can see, the lease cost to you is between 5.5% and 6%.
There are some other criteria like they want a minimum of $5 million value on the land. Perhaps we can put more than one deal together to achieve that threshold, or perhaps this could allow us to go for larger value add projects.
They have had a lot of success in self storage development using this program, with developers who utilize this program out of the gate have the land lease from day one. The project we purchased with the land lease was done this way.
Think about it for a minute. Let’s say you want to develop an adjoining property but don’t have the money to buy the land or don’t want to raise the funds. You can lease the land, get the construction loan, lease-up the project, then when the value is created such that you can refinance, or even sell the project, and have the ability to pay off the land lease.
Your equity isn’t going into the land, or you can get your land equity out to build the project.
The challenges we have faced with a land lease center around financing and disposition. Banks want the land lease term to be further, like ten years or so, past their amortization period.
The other “challenge” is that many buyers do that hand-wave thing and don’t consider it.
So often, one sells at a slightly higher CAP rate with a land lease.
Both of those “challenges” are apparently addressed in this program.
Further On Down The Road
I love the blues, and as Eric Clapton says in his song, I will share again further on down the road if we decide to use this strategy or not.
In this particular moment in time, as we are getting into the self storage business or growing our business, where processes are high and the other challenges we have to deal with, I find it exciting to have a new tool in the briefcase to use.
I would be very interested in your ideas, how you see this potentially working, and the challenges you may see using it.
Safe travels in your self storage journey.
