By Chris Koenig
Construction costs are through the roof. Interest rates have skyrocketed to Uranus. The market is in an odd state of turmoil, yet there is incredible liquidity on the sidelines chasing return–undeployed capital earns nothing right? In these times, as RV and boat storage developers, we have to cut the low hanging fruit to make our projects pencil. Underwriting at 8%-10% interest to hit a 1.20 debt service coverage ratio (DSCR) is not as easy as it was last year! We need to cut costs so that it won’t hurt the project’s economics or the status of a Class-A facility.
At this point, modular buildings have entered the chat. I have been a huge fan of cargo-containers/Janus MASS units for self-storage for years, as they are a known entity for cost control and are cheaper than “stick built” self-storage units. This has led me to look more deeply into the opportunity for prefab leasing offices and modified mobile-homes on Class-A recreational vehicle storage facilities.
If you dig deep in your developer soul, what are the essentials for a leasing office?
The trend in the last few/COVID years has been a small (or no) office with possibly an onsite manager or a kiosk. This is the way the world is moving; embrace it. Long gone are the days for a $1MM office/apartment/Taj Mahal.
After one of my projects received bids from six generous contractor bids for a 1,300 square foot leasing office at +/- $1MM, I was forced to do some soul searching. Is this office going to:
- Increase the value of my property?
- Make it more marketable to the “big boys” when I go to sell?
- Cause problems securing financing?
The answer is inevitably “no” on all three fronts. Why?
- Customers are chasing rare/premium covered RV and boat storage space to store their toys.
- Investors are chasing yield based on your net operating income (NOI).
- Lenders are lending based on projected NOI and your personal guarantee.
I have never seen a discount on an appraisal based on “the office” in the appraiser’s judgment vs. literally not having an office at all (and I don’t recommend this in most cases).
On the project I referenced above, the installed quote for my double-wide, modified home from Clayton Homes (a Warren Buffet company) is $250k (1/4 the price of a stick-built office). The amenities and customer experience are the same. I pit-set the mobile home so the front door/porch are at grade and the customer perception is 99.99% that this is a stick-built leasing office that looks homey. Modular and mobile home construction has evolved so much in the last 10 years that they look like track homes inside and out. In fact, the finishes can be upgraded at the factory or onsite to look like a premium (do this!).
The economics of these savings are real! Construction costs of $750K for the leasing office in these times equates to roughly $67K in reduced interest expense on the office ($750K x 9%) or $5.6K/month. This is serious cash flow savings. Ask yourself: Am I getting $5.6k/month in additional rent because of my “nice office”? No. Show me the stats on this please. Don’t confuse this with your typical job-trailer, which arguably could still cut it.
These numbers don’t increase the value of your property; however, they help your overall project costs and increase your possible equity in your project. Why spend money where you don’t need to? Get over the archaic perception that a “double-wide” looks like crap and get with the times. Prefab and modular homes are the way of the future, and they are a very feasible and economical solution for an office on any Class-A RV and boat storage facility with the right landscaping and design measures.
Chris Koenig is Managing Member of Kingsland Companies LLC, a self-storage and RV/Boat storage development, investment and management company.
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