Challenges When Buying Land to Develop Self-Storage

You’ve been seeking land for self-storage development, and it’s apparent that this task has become increasingly complex. All land-acquisition targets have strengths and weaknesses to be considered. Some flaws can be overcome, while others can be true impediments to financial viability. You may never find the perfect site, but here are some especially critical factors to examine.

Market Challenges

When evaluating a potential land parcel, I usually start by examining its location, size, shape, visibility, demographics and competition. Waiting five to 10 years for a site to mature simply isn’t the best use of resources. Here are a few factors that generally cause me to look elsewhere for my self-storage development:

The property is too small or doesn’t have the right shape to meet development goals. (Remember, your building area could be negatively impacted by maximum lot coverage, setbacks and building-height restrictions, all of which are set by the municipality.)

The parcel lacks proper visibility or ingress/egress from a main road.

There aren’t enough people with healthy incomes within the trade area.

The market is overbuilt, containing too much competition.

The site lacks critical utilities such as water, sewer, electricity or internet.

There are substantial local-impact fees.

The soil condition isn’t sufficient to the desired construction.

I’ve seen many self-storage developers suffer higher construction costs and struggle financially because they moved forward on a parcel with one or more of the above red flags. You need to be strong enough to say no to a property, even if it appears to be a good deal on first blush.

Price Point

Among the most important questions to ask yourself before buying land for self-storage development is whether the price is reasonable and will allow you to achieve your desired financial result. A parcel will nearly always cost more than you want to pay. That’s just a given in today’s marketplace. However, even expensive land can make perfect fiscal sense.

Before deciding if the price is affordable, create a financial model to forecast how your proposed project is likely perform. Don’t rule out a high-priced property until you perform a thorough financial analysis!

Also, avoid the trap of a “bargain” site. Just because you’re able to negotiate a “great deal” doesn’t necessarily mean a self-storage development will succeed there. Always consider all the financial aspects of the potential parcel.

Environmental Issues

You also need to make sure that local, regional and national environmental issues don’t cause any undue burden on your self-storage project. For example, are there wetlands on the site? If so, can they be mitigated? Are there any special requirements (impervious area restrictions) if the property is in a watershed or near a lake?

Your parcel may contain a species of plant or animal that has a special protection, like the gopher tortoise in the Southeast or the Venus flytrap in coastal areas of North Carolina. It might simply be under a highly restrictive tree-canopy ordinance.

You also need to find out: Does the land carry any special historical designations that may prevent development?

You may be able to work through all of these issues, but the cost of relocating animals, plants, trees, retention ponds or rain gardens may make your project unfeasible.

Zoning Obstacles

Assuming your property passes the above tests, you can move on to the question of approval. Is the land zoned for self-storage? Not all commercial zones allow this use, and many municipalities have heavily regulated or outright banned this type of development, so you need to confirm. Never assume!

Before you start the entitlement process, confirm that your land contract contains an exit clause (exculpatory language) to remove you from further liability or duties with regard to the purchase if you can’t build self-storage as proposed. You certainly don’t want to be stuck with a property you can’t use.

I’ve seen a self-storage developer purchase a multi-million-dollar site prior to receiving full approval from the local zoning board, only for the town council to deny the use. They were saddled with a very expensive property they couldn’t develop. Years later, it was sold at a loss. This could’ve been easily avoided with proper contract drafting.

I repeat: Don’t become contractually obligated to purchase a property until the land use and construction plan are fully approved by the municipality! The time and money spent on the entitlement process can be considerable, and it’s essential to be able to terminate the contract if your rezoning efforts don’t work out. There’s also an opportunity cost to consider, and perhaps a different parcel will serve you better in the long run.

Legal Considerations

Finally, it’s important that you retain competent outside legal counsel when contracting for the purchase of any self-storage development site. Make sure that the agreement includes ample time for proper due diligence and an exit clause such as, “The buyer may terminate for any reason or no reason at all.”

In addition, any self-storage site you purchase should always come with a “good” or “acceptable” title—that is, a title that’s free from liens, encumbrances or defects. It should also be insurable by a reputable title-insurance company with very few or relatively minor exceptions. These legal basics are sometimes missed, and the result can be tragic.

In addition to exculpatory language in the purchase contract, make sure the prospective site is surveyed (an ALTA survey is preferable) and there are no gaps, easements or other issues that can cause problems down the road.

Every land parcel has strengths and weaknesses. As a self-storage developer, if you can maximize the benefits and minimize the drawbacks, you’ll be better positioned for a healthy financial future.

Jeffrey Turnbull is the broker in charge at Turnbull Commercial Real Estate, with more than 25 years of experience developing and operating self-storage facilities in the Charlotte, North Carolina, area. Turnbull is also a licensed attorney in North Carolina, a licensed real estate broker in North and South Carolina, and a past president of the North Carolina Self Storage Association. He’s a regular contributor to Inside Self-Storage and a speaker at various industry events. You can reach him at [email protected].

About the Author

Jeffrey Turnbull

Broker in Charge, Turnbull Commercial

Jeff Turnbull is the broker in charge at Turnbull Commercial, with more than 25 years of experience in developing and operating self-storage properties in the Charlotte, N.C., area. He’s a licensed attorney in the state and holds a real estate broker license in the both the Carolinas. Jeff recently sold his self-storage properties and now offers consulting and development services. He’s a regular contributor to Inside Self-Storage and a speaker at various industry events. To reach him, e-mail [email protected].

See more from Jeffrey Turnbull

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