Hey everyone its David Barnett with the investlocalbook.com blog site.
I wanted to share a little story with you because I was just driving around and I passed
one of those big mini-storage businesses where you have the long buildings with all the little
10 by 10 units and whatnot.
And I'm going to call this story mini-storage mess.
Probably about six years ago I was approached by someone who had some land for sale.
And what was interesting about this land is that it was zoned industrial in a bedroom
community that had almost no industrial zoned land.
And I looked up the zoning bylaw and one of the things that struck me was that it said
that this type of land specifically could be used for mini-storages.
And it was one of the listed uses, and so I called the city hall and I said because
it is listed as being a permitted use of the property, does that mean that I have to go
before some sort of board or committee to get approval for this project or what?
And they said well basically all I had to do was bring the plans in.
And they would check it for things like turning radius for fire trucks and just all the regular
standard stuff that they do when they are checking your building, and they would issuing
building permits.
So the piece of land that was available was a good size lot and the person who wanted
to sell it was under a little bit of duress.
I was able to buy it for $40,000, but I did not want to put myself in a position where
I was speculating on this project and borrowing a bunch of money.
So I wanted to do it as a pure equity play.
And I actually put together a group of nine individual investors and we created a corporation
and we sold shares.
And I think the smallest shareholder put in three grand for 3000 shares, and largest shareholders
put in 12000.
And I think I had put in 10.
So we had money in the bank and we bought the piece of land, paid cash for it.
And then we went and found a builder who is experienced in commercial construction, and
we had spoken with him before we bought the land.
He read the zoning bylaw, he proposed and he had a relationship with a manufacturer
of this steel storage building.
So he made a proposal to us for a certain size building that he could fit on the property
and the number of units, and the math made sense.
There was going to be a good return on investment.
We were going to earn about 18%, and the plan was to have 40% equity and borrow 60% from
the bank.
Having so many shareholders, one of the things that came up was that none of the shareholders
wanted to be personally liable for the loan.
So we dealt with a bunch of different banks and talked with them and none of them would
do a mortgage without a personal liability from the shareholders.
Except I did get an offer from a credit union where they agreed that they would do a 60%
loan-to-value loan on the project if each shareholder personally signed a $5000 guarantee,
which is very different from joint and several guarantee where everyone is basically all
guaranteeing the entire amount of the loan.
So all the partners agreed to that, we all signed off on it.
We got approved for the mortgage and the builder was called by the manufacturer about a price
increase and told that they had a unit like the one he wanted to buy there that had been
manufactured; that the buyer had fallen through on, and if he wanted it they would make him
a great offer.
So he bought it.
So the steel building arrived and the mortgage was approved.
The builder went to City Hall to get his building permit and was told no he can't have one.
And he said, what do you mean we can't have one.
We have already spoken to you guys.
The zoning bylaws specifically said that this is a permitted use on this piece of land.
And they said yes but the zone industrial, and this was in the town of Riverview New
Brunswick.
And they said but the town Riverview Brunswick has another document here.
It's called an industrial development plan and it says that anything being built on an
industrial land has to go before the planning commission, which was entirely news to us
and to the builder who wasn't a newby.
He had 30 years experience in commercial construction and had built things all over this area and
in that community before, and had never been faced with this issue before.
So we had to go to the town planning commission and the people of the commission were a bunch
of counsellors, and they looked at the project and they said, well you know this could be
unsightly.
So we are going to require a privacy fence and we want you to pave the area around the
storage building.
And we want you to put curbs on your driveway, and we want you to plant trees and shrubbery
in your front yard kind of thing.
And they created this whole list of requirements for the building.
And none of the improvements of course created an opportunity for increased profit or sales.
The builder even argued that the road didn't have curbs on it, and he said if we put curbs
on our driveway when you rebuild the road and add curbs, it could be a different grade.
It might not match, to which the commissioner said, oh yeah but you could just rebuild them
at that time.
Any way the additions that the planning commissioner wanted were going to add about $60,000 to
the cost of building the project.
And our rate of returns fell from 18% down to 4%, which was actually less than the interest
rate the Credit Union was going to lend us money for.
So if we had moved forward with the project, the credit union was going to make more off
of it than we were.
And that did not sit well with us at all, so we scrapped the whole project and put the
land up for sale.
Unfortunately the builder got stuck with that steel building.
And we; you know he had put effort into it, designing, drawing and survey the lot.
So we said to him, we would like to pay you for the time that has gone into this but we
didn't have a building permit.
We don't want to take responsibility for the fact that you bought the building, and he
agreed to that.
He was very reasonable, so we paid him a few thousand dollars for the time and effort that
had gone into the project from his people.
And then we sat on that land for a year and a half waiting to sell it, and boy, am I glad
we didn't have a mortgage on it.
It was one of the nicest things of having an all equity deal.
There was no debt, there were no payments.
We were able to sit and sit, and sit, and we even had money in the bank to pay the taxes
on it.
And eventually when it was sold, we distributed the money, we disbanded the corporation, and
at the end of the day, everyone got 83 cents back on the dollar for the money that had
gone in.
So the risk in that deal had been managed but it taught me a really important lesson.
It is that when you get into any kind of real estate development deal, you are in partnership
with basically these municipal officials that you can't control.
And you can ask them straight up questions about what you can and can't do, and you can't
really trust what they say.
And it was one of the reasons why I sort of have a little bit of disdain for real estate
deals and I've got a lot of respect for people that are able to get into that business and
make money consistently project after project.
Any way that's the story of the mini storage mess, and it shows how even the best laid
plans can be laid to ruin by government officials who have power over everything.
Any way we'll talk to you later and have a great day.