All projects need a thorough business plan to entice the lender to provide financing. The self-storage industry, however, has one unique difference that may impede obtaining financing. Some financial institutions shy away from lending on a single-purpose facility, such as self-storage, due to limitations on the property use and obvious limitations to financial recovery if the entrepreneur fails.
In this article, we’ll examine the requirements of a good business plan, and the steps you’ll need to obtain financing for a self-storage facility.
Lenders expect a financing request package to have all information presented in a well-developed manner. A resume of the principals should include their business experience, net worth statements and past profit on other projects. This should also show their ability to provide an investment of 30 percent to 35 percent of the project cost. The entrepreneur needs to provide the project-cost projections and any licensing and permit requirements. Expect to show financial projections, a balance sheet, a projected profit-and-loss statement and a projected cash-flow forecast.
The plan should also have a list of professionals who will assist in the project including the architectural and engineering firms, accountants and general contractor. The final plan should show:
- Physical construction costs
- Fees and permits (sewer, water hook-up impost fees, building permits, etc.)
- Architect, legal and appraisal fees
- Interest and brokerage fees
- Contingency fees
- Construction contract and terms
- Flow charts for construction timeline and cash-flow statements
- Offers to purchase the property
- An income and expense statement detailing anticipated project activity and lease-up
- Phase One environmental reports, project feasibility studies and absorption analysis
- Recent appraisal
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.