ISS BLOG - Building or Expanding a Self-Storage Facility: My Take on Permanent vs. Portable Buildings

The debate between ground-up construction and portable buildings has been ongoing in the self-storage industry for more than a decade. There are pros and cons to each. When developing a new facility or expanding an existing one, the important thing is to understand the attributes of each product and how it might suit your needs.

Below, I’ll discuss the various factors to consider. Be mindful that each person’s financial profile, including taxable income and other characteristics, can often be the deciding factor between one approach and the other.

Income Tax

While bonus deprecation is set to decrease in subsequent years for qualifying property, you can typically write off upward of 20% of eligible costs when building self-storage from the ground up. Conversely, Section 179 of the internal revenue code allows you to write off the entire price of qualifying equipment in the same year of purchase. So, if you’re looking for write-offs on an existing, profitable facility, relocatable units can provide the most significant tax savings.

Real Estate Tax

Because portable self-storage units are moveable, they can’t be taxed as real estate, which can shorten the permitting and zoning process. However, they can be taxed as personal property. Also, a city can change its ordinance regarding portable structures any time it likes, and you might have to remove them.

I once talked to a self-storage owner about buying a facility that was comprised entirely of relocatable units. I called the municipality to ask whether there might be any issues in the future, as the site was zoned residential. Not long after, the owner received a notice stating that he had to remove the units, which was disastrous.

Cost

If your site is already level, or it’s difficult to access with heavy equipment, or you’re only looking to install a small number of self-storage units, portables can be significantly less costly, especially when considering the speed to put them into service. However, I’ve found that they’re more expensive to install in quantity than ground-up structures. That said, as hold costs and interest rates continue to rise, it’ll affect the cost of building from the ground up.

Financing

Because temporary buildings are treated as equipment, you can’t typically pay for them with commercial financing. Your money options will often be limited and more costly, which can reduce cash-on-cash return. Generally, loans on personal property have a much higher interest rate and shorter amortization. This is an opportunity cost you should weigh when determining your long-term cash flow.

Appreciation vs. Depreciation

I liken this to mobile vs. single-family homes. Mobile homes are prefabricated, but just like relocatable storage units, they tend to depreciate, while fixed buildings increase in value. Because the exit can be just as lucrative as the income, fixed buildings have a significant advantage. This dynamic also affects appraisals, which can influence your options when refinancing or a buyer’s when seeking a loan.

Flexibility

The ability to move portable-storage units and change your facility layout makes you agile enough to quickly respond to customer demand. You can also get rid of these units altogether, if and when the situation calls for it. I’ve seen owners install relocatables and later sell them because they wanted more room for outdoor parking or decided to construct permanent buildings in their place.

I know of one owner who used portable units to fill a consumer need quickly while he was building his ground-up structures. Once the permanent facility was ready, he offered his portable tenants an incentive to move into the new units. This was a great way to monetize the land and accommodate customers who needed storage right away.

Options

While more portable-storage options are becoming available, these units offer fewer choices for size, height and climate control than ground-up self-storage. If you’re looking to build multi-story or climate-controlled units, new development is really your only option.

Longevity

In my experience, ground-up self-storage buildings generally hold up better over time. My biggest issue with portable units is the floors often rot or become damaged because they’re generally made of some type of engineered wood. Also, because relocatables are prefabricated, the floor is typically elevated, which means animals can burrow under them, the lip at the entrance gets banged up by tenant use, and there are a few other issues. That said, these problems are often fairly easy to remediate.

Time Will Tell

I have my preferences, but I can’t say I would always choose ground-up self-storage construction for all scenarios. As the industry evolves and more portable-storage options become available, it’ll be interesting to see how things change. There are many new types of portable products on the market, from mobile pods to contractor suites to temporary apartments, and consumer needs may inspire more. When it comes to developing your own project, consider the above factors and your unique situation before choosing a direction.

Charlie Kao is the principal of Twin Oaks Capital, a Michigan-based commercial real estate company specializing in self-storage and multi-family assets. Services include real estate brokerage, asset management, feasibility studies, consulting and construction management. The company and its affiliates have owned, operated or planned more than 1 million square feet of self-storage. Charlie also owns House of Kaos Real Estate School, which provides continuing education credits for licensed realtors. He can be reached at [email protected].