Types of Financing
Once a complete and thorough business plan is formulated, you will require a commercial financial consultant who is familiar with self-storage. The consultant should also be knowledgeable in the financial institute’s lending preferences and restrictions. This advisor will assist in acquiring financing for the purchase of the raw land, project construction (interim financing) and the take-out or final fixed mortgage. (Note: A take-out mortgage with an amortization of less than 20 years is not recommended as it adversely affects cash flow.)
Raw land. The first element is purchasing the raw land or property. This is also the research period where a feasibility study is conducted and local demographics are reviewed to ensure the area will support this development.
Financing usually requires a down payment of 30 percent to 40 percent. Sometimes, the seller of the property provides financing until the building process starts. This is called a Vendor Take-Back Mortgage and usually has a term of one or two years.
Project construction. Cost estimates based on the size of the structure determine the construction loan. Documentation includes building permits, drawings, and Environmental Phase One or Two site assessments. An engineer can ensure the structure passes municipal guidelines and the construction costs are realistic.
The construction loan usually pays out the vendor take-back mortgage and provides funding for hard and soft costs to a maximum of 75 percent. This is the time the owners contribute their investment, and the funds are the first paid out. With proper preparation, your loan/mortgage should take a lender about two weeks to provide the project with a letter of interest.
The balance of the construction costs are staged, usually in three draws with a 10 percent hold back, to ensure the Construction Lien Act will not affect the project with all the sub-trades. Appraisal is usually started within this phase to verify the value of the land and building on completion. The appraiser or engineer will also verify when a draw on financing is due.
Fixed mortgage financing. The third element is the mortgage financing to pay the construction loans and places the repayment structure in line with the project’s cash flow. A line of credit will help maintain the operating expenses and mortgage payments. The line of credit is usually over a two- to three-year period or while the occupancy is below 85 percent of capacity.
To ultimately make the project appealing to financiers, you will need a realtor who understands the unique requirements of self-storage. Most important, you need to give your lender the vision to see your self-storage project as a financial success.
Dan Cardinal is the vice president of commercial lending for the Ontario office of Asset Capital Mortgage Corp., an Alberta-based company. Cardinal has more than 35 years experience in commercial financing as a banker and mortgage broker. For information, call 866.992.7738; visit www.assetcapitalmortgage.com.