We’ve written several times about the massive potential for cold storage. It’s true, there is great opportunity with this industry, but that doesn’t mean it’s a slam dunk. As with any business venture, there are potential pitfalls.
Attorney David Podein recently shared some key issues investors should consider before investing in cold storage, and we thought we would summarize them here for our audience. Expressed as a warning to investors, here are some factors that could cause the industry itself to grow slower than many are anticipating:
Unfamiliarity of Lenders
Due to the relative newness of cold storage assets, many lenders are unfamiliar with the intimate details of a cold storage property, including whether special permits or forms of insurance will be required for such a facility. Will uncommon inspections or approvals from regulators have to be factored into the equation? Many lenders don’t have standard debt service formulas and definitions that work seamlessly with a third-party logistics warehouse, and these types of hurdles can make things difficult for anyone not prepared to get out in front of these questions before they come up. At the very least, lenders may not share the enthusiasm of investors and new entrants to the cold storage market, causing deals to get done much more slowly than expected.
High Utility Costs
Utility costs are an example of an expense that can be much higher than new cold storage investors are anticipating — especially if they are unaware of the factors that can drive up costs. For instance, the jurisdiction of a facility being sold may allow for negotiation of utility rates. It’s possible that the historical costs given by the seller could be much lower than those of a new owner if the seller has taken advantage of special arrangements like these and the new owner does not. Any sudden bump in utility rates could swallow profits and cause industry expansion to slow or stall.
Permits and Compliance
Regulations can vary widely from state to state and even locally. Just because a location has been used as a cold storage facility in the past doesn’t mean that it is in compliance with existing laws and regulations. What will new occupants be using the facility for? Meat processing and storage? Frozen products? To ensure compliance, new owners must compare existing permits and licenses with current laws and regulations, as governed by the appropriate regulatory agencies. With government in many areas trending toward more regulation, rather than less, industry growth could be hampered by excessive requirements that negatively impact the cold storage industry.
Dormant Rail Access
A facility may appear to have rail access, but that doesn’t mean it is operational. If rail access is inoperative, purchasers then need to pursue arrangements with railroad operators, hammering out detailed service and assignment contracts that further increase the regulatory burden and legal costs beyond run-of-the-mill compliance issues discussed above.
As we’ve seen, the cold storage market can produce some unanticipated challenges for the most savvy market entrants and experienced commercial real estate investors. Taken as a whole, these complex factors may impede the growth of the cold storage industry — even as it attracts more and more interest.