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The Self-Storage Investment Pro Forma: 7 Areas on Which to Focus for Accuracy and Appeal

If you’re looking for investors or lenders to help fund your next self-storage acquisition or development project, you’re going to need a pro forma to help convince them—and it must be realistic. The exercise of creating it will help ensure the deal is viable and attractive. For the most accurate, helpful document, focus on these seven areas.

Charlie Kao

July 14, 2023

8 Min Read
The Self-Storage Investment Pro Forma

If you want to determine the viability of a self-storage acquisition or development project and secure funding for it, it’s imperative to create a realistic pro forma that projects revenue and costs and provides other key information. In addition to convincing lenders and investors that your proposal is sound, this document will serve as a guideline for conducting due diligence and aligning all partners on the project. To produce as accurate and useful a forecast as possible, focus on the following seven areas.

1. Current Rent Roll

If you’re looking to acquire an existing self-storage facility, a recommended first step in the due-diligence process is to examine the property’s current leases and project how much value you can create just by raising rental rates. This also helps appraisers determine pricing if you’re seeking the purchase at an “as-stabilized” value. At a minimum, this portion of your pro forma should include the number of units, unit dimensions and size, current rent, and projected rates.

2. Unit Size and Square Footage

This section should summarize the information from the rent roll, showing only one line item for each self-storage unit size. Next, report monthly revenue and gross annual revenue, and show what percentage of income and total square footage each unit type represents.

3. Month-by-Month Projections

The most important and substantial portion of your self-storage pro forma will focus on annual revenue and expense projections, broken out by month. Lenders like to see a monthly summary of financial performance, especially until the site reaches stabilization. This helps them gauge the degree and length of investment risk.

Generally, your pro forma should predict facility income, expenses, net operating income (NOI) and debt service. For debt service, include the assumptions for the type of debt you expect to secure, then you can adjust accordingly based on feedback from lenders and investors.

In general, the number of years you include in this section should be equal to at least the number of years of the balloon term of the self-storage loan. You also want to show at least two years of performance at stabilization. So, if you’re obtaining a three-year balloon on a 25-year amortization, I’d suggest showing three years of revenue and expenses. However, if you anticipate that stabilization won’t occur until year three, do a five-year projection.

For each line item, include a brief explanation of how you arrived at the number, whether it came from historical financial information, a vendor quote or your own experience managing other self-storage facilities. This should reduce the number of questions your lender or investor will ask, especially if an item is outside what they believe to be an acceptable range.

Until the self-storage asset is stabilized, you must show when the property-tax bill will be paid, any variation in seasonal expenses like utilities and maintenance, and how fast lease-up will occur. At the point of stabilization, it isn’t as important to ensure each monthly projection is accurate. In fact, you can then simply take an annual projection and divide it by 12 to fill in each line item. (Obviously, at that stage, each month will look almost identical.)

A quick word on projecting expenses: Though you may not ultimately hire a third-party management company or even onsite staff for your self-storage facility, you should still enter an amount for these items in your pro forma, as your lender or investor will want to plan for that cost in the event they must take over the property.

4. Year-Over-Year Summary

This section of your self-storage pro forma should summarize each year in a separate column, going out as many years as you covered in the section above. If did a five-year projection of revenue, expenses and NOI, you’ll want five columns here.

The message you’re trying to drive home is that the asset will achieve its objectives over time. Though storage facilities often don’t look great in the first year, in this section, the lender or investor can quickly see how it’ll perform given time for lease-up or for value-add measures to take effect. This is much harder to see if they’re looking only at the month-by-month analysis.

5. Loan Breakdown and Closing Costs

When I was a commercial loan officer, I couldn’t believe how often people sought self-storage loans without any plan for the additional funds that would be required to purchase and manage the facility beyond the equity injection. In addition to getting you to close, lenders want to make sure you’re well-capitalized to make payments on the loan, especially while the property is working toward stabilization.

This area of your pro forma is meant to show that you understand the details of closing a self-storage transaction as well as the cost of doing business when the property is in lease-up. If you’re pursuing new construction, you’ll have to pay property taxes, utilities, loan interest and a few other expenses before you even make your first dollar. Your operating reserves should be enough to cover these expenses in the months before you’re profitable.

In addition, you typically need to factor in another 3% to 5% of the loan amount for closing costs and setup fees. When you clearly indicate that you’re prepared for these and have the capital to cover them, it demonstrates that you’re a responsible borrower. Here’s a breakdown of costs to include:

  • Loan-origination fee

  • Underwriting fee

  • Prepaid insurance (typically one year)

  • Appraisal

  • Environmental fee

  • Credit-verification fee

  • Third-party vendor fees

  • Title closing fee and policy

  • Recording fees

  • Call-center-setup fee

  • Software-setup fee

  • Equity injection/down payment

  • Operating reserves

Your self-storage pro forma should typically show you have three to 12 months of operating reserves, equal to the amount of expenses and debt service incurred during the period before you show profit. This often can be your largest expense after your equity injection, so approach this section with care.

6. Competitors

In this section, simply list all your target property’s self-storage competitors, including addresses, distance from your site, and unit sizes and pricing. If there are any unit sizes in the market with little to no vacancy, color code them in red to show there’s little availability in the market. It can also be helpful to enter a quick comment on the real estate class of each facility. All of this information is important, particularly if you need to reference how you substantiated your pro forma rent roll or are asked to do so.

7. Deal and Operator Summary

While this is the last section of the self-storage pro forma you’ll work on, it’s likely the first your lender or investor will examine. Once you’ve had a chance to review and address the entire scope of the deal, summarize what’s most important to consider. Include a photo of the facility or a site plan, a photo of yourself, a quick summary of the acquisition or project, and your background and ability to execute.

Ideally, this information should be concise, much like an elevator pitch. Here’s a sample based on a theoretical project:

Deal summary. XYZ Self Storage will be the first asset we’re seeking to build in ABC County, though we already own two operating facilities in the area. This property is only two miles from one of our other sites. We’re projecting to build at $50 per square foot (including cost of land), while the current market is trading at $90 per square foot. Given that we’re building 50,000 square feet, the day we’re finished with the projected nine-month buildout, we’ll have $2 million of instant equity, with additional value-add from stabilization.

Operator summary. The operators consist of May Davis and James Jones. May has a background in accounting, which will assist greatly in back-office operations, while James is a licensed builder. Though this facility will be our first new-construction project, our team is very familiar with the trades and cost to build.

The key is to explain why the bank or investor won’t lose money, why it’s a good deal, who the operators are and your ability to deliver. Remember, their primary objective is to make money, so tackle this concern first.

Present a Compelling Case

Even if you have a lot this information in another document, like a feasibility study, I recommend that you include it in your pro forma. In theory, this could be the only document your lender or investors need to see. Loan decisions can be made quicker if referencing a single, complete resource. While your loan officer may review multiple documents to substantiate your pro forma, they’ll often present their findings to a committee that’ll spend only five to 15 minutes reviewing your case. Having a thoroughly organized pro forma will allow them to quickly pitch your deal to the necessary parties.

An effective self-storage investment pro forma serves many purposes. In addition to helping you secure funding, it should function as a guideline for due diligence and get all partners on the same page. While we don’t have room in this article to go through all of the tools or calculations, the above information should help you refine your documentation and make your pro forma stand out from others. Following these guidelines will also save you significant time along the way.

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 building-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].

About the Author(s)

Charlie Kao

Principal, Twin Oaks Capital

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 building-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].  

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