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The Preliminary Budget: Plugging in Rough Numbers for Your Next Self-Storage Development Project

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Setting a budget for a new self-storage project is a complex process. Before committing to a land purchase, learn how to create a preliminary financial plan that’ll help you arrive at a rough estimate for your build and make smart decisions.

If you’ve decided to build a new self-storage project, creating a construction budget is going to be one of your first tasks, and it’ll be all-consuming. Many owners and developers end up with a classic chicken-and-egg problem: You want to know if a project is worthwhile before investing in design work; but you need to invest in design work before your vendors and contractors can give you a solid price for their work.

In the earliest planning stages, you just need a rough financial plan to guide your decision-making. Basically, you’re trying to determine whether you’re willing to invest further. It begins with a vision of what you want to build. As yourself the following:

  • Who are my target self-storage customers? Are they home residents? Businesses? Boat/RV owners? Wine enthusiasts? What kinds of storage do they need? Understanding this will help you determine the types of buildings to construct. For example, will the facility be single- or multi-story? Will it offer drive-up or climate-controlled units? What unit sizes will it contain?
  • What are my priorities for cash flow? If you’re well-established, you may opt to build a larger initial phase. It’ll take longer to break even, but starting bigger can lower your cost per square foot (PSF) and reduce the number of times you need to hassle with planning-board approval, permits, loans, etc. If you’re a new developer, this may not be an option, as you may need to reach a positive cash flow as quickly as possible.
  • How will the property be managed? This will impact design and, hence, cost. For example, if the site will be unmanned (no onsite staff), you’ll likely need to install a self-service kiosk and perhaps more advanced security. If you expect to have staff, you’ll need an office.

Estimating Construction Costs

With these items in mind, you’re ready to dig in and start creating your loose self-storage construction budget. Your goal will be to develop ballpark figures for costs PSF. Many new owners and developers don’t fully appreciate the amount of time a contractor spends preparing a formal quote. If you call and ask for a proposal but can’t present some kind a project plan, you’ll be disappointed.

In this initial budgeting mode, you’re looking for simple numbers. Your line items should include, beginning with the costliest:

  • Land
  • Grading
  • Buildings
  • Concrete foundations
  • Driveways
  • Access control
  • Electric/lighting
  • Civil engineering
  • Landscaping
  • Signage
  • Permits
  • Bollards

Additional items to consider adding are fire hydrants or sprinklers, office finishes, extensive grading, and architectural features.

In my experience, a single-story, drive-up property will cost around $40 to $45 PSF, plus land, to develop. A climate-controlled property will be around $60 to $70 PSF, not including the land. Keep in mind these numbers are with the owner serving as the general contractor. Add 15 percent if you need to hire one. You’ll also want to plan for bank fees, a contingency of about 10 percent, and startup cash to pay your mortgage during self-storage lease-up.

Projecting Revenue

The next component of your financial forecast is a revenue projection. If you don’t already own land, don’t get bogged down in the details. In rough budgeting, think in terms of cost and revenue per PSF. You can determine the latter by checking the rental rates of nearby self-storage properties. I’ve found that averaging the cost of a 10-by-10 and 10-by-15 gives you a good income number to use in your calculations. To be more conservative, use larger units for your estimates, as they’ll have lower PSF income.

Your next task is to determine what percentage of your lot will be buildable. For traditional drive-up buildings, about 30 to 35 percent of the lot will become rentable space. With wider, climate-controlled buildings, you may achieve 45 percent to 50 percent coverage. The rest will be greenspace and driveways. Multiply the monthly revenue PSF times the rentable square feet to come up with potential revenue.

Predicting Monthly Expenses

Armed with construction costs and potential revenue, you’ll next need to estimate monthly expenses. Your mortgage is normally your largest, so look at your construction cost minus your down payment and use a loan calculator to estimate your monthly bank payment. Just bear in mind that lenders will be hesitant to quote you an interest rate without knowing more about you and the details of your project. You may have better luck getting them to disclose a range on a phone call than in a written communication method like email.

Your remaining expenses to consider are, beginning with the largest:

  • Property taxes
  • Payroll (if applicable)
  • Credit card processing fees
  • Utilities
  • Business insurance
  • Landscaping and snow removal
  • Marketing

Kiosk service fees and software subscriptions should also be considered, if applicable.

Your monthly expenses for a finished self-storage site shouldn’t be more than 70 percent of income. If they are, your costs are too high, rental rates too low, or you need to fit more units on the property. In the initial phase of a project, the breakeven may be higher, and that’s normal if the long-range completed forecast provides attractive results.

Moving to the Next Step

If this preliminary analysis shows your proposed project to be a dud, you can pass on the opportunity without investing in design work. This budgeting method can also help you identify the maximum you can pay for a parcel and still make money.

Hopefully, the results show an attractive investment. If so, your next step is to get the property under contract, and then start working with your civil engineer on detailed site planning. This is also the point at which you should consider hiring a feasibility consultant. Having a third party weigh in on your project can help you avoid costly mistakes, and may even be required by your lender.

At this point, you’re also ready to begin collaborating with your trades on design and detailed proposals. As you work through the process, your goal is to replace each ballpark line item on your budget with a detailed proposal from vendors. When you’re ready to close on your loan, your bank will require this documentation.

Focus on the Final Details

I’m going to wrap this up with a word of caution regarding the final project budgeting and financing. The raw materials used in construction can fluctuate in cost, sometimes quickly. You don’t want to get quotes, obtain financing based on them, and then find out five months later when you try to order materials that they’re no longer valid.

The solution is to confirm immediately before closing that all quotes are legitimate, and then update your budget. Make sure your vendor contracts allow for delivery within a realistic timeframe. Discuss this in depth with your providers to ensure the contract pricing includes timely delivery of materials to the job site. If you can, build in a healthy contingency. Once financing is in place, execute all contracts for materials and labor.

Finally, there are online tools that can help you create a financial projection for a self-storage project, including this one provided by my company. Our tool allows you to punch in the variables discussed above and will use your figures to produce a breakeven projection and two-year cash flow. Your cash-flow projection is important, especially if you’re using a Small Business Administration loan program, which requires your project to break even in two years or less.

Despite all the craziness in our world today, it’s a great time to build self-storage. Interest rates are low, and demand remains high. Good luck with your project!

Steve Hajewski is the marketing manager at Trachte Building Systems, which designs, manufactures and erects a full line of pre-engineered and customized steel self-storage systems, including single- and multi-story, portable storage, interior partition and corridor, and canopy boat/RV. He also owns a self-storage facility in Wisconsin and is a frequent contributor on Self-Storage Talk, the industry's largest online community. For more information, call 800.356.5824.

TAGS: Construction
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