Show notes from podcast episode 45.
I rarely dive into my my own business here but I have a story and a lesson worth sharing. I’m always learning and failing and getting back up and pressing onward.
I got some bad news this week. A self storage development project that I had been working on for 24 months is dead.
Let’s start from the beginning. My partner and I got involved in self storage with our first construction project.
We raised cash from outside investors for 25% and got a bank loan for our 75% ownership. We located the site, permitted the project, built the building from the ground up and operate that storage facility in Ithaca today.
The project has been a huge success. We spent $2.5MM to build it. We operate it extremely lean with remote management. We’re now about 60% occupied and we are cashflow positive and paying our investors back a healthy return on their initial investment. Its looking great from here on out.
We also had an offer on the table from a national player to purchase our facility for $4.2MM a few months after we opened the doors for operation. My partner and I could have taken about $600k each off the table but we declined the offer and decided to continue to lease up the facility and explore selling it down the road when its full and worth more or simply continue to operate it and enjoy the depreciation, appreciation and cash flows.
A few months after we opened the first facility for business in 2017 I went full time into self storage with the goal of getting another project in the works as soon as possible. My partner took over the service business with the help of a new management hire.
We picked a market we loved and got a parcel of land under purchase contract. The property needed a zoning variance to change from a business district to an industrial district. Even though self storage is a “business to consumer” retail-type business it is grouped in with other industrial uses like commercial warehousing and distribution centers.
We began spending money on civil engineering, permits, renderings, surveys and more. I attended 8 town hearings over 9 months. The local self storage owners showed up to the town meetings in force. They didn’t want the competition so they argued against the zoning variance. One competitor even hired an attorney to stand up and fight my project in front of the town. All in all we spent about $25k on the project before finally getting turned down by the town. We failed and moved on.
In March of 2018 we picked a different city and got a new parcel under purchase contract. This one was zoned correctly as an industrial site. It was wedged between a gas station and a highway. We began spending money on engineering, permits, renderings, surveys etc. I attended about 4 town meetings over 6 months before the town made it clear they didn’t like that use and decided to change the zoning altogether while I was in the process of trying to get approval. I had spent 6 months working on the deal and another $15k or so when they finally turned me down and changed the zoning. It was a heartbreaker. Back to square one again.
So in November of 2018 we got a third site under option in the same town as the previous site. It was zoned correctly, in a great high-traffic location and we negotiated a great price. In talking with the town the planning board members loved my use and were excited about my project. Finally some support!
We moved quickly and began the surveys and engineering. The site was near and old Indian burial ground next to the mohawk river so they required an archeological survey before we could do anything on the site. They wouldn’t even let us dig test holes to check soil types before the survey was completed. In the dead of winter with several feet of snow and the top 40 inches of soil frozen we couldn’t complete the survey so we had to wait until April.
So I had a decision to make. Hold up the entire project until April or take a chance on the archeological survey coming back clean and the test holes revealing what the soil maps told us they would reveal. I chose to get the project moving forward.
I spent this previous winter assembling my investment team, working with my local bank and getting the project use approved with the town. Everything went great. The investors were eager to join after the success at our first project. The bank was eager to lend because my partner and I had a few very good years and had some cash on hand. The town also loved our use.
So I began spending money on engineering and environmental surveys. We ordered the appraisal through the bank and I met with the board at my bank pushing towards loan approval. I engaged my civil engineer to compete the stormwater plan so we could get site plan approval with the town.
Business is weird because it all happens very slowly for a long time and it all comes together very quickly. Over the past two weeks things begin to finally come together.
On Monday April 15th 2019 I flew up, presented in front of the town board and public and we got site plan approval. There were several conditions of approval but they were all minor. We had to have an acceptable stormwater management plan and make a slight change to one of our driveways. This was a huge win because it was the step that killed our two previous deals.
Two days later on April 17th we finally received word that the archeological survey came back clean. No Indian remains or artifacts on site. Great news.
A day later on April 18th our loan was approved with the bank. Our appraisal had come back strong and the board approved us for the construction loan based on the budget I had built out. Great news and another huge hurdle cleared.
On April 19th all partners had reached agreement on the company operating agreement and it was distributed and signed by all of our partners. We scheduled the capital call for May 1st. Another huge hurdle cleared.
The last step was the test pits and soil tests. We had to make sure the ground was stable and our stormwater management plan could work on the site.
Stormwater management is a lot more complicated than people think. When you build a construction project you have to make the finished site plan drain and filter water at the same rates as before you did anything. This way if there is a big rain it won’t flood the local properties or roads. So if you put 100,000 square feet of pavement and buildings on a site that is a lot of water run off that previously was absorbed by green space.
The quality of the soil makes a big difference. Some soil, like sandy soil, drains and filters water very quickly and makes a stormwater plan a lot easier. Other soil like silt or organic matter doesn’t drain water very quickly at all. Either way a plan is usually feasible and can be made to work with stormwater structures like swells, retention ponds or underground water storage pipes in extreme cases.
So on Friday April 19th, with the archeological survey results in hand, we were finally able to dig our test holes on site.
What we found was a heartbreaker. Starting about 1 foot below grade and extending to about 5 foot below grade there was wood debris, bricks, concrete blocks, trash and more all in a rotting organic black sludge. It didn’t drain or filter water at all. What’s more is that this fill would make it virtually impossible to build proper building slabs that could hold up our storage buildings.
It turns out many years ago the property was used as a dumping ground for unwanted fill from all around town. Anytime anyone tore down a building the property owner would let them dump it on site and they would bury it. Anytime anyone had “fill” as extra dirt is called in the construction industry, they would bring it to this site and dump it. The owner thought this would increase the property value because the property got flatter and more consistent as they worked it around.
This fill would take hundreds of dump truck loads to remove and we’d have nowhere to take it. Plus it would cost hundreds of thousands of dollars to do this.
Our project is dead weeks before we were planning to break ground and begin construction. We are out the $30,000 in costs we accumulated preparing for construction with our surveys and engineering.
This is a major heartbreaker for me. I’ve spent 2 years trying to get a second project in the works and have failed 3 times. We’ve not only lost 2 years of my productivity but also nearly $100,000 in expenses associated with the three projects.
Yesterday I called everyone on my investment team and let them know that we would not be able to put their investment to use for another 6-8 months at the earliest. They were disappointed and a few told me they wouldn’t be able to commit to that new timeline.
I learned an important lesson on this project. Get the deal breakers out of the way as soon as possible. Spend as little money and time as possible working to get these deal breakers out of the way.
With construction there are a lot of deal breakers and not all of them are possible to get out of the way early. We couldn’t dig in the winter for example. The appraisal could have came back low and we could have been declined on the loan amount. It could have been an indian campsite and artifacts could have been uncovered. The town could have changed the zoning. A neighbor could have showed up and voiced his or her displeasure until the town gave in. A competitor could have hired a high powered attorney to fight our project. The list goes on.
It’s the cost of doing business. There are ups and downs in business. You have to take risks in the form of time and money to make great (and profitable) things happen. I’m not as upset about the $100k. The next successful project will make that back 10 or 20 times over. Self storage projects are so profitable because they are so darn hard to get permitted and get built. They take 4 years from concept to cashflow. It’s a long long game that most people aren’t willing to play.
The time is what really breaks my heart. I’ve spent 2 full years working to get a project approved and now I have absolutely nothing to show for it. My partner is sacrificing in a big way by managing our big and stressful service business on his own so I can pursue these opportunities for us. I feel like I let him down.
So what can I take away from this?
Number one I think we are going to get a few projects in the pipeline from here on out. Most developers do this. They have 6 projects in the pipeline because they know that 3 of the deals will die and the other 3 will be delayed and take twice as long as scheduled.
But what happens if all three go quickly and work out? We’ll need some more involved investors or to take on a larger partner. We’ve explored those routes and we think its time to get more serious. We can’t risk wasting another 8 months on a project that doesn’t come to fruition.
Ray Dalio has an analogy in his book “Principles of life and work” that is applicable here.
“Imagine that in order to have a great life you have to cross a dangerous jungle. You can stay safe where you are and have an ordinary life, or you can risk crossing the jungle to have a terrific life. How would you approach that choice?” – Ray Dalio
He talks about the lizard brain and that its hard wired for us to fear uncomfortable and dangerous situations in order to keep us alive and safe.
But what is really the danger? What are we risking?
Not death. Not hunger. Not social rejection or humiliation. We have safety nets here.
We’re risking time and money. We can always make the money back and if we do it right the costs of failing aren’t going to cripple us.
The worst case scenario just happened for the third time in a row and where do I sit? My family still gets fed. I still get to come home to this guy. I can still make my mortgage payment. I’m still safe from physical danger. I can’t let my emotions get the best of me and make radical decisions right now. I have to trust the process and keep a level head.
It’s all part of entrepreneurship. Onward and upward!
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