The Expansion Deal that Almost Broke Us

What if your “can’t-miss” real estate deal missed… hard?

In this episode of the Self Storage Investing Podcast, guest host Joe Downs and Bellrose Storage Group partner Tim Kane share their first-ever expansion project; a textbook-perfect deal that was derailed by unforeseen pitfalls, a global pandemic, and shifting market dynamics.  

From zoning setbacks to COVID-related delays and the gut punch of rising interest rates, Tim and Joe walk us through the raw, honest journey of a project that went sideways,  and what they learned to come out stronger. 

WHAT TO LISTEN FOR

3:25 Why did this expansion project look like a guaranteed win?
6:03 How did a narrow lot design derail our entire construction timeline?
9:50 What curveball forced us to use portable units mid-project?
15:05 How did we recover when the market shifted against us?

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Chapters

• 3:25 Why did this expansion project look like a guaranteed win?
• 6:03 How did a narrow lot design derail our entire construction timeline?
• 9:50 What curveball forced us to use portable units mid-project?
• 15:05 How did we recover when the market shifted against us?

Transcript

Big Announcer (00:03):
This is the Self Storage Podcast with the original self storage expert, Scott Meyers.

Joe Downs (00:11):
All right. Welcome to the Self Storage Investing Podcast. I am Joe Downs sitting in again for Scott Meyers, and I want to start today with a story I think everyone knows, but maybe not in the way you think. All right. Picture it is the year 2000. Blockbuster Video is a nine billion dollar global empire. They are the undisputed kings of home entertainment and a small, quirky DVD by mail startup comes along and comes to them with an offer. The founder, a guy named Reid Hastings, offers to sell his company, as you can probably have guessed, Netflix, to Blockbuster for fifty million dollars. That is it, fifty million. Blockbuster’s executive team look at the numbers. They were making hundreds of millions of dollars alone just from late fees per year. And that is a business that Netflix is trying to eliminate. On paper, their decision was flawless. Their model was working perfectly.

(01:10):
So they laughed Reid Hastings out of the room. Now we all know how the story ended. Blockbuster’s quote unquote correct decision was based on all the data they had, and was made completely wrong by a massive unforeseen market shift they could not have imagined. It was the rise of high speed internet and streaming video. They did everything right according to the playbook, but the game changed itself. So the lesson here is powerful. You can have the perfect plan, the perfect numbers, the perfect strategy, but the market can and will punch you in the face sometimes. And what you do in that moment, how you adapt, how you learn, how you survive is what separates the amateurs from the pros. So that story is the perfect setup for what we are going to talk about today because we have our own story. A story about our very first expansion project, a deal that on paper was an absolute slam dunk, but in reality taught us some of the most valuable and painful lessons we have learned at Belrose Storage Group.

(02:05):
And to help me with that story, I brought in my partner and the man who was in the trenches on this project every single day, Tim Kane. Tim, welcome to the show and I hope this is not PTSD for you. We are reliving this. But I think it is important. So much happened to me. I think it is important to share with us because a lot of folks out there that are thinking about expanding their facility or Tim, I am on a lot of podcasts when I am not hosting Scott’s. I am a guest on a lot and we talk about expansions and I give out my email, people call or email and I always forward them to you as you know. And you know the lion’s share of those emails are about expansions or I have got this dirt and I want to build self storage. Even it could be new build, it could be expansion.

(02:48):
Either way, the lesson I want to talk about today is applicable to both. So Tim, can you take us back to the beginning of this project as a full disclosure for the listener? This was our first expansion. So I am not trying to beat Tim up here. We were all rookies at this and we did this together. We were in this together. We made decisions together. So this was a team effort. Tim was just the lead on it. So Tim, paint the picture for us. What did this deal look like? Why did it look like such a home run for us? Why did we strap on the boots and say, “All right, we are going to do this,” even though it was our first?

Tim Kane (03:25):
Yeah. So this was in Lynchburg, Virginia in 2020, interesting year. It was a great year. Everything looked great. It was a great year.

(03:36):
Yeah, until. Two weeks. Two weeks to stop the spread, Tim. Yeah, it was a little longer, right? Just barely. It was nine thousand square feet. And I remember actually going and talking with the seller. Nine thousand square feet with room to expand. That is like one oh one. So it is like, okay, small facility, but now you are dealing with a non institutional seller where you can expand and now you can have an exit at an institutional level on the size of expansion. Rates were low. The location was A plus. Traffic count was amazing and the demand was there. And so it checked a lot of the boxes and it was a simple, keyword simple, one story expansion where we were literally just connecting the existing nine thousand to double the size. And actually, I am sorry, triple the size to get it up to almost thirty thousand square feet. So on paper, this was just in a textbook, a home run from the beginning.

Joe Downs (04:42):
So every single metric, every piece of data we had, everything was screaming yes, do this. And it was not a question of if we should do it, but how fast can we get it done? And I think I am remembering this was the perfect first expansion for us. It was like a cannot miss project, which then leads us to the execution. So Tim, you were the lead on the execution. We were rookies, obviously. I know we learned a lot the hard way in this project, but none of it was what we thought we would learn, I do not think. So walk us through the build. What were some of the early challenges that we faced and what in particular were the rookie challenges that started to complicate what we thought was a simple project? And do you know what I mean by that? When I say the rookie mistakes, not and we are going to get to some of the other things that happened that I think I feel like if you talk to a seasoned developer, they will tell you some of the other things that happened to us.

(05:46):
Man, that is par for the course, that is development, that is real estate. But this one in particular, and you might throw a couple out here, I felt like was just one of those, you have never seen this before and had you, you might have looked at this project a little differently and tweaked some numbers here and there. So talk to me about that.

Tim Kane (06:03):
Yeah. Well, one is whenever you are expanding, no matter how big the expansion is, you have got to allow for time. You are dealing with a jurisdiction, the authority that has jurisdiction, AHJ, and they do not care about your business plan. They do not care that you are going to miss rental season. It is what it is. It is a deli counter and you are just a number. Then you threw in COVID in there and we can get into that later. But what is very interesting about this particular lot, it is a very narrow lot. And as rookies and on paper, again, we are just hey, we are just attaching units here. This is not the end of the world. But what we found out is during expansions, there are a lot of subcontractors on the site at the same time to keep what we call the critical path going forward. Once you start missing milestones on the critical path, it is a domino effect for subcontractors.

(07:07):
And what I mean by this, the facility was so narrow, the lot was so narrow, normal subcontractors that can be on the site at the same time could not. And the project manager kept telling me this and I was just like, that sounds awful. That sounds awful, but let us work through it. Let us work through it. It was over time, it compounded. That missed time when those subcontractors could not be on the north side and on the south side and have a separate construction entrance, it led to months and months of lost time, which was catastrophic leading into COVID for several reasons, as I am sure we will talk about.

Joe Downs (07:47):
And Tim, as you are talking about this, I am reliving it and I am remembering things that make me laugh now. One of them was how lucky we thought we were that even though it was a narrow lot, it was perfect for the type of expansion we were going to do because we could do a fortress style, right? Do you remember that?

Tim Kane (08:07):
The key word. Oh, we love that term.

Joe Downs (08:09):
On paper, this is a no brainer and we do not even need a fence. We will use the units as the fence.

Big Announcer (08:15):
Exactly.

Joe Downs (08:16):
Gosh, we got lucky that the lot size was like this. Even though it was narrow, it is all going to work out great. Hey, rookie. So right away, the physical reality of the site threw a wrench into our timeline. We did not see that ahead of time. Obviously that is something that is burned in your brain, seared in your brain at this point now as you are thinking four steps ahead when you are dealing with development now with our StorePro facilities. But even when we look at other expansion opportunities when we are buying value add, I am sure that and many of the things are seared into your brain of like, oh, well on paper that looks good, but how are we going to manage this project? Or what are we going to do from a timeline perspective, from maybe an interest reserve perspective, because it is going to take longer because we cannot have multiple subs if you were to see that site again.

(09:13):
So that is just a detail that a seasoned pro, which you are now, might have priced in. But for us it was our first lesson and the difference between the plan on paper and the reality on the ground. And then Tim, just as we were navigating through that, the black swan event of the century happens and hits the entire world, of course. But while we are already dealing with okay, this sucks, but we will get through it, and then this gets dumped on us. What was now the next thing we had to deal with, which well, I am not going to spoil it. Go ahead. I will let you. Ball is in the tee, swing away.

Tim Kane (09:50):
No. Well, I mean, I just want to emphasize as well, not only was it that the subcontractors and the narrow lot, then everyone knows of the material delays and everything during COVID. And then on top of that, if you remember, Joe, remember there was an odd setback where it was residential setbacks in the mid section of that parcel. There was about one third of that that had residential setbacks and we came up with a brilliant plan, which I still think today is a great plan. We had to use portables because we had to. So we did portables. So it was the traditional storage that was existing. Then we connected about ten thousand square feet of portables and then the second ten thousand was permanent, right? And it was brilliant.

Joe Downs (10:43):
Great. So Tim, hold on, just for the listener, unpack that a little bit. So visually, if I recall correctly, we were coming down the same property line and we had our typical setback was fine off the property line. And then we hit a point in the same row, I believe, where we had, because of the property next door, a residential setback, which increased our setback. And frankly, to your credit, the workaround was the portable. And in that particular jurisdiction, the portable, because we were allowed to put that as close to the property line, or maybe even closer, but we chose to just keep it in line. Is that right?

Tim Kane (11:27):
Correct.

Joe Downs (11:27):
Yeah. So this is actually pausing to highlight something. I want to make sure the listener understands what we are talking about, but also I want to highlight, this is one of the beauties of storage. You can actually do this, right? You can be thrown curveballs and still hit the ball and play. And in this case, you did. I do not think we saw that initially as an issue or we thought we could get around it, but even still, wow, great job. We continued with the project and that probably did not even cost any more to have the portables shipped and erected in place. And frankly, when you are there, they look just like they are permanent. But for the listener, we kept a straight line going all the way down the property line, but it is a mixture of permanent and portables, portables in between to deal with the very unusual situation, by the way, that we encountered here.

(12:25):
But gosh, one of the cool things about storage is you can do this stuff. So even though we are talking about some things that did not work out with all the what is the expression, of all the best laid plans or my favorite Mike Tyson’s quote, which is everyone has got a plan until you get punched in the

Big Announcer (12:40):
Face.

Joe Downs (12:41):
We got punched in the face a few times here, but we were able to take some hits and keep coming because we were in storage and we had, you can maneuver a little bit here. So I think that is one of the neat things. So then after all these delays and all the challenges, we finally get the CO. Tim, no one is happier than you, I think. Sure. Oh yeah. There is supposed to be a moment of celebration, but what kind of market are we now?

Tim Kane (13:13):
Yeah, we missed the market, right? It was insane. All the domino effects, all the delays, all the COVID highs, the amazing trailing twelve of the rent roll, tailwinds behind us, and then wham. It hits. People stopped moving, Joe, as soon as we got the CO and people stopped moving because of the significant rate hikes on interest rates and the storage world hit a plateau as it does in market cycles. We just unfortunately caught the end of that.

Joe Downs (13:46):
Yeah. We often talk about how self storage is recession resistant. And I do not know that it has even been defined as a recession as what we went through. Who knows? I think that is up to the politicians of the hour who define what has happened and where we are headed, but it certainly was a period of stagnation. We definitely had interest rates go up, I think four hundred basis points in like nine months. That was in twenty three into twenty four, I think. And well, we had an inflationary economy where people just stopped moving. And I think combined with the delays, combined with now we have got new debt service, combined with the market having significantly shifted, we really ended up in a scenario where we had a brand new, shiny toy that we could not play with, to use an analogy, in a market that did not want to be very kind to us. So Tim, I mean, this is the moment where I think I want everyone to really hear about and listen to.

(15:05):
We had the perfect thesis. You really did execute the build, albeit with some challenges. And that is what I was alluding to earlier. Any developer is going to tell you, you are going to have delays, you are going to have this, you are going to have the inspectors or the code enforcement officers tell you one thing and fail this or do this. I do not think we had a lot of that. It was really just a lot of COVID delays and things that were out of our control. And yet when we are ready to reap the rewards, the market pulls the rug right out from under us. Tim, what was that feeling like? Remember the conversations between you and I at that point? Remember what

Tim Kane (15:43):
Was going on? Oh man. No, it is just we did everything right, right? And I think that was the frustrating thing whereas, well, we thought we did. Looking back, we have that new document circulating in the office of lessons we have learned and that document gets longer and longer, but we have not made the same mistake twice. And that is what the frustrating part was. And then even the underwriting during this time and right before COVID, the underwriting, we did the right thing. We had sensitivity analysis. We had gradual increases, gradual rentals, but it one eighty’d on us. And it was more as nothing we could do about it. So I remember just feeling so helpless of, you have got to be kidding me, our first expansion, this happens. I mean, those were some interesting conversations and meetings during that time about this.

Joe Downs (16:37):
Yep. All right. So we had to adapt. I am no Silicon Valley here, but I think what did the Marines say? Improvise, adapt, and overcome or something like that. So we did our best to be guided by the Marines there. We had to adapt. We could not stick to the original plan, obviously. Tim, where does the project stand today? No rosy picture here, but what does the recovery process, I will call it, look like for us? What is the status now? I mean, just where are we? What is the outlook? What is the forecast?

Tim Kane (17:15):
Well, this is the thing. That is why we love storage. We are stabilized. As we sit today, we are stabilized. This is a college town, which is another thing we learned about that we can get into if you want, but permanent residents, we are stabilized. The problem is, Joe, we are stabilized not at the rates we want to be stabilized at, right? Because during that time, everyone was going the race to the bottom and competing with each other to get rentals. So when we were projecting one rental rate and then starting significantly lower, we have just lost some time. But with storage and now being stabilized, we are now strategically pushing those rates and we are getting back to where we need to be. We just lost some time, but here we are.

Joe Downs (18:06):
Yeah. And Tim, I think you just hit on something that I was alluding to earlier. I mean, that is the beauty of storage. And I say this when we teach it, when I am on podcasts. In my background, I have raised money for multifamily, office, some hotels, and I think one of the advantages of storage is hotels, I guess, are similar except that it is so operationally intensive because your contracts are nightly and storage is monthly and multifamily is annual. But we have the ability to adapt on a monthly basis to what is going on in the market and the conditions, whether good or bad, and survive. And look, this is real estate. Nothing ever usually goes perfectly to plan.

(18:59):
You have to be even more protective of that plan more from the outset in the due diligence and the planning is what I am trying to say there because there is so much more risk with expansion and development. But that is storage. And again, that is just one of the things I love about this business is because things did not go our way. They should have on paper. We should have gotten an A. In the school of academics, we turned in an A paper. In the school of hard knocks, it said, take your A paper and shove it where the sun does not shine. This is the reality of your situation now. And that is kind of back to the Mike Tyson quote, which is everybody has got a plan until they get punched in the face. But that is the beauty of storage. You can get back up. You can change your plan. You can change it monthly.

(19:56):
We can survive. We had to survive the race to the bottom of rates. We were able to do that. We are stabilized to your point. Are we where we want to be? No, but that is real estate. Will we get there? I do think so. We have got tailwinds at our back with interest rates, with the economy for sure. The numbers are just I mean, the current administration has not even put their plan in place yet and the numbers are through the roof. Twenty twenty six looks like a phenomenal year and all signs point to a great year for storage as well. So the story, I do not know if it has a happy ending yet, Tim.

(20:38):
I think it is going to have a happy ending. I think it is going to have, at the very worst, a perfectly fine ending, an acceptable ending whenever that day comes and we get to control that. But certainly it is a lesson in the fact that storage allows you to fight, to live another day. You are not stuck. You are never buried unless you bury yourself. So the asset was saved. It is stable. I think it will be a perfectly fine, if not very good, long term hold. The journey might have been brutal, Tim. Looking back on this entire experience, what is your single biggest lesson, your takeaway from it, and what is your new approach to expansions now? Anything change?

Tim Kane (21:32):
I think you and I share this, and I hope everyone else does too with the students and everyone else, is this deal still needs to work without the expansion. I think that is the biggest mindset change of when you are

Joe Downs (21:47):
You mean when at acquisition it needed to work on paper, whether we expanded it or not.

Tim Kane (21:53):
Correct. I do believe so. Because that jurisdiction, code might have changed during your due diligence. Code might just change next year. You might have a residential neighbor that just destroys the whole project at a public hearing. Now, do not get me wrong, if it is by right, by use, and you have talked to the jurisdiction and everything looks rosy, that is great. But you do not have that building permit in your hand, that grading plan in your hand. So you just want to make sure that you would still be happy acquiring this facility whether you expand or whether you do not. So I would say that is the single biggest change we have made internally. And then as well, give yourself time. Do not be a yes man and do not try to sell it to stakeholders unrealistically. Be realistic and achievable from the get go.

(22:50):
Allow sensitivity. Allow the jurisdiction to take longer than you think. Have your rental rates be realistic and achievable. So what I am saying is just do not think you are going to get a grand slam right off the bat. It is not if something goes wrong, it is when. And how to mitigate that and make sure that your underwriting and your plan in place allows for you to not have it go perfectly.

Joe Downs (23:14):
I think that was the lesson right there, Tim. That is the million dollar lesson. You cannot just underwrite the deal. You have to underwrite the risk because things can and will go wrong, especially in expansion and development. So you can only learn to see those risks through experience. We learned the hard way. So either through your own experience like us, or by being in a community with people who have the scars like Belrose, to prove they have learned these lessons already. And by the way, folks, that is exactly what we are building. That is why we are building the Storage Mastermind community. It is a place to learn from the collective experience of experienced investors like Tim so you can avoid making these same rookie mistakes on your own. If you liked what we heard today and want to learn more about how to underwrite deals, navigate risk, and get the real world education you need to succeed in this business, I want to invite you to check out two places.

(24:10):
First, you can go to theselfstorageacademy.com. It is a comprehensive educational platform for those who want to take a deep dive and come to an academy to learn more about self storage from start to finish. Or if you are ready to surround yourself with a community of active, experienced investors, go to thestoragemastermind.com and join our free community. See what it is all about. Tim, thanks for coming on the show today and sharing the raw and honest truth about this project. Hopefully you do not have too much PTSD from it. And thank you everyone for listening. If you know someone who is about to jump into their first big project, share this episode with them. They will thank you later.

Big Announcer (24:57):
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