I share a story about my attempt to develop a mini-storage facility that reveals critical insights into the complexities of real estate development, particularly regarding zoning regulations and municipal oversight. https://www.youtube.com/watch?v=9wrVubshfiY
Overview of the Mini Storage Mess
Background and Opportunity About six years ago, I was approached with an intriguing opportunity: a piece of industrial-zoned land in Riverview, New Brunswick, that was in short supply in a growing community. The zoning bylaws permitted mini-storage as a viable use for the property. Wanting to mitigate financial risk, I assembled a group of nine investors, forming a corporation and collectively investing in the land. They raised a total of $40,000, enough to purchase the land outright, which eliminated the burden of debt and mortgage payments.
Planning and Building After securing the land, my team worked with a builder experienced in commercial construction. The builder proposed a plan for a steel storage building that would yield an attractive 18% return on investment, financing the project with a 60% loan-to-value mortgage from a credit union, contingent on each shareholder signing a $5,000 personal guarantee. However, this arrangement allowed for individual liability without joint responsibility for the total loan amount.
The Twist: After the builder secured the steel structure at a favorable price, they went to city hall to obtain the necessary building permit. To their surprise, the local planning department stated that, despite the zoning allowance, any construction on industrial land required approval from the Planning Commission. This regulation was part of a broader industrial development plan that had not been disclosed during their initial inquiries.
Municipal Requirements At the Planning Commission meeting, my team and I faced a slew of additional requirements, including:
Installing a privacy fence
Paving the surrounding area
Adding curbs to the driveway
Planting trees and shrubs in the front yard
These unexpected mandates would increase the project's costs by approximately $60,000, reducing the projected return on investment from 18% to a mere 4%, which was lower than the interest rate for the loan. The partners decided against moving forward, feeling that the bank would profit more than they would from the project.
Lessons Learned The team listed the land for sale and decided to compensate the builder for his efforts, though they had no obligation to do so since they lacked a building permit. Fortunately, because they had purchased the land outright, they could hold onto it without financial strain while waiting for a buyer.
Eventually, after a year and a half, the land was sold, and they were able to distribute a return of 83 cents on the dollar to their investors. Barnett emphasized the importance of being aware of municipal regulations and the unpredictable nature of local government, which can dramatically impact real estate development.
Key Takeaways
Research Zoning and Regulations Thoroughly: Always verify local regulations and potential requirements beyond what is initially presented.
Partnership with Municipal Officials: Real estate developers are essentially in partnership with local government officials, whose decisions can significantly influence project feasibility.
Equity over Debt: In this case, an all-equity deal proved advantageous, allowing the investors to wait out market fluctuations without the pressure of mortgage payments.
Contingency Planning: Always prepare for the unexpected and understand that plans can change due to factors beyond your control, including bureaucratic processes.
Respect for Industry Professionals: Barnett expressed admiration for successful real estate developers, acknowledging the complexities and risks inherent in the business.
This story serves as a cautionary tale for aspiring real estate investors and developers, highlighting the importance of thorough research, adaptability, and respect for the regulatory environment in which they operate.
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