The financial model must take into consideration the amount of square footage to be built, how many units of what size and rental rate, phasing of the project, construction costs, financing rates and terms, operating costs and, most important, how long the lease-up period will take. The lease-up period will determine how much operating capital and lease-up reserves are needed to get to the breakeven point.
Many projects are not cash-flowing today, and the owners are in financial trouble because they didn’t allow enough time and money to get the store to the breakeven point. Make sure the model your feasibility provider uses takes rent discounts into consideration and that rental rates are not inflated. The model should cover a 5- to 7-year period, month by month, so you can see the seasonality.
Here are a few things to watch out for in a feasibility study. Ask the provider how he takes the following into consideration:
- No discounts in financial pro formas
- Aggressive lease-up periods (more than 2 percent or 1,500 square feet per month)
- Poor design layouts
- Aggressive rent levels
- Small unit mix (small units get high rents per square foot, also called a banker’s mix)
- Too much climate-controlled space
- No space for snow
- Understated construction costs
The feasibility study is a great tool to help you determine the viability of your project. Interview several providers and get multiple quotes. When completed, ask to see a draft of the report before it’s published. You may catch a few items that need to be corrected or clarified. The provider would much rather make those changes for you up front rather than later.
Remember, supply and demand changes every three miles or so. There are development opportunities out there. Find those sites, get a feasibility study done, and do the American capitalist duty of filling that remaining demand!
John H. Gilliland is the CEO of the Investment Real Estate Group of companies, which provides self-storage brokerage, management, construction, consulting and feasibility studies for facilities in the mid-Atlantic and northeast United States. To reach him, call 717.779.0804; visit www.irellc.com.