Word to Commercial Realtors

I was recently asked to comment on a 12 acre property that could potentially be used for self-storage in a growing community.  There was an existing building that makes $150k in rent per year.  The asking price was $2M.  The ask seems steep if you're looking to build self-storage but you get a nice rent payment to help offset things so I was still interested.  There more I got thinking about it, the more I worried that said renter folds up shop and you can't re-rent the building for $12,500/month.  So, here was my response and I think it's an interesting thought process about moving forward on something because the numbers work today.  I know most gurus say that you should make sure the property makes sense from day 1, but in this case, you should also make sure that the property makes sense in day 1001.  (For the sake of this blog entry, assume 6 acres is developable and the rest already has a tenant on it including the existing building.)

Here is my take on this property:

There is a bunch of storage across 3rd Ave from this site.  The auto towing place and the place next door already have their properties purchased so putting up additional storage is a lot cheaper for them.  Not to mention they can do it and probably stay under the 1 acre disturbance which doesn't require stormwater ponds.  I'm also concerned that I'd only have one tenant in the existing building and if that tenant left, there goes $150K/yr in income.  That, right there, would probably preclude me from buying.  Now if the owner wanted me to manage the existing building and tenant and then build storage on the rest of the property (on their behalf), I'd be happy to work out a deal with them.  Either they could pay a development fee or cut me in on the equity.  I would even handle the management of the self-storage.  But, it's probably a little risky in that both opportunities I'd be looking to develop (small and large storage) are right across the street with more acreage to build on.  

I know you mentioned that your client isn't looking to take on more work so I understand if he'd rather not go there.  But I'd be willing to take care of all of the management which would allow him to kick his feet up.  And with that said, I realize that this deal isn't very favorable to you and getting your commission check.  So I would understand you wouldn't exactly want to guide your client down this avenue.  But....If you did connect me with the seller and we develop the property, we probably build something that actually clears him $2M on the property AND you would get a much higher valued property to sell (which equals a larger commission - value would be somewhere around $4-5M) plus a much more in-demand property to sell and therefore easier to move.  But, it's about taking the long vs. the short game and I couldn't fault you for taking either one!  

Lastly, this property seems like it would mostly be fit for an owner-occupant for the existing building.  But with that, why would they want a $2M property when they could just buy the building and storage lot for $900K somewhere else?  And I don't see a developer willing to take on a $2M tab while knowing that $150K in income could walk away in a year or less and then he has to replace that income somehow.  That's why this is a super risky deal for a developer/buyer on either front.  

I hope you don't think I'm a total jerk here.  I'm just trying to help you sell this bugger.  It's a nice property, but the ask is a struggle for either party who might want to buy it (owner-operator or self-storage developer). 

Let me know if you think a sit down with the owner might help convince him to try the own, develop, and THEN sell, route or if you need some ammo to lower the price.  Don't worry, I wouldn't be so forthcoming in a face to face.