Real estate investment managers, despite the benefit of investing in and owning hard, irreplaceable assets, must also adapt to market forces given the evolving usage and function requirements of real estate and growing flows of capital investment seeking increased real estate allocations. Our company continues to prioritize the evolution of its own product lines, service offerings and  investment in human capital in response to its own competitive landscape.

In this quarter’s Chairman Minutes, I’d like to celebrate our selfstorage business’s 5-year anniversary of hiring Feerooz Yacoobi to lead and build out this important segment of Buchanan’s going forward investment platform. Since his hiring, Feerooz and his team have completed $260 million of self-storage investments through predominantly buying new pre-stabilized properties where value creation can be realized through their lease up and stabilization.

Additionally, the team has purchased stabilized properties for our core-plus fund and for standalone investments that provide current cash flow and yield enhancement opportunities. Separately, Buchanan has also made first mortgage loans within the storage sector through our Buchanan mortgage business line so clearly maximizing the synergy between business lines within the greater asset sector.

With the assistance of Jon Suddarth, Vice President within Buchanan Self-Storage, this piece will address further additions to the storage platform including ground-up development as we entail the protocols, risks, mitigants and opportunity it provides for our investors.

There is no doubt that development is hard and therein lies the opportunity as most real estate practitioners do not have the experience, skillset, or financial capacity to pursue such a venture. So “why subject yourself to the risks of a development project instead of opting for acquiring the more predictable, yieldproducing stability of an outright acquisition?” There are many reasons, but the primary driver that has Buchanan focused on development is the opportunity to secure a key Class A development asset with its potential for an attractive project return.

Sounds straight forward enough, but most self-storage operators do not have the vision to recognize or source these opportunities, technical skills to entitle a complex site in a prime location,
experience to satisfy sellers timing and performance requirements, and may lack financial wherewithal to capitalize a project.

The average lifespan of a development project, from its initial site identification to opening, can span 3-4 years, including 1.5-2 years for securing full entitlements/building permits with another  1.5-2 years for its construction. While this may seem like a lengthy process, the returns and strategic site attainment can more than warrant this extended investment timeline. Let’s detail some areas of risk and their associated mitigations.

Seller Risk

Will the seller fulfill their commitments and allow adequate time to secure full entitlements? We invest considerable time upfront meeting with both city officials and sellers, outlining the process and setting expectations. We financially backstop the seller with option payments as part of a binding purchase contract which is typically aligned with predictable entitlement time frames.

Entitlement Risk

Will the city approve the project during discretionary City Council hearings that often occur at the end of the approval process? Our development teams visit the governing jurisdiction multiple times before entering a contract to ensure coordination between our interpretation of land use codes and those of the city. We will not move forward on a deal unless entitlement risk is fully vetted with a clearly defined entitlement timeline.

Market Risk

Will market conditions remain predictable during the lease-up phase? We prioritize our new developments in submarkets with high barriers to entry, conservative square footage per capita metrics, and proven markets with highly sought after stabilized asset sales.

Construction Risk

How do we handle unknown soil conditions, cost escalations, tariffs, weather delays, and other construction-related uncertainties? We work with best-in-class consultants and contractors to clearly quantify and mitigate the potential risks while providing for appropriate financial contingencies.

Lease-Up Risk

Will leasing activity meet our projections and at what rate? We utilize our own portfolio experience and insights from third-party property managers to apply conservative assumptions and proven strategies to proforma our new investments accordingly.

Financing Risk

Will financial conditions remain predictable throughout the entitlement process and prior to the purchase of the land? Buchanan takes advantage of our relationships in the lending industry to secure favorable financing while often utilizing varied interest rate hedging strategies and select credit enhancements to optimize the financing structure. Most importantly, we minimize excess leverage allowing for future extension optionality and market cyclicality.

While additional risks certainly exist, it is important to note that Buchanan absorbs the financial risk associated with the purchase contract payment options and predevelopment engineering and
consultation services to obtain the necessary entitlement and building permits prior to the closing on the land.

These pursuit costs are typically more than $1 million per transaction depending on project particulars. Our investors participate at our land basis only after full entitlements are realized, shielding them from these predevelopment risks.

Given the financial commitment required for these investments, we remain extremely selective in the pursuit of ground-up opportunities. To this point, Jon has reviewed approximately 600 development sites since March 2024 of which 75% were eliminated for one reason or another with the balance being preliminarily underwritten. He then makes offers on a small percentage (less than 5% of deals evaluated) that provide acceptable market demographics, an appropriate economic outcome and in cities with predictable entitlement protocols. Once accepted, his real diligence begins as he vets his value intuition satisfying his extensive checklist prior to executing a purchase and sale agreement. Today, he closed his first development acquisition under the Buchanan banner on a project he put under contract 14 months ago.

Unlike the Kodaks and Blockbusters, Buchanan has continued to challenge itself by looking for additive and financially accretive opportunities for its company and investors. Our decision to expand our self-storage footprint has been rewarded as we have now realized two successfully approved new storage development opportunities within the Bay Area totaling $55 million in project costs. In addition, the new business line and associated skillsets has enabled us to attract an institutional capital partner to fund these new investments. Noteworthy is that all of this started with Buchanan’s key recruitment of Feerooz and ultimately Jon with their deep expertise necessary to increase investment optionality and build-out this new venture. Congratulations to Feerooz and Jon for a job well done.