Ryan Gibson 0:00
We buy existing properties and our main focus is to deploy really solid revenue management and that would mean taking a property that’s underperforming or it doesn’t have isn’t quite built out all the way like we have extra land to we could build additional units on and we will take that property. Implement ancillary income like tenant insurance will raise rents to market will expand the existing portfolio of basically our property and will basically increase that noi so that we can improve the value of the facility over time.
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J Darrin Gross 0:53
Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals to provide their experience and insight to help you grow your real estate portfolio.
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Today, my guest is Ryan Gibson. Ryan is the co founder president and chief investment officer of Spartan Investment Group. Ryan has organized over 200 million of private equity for Spartans projects across the country. And in just a minute, we’re going to speak with Ryan about real estate investing and development.
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Ryan Gibson 2:45
Thank you, Darrin, thanks for having me.
J Darrin Gross 2:47
I’m looking forward to our conversation today. But before we get started, if you could take just a minute, and share with listeners a little bit about your background.
Ryan Gibson 2:56
Yeah, started off actually as an airline pilot, and I met my business partner in Washington, DC. And we started with a residential development. And now we have a portfolio of a little over 500 million of self storage, a little bit of office retail industrial spread across 13 states. And our focus today is on finding existing Self Storage properties that we can add value to either through expansion or increasing rents or revenue management, or we sometimes build from the ground up. So we’ll find a development site, that will fully entitle and build a construction from the ground up and then lease up the facility. The other thing that we focus on and specialize in is construction. So we have our own construction company that will build self storage for others and also builds up our portfolio as well.
J Darrin Gross 3:50
Awesome. So if I understood right, the the asset class you guys focus on is is self storage and office is that right?
Ryan Gibson 3:59
Primarily 100% Self Storage. Sometimes the Self Storage is that we buy come with some ancillary things like office, retail, industrial, etc. But the majority of our focus is building our free up storage in our storage platform.
J Darrin Gross 4:16
And the two strategies I heard you say and I was hoping we could get into today is kind of compare. If you’re buying an existing property, I’m assuming that’s a value add strategy where you’re, you’re looking to increase the value. Is that is that my spot on with that or is that? Am I missing something? Yeah, absolutely.
Ryan Gibson 4:42
We buy existing properties and our main focus is to deploy really solid revenue management and that would mean taking a property that’s underperforming or it doesn’t have isn’t quite built out all the way like we have extra land to we could build a additional units on and we will take that property, implement ancillary income, like tenant insurance will raise rents to market will expand the existing portfolio, basically our property and will basically increase that noi, so that we can improve the value of the facility over time. That’s 95% of what we do.
J Darrin Gross 5:21
And when you’re when you’re buying an existing property, what are some of the the, I guess your due diligence? What are you looking for? Is it is it management? I mean, you mentioned the opportunity to build out more but but is management kind of one of the the the easy to fix? Or is it or is it grants? Or was there a particular thing that you look for? Or is it kind of like you dig in and, you know, try and find the, the golden egg or whatever the title make it, you know, make it work better?
Ryan Gibson 5:57
That’s a great question I there’s three things really, that we look for on an existing property. One, we look at the market, and if the market has rents that are below the rents that that facility is collecting, we analyze how much below the market that is based on a light kind property. That way we know we buy the asset, that we’re already below the market in rents, but also what’s really important in that is that the occupancy of the market is strong. And the rental rates are strong, so that we can justify raising rents on their on our current customers. So that’s kind of like the easiest, one of them all. The second thing that we look at is, what is the future potential of that market in the sense of how much population growth is coming? What is the access to population centers? What is the general consensus of where that market is headed, maybe there’s 10,000 homes being built within a mile, or there’s really strong job or income growth, those are variables that we strongly look at to make an investment decision, you know, surrounding a particular asset that kind of plays into occupancy and rents below the market. And the third thing that we look at is really, what other value can we add to the facility. So a lot of ways to make extra income is through tenant insurance sales, you know, we get 70% of the revenue on the insurance that we sell our tenants. And we require all facilities to have 10 insurance, they don’t have to use ours by by law, they can use whoever they want. But they have to have insurance to do that. So that’s one big ancillary thing that we can add right away. The other big one is that if it comes with vacant land to expand, and there is unmet demand in the market for additional storage, we will go in, and we will make sure that we can do the expansion that we’re intending to do. And that that comes in the due diligence process. We do a site survey, we look at the environmental study, we look at, can we build what we’re intending to build here. And you know, that’s usually done through the assistance of a civil engineer. And then those additional units will will add a ton of value to the to the property overall. So those are kind of the three main things that we’re going to look for and due diligence
J Darrin Gross 8:10
on it, and you mentioned the insurance and kind of the the rents, are you guys employing any kind of systems? I mean, is that a like, is it management systems as well? Or is there any kind of automation? And I have talked with others? And that seems like that’s kind of a big thing, if you get here? I’m just kind of curious, do you get that?
Ryan Gibson 8:37
Yeah, the nice thing about self storage is I feel like property technology, or prop tech is something that actually scales and self storage. So most facilities have not, you know, 90 95% of them have the capability of being fully automated, where you can integrate the revenue management system that we use into the property so that it speaks to the gate software, and it could switch on and off access based on late payments of rents, and other things like that. So the industry in general is highly automated, I don’t think it’s unique. That Spartan is going out and highly automating these facilities or implementing these software’s. Now, it’s rare, but sometimes we find a mom and pop that just has been doing it by hand, you know, handwriting, the leases, still, they’re not hooked up to the internet. Some facilities don’t have internet at all, or even sometimes running water or things like that. And they’re just doing it, because this is how they’ve always done it. And there’s no reason to go spend money in the software. But the industry has made it widely available to use this type of revenue management software that provides a lot of scale and automation. And so Absolutely, we do that, but I wouldn’t say that makes us really unique necessarily. I would say that that’s more of an industry trend that that most operators are doing and and it scales because you can really start dialing in collections, you know, having delinquent customers, you know, make sure they’re paying because they’re not being able to access their units, that gets their attention pretty quickly. So, you know, it’s a really fascinating space because of the automation that’s available to the to the consumer and the operators.
J Darrin Gross 10:19
Done. Did I hear you, right, 13 states is where you’re currently operating? Yes. And it is that? I mean, obviously, you do your deal with due diligence, like you talked about on kind of man in that. But do you have people on the ground then later with your organization? Or do you have third party? subcontractors that do any management for your How are you set up that way?
Ryan Gibson 10:45
Yeah, currently, we’re mostly all there’s only one facility out of 60 or so we manage all of them ourselves. So our employee count, as you know, well, north of 100 employees, I think 115 employees now, and we have our own employees deployed at each individual property across the country. So when we go through the acquisitions process, our employees are traveling to the site that will be overseeing that facility. So we know exactly what we’re getting into, before we buy the asset. And I think that’s an advantage. One of the many advantages of having your own in house property management is you have the ability to know that your employee is going to be there, that you have boots on the ground, in each of these markets that really help us you know, drive good performance. So that’s a really, really big piece of that, plus, you know, the principles of the organization, you know, myself and Scott and Ben, we traveled to the sites and see these properties for ourselves as well. It’s really important.
J Darrin Gross 11:45
Yeah, there’s no substitution for seeing it up front, in person. So your investment model, are you guys primarily doing? What am I trying to say here? Are you doing syndication? Are you doing? Is this your own money? Or how are you? How are you raising capital? Or how are you?
Ryan Gibson 12:09
Yeah, yeah, every every property is a syndication. So we, we like to target, you know, the bold types of investors, those investors who want to replace hard earned active income into passive income. So we have our in our Spartan storage income fund, that we raise capital for that goes out and buys existing properties with cash flow. And that’s a very specific target for people that want to see that monthly income because we do monthly distributions, that provides the investor with the upside potential and the month of cash flow, it also has got a component of depreciation, so the investors are getting losses tax depreciation in the year that they invest, which is great. The other thing that we do is a growth fund. So Spartan storage Growth Fund, which targets ground up developments. So those are the for those investors that yeah, maybe they’ve got a good balance of passive income, or maybe passive income isn’t as important as taking a little bit more risk for a lot more reward. And that’s the growth fund where we go and we find difficult to build sites or entitlement projects where we can go build from the ground up and add, that’s where we get the most value out of an investment. So we give our investors sort of those two options. And then we also do a debt fund, where if investors want to just have no upside, but But no, they’re gonna get that eight to 9%, monthly coupon, regardless of what happens and be in a higher position, or with some collateral, the debt fund provides that, that, that vehicle for them as well, so, and of course, we always put in our own money, we’re typically putting our own guarantee on the loans. And our employees also invest in our projects as well. So we’re very aligned when it comes to, you know, having our share of skin in the game.
J Darrin Gross 14:04
So tell me on the on the debt fund, do you use that on your own deals, then? Or is that to use go out and lend money to others or we’re
Ryan Gibson 14:12
Currently it’s just on our own deals. In the future, we may expand that to lending to other operators. But really the the issue with going to other operators at this point is having an investment committee that can approve the, you know, the worthiness of the borrower, and we’re just not quite feeling comfortable with doing that yet. So as of right now, it’s to help fund our own projects. And especially in this interest rate environment, it’s become more critical to have kind of more control over the capital stack so that we can do more for our investors, which is which has been fantastic.
J Darrin Gross 14:48
Yeah, I think you’re one of the first that I’ve talked to that have have I mean, people I know do a lot of like note investing and that kind of stuff, but actually to raise capital as debt as opposed to more of an equity side of things. And have you always been that way? Or is that something that came about later? Or how long have you been doing that?
Ryan Gibson 15:15
Yes. Yeah, so we haven’t been doing a debt fund. In the past, we’ve done kind of a deal by deal syndication of private debt. And it’s been very beneficial to our investors a great example, we were buying an asset back in 2017. And the lender pulled out at the last minute and is anybody knows in a single asset syndication, so many things have to come to a head to make the transaction successful, you have to have the capital raised from the investors, the bank financing lined up, and all that comes to a point at the time that you’re supposed to close with the with the seller. And sometimes that doesn’t really line up as you plan. And having the the RM to do private debt in the investors that have that appetite, can be very beneficial to being able to close on time when you say you’re going to close or maybe even adjust the closing timeframe, up to be more competitive. And so we’ve been doing this since 2017. And it’s been better, you know, there’s a litany of things that have happened such as bank financing pulls out last minute, or the bank changes the terms a week before, you’re supposed to close. And you say, I don’t really want to get stuck with this loan, I want to go somewhere else, but I just need a temporary loan for three months. So I can close on time and comply with the purchase and sales agreement, but have the bandwidth of the runway to go find better terms for debt. And traditionally, if anybody invest in self storage, or has been investing in self storage, it’s not the easiest asset to finance. And especially when you’re doing these projects that are value add and have a construction component to them, or they’re underperforming, or they’re in a tertiary market, or you’re an out of state operator, it’s difficult to find financing, exactly in the way that you perform it. So the private debt has really just opened up a lot more flexibility as our organization grows. Yeah, no, that
J Darrin Gross 17:07
makes so much sense. I I’m surprised, I haven’t heard others, you know, talk of it as much. And just the thing that kind of stands out for me, it’s just the control, like you mentioned, you’re no longer, you know, at the whim of the bank that decides to pull out in the last deal? Or? Or, you know, it would seem to me, it would give you a lot of security in the ability to control the closing and the deal. Now, when you when you put the debt on there, do you then once you get the property, you know, operating at a higher level on the NOI increases? Do you then seek to replace the debt and and use it again? Or is it a more of a permanent debt for the property through the fund?
Ryan Gibson 17:57
Sure. So it’s, you know, the debt fund offers redemption. So if investors want to park cash for three months, and then call it, it provides that liquidity. So we’re constantly turning over the money and putting it into other projects, as part of a debt fund allows. But but also, if that liquidity comes back, and we have a redemption request, or an investor that wants their cash back gives us that flexibility as well. So it’s kind of a win win for everybody, you know, it’s it’s, I don’t want my money to sit my savings account and collect point 00 2%. Or maybe it’s higher now. Maybe it’s 2%. Now, but you know, at the same time, it also provides limited liquidity based on the redemption period, and etc. So it gives us flexibility, you know, we look to say, the way that we’ve written the rules in the debt fund is, if there are if all the redemption requests are fulfilled, then great, we can continue to go lend that cash to other projects, but if it hasn’t been that we can’t continue to lend until all the redemption requests have been fulfilled. So, it gives us that optionality to pay off an investor or roll it into the next project. So a lot of interesting things.
J Darrin Gross 19:08
Got it? And I guess, let me just be more clear. So I get the idea and that your ability to close us whether it be the the equity raised through syndication, or the debt fund for bring that bring in the financing, but is there a point you do down the road wants the property you have it up and running and and, you know, operating at a higher level than what you purchased it at? D then ever replace it debt? or D? Yes. Okay. Okay. 100% Yeah, so
Ryan Gibson 19:44
a great example, we bought a property a couple of years back for about 1,000,003 and we put about 300,000 into fixing it up. property was a disaster. It was like 14% occupied. Obviously we fix it up and leased up the pot. property to stabilization, more than tripled the value and then did a cash out refinance. And then the investors benefit because they get all their cash back tax free and then continue to earn income from distributions on the property just as they would, prior to the refinance, except, you know, just not as much, because obviously, there’s higher leverage on the asset. But that’s a great strategy that we have repeatedly used. And today’s interest rate environment, obviously, it’s a little bit more difficult, because you’re going to be refinancing out probably some pretty healthy debt, you know, lower interest rate debt, but we do plan to do that going forward, as as we feel and have we, we’ve seen the predictions that interest rates will decline, hopefully, at some point. So,
J Darrin Gross 20:43
ya know, I love that concept and that strategy, you know, again, to have the cash to close to get your thing or your your deal, you know, operating at a higher level, and then to be able to refinance and, and recharge the line with investors or return capital or whatever that might be. But that’s, that’s a, that’s a neat, new way you’re doing it. As far as the operation of the properties, you mentioned that you’ve got people on the ground, you’re buying these in a syndication model, what’s a typical hold time for you guys on a on a property.
Ryan Gibson 21:18
So we’ve seen hold periods go two years to five years, typically, we project five years for pretty much everything we do. And we’ve seen properties, mostly that what typically happens within five years is we send all the money back, whether through distributions or through a refinance, or a partial sale, maybe we’ll have a an asset with a carwash on the front, or something like that. And we’ll, we’ll sub split the parcel and sell the carwash and the cash back early, but our goal is to send all the investors money back, plus a profit within five years. That’s our goal with every syndication we’ve ever done. So we’ve been pretty successful.
J Darrin Gross 22:00
Got it. And as far as when you’re buying an existing property, the timeline, from when you identify a property to close? What’s uh, what’s the typical timeline for either on due diligence.
Ryan Gibson 22:13
Typical due diligence period, depends on the asset, obviously, but I would say 60 to 90 days is pretty typical. 90 days being on the long end of things, obviously, that property may just have more dd to do or more kind of a tricky situation, or maybe a bigger asset. But you can see, you know, due diligence has dropped due diligence period has dropped because of our team, to as little as 30 to 45 days in some cases. But it really just depends on the third parties, because you have to order the survey, you have to order the environmental, and we rely on those studies to come in, in order to conclude due diligence. So it really just depends on the third parties. But we’ve seen that due diligence period really get a lot shorter over the years because of our thoroughness, and knowing exactly what we need to know, before we close. So that’s, you know, but I would say 60 to 90 days to answer your question a little more directly.
J Darrin Gross 23:10
Yeah, and then but even your your ability to shorten that, in your capital to be able to close? That’s, that’s pretty impressive. What about, what’s an average timeline for you guys to take a property that you acquire, implement your, your strategies to where the property is, you know, operational at the higher forecasted model.
Ryan Gibson 23:37
So we always pro forma a decline in revenue, at least initially, because when you take over, you’re always going to have a declining occupancy or friction, you know, these people walk into the office, and they see a new person, a new uniform new paint job on the place. And they don’t like it. They don’t like the change. But typically, we’ve seen revenue increase in as little as three months. And we’ve seen it take as long as a year. So I would say three months to a year is when we start seeing that benefit. If it’s a really nasty property, it might take a little bit longer, maybe on the more on the year side, we bought a portfolio about a year ago, and we’re just now turning it around. It took took a while to just deploy all the capital improvements, turnover, all the staff get everything sort of in place, and the revenue is now you know, increasing and it’s been about a year, but we’ve also takeover we’ve also taken over assets and done immediate rent increases and we’ve seen the impacts of that effect within as little as three months. So it’s it really depends on the the asset quality and sort of the deal itself.
J Darrin Gross 24:43
And as far as your capital improvements, you mentioned you’ve got your own construction, crew or personnel. Are you guys deploying? Are you a general or how Are you Are you hiring subcontractors? Or how are you handling all the work that you need to do in a in a value add strategy is had that in house or is that are you are you subbing out some of the worker.
Ryan Gibson 25:13
So everybody, everybody’s a Spartan from our project executive at the corporate level to our estimator, Project Engineer, all the way down to the job check trailer is a Spartan, so we are licensed in the states that we do improvements in, we’re a licensed contractor, we’re general contractor, but everything is subbed out. So we don’t self perform any of the subcontractor work, but we’re doing all the general contractor work and serving in that capacity. So we do everything from the initial improvements to the expansions. So we’ll build we’ll, we’ll do everything from oversee the hanging of a camera to a multi storey building from the ground up.
J Darrin Gross 25:56
That’s awesome. Definitely, you know, just have the more again, control compared to relying on on everybody else outside and, and be able to assess the situation, the numbers you’re getting and, and figure out if you’re getting a good deal, or somebody’s trying to take advantage of you. That’s good on you. So let’s talk a little bit about the development opportunities. You’ve mentioned, we’ve talked a little bit about buying an existing property or going out there some land that you can, you know, expand the operations on. Have you guys done some just bare ground, no asset, or, you know, no operations in place and gone gone vertical from there, or where’s it all been on an existing property with with operations.
Ryan Gibson 26:50
So we’ve done ground up development, we’ve done several, and we’ve taken some very difficult parcels and turn them into beautiful Class A properties I was mentioning before, we jumped on here, one that’s just outside of the Portland market about 35 minutes south east of Portland in a town called Sandy, we built a really beautiful property there took a really useless piece of dirt to be perfectly honest. It’s if you ever cruising out to Mount Hood, you’ll see the I think it’s an arco gas station right next to the Tractor Supply. And we’re right into that little that little complex there. And we took this parcel that has wetlands in the back, it was kind of a stalled project from a developer and took it over got it and got it the rest of the way through the the entitlements or building permits, and built it. And we’ve also built property in the state of Washington that had been riddled in wetlands, required approval, extensive approval from the core Department of Ecology, fish and wildlife, etc. And we’ve done things like rezone properties, there’s been a property we built in Colorado and Aspen Park, Colorado, that we had to use dynamite to blow up bedrock to put in a foundation. So I feel like the things that we even the early on projects have all been just extremely difficult. From, you know, the land that we had to work with, and the entitlements and zoning and permitting that we’ve had to deal with, we’ve done some very difficult projects. But what’s great is once you get those projects built, they’re in high barrier to entry markets, they’re in markets, where the competition is going to be severely limited in the future. So that you know that you’re kind of walling up your your fortress of, of competition. So while he while you pay a lot up front, in brain damage, and time and money, you also get the benefit on the backside, which we really like. So we do do ground up construction, and we do do, you know, very challenging entitlement opportunities.
J Darrin Gross 28:49
Yes, so these challenging entitlement things a little bit, I understand what that is just the time it can take to make something, you know, or to get the, to the point where you’ve got permits, and you’re ready to roll. You know, you were just talking about, you know, 90 days from identification to closing. What kind of timeline are you talking about when you you identify a property for development? And maybe we should break it down from from identification to permits to you’ve got space to rent?
Ryan Gibson 29:27
I’m laughing because that’s a that’s such a fun question to answer. Anywhere from No Time required at all, because the permits aren’t even there’s there’s no jurisdiction, we just called the h j, the authority having jurisdiction. There’s no jurisdiction, there’s no building permit process. So zero days to five years. So so it’s it’s everything in between. So, you know, he might, you know, we were really getting really frustrated when we first started getting into this because we’d hear people say, oh, yeah, it takes three to six months to get a permit and a year to build and And then it’s open. And then you know, we’re here we are in our project that, you know, our first ground up development took us four years. And we call it four years trees, the keys. So from the time that like, trees, yeah, so tree trees to key this could could vary. And it’s, it really depends. But, again, you know, we just built a facility in Tyler, Texas, there’s, we’re literally not even in a jurisdiction that has authority over our permit process. We’re we’ve got facilities and tight everything’s Oh, Texas is just an easy place. We have facilities in Texas that we built, that we had to go in front of our hearing examiner to get a conditional use permit on. And now, you know, just scheduling that hearing and getting in front of the board, and, you know, or the, the planning commission, and then them deciding and voting and how long that decision takes, you know, that could take six to nine months. And then you could be ultimately denied or have to come back and clarify, unfortunate, you know, fortunately, those things have been approved, and we’ve gotten pretty good at it. But it really can depend. And it really, in your due diligence process, you know, I highly encourage you, you know, of course, ground up developments going to have a longer due diligence timeframe, typically. But really, the important part is there is that we want to make sure that we can get all the government external approvals, before committing to fully committing to buying the land, you know, we’ll put up earnest money and spend a lot of money on the studies and things like that, but we don’t want to actually own the land, or be so committed to the property. And so we know we can do what we want to do. And we’ll move as quickly as we possibly can to get to that decision point. So we’re really upfront with our sellers, that that is our goal, right? Our goal is to build this thing here. And our goal is to move quickly, to buy the land and get those approvals. So. But yeah, it really it, you know, the sandy project, that was a five year development? Really? Yeah, yeah, the city didn’t want it. They didn’t, they didn’t want it. And in fact, after we had built the facility, they further restricted where self storage could be built. So it’s not something everybody thinks, oh, man, I see it just popping up all over the place. Self Storage is in every single neighborhood that I’m in, but especially in the Pacific Northwest, there’s a lot of jurisdictions that are putting moratoriums on storage there, and they don’t want any more of it, which is really I think, you know, I know I’m in the industry, but I think it’s a disservice, because every American uses self storage, at some point in their life, typically, you know, one in every 10 Americans. And, you know, when you look at a city, we know exactly how much demand exists because there’s heuristics, there’s through state, local, and really, micro market heuristics that, that tell you how much demand there is. And when you restrict the supply, all you do is increase the price for the facilities that remain. So really, you’re doing a disservice to the people in your community that need a self storage facility. And most of the time, people use people think, oh, self storage is just for people who have too many things. But I’ve pulled the housings of people, you know, at speaking events and conferences, and we also know our customers, you know, or we have, you know, 30,000 plus customers, they use it for primarily two reasons. Number one, for business. So their store, they’re using it to, you know, a real estate staging company, or sheetmetal contractor or somebody who has an Etsy store, something like that, some some kind of business, or they’re using it because they have a life event. They move, they relocate, they downsize, they renovate their home, somebody dies, they put their stuff in storage, there’s their family gets too big, they put their stuff in storage. So really, it’s a life event driven business. And when you restrict, allowing it to be constructed in a, in a community, you’re going to, you’re going to just create price inflation, like anything. Now, the other hand of that is if you if you build too much of it, then you reduce the pricing, right. But, you know, that’s kind of the balance. And that’s some of the things that sometimes are in our favor as operators and sometimes go against us.
J Darrin Gross 34:09
Ya know, the, the supply and demand thing, and in the political landscape is always kind of a dynamic that it seems like there’s a, there’s good intentions for whatever reason, that they’re, they’re putting out there, but but I don’t think that the they always have a good understanding of the market and how to solve the problem. You know, and it’s so unfortunate because it’s, it’s in a lot of different asset classes, not just self storage. I mean, you look at, you know, housing, absolutely, and stuff and it’s just it, but it’s a, it for whatever reason, that’s a riddle that seems to just be a constant. And, you know, then there’s, you know, the, the, the source of the problem that they identify is not necessarily the source of the problem, but it’s more of a restrictions that they put on the marketplace. But other another time another conversation,
Ryan Gibson 35:09
I think summarized and with that is, you know, affordability is a person made problem. Its zoning, at the end of the day, you know, you restrict what you can build and where you can build it. And you create affordability issues. So I digress. Yeah.
J Darrin Gross 35:25
Well, I, you know, I’m kind of curious. This kind of leads in her comes from that is the zoning. Do you find that as you get further away from a metro area, the minute it typically, I mean, you mentioned like, 00, time to, to, you know, four or five years, whatever kind of thing is, is that the zoning, typically, is it very specific about self storage? Or is it? Is there is there? I mean, is there a lot of resistance to it, outside of the Northwest?
Ryan Gibson 36:00
Yes, or No, I mean, there’s certain markets, you know, that will restrict it, especially like, you know, resort towns and highfalutin areas, I would say three things, three, three ways to bucket what you’re going to encounter one little to no zoning, or very generic allowance in a commercial zone. So if the property is commercial zoned, you’ll be able to go into the zoning code, and you’ll see that self storage as a permitted use under that zoning jurisdiction, that’s pretty typical, you know, out out in the rural areas, that you’ll be able to do that. The second thing you’ll encounter, you know, the out of the three that I would say, is you’ll the zone, the Self Storage, you’ll be allowed as a permitted use under conditional permit. So a conditional use permit, or some kind of special use permit, something that you have to go in, and it’s not an automatic approval, but you have to sort of justify to somebody what you’re about to do. And then I would say the last thing you encounter is, it’s, it’s not allowed, or you have to have a rezone, you know, based on the property you’re trying to do. So maybe it’s a residential property, or maybe it’s zoned a certain way, and you’ve got to get it rezone into commercial, or rezone into allow for self storage. Or you might find that even if you are allowed to build self storage here and you are in the zone, there’s a moratorium for that for another year. So or there’s some kind of restriction in that zone. So it’s really important to understand kind of what you might expect to find in a market. And that always starts with just going down to the city and saying, I have this parcel, I have the site, I want to put self storage on it, obviously do your homework a little bit on the zoning and what’s allowed, but just go get the temperature check from the city. And that’s usually done through what’s called like a pre application hearing, or some kind of a preliminary hearing where you can kind of get all your chips out of the table. And you don’t have to have design plans or spend a lot of money on an architect with that. But the more you kind of under know, kind of what you want to build and what you want to get out of it, the more you’ll take away from it. So housing kind of the better prepared you are from from a pre op meeting, the more you’ll kind of take away with what you can do,
J Darrin Gross 38:10
ya know, if you’ve got a partner in the project, or if you got a, you know, somebody’s gonna try and keep you from doing it makes a lot of sense. He let me ask you, so you mentioned kind of the the return, you know, the opportunity if you’re if you’re doing the value add strategy that the returns kind of quicker, and people are able to say if they’re late, isn’t exactly what you said, maybe what I interpreted was, that, if so many is kind of more on a right away, they’re looking for a return that the syndication model in the in the value add, allows for that, whereas, but you also made it sound like that, you know, the opportunity, like you mentioned the one deal where you bought it for like 1,000,003, put 300 in and were able to triple the value and return all the capital and do a refinance and and all that. How do the returns compare with the new development as opposed to some of the value added strategies? Or the
Ryan Gibson 39:20
Yeah, obviously, you know, past performance doesn’t predict future results. And this is just a projection, you know, do your own due diligence, I would say the projected return on a kind of existing property that you know, kind of stands to just have some slight you know, tweaks to the value add and revenue management, you’re gonna see 14 to 19% annualized returns so that that includes all the money that you might receive from cash flow, and all the money that you might receive from the potential sale. So that’s a range that we give our investors so 14 to 19% with cash flow being between, you know, usually typically starting in the four to 5% range and and increasing to the 8% per annum range, and then that we kick that out monthly. And then the rest of the money coming from the eventual sale the asset, you know, after we make those improvements, properties producing more income and there by the valuation is higher the growth fund or or the ground up developments where you’re you’re taking raw land from scratch, maybe getting a really good price on the raw land and really doing a lot of the sweat equity work through getting those challenging entitlements and permits and building, you’re gonna see those returns stretch into the mid 20s. So you’re gonna see that 22 to probably 27% projected annualized return, no cash flow, I always like to stress to investors, you know, when you build something from the ground up, it’s not producing any income for at least three years, typically, you know, if you if you had a fully entitled site, and you could put a shovel on the ground, a typical size facility, so it’ll take you a year to build it, then it’s going to take typically 30% leased per year. So if it’s going to take and your breakevens, usually around around 6060 to 65%, typical, you know, depends on your capital stack and all that. But typically 60%. So when you think about a year to build, and then two years to get it to 60% occupancy, you’re looking at no cash flow for three years. So but you’ve built a tremendous amount of value, your cost basis, or what it costs you to get to that point is going to be considerably typically considerably lower than what somebody be willing to pay for that asset, at certificate of occupancy like right when you open or when you lease it up and stabilize it. So there’s a wide range of exit strategies in that model, but there’s no cash flow. And there’s an expectation to make mid, you know, low to mid to maybe even high, you know, 20% return range on that on an annual basis.
J Darrin Gross 41:57
Now, I appreciate you doing the comparison there. Because it’s always been kind of curious and always thought there was a opportunity for a greater return on the development. Do you guys ever do any redevelopment, take a like a warehouse and convert it into self storage or like an old retail box or something like that.
Ryan Gibson 42:18
We haven’t done the work ourselves to do that. But we have bought a Macy’s that was converted into self storage. It’s one of our largest properties, 180,000 square feet 1100 units in Fort Worth, Texas, we bought a Macy’s that was part of a mall. And that was converted into self storage. So we look to do more of those. But we haven’t done as much as I would say I like I’d like I’d like to I think there’s a big opportunity. And that still, some of those parcels are you know, they don’t have enough demand or the the expectation of what they would sell and how much money you’d have to spend to fix it up to convert it is still kind of out of out of balance. Because you know, if you’re buying like a really nice main and main store that can be repurposed into a Whole Foods or something that is going to get, you know, really good cash flow, the sellers are going to expect to sell that asset for what kind of retail it made a main would trade for. Likewise, if you’re buying a junk Kmart that went out of business many, many years ago, it may have gone out of business for a reason. So and it doesn’t necessarily equal Self Storage demand. So even if the building is super cheap, it might not be in an area that’s going to have self storage demand. So you got to be really careful. You know, a lot of those opportunities have been picked over, or sold off if they’re if they’re really well positioned. But there’s still a ton of empty retail, and grocery store chains and bowling alleys and skating rinks and just tons of opportunities out there. You just got to really find what makes sense.
J Darrin Gross 43:53
No, no, I just love the opportunity or the idea of repurposing as opposed to you know, knock it down, put it up, you know, cuz it seems to me like there’s a there’s some infrastructure there that’s worth something, but maybe, you know, just the cost doesn’t, doesn’t penciled up to make it work. But
Ryan Gibson 44:10
J Darrin Gross 44:13
Hey, Ryan, if we could, I’d like to shift gears here for a second by day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies that we typically consider, we first look to see if there’s a way we can avoid the risk. If that’s not an option, when we look to see if there’s a way we can minimize risk. And when avoiding or minimizing is not an option, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be the economy, the Fed, political you know, whatever you whatever you view as the biggest risk if you can identify that, and let us know what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Ryan Gibson, what is the Biggest Risk?
Ryan Gibson 45:25
Yeah, so I would say your biggest risks are external threats. Things like cap rate expansion, you know, property values declining, really can’t control that. Interest rate, risk, etc. But I would say my focus that I’d like to share is five main things that I look at, in underwriting a deal. In I can do this in 10 seconds. I look at revenue growth year over year, and is it reasonable? Does the business plan, identify if that revenue is achievable based on the market study that you’ve done, somebody else has done or an operator’s done? The second thing I look at is insurance. So insurance costs are not going down. So if you have not pro forma added, that your insurance expenses are going up, I usually don’t like the deal anymore. As much. The second thing that I access risk, or the third thing is property taxes, property taxes are not going down, property taxes are going up. And if you’re not planning on property taxes, at least doubling over a five year hold period, I don’t think we’ve assessed the risk and the opportunity. The third thing I look at is expense to gross our revenue to expense income. So Egi, expense to gross income ratio, I guess there’s another way of saying it Egi. That’s if you make $1 of revenue, what percentage will be your operating expenses. And so in self storage, I’ll look at a deal. And I’ll say, you know, I expect to see between 35 and 40%, expense to gross income ratio, meaning that if you’re collecting $1, I expect to see 35 to 40 cents for that dollar and expenses, and all your utilities, insurance, property taxes, all that stuff before debt service. If I see that number 20%, or 15%, I don’t think there has been enough assessment in the underwriting to really accurately depict the worthiness of that deal. And the last thing I look at is cap rate. Because cap rate, you know, we love to everybody loves to think that they’re the best operator, they have secrets and things like that. But at the end of the day, cap rates drive the value, they drive, the value, they drive, the exit strategy they drive, the market really drives where a lot of these assets can perform. And yeah, we can control and do our best. But that cap rate really makes an impact. I mean, one $1 on a 6% cap rate means $15 evaluation. So yes, operating income can do that. But I like to see an investment where you can stress test it. And that you can actually show the cap rate getting worse than what you bought it for. Not from your operations, but just market cap rates. So if you buy something going in cap rate at 5%. In today’s market, I’d like to see that it can exit at a market cap rate of 6% and still be profitable. So when I assess risk, I look at those five things and underwriting and I and I really kind of stick to my guns on that. That’s how I can look at a deal in 30 seconds. No, have they adequately assess the risk? Of course, there’s tons of more things that you need to do beyond that, but those are kind of my five quick checkboxes on any opportunity.
J Darrin Gross 48:40
No, I love it. It’s kind of simple and direct. And you can you know if it follows check the box you can can proceed. Ryan, where can the listeners go if they’d like to learn more connect with you?
Ryan Gibson 48:55
Yeah, sure my emails, Ryan at Spartan hyphen investors.com, or our website is just Spartan-Investors.com. I’m also pretty active on LinkedIn. So if you connect with me on LinkedIn, I think I’m Ryan Gibson oh one or something like that. And in the Seattle area.
J Darrin Gross 49:13
Awesome. Well, Ryan, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.
Ryan Gibson 49:23
Thanks for having me, Darrin.
J Darrin Gross 49:25
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