Many self-storage businesses are small, family-owned companies; and for a lot of facility owners, their first self-storage project is also their first commercial construction project. For this reason, they may be unfamiliar with many stages of the process.
When building a storage facility, budgeting is one of the first critical steps. You want to create a realistic financial plan. Budget too low, and you may jump into an unprofitable investment. Budget too high, and you may pass up a good opportunity. The following will help you find balance and create the ideal budget for your next self-storage project.
Size, Phasing and Estimates
Before you begin budgeting, you need to determine the size facility you expect to build and if there’s any potential for future expansion. Your first phase may have a higher breakeven point than the overall project if you’re preparing a large site for additional buildings. In the long run, this is wise; but in the short term, it can be challenging. Working up a budget and financial projection for the initial phase as well as the complete buildout will give you a better picture of the overall risk and reward.
Early in the development process, when you’re looking at multiple parcels and considering which to purchase, you should be thinking in terms of cost per square foot. If you expect a contractor to provide you with a detailed quote for multiple projects, you may be in for a rude awakening. Creating a detailed bid takes time, and it's unreasonable to expect an already overwhelmed contractor to spend too much time on pricing for multiple variations of your project.
Instead, research the costs for building, electrical installation, foundations and paving, and assign a cost per square foot for each trade. Then you can build up your estimates for multiple locations. This saves time and allows you to focus on the two main variables when comparing possible new sites: land cost and rental rates.
Budget Line Items
Your budget is going to contain a few large items and many small ones. Major items include the land, driveways, foundations, grading (including storm-water handling) and steel buildings. Smaller items that add up include bollards, electrical, fencing, gates, landscaping, signs and video cameras. Additional line items are your professional services and fees: interest, start-up cash, engineering and legal fees, and permits. If your facility will have an office, plumbing, or architectural finishes on the buildings, you’ll need to add materials and labor for those items as well.
Don’t assume all utilities will be available at your site. If you’re building on the edge of town and require high-speed Internet, check to see if your local provider will require an upfront fee to connect you. On my own storage project, the city’s only wired Internet provider requested $40,000 to connect us (I declined!).
A final budget category that can’t be overlooked is interest expense and operating cash. As your project nears completion, you’ll breathe a sigh of relief. Don’t get too comfortable—the feeling is only temporary.
Even when all goes well, the rent-up period can be a great source of anxiety, especially for a first-time developer. Despite best intentions, keeping a project on schedule is a major feat, especially for an owner who’s also serving as his own general contractor. You think you’ll open in June and rent up during the busy summer season? If you can, great! But you might have to open a few months later and withstand a slow winter. Have a financial plan to withstand delays.
In forecasting cash flow, consider your property taxes. Within 12 months of opening, your first tax bill will arrive—and it can be a shock. Most likely, you’ve escrowed to cover this; but it’s common that the escrow was based on a land-only value and won’t be sufficient to cover the full bill.
Finally, your budget should include some accommodation for the unknown. Include a contingency or open line in your budget, perhaps 5 percent of the project value. Once your loan is in place, getting additional funds can be problematic. If you don’t have personal resources to turn to if something goes over projection, it’s better to have additional funds available in your draw. When I built my own project, I assembled a construction budget using mid to high quotes. I wanted to see the project was feasible even in a worst-case scenario.
Construction Loans and Draws
Depending on your financing arrangement, you’ll likely have a limited number of draws available, or you may be charged for each draw. Your lender or title company will send out an inspector each time you request funds to ensure work is complete before payment is made to contractors. This may create a delay in payment.
Consolidate payments to reduce the number of draws you need to make. Communicating with your contractors about when you plan to process payments can help get them on the same schedule, or at least transfer responsibility to them for meeting deadlines to get into your next draw. Some contractors may overstate the percentage of work that’s complete. If you feel a payment request doesn’t match the amount of work done, ask them about it before you submit the draw.
Ask your lender about draws for material as well. It’s helpful if you can be reimbursed for these expenses outside of the draw system, which may be possible with some lenders.
As the project progresses, it’s critical to keep meticulous records. Every invoice, receipt and check should be organized for easy retrieval later. If you’re spending out-of-pocket on items such as deposits, engineering and permits before your loan is in place, keep a tally of these expenses with supporting documentation for your lender. These should count as a down payment in terms of loan-to-value.
Staying on Budget
When a project runs over budget, it’s often because of unexpected conditions, missed line items or change requests. While you can’t predict some issues, such as soil that isn’t what you thought it would be or a freak spring snowstorm, you’ll increase the odds of staying on budget and schedule by sticking with your original plan.
As with most of life, great planning leads to a predictable outcome. Self-storage construction is no different. Research your market and educate yourself as much as possible, and you’ll have a good start toward success in your endeavor.
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.
