The Patriot Deal Room: The Broker's P&L Said 5.7%. The Real One Said 3.4%.

THE PATRIOT DEAL ROOM

ISSUE No. 02 // SELF-STORAGE // INFILL SUBMARKET, NORTHWEST DALLAS

VERDICT: PASS

The Broker's P&L Said 5.7%. The Real One Said 3.4%.

Same property. Same trailing twelve months. One pencil.

By Jeremiah Boucher | Founder & CEO, Patriot Holdings · 6 min read

This week: a Dallas self-storage deal where the seller cut the price twice and started whispering a number 20% below the ask. On paper, it looked like a motivated-seller opportunity. Then my COO did a one-afternoon field check that killed the deal cold. Here is the whole autopsy.

DEAL SNAPSHOT (details anonymized — the listing is private)

ASSET	Self-storage, ~280 non-climate drive-up units, ~40,000 NRSF
BUILDINGS	Six single-story buildings, built in the early 1970s
MARKET	Infill industrial submarket, northwest Dallas
OCCUPANCY	66% of units \| 73% of SF \| third-party managed
ASK	Just under $3.5M (~$82/SF), cut into the low $3Ms
SELLER SIGNAL	Will transact in the high $2Ms, “willing to get creative”
NOI AS MARKETED	~$190K \| a 5.7% cap rate at the original ask
ACTUAL T-12 NOI	~$118K \| a 3.4% cap rate on real numbers

Two NOI numbers for the same building. Hold that thought.

WHAT I LIKED

The basis math looked like a margin of safety. At the seller's real number, you are near $66 per square foot for drive-up storage on almost two infill acres inside Dallas. You cannot build this product, on this dirt, for that money. Buying below replacement cost is usually the start of a good conversation.
The remote-management conversion was plug-and-play. Automatic gate, cameras, keypad entry, management software, all installed and running. The OM also lists a checklist of recent capex: roofs, security, office, plumbing, lighting. On paper, the heavy check-writing looked done.
For once, the Texas tax trap wasn't going to spring. Current property taxes imply an assessed value around $3.1M. Buy in the high $2Ms and reassessment to your purchase price holds taxes roughly flat, maybe trims them. Regular readers know Texas reassessment is usually the line item that kills the deal. Here it was neutral.

That's the paper case. Then my COO went and looked. — Jeremiah Boucher

WHAT I DIDN'T LIKE

You can't see it, and it's rough. The facility is tucked inside an industrial park with essentially zero retail visibility. No drive-by traffic means you are buying every customer with marketing dollars, forever. And despite the OM's capex checklist, the field read is an aesthetically rough early-1970s asset with plenty of deferred repairs and maintenance still coming. The capex list tells you what they fixed. The property tells you what they didn't.
They can barely give units away. This facility spends about $36K a year on marketing, enormous for 280 units, and still sits at 66%. Then the web check: 10x10s advertised online around $32 against a $65 street rate. That is roughly 65 cents on the dollar of their own standard rates just to get bodies in units. The OM's “achieved rate” of about $100 on a 10x10 is a photograph of tenants signed in a better market. The rates walking in the door today are less than half that.
The oversupply is structural, and the competition is sophisticated. Nearly 15 SF of storage per capita in the 3-mile ring, against negative population growth and roughly a dozen housing starts. A wall of REIT and institutional operators sits within a mile or two. We know two of the nearest competing stores firsthand: very hard stores to drive rate or hold occupancy at. This is not a management problem an operator fixes. It is a market problem nobody fixes.

SELLER MOTIVATION CHECK

Watch the tape, not the listing. The ask dropped once publicly. Then the broker floated a number well below that privately. Then came the phrase every buyer should underline: “willing to get creative with the right group.”

Translation: the carry hurts. A passive owner paying a full third-party management stack, management fee, payroll, and $36K of marketing, on a building that is one-third empty is watching about $118K of real cash flow get eaten alive. And a seller cutting price into a market where his own manager is discounting 35% just to fill units knows exactly what he owns.

Two price cuts plus an invitation to structure is not a seller testing the market. It is a seller who has already decided to leave.

READ THE P&L LIKE AN OPERATOR

The offering memo shows three columns: actual trailing-12, broker adjusted, and pro forma. The marketed cap rate comes from the middle column. The middle column is where the fiction lives.

Quick refresher on the math, because it is the whole game: a cap rate is just NOI divided by price, and price moves inversely to the cap rate. At these cap rates, every dollar of NOI a broker adds with a pencil justifies roughly $15 to $18 of price. Add $76K of paper NOI, which is exactly what happened here, and you have conjured over a million dollars of paper value.

Line Item	Broker	Operator	Note
Repairs & maintenance	$7,351	$22,000	Real number for a 1970s asset.
Contract services	$4,438	$10,221	Kept at actuals.
Marketing	$12,483	$18,000	No visibility means paid demand, forever.
Utilities	$12,364	$14,164
Office / admin / software	$7,490	$10,225
Real estate taxes	$72,835	$63,000	Reset to a high-$2Ms purchase basis.
Total operating expenses	$184,985	$205,634
In-place NOI (~$379K collections)	$193,603	~$173,000	And this still assumes in-place rents hold.

The games that built the middle column: repairs marked down to about 18 cents a foot on early-1970s metal roofs and asphalt drives, and marketing cut by two-thirds while the pro forma simultaneously leases the building to 92% and pushes rates 20% above what the market is paying. Pick one. You cannot have all three. Payroll was zeroed out and replaced with thin contract labor and a call-center line.

Even our own generous rebuild, remote-managed with realistic repairs and marketing and taxes reset to a high-$2Ms basis, only gets in-place NOI to roughly $173K, a low-5s cap rate at the ask. And that rebuild assumes in-place rents hold. The $32 web rates say they might not. The honest in-place number is the actual one: about $118K, a 3.4% cap rate at the current price. Here is what that means at every price the seller has floated:

NOI Basis	Orig Ask ~$3.4M	Reduced ~$3.1M	Seller Real ~$2.75M
Broker adjusted NOI (~$194K)	5.7%	6.2%	7.0%
Operator rebuilt NOI (~$173K)	5.1%	5.6%	6.3%
Actual T-12 NOI (~$118K)	3.5%	3.8%	4.3%

A 3 to 4% in-place cap rate doesn't cover debt, let alone pay you for lease-up risk, deferred maintenance, and a shrinking, oversupplied trade area.

THE VERDICT

VERDICT: HARD PASS

I wouldn't touch this site with a ten-foot pole. Three things decided it, in order.

The rate ceiling is structural. Oversupplied trade area, flat-to-negative demand, REITs a mile away with cheaper capital and infinite patience. No operator prices their way out of that. The current manager is professional, spends heavily on marketing, and is still discounting 35% to fill units. That is the market talking. Listen to it.

The in-place yield doesn't pay you to wait. A 3.4% cap rate on real numbers doesn't cover today's debt, let alone compensate for lease-up risk, deferred maintenance, and demand risk stacked on top. First rule: protect capital. Get paid for the risk you take. This deal pays you for none of it.

Even the “right” price is a trap. Below replacement cost only matters if the market will eventually need the product. Here, supply already exceeds demand and the population is shrinking. At the seller's real number you are not buying a deal, you are buying a fairly priced struggle. A pass is the win.

THE LESSON

NEVER UNDERWRITE THE MIDDLE COLUMN

Every offering memo has three P&Ls: what happened, what the broker adjusted, and what they are dreaming. The marketed cap rate almost always comes from column two. Rebuild it yourself, your management load, your repairs number for the actual age of the asset, your tax basis, and price the deal off that.

And the field check beats the OM. One afternoon of real work, driving the trade area, knowing the competitors, pulling the facility's own website rates, told us more than twenty pages of pro forma. When the story and the street disagree, the street is right.

The Patriot Deal Room breaks down real deals we underwrite at Patriot Holdings, the ones we buy and the ones we don't. New issues publish every Tuesday.

DISCLOSURE: This content is for educational and informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security, nor investment, legal, or tax advice. The deal described has been anonymized and is not owned by Patriot Holdings or its affiliates. Figures are drawn from a third-party offering memorandum and our own underwriting, are estimates, are not audited, and are presented to illustrate analytical process rather than any actual or projected result. Past performance is not indicative of future results. All investments involve risk, including the possible loss of principal. Any private investment offering is available only to verified accredited investors pursuant to the applicable offering documents, which govern in all respects.

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