Private Equity Real Estate

Private Equity Real Estate

Background

There is a plot of land on which there were originally plans to build climate-controlled storage spaces. However, due to strong competition from large-scale new builds in the area, this option had become too risky, and we were exploring to redevelop the land. We laid out the various opportunities and gave a recommendation on the most suitable option.

Approach

We looked into a few options, including redeveloping current buildings, introducing innovative storage facilities, creating chargeable parking spaces, installing solar panels, etc. and explored the associated financing structures. We conducted due diligence: interviewing industry experts as well as visiting the land plot, container factories, and shipping ports; we also engaged a reputable, independent storage consultancy to conduct a market and feasibility study to better understand the industry and viability of our plans.

Shortlisted Options

We narrowed down to 2 options: Option 1 was the initial choice due to existing relationship with a potential business partner, and Option 2 was what we recommended due to the better business case and less financial burden.

Option 1: $4.8M Investment Needed

To have large-scale storage used by businesses, hobbyists, and households. Focus is on retaining current tenants who are expected to be the core customer base.

Mixed-use space will be 65% storage units, and 35% flex space units.

Financial Considerations

Option 1 would see an operational breakeven at Month 21, with an occupancy rate of 80%. Loan payback would take 11.5 years and loss cover capital repayment would happen only around the 120th month. With a net return of ~$420k, the yield after mortgage is 13.0%.

Option 2: $1.0M Investment Needed

Existing site will be revamped to update appearance and attract customers, but current footprint for primary buildings will remain to reduce costs. Professional fence, gravel yard, and parking spaces with power charging will be installed to create a mixed-use space and broaden appeal to a more diversified clientele; solar panels will also be installed to benefit from a clean, renewable, and eco-friendly energy production process. Innovative container storage that includes temperature control, i.e. regular, cooler, freezer, etc., will be introduced, in line with the original plan of building out a climate-controlled storage space.

Mixed-use space will be 37% storage units, 32% flex space units, and 31% parking space.

Financial Considerations

Option 2 would see an operational breakeven at Month 15, with an occupancy rate of 63%. Loan payback would take 7 years and loss cover capital repayment would happen at the 28th month. With a net return of ~$145k, the yield after mortgage is 11.5%.

Our Recommendation: Option 2

With significantly less investment ($3.8M difference) and an after-mortgage yield (11.5%) not significantly lower than Option 1’s (13.0%), Option 2 is undoubtedly the recommended option. Option 2 would bring in $230k annually, while requiring a $1.0M investment with a loss cover capital of $70k. Breakeven profitability would happen at Month 15 with 63% occupancy, and the project will turn profitable in Month 28 with 90% occupancy.