By Marc Goodin
While many self-storage developers and owners believe construction budgeting is a science, anyone who’s been through the process knows it’s actually a cross between science and art. Even how and when you request an estimate from a contractor can have a significant outcome on a project’s final cost. Preliminary budgets can easily be directed higher or lower on a quick change to the price per square foot.
For self-storage, we typically refine multiple budgets long before we have our final construction budget. If you’re planning a new facility, I recommend sketching out a simple concept budget before you even search for land. This takes about 15 minutes and is outlined below. It helps you understand the basics of what goes into the development of a project and the money required to build it. It’ll also let you know if you should be seeking land for a single-story or multi-story facility and how much you can afford to pay for it.
Once you have your concept budget, you can update it using site specifics and typical per-unit costs to create your preliminary construction budget. These revised numbers are then plugged into your business plan, which includes typical operational expenses and local rental rates, to confirm the project is feasible.
Lastly, once you have a detailed site plan and the building design, you need to develop a final construction budget based on actual bids for your bank loan—again, to confirm the project’s feasibility.
Self-storage budgets can and do change quickly depending on your experience, the land cost and features, the economy, and where you plan to build. The following figures are for illustration purposes only. You’ll want to engage an industry expert to assist as you refine these numbers for your actual project.
By way of example, let’s create a concept budget for a 50,000-square-foot self-storage facility for which no land has yet been purchased. The typical land requirement will be 4 to 5 acres for a single-story facility and 2-plus acres for multi-story. Construction costs will run approximately $40 per square foot for single-story and $70 to $80 per square foot for multi-story.
When owners project a lower cost per square foot, they’re often assuming everything is perfect, which is rarely the case, or they fail to include soft costs such as banking and professional fees, design costs, and a franchise fee (if there is one). Also note that unusual construction requirements such as ledge, significant cuts or fills, retaining walls, special zoning requirements, off-site improvements, etc., aren’t included here and can significantly increase costs.
As you can see, multi-story facilities cost more and can’t be phased, so they require significantly more capitol and initial equity. This is why they’re typically built by more seasoned developers. Many multi-story sites will even have higher price tags to offset the land cost per unit and generate a better return.
A word of caution: Never use a parcel of land simply because you own it or the price is low. It must have significant drive-by traffic, and the area must have an unmet demand for self-storage. With the help of a good commercial real estate broker, you can quickly determine the land cost in various markets to help you update the concept budget and determine your options moving forward.
Now, based on your liquid assets, you can start to determine the best opportunities for your needs and investigate land, design, and regulatory and banking requirements in more detail. At this point, you’re either ready to charge ahead or realize you don’t have the necessary capital.
If you don’t have the capital, don’t give up. Finding a more aggressive lender or a partner with either the land or cash equity may be a great option. Working with an experienced development expert can also help to reduce the construction cost. You can look at building a smaller facility, but smaller sites tend to be significantly less profitable and more of a hobby than a business.
Preliminary Construction Budget
For our preliminary construction budget, let’s assume you’ve found a land parcel that meets your requirements. You can now update your concept budget based on your specific land cost, proposed square footage, and initial conversations with lenders, designers, contractors and other experts. The better the concept and the more detailed the investigation, the better the estimate will be. A good conceptual plan must take into consideration the land quality and topography as well as local planning and zoning requirements.
Now, with your preliminary budget in hand, you can once again look at the overall feasibility of the project, including specific design options or restrictions. Until you establish your own rental rates and operating costs, you can apply standard rates being used in the target market.
Final Construction Budget
The final construction budget is critical, as it’s used for financing. If it’s wrong, it can cause significant cash shortfall in the short and long term. In my experience, actual costs are typically higher than the final construction budget for three reasons:
- Poor or incomplete design plans and a lack of detailed specifications
- Failure to consider all the soft costs
- Unexpected land conditions below the ground surface
Let’s look at these in more detail, starting with design plans and specifications. You’re building a multi-million-dollar business, and scrimping on the planning and design phase is dangerous to your success. Typically, you want to get two or three construction bids. This helps ensure you’re getting good pricing. If there are large differences between bids, dig deeper to find out why.
Plans should never be a substitute for good, written specifications and a bid package. A construction bid should summarize and detail the work to be completed and is often 30 to 40 pages long. It will address payment schedule, delays, additional work, unit cost for unknowns, and a host of other things in addition to the actual building. Following is a very brief outline of categories to be detailed in the construction-bid specifications.
One of the most critical is “general conditions/miscellaneous,” which represents requirements for all other sections as well as any items that don’t have a dedicated place of their own. Don’t assume anything—have the contractor put it all in writing here.
This section is where you should include a note that no extras can be started or will be paid if they aren’t approved in advance and in writing by the owner. Also include the payment schedule. For example, you might state that payment will be made within 45 days after receiving an invoice for completed work. You might also stipulate that 15 percent will be held back from each payment and paid within 30 days after the final Certificate of Occupancy is received. Additional items to cover under this category are construction-permits fee, temporary power, trash, survey stakeout, inspections, testing, insurance, material and workmanship guarantees, contractors as-built, and any items that aren’t included in the price.
Once you’ve addressed the general conditions, here are some other primary categories to include in the construction bid:
- Erosion control: Including silt fence, construction entrance, inspections, sedimentation traps, etc.
- Site work: Including mass-earth work, rough grading, final grading, sub-base and base materials, compaction, quantities, depths, etc.
- Paving: Including two courses, thickness, type of paving material, etc.
- Drainage: Including piping, catch basins, stormwater-detention basin, end-of-job cleaning, etc.
- Landscaping: Including topsoil, lawn establishment, landscape plantings, watering, sprinkler system (if required), etc.
- Utilities: Including water, sanitary sewer, gas, propane, cable, Internet, electric, etc.
- Concrete foundation: Including full foundation vs. floating slab details and requirements, how the foundation will be formed and finished, concrete strength, saw cuts, curing spray, minimum thickness, rebar, testing, etc.
- Building materials: Including insulation, HVAC for climate control, site-specific siding materials, warranties, roof painting, etc.
- Building erection: Including unloading, site-preparation requirement prior to construction, ownership of scrap, leftover materials, start and finish dates, etc.
- Office buildout: Including special exterior features such split block, doors, windows, flooring, ceiling, HVAC, electrical, plumbing, bathroom and fixtures, trim and finishes, carpentry, desks and cabinets, wall product displays, utility room, etc.
- Lighting: Including site and building lighting, fixture types, wattage, light timers, etc.
- Security: Including camera location and types, screens, recording equipment, door security, fencing, access-control gates, software, etc.
- Site signage: Including property and building signage, front-door signage, office signage, lighted signs, etc.
A 15 percent contingency fee should be added to the contractor’s bottom line. Again, the more detailed the construction plans, specifications and bid, the less likely that you’ll have extras and overruns.
The second reason for overruns is failure to consider all the soft costs. To get a complete project total, you must include everything required to get the doors open. Here’s a typical list of soft costs to include in the final construction budget:
The third reason for cost overruns is unexpected land conditions below the ground surface. Poor soils, high ground water or clay material can have an impact on design and construction. For a single-story building, your civil engineer can coordinate a series of backhoe soil test pits to observe and report on subsurface conditions including ledge, water and soil types. This information will help the designer do a better job and the contractor to provide more accurate pricing. For multi-story facilities, borings are typically required.
Whatever budget phase you’re in—concept, preliminary or final—a good self-storage consultant can help. Not only can he save you money (often several times what you’ll pay for his fee), he can help shorten development and construction time and ensure the product meets your needs and those of your end users. Engage the right professionals to assist in your project, and your budgeting will be easier and more accurate.
Marc Goodin is president of Storage Authority Franchising and the owner of three self-storage facilities that he personally designed, built and manages. He’s been helping others in the industry for more than 25 years. To reach him, call 860.830.6764 or e-mail [email protected]. You can also purchase his books on facility development and marketing in the Inside Self-Storage Store.