226: Unveiling the Self-Storage Success Blueprint: Part 2 With Fernando Angelucci

Big Mike Fund Podcast
226: Unveiling the Self-Storage Success Blueprint: Part 2 With Fernando Angelucci
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Join us for an insightful continuation with Fernando Angelucci on the latest episode of The BigMikeFund Podcast! Fernando returns to delve deeper into the self-storage market, offering expert analysis on its current state in the US and shedding light on the impact of unexpected Black Swan events. He explores the challenges confronting new players in the industry and shares strategies for navigating the ever-evolving real estate market through creative financing.

From financing options for selling storage facilities to the intricacies of successful real estate deals involving seller financing and bank loans, Fernando provides invaluable insights. Plus, he shares expert tips on negotiating deals with a sharp focus on price and structure. Don’t miss out on this informative discussion with one of the industry’s leading voices!

HIGHLIGHTS OF THE EPISODE

00:36 – The current state of the self-storage industry in the US

04:51 – The impact of a Black Swan event on the self-storage industry

09:58 – The current state of the self-storage industry and the challenges faced by new players

15:05 – Navigating the current real estate market through creative financing

19:39 – Financing options and strategies for selling storage facilities.

25:04 – A successful real estate deal with seller financing and bank loans

29:58 – Negotiating a deal with a focus on price and structure

If you found this episode substantial and want to dig deeper into real estate, or maybe you want to discover better investment opportunities, be sure to check out www.tempofunding.com.

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Full Transcript:

Intro/Outro: Welcome to The BigMikeFund Podcast, where you’ll learn about advanced wealth building strategies from real estate investing to creating massive ROI and secure retirement profits. So pour yourself a cup of coffee, grab a notepad, and lean in. Because Big Mike has got the mic, starting now.

Mike Zlotnik: Welcome to The BigMikeFund Podcast. I’m the Big Mike, Mike Zlotnik, and today it is my pleasure and a privilege to welcome back for the episode two of this spring 2024 recording, Fernando Angelucci. Hey, Fernando. 

Fernando Angelucci: Hey, Mike. Thanks for having me back. 

Mike Zlotnik: Yeah, thanks for coming back on the podcast. Previous discussion went really well. We talked about the international situation, how you are in South America. You’ve traveled the world. You look at storage in other parts of the world. You’ve seen inflation being way higher than the U. S. And then now let’s come back to the U. S. experience in the self storage industry. This is kind of your bread and butter. So yeah, in the world outside of the U. S. use of storage is a lot lower demand.

Versus where the U. S. is at. The U. S. is almost unique. A lot of international investors, they come into the U. S. and they’re surprised how widely storage is used. Is this a trend that’s increasing? Or is this sort of a stable trend at this point in the U. S.? Is the demand per capita, or three mile radius, five mile radius, one mile radius, in most markets, stable?

Or is there a pattern change? Self storage is in the business. Of change, right? People move when something happens, but the moving has been somewhat slower in this environment when the interest rates spike, people don’t move as much so I’m just curious. What’s happening right now? 

Fernando Angelucci: Yeah. So we’re continuing to see a trend of more and more people using storage.

Just a couple of years ago, it was at about one in every 11 people use storage. Now we’re at about one in nine and we see that growing. And that’s because of a few things. It’s not only just because we’re in the moving business, as you say, but now you’re starting to see a change in demographics. So for example, the millennials don’t want to live in the suburbs away from the action.

They want to be downtown where the nightlife and the entertainment is. And in those areas, you have much higher rents per square foot. For say in an apartment building. So instead of opting to go for a three bedroom apartment, they go for a two or opting to go from a two to a one, and then using storage almost as if it’s like an external closet, as we’re starting to see that more and more.

As rents become less affordable in these larger kinds of class A markets, we’re starting to see more use as opposed to it being more of a. You know, temporary moving type situation or something that’s caused on a life change. It truly is being used almost as an external closet. So it’s a more stable use.

These are the tenants that typically stay for 3510 years. The other side of that generational. gap or that divide, you have people on the older end of the spectrum. So you have baby boomers, you have the silent generation, you have people that nowadays are, you know, almost 15, 000 people a day are retiring and downsizing.

So what are they doing? They’re going from those, you know, three, four bedroom ranch houses in the suburbs, and they’re either moving into say a one or two bedroom condo. Or if they’re on the older side of that gap, they may be moving into nursing homes or assisted living facilities, active living facilities, communities.

So what we’re seeing is a downsizing, but these people don’t want to get rid of their things. And they don’t want to, you know, the kids don’t want that. So that’s very interesting. We started to see actually a trend in assisted living facilities requiring that you have a self storage lease prior to moving in, because if anything happens and you’re unable to pay the, the, the, the monthly room rent they have the ability to sell off your home to pay any deficiencies in rent.

In your payment for that room rent. So it’s been a very interesting trend. Now that’s just as a whole across the United States in general, on a more macro trend, when you look at in, you know, the most previous 6 to 12 month period. You do see somewhat of a slowing down from the COVID and pandemic, you know, hot boom during that time you had people having to work from home or the kids having to go to school from home.

So, you know, they had to turn that second or third bedroom into an office or into a school area for their children. And that caused over the last two years, Storage to go up over 80 percent year over year in rents. And that was, you know, pretty crazy. We were seeing stabilized vacancies at sub 6%.

Which is, we’ve never seen in the industry before, and now we’re starting to get a cooling off from that. Now, people returning to work, people going back to school. So, for example 1 of the larger technology providers in the space that has data on over 1000 facilities. They did a quick report at this most recent self storage association spring conference.

Showing that the stabilized vacancies have now dropped to close to 84 percent occupancy with a, you know, a 14 to 16 percent vacancy rate as now the kind of stabilized trend and that’s kind of where it was prior to the pandemic, you know, 2019 beginning of 2020 so we’re seeing a reversion to the mean, if you will at the same time, You were starting to see a lot of projects coming online from these, you know, these ground up developments that were in process that take 18 months to 24 months to go through zoning and entitlements another 12 months to actually develop and get certificate of occupancy and now those projects that were still in that, you know, 0 percent to Two and a half percent fed fund rate projects are now starting to hit the market.

And in some areas that had a very large population increase during the pandemic, like the South and the Southeast, we’re starting to see oversaturation in those markets. That coupled with, of course you see problems with hurricanes coming through hitting Florida, we saw over six insurance providers leave that state, which started to make a lot of our ground up developments in that state unfeasible.

And we actually canceled four of our large projects there because we went from a 35 to 50, 000 projected premium per year, up to in some cases, up to 170, 000, just on the insurance premium alone that coupled with. The banks, as we talked about on, on the previous podcast, the banks really tightening up because of the, you know, the alleged runs on the banks that they were seeing in the future.

A lot of these banks were holding sub 1 percent treasuries. And they were worried that if they had to liquidate those, there’d be, you know, massively in the red. Fortunately, the fed created a program where you’d be able to put up those assets at par value. And it was a one year loan. Then again, that was extended for another year.

We’ll see if it gets extended for a third year. And that allowed the banks to now start to back off of the crazy underwriting assumptions they had. Like we said, on the previous podcast, I had deals where just in November of 2023, October to November of 2023, I was getting offers. In the 43 to 47% leverage range where they were underwriting my project at an eight and a half or 9% interest rate, plus a 1% stress test.

And they would stress the DSCR up to 1.4. And these were on some projects that even had cashflow coming on day one. So now we’re starting to see the bank starting to calm down a little bit. Just last week, we’ve already received a few term sheets on some projects we have ongoing and they’re underwriting back to a one two debt cover.

There’s no stress test. The rate has now dropped to what I’m starting to see in the six and a half to seven and a half range as opposed to eight and a half, nine percent that I was seeing literally just six months ago. So it seems that the banks are starting to feel more confident that we’re not going to have some type of run on the bank across the economy due to what have you, a recession at the, you know, at the Wall Street level, if you will.

So those are kind of some of the trends that we’re noticing right now. 

Mike Zlotnik: Thanks Fernando. That’s a lot to unpack. Appreciate you sharing this. So I’ll go back to the first carbon big cities people using storage as an extra closet. Certainly seen it. I mean, your city, you see the self storage popping up as a way to get an extra room where you don’t have the extra room in this rents climb and per square foot for that show.

It’s cheaper to get storage. So agreed on that, on that. Concept that trend is probably fundamentally solid in big cities and also supplies also limited. Where do you build them? So it’s just there’s no, you know, there’s no room to build but let’s go back to the Most recent developments where the banks are lightening up a little bit on the underwriting which is definitely helpful because experience of purchase of a, or refi heavily depends on the bank how tight the credit is, and if the credit is too tight, none of the, none of the project’s penciled.

Very interesting commentary, well, it’s a well known commentary, the entire industry has been hit, so we’ve obviously hit the higher for longer rates. Who also hit these insurance premiums going to the roof. It’s another sort of unexpected, like a black swan event that doesn’t happen often. And it’s like a massive tidal wave that hit everyone at the same time.

And it continues to hit. So the new development projects are stalled. People just not writing their own pencil any longer, but the previous ones that were originated now coming into the supply. So it’s actually exacerbating the problem because supply is coming in, demand, like you said, I love the term reversion to the mean on the overall demand.

And the 85 percent occupancies, from what I learned years ago, is the standard for the self storage industry. So if you were in the 90s, that was above the average, and certainly some facilities can operate, but it’s a local dynamic. So, yeah, all this stuff is telling me something interesting, it’s telling me some kind of low returns on self storage projects for a while, right?

Just the, all the forces that are out there. Make it less attractive to write a fresh check unless you get some phenomenal deal from some crazy motivated seller. Are you seeing any, anything like that? Or it’s just, it’s a slow patient game. 

Fernando Angelucci: Yeah. So, you know, we, we usually will break apart the storage industry into existing.

Assets that are already producing cashflow and then assets that are not producing cashflow. And that could either be a lease up project or even a ground up development project. So where we have been seeing deals coming into the market now are those where they do not have existing cashflow in place, because then the bank looks at that as a much riskier asset and the terms are much tighter.

So we are seeing some I wouldn’t say fire sales, but much more motivated sellers for those types of assets than even 18 months ago. Where we are seeing those types of deals pencil out. 

Mike Zlotnik: Sorry, I’m just going to jump in. Somebody built a facility, it’s empty, lease up is slow. And they, they, they’re out of cash.

They’re stressed because they took variable rate debt, now the debt is squeezing them. They have to sell, maybe they, you can get a pretty good discount on the property because it’s not, you know, needs to go through lease up. Exactly. 

Fernando Angelucci: Yeah. So, you know, when we first came into the, the industry years ago, it wasn’t not uncommon to see someone sell a certificate of occupancy project with 0 percent occupancy for close to what that asset would go for at stabilization.

That those times are long gone. Now, what we’re seeing is again, to the term that you like reversion to the mean now, those Developers that are selling those CEO projects, they’re going back to the, you know, cost plus 20 percent is what’s pretty standard now in that, in that side of the world. And that’s what it was like prior, you know, to this, this 0 percent fed rate policy.

The other place that we’re seeing these types of deals pencil is when you decide to, instead of bringing a ton of demand into the market right off the bat, you phase that demand in or that supply in. So instead of. Trying to build 80 to 100, 000 square feet of storage. Day one, you get a little bit more land than what you’d usually need.

And then you build 30, 000 square feet first. And then you put a building behind that. Once that one is stabilized, then you put another 30, 000 square feet behind that. And then another 30, 000 square feet behind that. And that allows you to use your equity that you’re building in those places. That first phase or that second phase to then build the second and the third phase without having to go back and issue a capital call to your investors.

So we’ve seen that strategy working out quite a bit, but like you said there are some people that are in big trouble right now, because not only did they take variable rate debt, but they took short term debt as a bridge, a, you know, two year, 24 month. Loan to get from construction to, you know, CEO with maybe a little bit of lease up and now they’re finding that they’re not at the values they need to refinance out and they have to fire sell the property.

So we are on the lookout for those types of deals. 

Mike Zlotnik: So yeah, that’s up. It hit multifamily industry. And now what you’re telling me, it has hit obviously storage because Anytime you do construction it is a value add because it’s a value add. The only debt was available floating rate debt. There was no other way.

And then those loans are maturing. The rate, the rate is up a lot. And the, the, these projects are in financial pressure. Similar to some of the multifamily projects is a terrible situation. But that’s where you see a distress when they finish the project. And if they don’t sell it. They got to raise a lot of capital.

Otherwise, they can’t keep the lights on. They can’t get the project to the finish line. And then on top of that, some of them have been budgeted based on old insurance premiums, right? So you finish the facility insurance is much higher. So your, your monthly burn is way higher. And not only that, 

Fernando Angelucci: but also, also market rents, what we’re seeing across the board right now, 

Mike Zlotnik: market rents are softening up.

Fernando Angelucci: Yeah, because it’s not only what people are willing to pay, but the larger operators, the REITs, publicly traded REITs, they value occupancy over net operating income because they have longer term capital. So, what they’re doing, for example, Extra Space, they cut rates 35 percent across the board for street rates.

So, if you’re a project in that area that is competing against the 

Mike Zlotnik: Extra space, one of the largest reads, they cut the rates where? Every market or across the board? Everywhere all over the country? 

Fernando Angelucci: When they were talking at the, at the, the annual conferences, they said, hey, we’re aggressively cutting rates up to 35 percent across the board to stay occupied and make sure that no one steals occupancy from us.

And the reason for this is pretty simple in storage. Storage is a highly sticky asset. So if you can get the person into the facility at a lower rate, then you have an aggressive Increasing of that rate over a 12 to 18 month period where you, and then you get them to what was your, your market rate originally.

And usually the, the, especially for the smaller units, the, the friction of moving usually is not worth it over an extra 10, month in rent. And then you just take that rent hit that rent increase. So that’s a problem though. If you’re coming into the market with set fresh, supply, Because now you have an empty facility, you’re competing against a facility that’s full, that is willing to cut rates so that you can’t steal occupancy from them.

Mike Zlotnik: That’s an interesting point. Literally last week we had a panel of experts and you, you should be on a panel. So, I mean, this would all do respect. I had a couple of other guys in storage, you know, those guys Jake and, and, and Scott, so Jake Wendelsteins and Scott Meyers. So, you know, those guys they’re like, they’ve been in storage for many years.

They’re pretty. The day experts like you. So one of the things that they, that I heard on the panel is that a lot of big reads offering massive incentives to move in. So your normal rate, 200 a month you get a special, no rent for three months or some crazy, like basically these incentives are absolutely the, like you said, effective, effective rate cut is like 35%, but they don’t do it in the form of a rate cut.

They’re giving them big incentives to move in, and I guess to stay maybe, something like that. Are you seeing that? Is it the same behavior where the small guys are, are, are taking it into a battlefield where the big players are very aggressive on their pricing side to motivate people to stick with, with their product?

Fernando Angelucci: We’re seeing on both sides. So not only just a true, Hey, the rent was 200. Now it’s 140. We’ve seen that we’ve also seen the, the massive incentives, 50 percent off for six months or your first month and your last two months. Are 0 right or 1. So we’ve seen it both. But as it as an average, it comes out to about a net effective about 30 35 percent decrease in incoming street rates, which makes it difficult for incoming Lisa projects to lease up quickly.

Mike Zlotnik: That is gigantic. I mean, I don’t know how to put it. It is for fresh capital. You could get, obviously you could try to get much better deals if you could steal these built for certain cost facilities and you come in and you low offer them based on new higher insurance and new cost of money and everything else.

It so fresh capital, much greater deal existing deals. I’m very concerned about NOI drops, right, if you have to stay afloat because it’s both a beauty and a curse. of the self storage industry. The monthly rent, it’s a beauty because when things are good, you can bump, bump, rents up a lot. But it’s a curse if you have to start cutting just to stay competitive with, with the big, you know, big competitors, KubeSmart LiveStorage, a number of other shops.

So, you see valuation correction significant as a result because NOIs are falling. Insurance is up, cost of money is up revenues are down because of this competitive pressures. Probably a lot of pain, right? I mean, am I reading it wrong? 

Fernando Angelucci: So, again, we split the market into Properties that are already cashflow positive after death service and properties that are not.

So the ones that are not, those are the ones that are feeling a lot of pressure, a lot of pain. But for example, for us in the last 18 months when we’ve got to the part where we are now in the economy, the, the deals that we’re going after majority now are deals that have existing cashflow, that cashflow after death service day one.

And those types of sellers are not feeling much pain because they say, why should I sell? When I have long term fixed rate debt, I could just keep collecting the cash flow until the market comes back to a place where I’m liking the valuations. So on that side of the world, it is a little bit harder to get good deals because of the prices that those sellers are expecting coupled with where new debt is, but they themselves are not feeling much pain the way that we’ve been getting around that is now moving to.

Typically, you know, we were talking about the Volcker Volcker years. So one, one type of strategy that was used a lot during that time was seller finance or creative financing. And we’re starting to see a lot of that come back. Now, you know, prior to 18 months ago if you were to make a, an on market offer through a broker and even mention, even whisper the words, creative financing or seller financing, they wouldn’t even present your offer to the seller just didn’t make sense.

But now. Because they know, you know, we usually don’t buy a lot of stuff on market and almost 90 percent of what we buy is off market. But nowadays we’re seeing brokers reaching out to us saying, Hey, Fernando, Steven, we know that you guys know how to structure creative offers where we can get to that price where that seller is willing to sell.

But in the end of the day, it all pencils out to the same way as if you got your price and you got bank debt. And so that’s the thing that we always try to teach people. Try to explain to other people that we’re teaching how to do this is the price really doesn’t matter. What matters is the price plus the amount of interest that you pay over your projected hold period.

So if you can adjust the amount of interest that you would have paid, if you bought at your price with bank debt, you can still pay the seller’s price, but with them carrying the debt at the interest that you need so that your total project cost, including interest over the hold period is the same as it was, if you went with bank debt.

Mike Zlotnik: You’ll love it back, back to the past the, the seller finance concept or, well, I don’t know how you can, you also do assumable. So obviously the seller finance is, is the right, and then assumably they’ve got a good fixed rate debt. And they want to sell somehow. Now you can wrap around and assume, and at least have that experience of low interest rate cost versus what the market offers today.

I mean, that that’s been a discussion in multifamily too. But you’re right without creating financing, either a wrap. Or seller finance, the math just doesn’t work. You can’t pay them the price that they want otherwise you need a steeper discount. So it’s kind of a trade off. Is it the cash price or a payment term price, right?

That’s, that’s what, what you’re describing. 

Fernando Angelucci: We always joke around, it’s you can have your price and it’s my terms, or it’s my price and your terms and your terms are usually that you want cash right now. Right? So there’s, there’s always, like you said, there are those structures where some, some owners have some good perm debt that is assumable.

Typically that’s gonna be your CMBS or your life co. Money. But then there’s also these banks that are not assumable. And if the bank finds out that there is a wrap around their, you know, mortgage one, they will. Trigger because 

Mike Zlotnik: they loan the money at 4%. Now they can charge a lot more of the hell. I mean, they’ll call the note, 

Fernando Angelucci: right?

So one of the ways that we’re getting around those non assumable kind of aggressive do on sale clauses is to structure a master lease with an option to purchase at the end of, so it looks like. Seller finance, it smells like seller finance, but the eyes of a bank, it’s not, if you have a lease option that you pay up front, that lease option will go towards the purchase option at the end of the five years, what, what have, however you structure it, and then you pay a fixed.

Lease fee to lease the self storage facility. And then you get to run the operations. It’s basically the equivalent of a, of a interest only debt. But you don’t have the issues with that, that do on sale clause from a bank that is, you know, they don’t want to participate in a structure that way. 

Mike Zlotnik: Yeah, that’s a very powerful technique.

The master lease has been used in commercial real estate many times. And it. Definitely gets used on on larger projects. And then the leasee can, can sublease and that, that, that’s a very simple, clever way to get around doing sales. So it’s a very, it makes a lot of sense. Right. So let’s continue to kind of analyze this.

And like you said, it’s a very bifurcated experience. Those who have fixed rate debt, and same is true with multifamily. NES is 

Speaker 4: less. 

Mike Zlotnik: If you got fixed rate debt and you don’t have a term cliff, term maturity, where you don’t have floating rate debt, and you’re generating positive cash flow, you’re sitting relatively pretty.

Of course, you, if you start losing a little bit of occupancy, we’ll do the competitive pressure and some, you have to make some adjustments. You may have to Battle the competition, but at least you have some room way with fixed rate debt. So kind of interesting. And are you seeing great opportunities today on the new buy and a new buy?

Obviously. You got to get deep enough discount to account for all the risk. Your financing options are much, much worse, right? You have longer lease up, more difficult lease up, more competitive pressures. And the returns on fresh money have to look more attractive. So if you don’t get good enough price.

So how much of a discount are we talking about? Let’s get specific. Somebody built a facility. And I remember this, like you said, just a few minutes ago. You would build, cool. And sell without full lease up for almost the price at the end of stabilization. These were gigantic upside and I don’t know what’s even the cost plus, works because If if a cell is distressed doesn’t matter, right?

I mean you it’s a squeeze It doesn’t matter what they pay for construction doesn’t matter all this all this stuff What matters is what they can get for it today. So give me some examples. What are you seeing out there? On, on this brand new build facility is this 20 percent discount? Is this higher?

Is this lower? How, how much? And I’m just curious what, how, from the peak, obviously, cause we, we have to go back from the point where you traded at a high price and now it’s a trading. What kind of discount are we talking about? 

Fernando Angelucci: Yeah. So it’s, it’s hard to put a, an average discount because obviously storage is one of those market by market.

Right. Right. Asset types. And when I say market, I mean a 3 to 5 mile radius, not a city or a, you know, a part of a city. So where we’re coming in is usually, you know, we want to be able to see a 1 3 debt cover within 24 months of buying that asset. And if we can’t get to that number, we have to keep pushing that price down until it gets to that one three deck cover.

So, I mean, we’ve had offers all over the board. We’ve had offers that were at cost plus 20 at kind of the high end, which is kind of standard nowadays. And then all the way down to 30 percent discount on cost, which obviously the. The sellers did not want to take because they just spent 14 months building out this asset.

And now I’m telling them that, you know, they spent 14 million in my offers at 11 and a half, right? 12, 12, 12 million for that asset. So we’re not really focusing on those assets right now because I don’t want to fight the banks. There’s an opportunity there, but I’m going to work with where the easy money is.

And the easy money is Assets that already have cash flow positive after debt service, but the niche that I’m seeing here is kind of mixing a little bit of both. I’m going after assets that it’s already stabilized. It already has, you know, 85 to 90 percent occupancy. However, that that asset comes with additional land that’s already zoned for storage.

And what I’ll do is then I’ll expand the asset by 30 percent at max 50%. So if it’s a 50, 000 square foot facility, I’ll build another 25, maybe 28, 000 square feet. That is a much easier sell to the bank. Cause you come in and say, Hey, I got an asset that has proven history in this market that there is demand.

It is above where it should be. If you look at a national average, which means there’s pent up demand. I have land that’s already entitled. It’s ready to go. All I’ve got to do is get permits. And during that construction period, The income from the existing facility will cover the additional debt that’s needed.

So to them, it’s, it’s, it’s a, it’s a, it’s a go, because not only do they have an asset that stabilize, but then I’m going to be increasing this asset. And by the time I get stabilization on that additional 30 to 50 percent in size, they’re going to have an asset where the, the stabilized loan to value is going to be sub 50%.

It’s hard for a bank to say no to that, right? It’s much easier for a bank to say, Hey, there’s going to be no cashflow. Okay. I’m going to need five years from you. I’m probably going to need 36 months interest only to make it work with where interest rates are right now. We don’t know. There’s no historical proof that it’s going to work.

These are all just projections from feasibility studies, what have you. That’s a much harder sell to a bank, especially if you’re going towards those kinds of local and community banks that are typically going to give you your better, better style debt, but they are also much more conservative. 

Mike Zlotnik: Yeah, very interesting focus that you are picking relatively easier targets, so you don’t need to get a steep of a discount, but you’re still probably looking for some.

So what kind of discount are you still looking for in projects like this? So you want expansion room to expand you know, you want a room to build additional capacity. When you’re buying them, are you trying to lock them in already with a construction loan for additional capacity? Or It’s more about, okay, I’ll buy, operate for a while, see what happens, and build, you know, at the right time.

Fernando Angelucci: Yeah. So for example, our most recent syndication that we closed we closed on December 29th of 2023. We bought the facility in cash with a, a seller finance structure where the seller agreed to take a second position on about, so it was about a 2. 3 million purchase. So it was a smaller deal. Seller took an 800 K second position seller finance note.

At 4 percent interest only for five years that allowed us to go to a bank and say, Hey, we’re not, we don’t need much from you. We’re looking for a combined loan to value of 68%. The sellers coming in with a 4 percent debt interest on which is going to push the DSCR combined DSCR way lower than the thresholds than you guys really need.

Are you willing to write on this? We’re already operating the facility. We’ve already started putting modular units on the facility. We just need you guys for the construction debt. Is that something you’re willing to do? And now we have banks that are coming in and offering us really good terms, anywhere between six and a half to seven and a half low prepay penalties and 25 year amortizations, which basically.

Yeah. We’re, we’re out the door at the end of last year, everything was 20 fifteens or twenties. And they’re giving us five years on that construction debt to line up with the, with the seller finance piece that’s under underlying. So that I’m able to get into those, you know, these types of structures, it’s very easy to not have to ask for a 50 percent discount.

So you’re most likely going to win. That bid when you’re competing against other buyers, but at the same time, I could still offer 16 to 22 percent IRRs to my investors and a one eight a two, two equity multiple, which is kind of what we will aim for on these type of purchase plus expansion deals.

But we’re able to already, you know, investors like. Stability. They like the ability to start getting distributions early. They don’t want to wait three to four years for a ground up development to start kicking out a nice cashflow so they can pay their accumulating press. So it makes it easier all the way around.

It makes it easier from the bank. It makes it easier from the investors. It makes it easier for the seller to accept. It makes it easier for us to buy. 

Mike Zlotnik: Yeah, I appreciate that. You almost have to focus on income today for investors. It’s like the growth deals, super hard. So it’s, it’s the biggest issue is that the seller really good growth deal.

You don’t have stability of data to justify You either underwrite it aggressively, which you can’t sell, right? Or if you underwrite it ultra conservatively, you can’t get the deal, you can’t buy, so it becomes, you can’t transact. So the power of these self financed deals, you set 4 percent money at second position, that does, that’s ridiculous.

We do them as that, you know, 20%, right? 4% money that make can make the, that, that can make the deal. Right. That’s, that’s the crazy part. ’cause basically it’s, it’s near free money and it, it, and you said the bank, they, they, they lean the whole asset, but they only give you construction money. Right, 

Fernando Angelucci: right, exactly.

Mike Zlotnik: So it’s super powerful 

Fernando Angelucci: and it, it makes us win these deals. Right. I mean, you were talking about. First of all, on the investor side, the cashflow prior to this tightening that occurred when we were raising on growth deals, we were raising about a million dollars every two to three days on our growth deals.

Now, a growth deal, if I’m getting a million a month, I’m doing good, right? But on, on the, the cashflow and deals, those deals are still filling up within 72 hours at max one week. I have everything committed. And then I’m also able to go to the seller and say, listen, this is how I get this, the, the, that second position construction piece, right?

Or that second position seller finance. Does it say, I have a way that I can offer you more than all of the other buyers that you’re talking to are able to offer you. Yeah. But it’s going to take getting a little bit creative and let me show you how I could protect your investment. So not only am I coming and say let’s you know, I need you to help me solve your problem So that we can get a a structure that makes sense And I say the only way that i’m going to be able to pay more for your asset than all the other buyers That are are competing on this is I have to I have to build I can’t just buy it and operate it the way it is.

I have to buy it and I have to expand it. That’s the only way I can pay you that price. The unfortunate part is I need to get construction debt for that build out. So. The only way that a construction lender is going to come in is if they’re in the first position. So that’s just number one, you’re going to have to be in second position regardless.

The second way to get that construction debt very easily is if you help me drop my combined debt service or my combined loan to value. So that means that you’re going to have to be in sub Submarket terms for this to work out, but that accomplishes your goal, which is most sellers is I want this price.

That’s all I’m focused on. I don’t care about anything else. I want this price. And if you get me to that price, I don’t care how you structure the entire deal. Make it work. One of the other things that we’ve been doing with sellers as well. Oh, I’m sorry. Good. 

Speaker 4: No, I was going to say that. No, go ahead. So what were you doing with sellers?

Fernando Angelucci: So one of the other ways that we’ve been kind of showing sellers how we are different than other buyers is by actually helping with their tax problem. The interesting thing about storage is over the last 10 to 20 years, people that built these facilities for 25 to 40 bucks a foot. Now they’re selling them at 10, A hundred to 150, 180.

In some cases, they have a massive tax problem because their basis is so low. So we say, Hey, not only can you do some seller financing with us, where we can drip principle your way, so that way you can kind of spread out your capital gains. But what if you actually come in on the stack with us? So now you’re, I’m also converting a part of that seller into an lp, and then I’m pushing all of my bonus depreciation towards that seller so that when they sell to us, yeah, maybe the price is the same as someone else.

But the net in their pocket is 20 to 30 percent higher. 

Mike Zlotnik: That’s, that’s pretty cool. That’s more creative finance, more bono depreciation. Yeah, it makes, yeah, it makes a lot of sense if you can, if you can help them reduce tax liabilities as well as, yeah, get them So, but I’m assuming these are, let’s just call them smaller operators.

These are, you can’t have these conversations with the big operators. So these facilities are what 20, 30, 000 square feet, even smaller, right? 

Fernando Angelucci: No. So we’re, we’re aiming for basically the top of the range prior to REITs getting involved. So basically a facility is going to be worthwhile for REIT once you can buy it at about 50, 000 gross revenue per month, because at that point, third party management is in line with the percentages that you.

That you estimate, you know, usually about four to 5%, anything below that, then all of a sudden your property management is gonna become 8%, 9%, 10% of, of re re revenue. Right? So our goal is to buy just below that 50,000 gross, but then expand the facility. So then a, when we go to buy or when we go to sell, then we, and now it is a, an asset that a REIT would want to.

To take down and that allows us to get a much bigger asset. 

Mike Zlotnik: You’re, you’re not talking about mom and pop facilities, but you’re, but you’re not quite reaching your standard and you can expand and potentially that’s a very interesting strategy. These are, these 

Fernando Angelucci: are 40 to 40 to 60, 000 net rentable. So it’s not going to be a small deal because if the deal is too small, getting financing is a pain.

But we’re, they’re just, there’s just sub REIT and then we are building them to become a REIT quality asset that we can eventually sell. And then that allows us to make a large spread on the cap rate at purchase and at sale, because when they’re buying, they have to deal with people like me that are looking for big discounts.

But then when I go to sell, It’s really someone that’s just buying cash flow because they have quarterly profit expectations that they need to meet on the stock market. 

Mike Zlotnik: Yeah, that makes a lot of sense. Fernando, this is a lot of great nuggets. Appreciate your wisdom. You certainly got your systems. I don’t call it pat down, but you got your niche.

You got your niche and you, you know what you’re doing. And you, you are certainly dealing with these very dynamic marketplace. And in fact, this could create more opportunities because all this right. Creative finance, everything else that takes out sort of your Standard, traditional or typical in, unless and until they have a certain level of experience, sophistication to structure these deals.

It’s also, they’re big enough where you, you, you kind of, you know, chime away the, the really push away the really small fish and, and you, you become, it’s, it’s like you, you, I guess. You’re the biggest shark in a relatively small pond, but not really small either. So it’s kind of, it’s a good way to get, I guess, to swim in that, in that.

Fernando Angelucci: Right. 

Mike Zlotnik: Final question, and we got to wrap up. Markets. So you still, what markets do you like today in storage? Where are you trying to buy? I’m just curious. Is it still? Southeast, South, Sunbelt, or are you going somewhere where you don’t care as long as the deal is good? 

Fernando Angelucci: You know, we market to the lower 48, but we always have the same type of due diligence.

It doesn’t matter where we are. The things that, the areas that have been working recently, are going to be your Midwest deals, your Southeast deals, not including Florida? So, you know, North Carolina, South Carolina, Georgia, Alabama and then, you know, in the Midwest, you got your Illinois, Ohio, Iowa is your, your Pennsylvania’s.

These type of areas are doing really well for us. We’re, we’re winning some really good deals with some really good spreads on them. 

Mike Zlotnik: The Midwest study ID. You’re avoiding the South. I guess Florida is just an insurance situation. That’s completely insane. 

Fernando Angelucci: It’s insane. 

Mike Zlotnik: So it makes sense. Appreciate you sharing.

Once again, how would folks get ahold of you? What’s the best way to reach out? 

Fernando Angelucci: So the two easiest ways are the first one, you can call or text me. My number is area code +6304088090. Or you can go to our website. It’s www.ssse.com. 

Mike Zlotnik: It’s pretty cool. Three S’s and an E dot com. 

Fernando Angelucci: Right? 

Mike Zlotnik: Fernando, appreciate you coming on the podcast episode two.

Enjoy the spring and hope some really interesting deals come your way. So. 

Fernando Angelucci: Likewise. Talk to you soon, Mike. 

Mike Zlotnik: Thank you. 

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