Accretive Finance

I have a client who runs a mini storage business whose biggest profit center is not actually renting 10′x10′ or 10′x20′ lockers either heated or unheated, but leasing parking spaces in his graveled lot.

Trucks, RVs, trailers, loaders, pickups, backhoes… all find a resting place in his yard, and the more local ordinances the municipality passes (like no RVs permitted in your driveway), the more demand he sees for his parking lot.

There is more good news–his site is big, over 13 acres so lots of room for expansion.

The bad news is that no lender will back him with cash to expand his parking business–they don’t like the fact that there are no long term (say 5-year) leases (I mean who would sign a 5-year parking lease, really?) plus there are no additional structures built to secure their loans–only a bigger graveled yard. 

How much does it cost to gravel a yard? 

Well, an acre is 43,560 sq ft, and if you strip the topsoil off and add 12 inches of compacted engineered fill (granular B topped by granular A, ie, gravel), you need 43,560 cu ft or 1,613.3 cu yds of fill.

Note that he has a sandy soil under his overburden (topsoil) so it has decent bearing capacity. Thus, he can get away with 12 inches of fill instead of the 18 inches he’d need if he had a clay base instead, so in a way he’s lucky some more.

If he orders loads that deliver 15 cu yds at a time, he’ll need 108 truckloads. In a place like Ottawa, that’ll cost him around $300 a load or $32,400 total.

He’ll rent a dozer, loader, grader and roller, and operate them himself, so he’ll save some more money.

But for you and me, we are more likely to order the equipment together with skilled operators so it’ll cost us more. We’ll also need a water truck to spray H2O on our fill to get a nice tight compacted fill/parking surface.

My client can probably gravel an acre for $38,000, which might cost you and me $45,000. If you need 18 inches of fill or more, you’ll have to adjust the number upwards. You’ll also need to adjust the numbers up or down for the price of fill in your neighborhood, to the extent it’s higher than $300 a load or lower.

So how is he going to pay for it?

Easy.

He’ll find a supplier who’ll finance it for him this way:

1. cost is $38,000

2. he can fit 48 semis on each acre (with double-loaded parking aisles)

3. he charges by the linear foot so short RVs pay less than longer ones, which pay less than semis

4. making things simple, let’s assume he rents to 48 semis/acre at $100 per month per semi

5. that’s $4,800 each month in income

6. if he pays his supplier by pledging half of his increase in income, he’ll retire his obligation in 38,000/2,400 or 15.8 months

He might offer his supplier an extra month to compensate them for the fact that they have to wait for full payment, but he can entice them by saying, “I’ve got another 12 acres to fill, so when we get this done and mostly rented, let’s do it again. So look at this not as a $38,000 sale but more like a ($38,000 + $2,400) x 13 or $525,200 sale.”

“Deal!” his supplier exclaims.

@ profbruce

postscript: in a way, you’ve just created a (for-real) perpetual motion (money) machine (as long as demand is buoyant).

postscript: this is not a new concept. Accretive finance has been around for a very long time. You know those “Don’t pay a cent events” that furniture and appliance stores run? A form of accretive finance in a way. 

Say you offer your 1-bedroom flat for rent at $930 a month + utilities ($145) + a tech package ($115 for high speed Internet, wi-fi, basic cable, Netflix and wall-mounted, large screen TV) or a total of $1,190 per month. But you just found out if you furnish it, you can get $75 a night on airbnb. That works out to $2,250 with a 70% occupancy rate or $1,575 per month, an extra $385 for you. 

But whoa there cowboy or cowgirl, now you gotta buy some furniture. It costs you just $1,750 to do that because you are one smart person–you put $750 cash in your jeans and take your pickup for a tour of your city whereupon you find out that people in an aging population like Canada’s are dying like flies. So you are able to get a fabulous dining set plus living room and bedroom 

furnishings from lazy heirs for almost nothing because they want to empty out grandma’s house as fast as possible so they can sell it and use the proceeds to pay down their stupidly high personal debt.

Where do you get the other $1,000? Well, you got it from the furniture store who tell you that you won’t have to pay a cent til next year–January and it’s just March now so you’ve got 9 months to save up. In 9 months, you’ll have an extra $385 x 9 or $3,465; plenty to pay

off the store.

What’s your cap rate on the cost of furnishing your 1-bedroom flat?

It’s $385 x 12/$1,750 or an incredible 264% pa; ie, this is worth doing brothers and sisters since cap rates on residential rentals in Ottawa are anywhere from 4% to 8%; in Toronto, 2-3%, in Van city even less. So if you can get a marginal cap rate of a few hundred percent, that’s pretty cool.

postscript: you should know that due to traffic theory, he will never actually get to 100% occupancy. I’ve told him that when he gets to 75%, 85% or 95% occupancy on each acre, it’s time to gravel the next acre. Don’t wait for 100%.

The reason?

Occupancy rates are asymptotic so it’s like crossing a room by going halfway across then half of that half then half of that quarter etc. You’ll never actually make it to the other side of the room so don’t try this at home.

In practical terms, even for very busy mini storage buildings/parking lots/co-working spaces/mini offices and so forth, they experience vacancy even when they are full. 

Say you decide to terminate your parking agreement mid-month, and I need to park my RV at the end of the month, there is a vacancy even though the lot is “fully” leased.

Even residential subdivisions that have been around for years and years almost always have a few lots not built on. 

So if there is a neighborhood that you absolutely want to live in, but you are told there are no building lots, walk or drive around–you’ll see a home somewhere on a double lot, maybe hidden behind a hedge, which you may be able to pry from the hands of the existing owner… the extra lot that is.