Real Estate, Specialty & Niche

How to Underwrite a Cold Storage Facility

Underwrite cold storage by evaluating both the specialized building and the income model. Inspect refrigeration systems, insulated panels and power capacity, then analyze tenant or operator credit, utility costs and throughput or storage revenue. Key metrics are tenant credit or operator EBITDA, energy cost, refrigeration system life, lease term and DSCR.

What makes cold storage underwriting different

Cold storage facilities are refrigerated or frozen warehouses that store food, pharmaceuticals and other temperature-sensitive goods. They require insulated panels, specialized refrigeration systems, heavy power and freezer-grade floors, making them expensive to build and difficult to convert. Some are leased to single tenants on long NNN leases, while others are operated by third-party logistics firms that earn storage and handling fees from many customers. Value comes from high barriers to entry and essential demand. Risk comes from equipment failure, energy costs, ammonia safety regulation and the specialized nature of the building.

Lenders underwrite single-tenant leased facilities like specialized industrial, focusing on tenant credit, lease term and the cost of re-leasing a building few users can occupy. Operating facilities run by third-party logistics firms are underwritten more like businesses, using EBITDA, contract terms, customer concentration and energy pass-through provisions. Equity investors focus on scarcity, rent premiums over dry warehouses, replacement cost and the value of automation. They also weigh energy efficiency upgrades and refrigeration system life, since a major replacement can consume years of cash flow. Location near food production, ports and grocery distribution networks drives long-term demand.

Key metrics

Tenant Credit or Operator EBITDA

Determines the reliability of income depending on lease or operating model.

Energy Cost

Power is a major expense for operating facilities and affects margins.

Refrigeration System Remaining Life

Replacing refrigeration systems is costly and disruptive.

Lease Term

Long leases reduce re-leasing risk for specialized buildings.

Lenders typically prefer leases extending past loan maturity.

DSCR

Confirms debt service coverage.

Lenders commonly look for 1.25x or higher, often more for operating facilities.

Customer Concentration

Operating facilities may depend on a few large customers.

How to underwrite it, step by step

Determine whether the facility is leased or operated and identify income sources.
Inspect refrigeration systems, insulated panels, floors and power capacity.
Analyze tenant credit or operator financials and customer concentration.
Review energy contracts and historical utility costs.
Confirm ammonia or refrigerant safety compliance and permits.
Assess location relative to food producers, ports and distribution networks.
Size debt on NOI or EBITDA and stress energy costs.
Set reserves for refrigeration replacement.

Due diligence checklist

Leases or customer storage agreements
Tenant or operator financial statements
Customer revenue reports
Energy bills and contracts
Refrigeration system inspection report
Process safety management documentation
Building specifications
Property condition report
Phase I environmental site assessment
Insurance including spoilage
Market study
Appraisal

Key risks and mitigants

Refrigeration or power failure spoils customer inventory and creates liability.

Inspect compressors, condensers and controls, require backup power, preventive maintenance contracts and spoilage insurance.

Energy costs rise faster than rent or storage fees.

Review utility contracts and pass-through clauses, stress power costs and credit efficiency upgrades only when funded.

Specialized building has a narrow pool of replacement tenants.

Underwrite long re-leasing downtime, lower leverage and require lease term well beyond loan maturity.

Ammonia refrigerant safety violations or a release event.

Review process safety management documentation, inspection history and permits before closing.

A few food or grocery customers account for most throughput revenue.

Analyze contract terms, renewal history and customer credit, and haircut revenue from short-term contracts.

Floor heave or panel damage from long-term freezer operation.

Have engineers inspect subfloor heating, slab and insulated panels and reserve for repairs.

Typical financing and deal structure

Cold storage is financed with bank loans, CMBS, life company loans and debt funds, with terms depending on whether the facility is leased or operated. Single-tenant leased facilities with strong food or grocery tenants on long NNN leases can access favorable terms similar to specialized industrial. Operating cold storage businesses are often financed at the company level with leveraged loans, asset-based facilities or sale-leasebacks of the real estate. Development and expansion use construction loans with substantial sponsor equity, often from institutional investors. Covenants commonly include refrigeration equipment reserves, minimum DSCR, insurance covering spoilage and business interruption, and compliance with process safety rules for ammonia systems.

Red flags

Refrigeration system near end of life without replacement plan.
High energy costs without pass-through.
Ammonia compliance violations.
Single customer accounts for most revenue.
Location far from food supply chain hubs.

Frequently asked questions

Why is cold storage expensive to build?

Cold storage requires insulated panels, refrigeration systems, heavy power infrastructure and specialized floors to prevent frost heave. These features cost much more than a standard warehouse. High construction costs create barriers to entry, supporting value for existing facilities. Construction and commissioning also take longer than for a dry warehouse.

How do lenders underwrite cold storage?

Lenders evaluate the building's condition, refrigeration systems and tenant or operator credit. Leased facilities are underwritten on lease term and tenant strength, while operating facilities are underwritten on EBITDA and customer diversification. Lenders often require equipment reserves and conservative leverage. Energy pass-through provisions in customer contracts are reviewed closely.

What is the biggest risk in cold storage?

Key risks include refrigeration failure, energy cost increases and the specialized nature of the building, which limits alternative uses. Operating facilities also face customer concentration risk. Underwriters inspect equipment and stress energy costs to manage these risks. Lenders also look at insurance coverage for product spoilage and business interruption.

Is cold storage a good investment?

Cold storage can offer stable demand from food and pharmaceutical supply chains and high barriers to entry because of construction cost and specialized systems. However, it requires operating expertise, careful energy management and capital for refrigeration replacement. Returns depend on location, tenant or customer quality, lease or contract terms and operating efficiency, so underwriting should be asset-specific.

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Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.