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Four Financing Sources for Renovating Self-Storage

Georgia Ragsdale Comments

Fresh paint, safe and secure storage areas, attractive landscaping ... smart business owners know that both small and large capital expenditures can go a long way toward improving their self- storage facilities’ cash flow and resale value.

So the question is not if you should renovate, but how to finance the project. This article reviews the four major sources of financing available.

Construction Loans

A construction loan is the best way to finance significant improvements. If you plan to add more buildings, for example, a construction loan will provide funds underwritten to the future value of your property.

The benefits:

  • Future value. The loan amount will be based on the “as completed” value.
  • Interest reserve. The loan will be issued with an interest reserve in the loan so that payments do not need to be made during the course of construction and lease-up.
  • Due diligence. The lender will underwrite the budget and perform due diligence on your builder, including the appraiser’s opinion on the future value of your facility.

The drawbacks:

  • Fees. The fees and interest reserve will increase the loan amount.
  • Paperwork. The construction loan process is a time-consuming and document intensive one with many moving parts.
  • Time. Consider this loan process may take 60 days or longer to close.

Construction-Loan Case Study: A new owner acquired a self storage property with 10,000 net rentable square feet for $1.3 million. The site had land to build another 50,000 square feet. The construction costs were $2.1 million against a future value of $7.2 million. The bank loan covered 85 percent of the total cost of the project and carried a three-year interest reserve during the build and lease-up phase.

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