Ingredient 3: Profitability
You can have the best site in the world, in an undersupplied market, but it won’t matter if the returns are not comfortable. Once you’ve learned the market, you need to translate it into expected investment and returns.
Your feasibility analysis should include a financial model with specific assumptions. For example, an increased marketing budget—to perhaps mitigate a marginal site location—will be reflected in the pro-forma. A recommended unit mix and pricing strategy, based on market demands, drives potential revenue. The financial model should also include an approximation of input costs, capital requirements, unit absorption over time, debt load, operating costs and overall returns. This model should be detailed enough for investors, bankers and, of course, you.
The financial portion of your feasibility study should tie everything together by answering these questions:
- How long will it take for my project to lease up?
- How much reserve is required for interest and operating expenses?
- When will the project break even?
- When will my occupancy stabilize?
- How much should I budget for operating costs?
The Final Dish: Recommendations
Once all of the questions are answered, it’s time to determine if the project is a winner or a loser. Your feasibility study should make clear recommendations on proceeding with development:
- Recommended square footage
- Phased development
- Unit mix (sizes and climate/non-climate ratios)
- Pricing strategy
- Marketing plan
- Features and benefits
The long-term health of your project depends on effective planning during pre-development. A good feasibility study will give you the tools you need for attracting investors and bankers; plus, it will give you objective assurance that your project will bring an acceptable return.
Building a better project begins with a good feasibility study—the recipe for success.
Benjamin Burkhart is owner of BKB Properties LLC and StorageStudy.com. As a consultant to the self-storage industry, he specializes in feasibility studies, acquisition due diligence and loan-package preparation. He can be reached at 804.598.8742; e-mail firstname.lastname@example.org.