So, you’ve decided to build a self-storage facility. Congratulations! Years from now, you and your family are likely to look back on this decision with satisfaction and joy. It’s life-changing—mostly in a good way.
Developing a storage project can also be taxing. Where do you even start? There are many tasks you’ll need to go complete on your journey. Each step is complex, so it’s important you understand them before you jump in and get started.
What Am I Getting Into?
Developing self-storage is a roller-coaster of emotions. There’s a great feeling of satisfaction as you see the facility fill up and create cash flow; but that comes after many sleepless nights and mountains of stress. For example, if you’re a new owner/developer without other large assets, you might need to pledge your home as collateral.
If you haven’t ever developed a commercial property, you might be surprised by how much it costs and how much comes out of your pocket prior to setting up a loan. Unknowns that can run up your budget include wetlands, zoning changes, stormwater planning, architectural boards and fire codes. To gain the approvals you’ll need before financing is available, you’ll likely need to invest $10,000 to $50,000 in civil engineering, permit and review fees. You might also need to hire architects. The more complicated the project, the costlier it’ll be.
Choosing a Location
Deciding where to build is one of your first and most important decisions. You need a market that’s underserved. You’re looking for a well-populated or growing area with a need for more storage. In a nutshell, analyze demand by comparing the population to the number of square feet of existing storage in the area. Also, look for a site that’s properly zoned in a highly visible area, as close as possible to dense residential development.
Consider multiple parcels, and don’t be surprised if your deal falls apart or zoning prevents the project from moving forward. When you find an area where you think there’s unmet need, there’s often a reason. It could be the city won’t allow storage or the rental rates won’t support a new facility. Keep looking until you find the perfect site.
Creating a 'Ballpark’ Projection
You’re doing this to make money, so before you invest in a location, you’ll need to work up a financial forecast. However, you can’t expect your suppliers to give you solid prices without a plan. And working up a plan requires a significant investment in engineering services.
This is where ballpark estimating comes in. Research some typical costs and rental rates to formulate cost and revenue per square foot. A conversation with a local civil engineer might help you understand what your grading and land preparation will entail as well as approximate costs. Your building supplier can give you ballpark numbers on various structure types.
By now you should also be in discussions with the city engineer or zoning officials to ensure the land is correctly zoned and determine whether there are any restrictions or requirements. Some areas will require a conditional-use permit, or there could be architectural standards for new projects.
It’s also time to call a few lenders and determine what interest rate you can expect to pay. You likely won’t get anything in writing since you don’t have a plan, but you should be able to get a range. This initial conversation with your banker is probably best had by phone, not e-mail, as he may be more reluctant to put tentative items in writing. This is also true of your initial contacts with city officials and your civil engineer. You’re going to get a lot more out of an in-person or phone conversation than a documented e-mail.
Armed with all this data, you can begin to determine the maximum you can pay for your land and still make an acceptable return.
Make an Offer
Before investing time and money in design work, get that property under contract! Negotiate the longest possible time to line up permits and financing before you close the deal. Owning the land means you’re paying interest and property taxes, so you may want to offer a higher purchase price or non-refundable deposit to delay closing. The offer should include contingencies that allow you to back out if you can’t get reasonable financing or approvals to build.
Fill in the Details
You can’t get lending based on your rough plan, nor can you get solid quotes. You’ll need a local civil engineer to design a stormwater plan, which usually includes a pond. Your building manufacturer will work with you to design a layout and that best uses the land. You’ll then work up the exact unit mix and design. Once you have site plans in place, you can request detailed quotes from your suppliers and add detail to your revenue projections.
Assuming you’re staying on track for your project to be financially viable, you’re ready to apply for permits. In most cases, the building manufacturer will provide the permit set you’ll need. Complex projects may also include an architect.
Keep detailed records on all the money you spend on permits and engineering. It should count as equity in the project in the eyes of the lender.
Line Up Financing
Lenders will base their decisions on the five Cs: character, cash flow, capital, collateral and conditions. The exact requirements will differ based on lender and programs, but they’ll need to see a detailed construction budget, exact unit mix and a cash-flow projection. If you have a collateral shortfall, a lien may be placed on your home or other property. (They’ll typically discount the assets by 20 percent, which is common on high loan-to-value projects.)
Remember, pricing for your subcontractors can be volatile, especially when steel prices are fluctuating, so make sure your quotes are current when you close the loan. Lenders may also need to see building permits and proof of zoning before closing.
New owners/developers with limited resources might want to take advantage of Small Business Administration programs, which allow up to a 25-year term and finance up to 90 percent of the project value. Typical interest rates are 1 percent to 2 percent above prime and are adjustable. Expect an interest-only period during construction. Lenders may also offer variable rate during construction with three- to five-year fixed rates upon completion.
Purchase the Land
I’ve done projects where I financed the land and others where I owned the land prior to financing. When feasible, buying the land for cash makes the transaction much easier, and the land will count as equity when arranging the loan. The other advantage of buying the land outside of the loan is the interest-only portion won’t start until you pay for expenses from the loan. Typically, this would be a building deposit or site grading.
With land, financing, permits and approved plans, you’re now ready to build. Anxiety will remain high as you’ll inevitably wish the project is completed faster. After all, your interest-only loan will balloon quickly as you make payments to contractors.
You can’t do much about weather interruptions, but you can do your best to make sure materials show up in a timely fashion. You don’t want them to arrive too late, or there will be delays. You also don’t want them to arrive too early, or they could be damaged or stolen while at the job site. You can also make sure you’re listening to contractor issues and feedback to ensure everyone is working efficiently.
When construction is done and the Certificate of Occupancy has been issued, you’ll switch to rent-up mode. It’ll get better with each week until you break even. Before you know it, you’ll be thinking about your next project or expansion. You’ll likely start right around the time you forgot how much work that first one was. Good luck!
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; visit www.trachte.com.