Self-storage financing enables small business owners to engage in purchasing, building or renovating their self-storage units. The most frequently used types of financing for self-storage are SBA 7(a) commercial real estate loans and SBA 504 loans.
Leading providers of these financing options have experienced lending teams. These teams consist of experts who assist the owners of self-storage companies in gaining approval for financing.
Major Uses for Self-Storage Financing Today
There are several primary uses for self-storage financing options today. Different loans may be best suited for various financing circumstances, such as the following:
New Construction Loans
Self-storage loans for new construction are in high demand for building new facilities for self-storage. Although gaining approval for these loans can be somewhat difficult during a weak market, whenever the market is strong, numerous lenders will lend funds for building new storage unit complexes. Knowing the current demand for self-storage in your specific locale can help you acquire a loan as the owner of a self-storage business.
The cost of constructing a new self-storage facility can range from approximately $25 to $50 per square foot of space. After construction is completed and your storage facility is open for business, it will most likely take three or four years to attain average occupancy capacity.
As you can see, you will need more capital to cover typical operating costs, including rental and loan payments. You will also need funds to pay a regular salary to yourself as owner or to a manager.
In construction projects of this type, there are always additional expenses to be paid before you rent out storage units. These extra costs may include:
- Extra expenses during pre-construction building site preparation
- Lease-up stage operating costs.
- Down payments prior to and during the construction phase; and
- Interest payments related to construction.
Acquisition Loans
If you plan to purchase a currently existing self-storage building or complex, you need to obtain a self-storage loan for acquisition. Real estate investment trusts (REITs) and sizable investing companies engage in large volumes of merger and acquisition activity involving the self-storage industry.
There are also a lesser number of storage facility acquisitions by other self-storage companies. Yet if your self-storage business has plans to buy an existing facility, there are many financing options available.
Expansion Loans
Self-storage loans for expansion can be categorized as smaller building loans since they enable you to construct additional space for your existing facility. If your current self-storage business is profitable, a conventional bank loan may be a good choice. However, SBA loans are in popular use for this purpose since they offer added benefits.
Renovation Loans
As the owner or operator of a self-storage company, is it extremely important to maintain excellent curb appeal for your facility. When you keep your storage building or complex in superior condition, this instills lasting trust in your clients. It will also attract more potential customers for your facility. You can best build a loyal customer base by offering storage facilities that ensure good protection for each customer’s stored property.
Typical renovation projects for self-storage facilities include the following:
- Replacement of Rolling Doors. In busy self-storage facilities, the large industrial rolling doors are in operation constantly. Raising and lowering these doors frequently can result in significant maintenance expenses over long-term use. For many storage companies, this is actually the largest expense for facility upkeep. In addition, if these rolling doors need replacement, the cost is about $550 – $570 per storage unit.
- Reconfiguration of Storage Units. During your years of owning or operating a self-storage facility, you will probably reconfigure the size of some units. This is often a necessary project to accommodate the needs of ongoing clients and new customers for larger storage spaces.
The expense of these construction projects can sometimes be covered with cash flow. However, if major structural adjustments must be made, your reconfiguration plans may be more complicated and too costly to be paid for solely with cash flow.
Bank Loans
If you are planning to renovate your current self-storage facility, you may decide on a conventional bank loan for financing. When you apply for financing with a bank where you are an account holder, the banker or loan officer can access your records easily.
This often makes the entire process faster and easier for you and the lender. You may also qualify for a greater amount of funding than you might when working with a new lender. Conventional bank loans can also be helpful for refinancing a current construction project.
SBA 7(a) Loan for CRE
SBA 7(a) loans for commercial real estate are a good choice for financing acquisition, renovation, expansion or new construction for your self-storage facility. These loans offer repayment options of as much as 25 years. This can enable you to plan a major construction project and make repayments over a long time period.
Many of these loans also offer you the convenience of financing construction interest fees into your loan amount. In addition, some loan policies may allow you to finance as much as two years of loan repayments into the amount of your loan.
Another helpful benefit is that the Small Business Administration does not require applicants to have had actual self-storage experience for loan qualification. If you have evidence of expert business knowledge and practice, this can help you gain loan approval. Also, if you present proof of having owned business property, this can help you qualify for funding.
SBA 504 Loan
An SBA 504 Loan is an ideal option if you want to refinance self-storage financing. You can frequently acquire financing at lower interest rates than you have been paying. You can also benefit from consolidating several loans into one fixed-amount payment.
These loans typically have five to 10-year terms. An extended amortization period also enables you to make lower repayments. This also provides a balloon payment at the term’s completion.
Bridge Loans
If you are about to purchase a self-storage facility at a good price, you may need to close the sale quickly. If so, a commercial bridge loan may be an ideal option for you. Although these loans can be costly, if you make timely repayments, you should be able to refinance promptly to a longer-term loan.
Lines of Credit
Business lines of credit are excellent options for small or moderate construction projects or recurring financial needs. If your storage facility needs only a few rolling doors replaced, this will not require an excessive amount of funding. If you have a line of credit for your business needs, it can also cover unexpected expenses that arise.
Hard Money Loans
Most hard money loans are short-term financing offering 12-month repayment terms. They are helpful if you need to close quickly or if you have less than an excellent credit rating. These short-term loans are costly, and they are used most frequently for purchasing or refurbishing investment property. Other types of financing are more often used in the self-storage industry.
How to Qualify for a Self-Storage Loan
Once you determine the type of loan that is best suited to your current self-storage facility construction project, it is easier to find a loan and lender. Each different loan type has specific qualifications and requirements.
Loan Qualifications
Although every loan requires certain specified qualifications, there are some general requirements that most lenders ask for. These requirements include a credit score of at least 680 and a minimum down payment of 10 percent. Most lenders also require that loan applicants have been in business for a minimum of two years.
Most business financing plans also require a debt service coverage ratio (DSCR) of 1.25x or more. In addition, loan applicants must have credit histories that lack any recent occurrences of bankruptcy, foreclosures or tax liens.
Required Documents
Each different type of business financing for self-storage company owners requires specific documents along with the completed application. Documents that you should have available before applying for a loan are the following:
- Three years of business and personal tax records;
- A statement outlining the loan purpose;
- For refinancing, a current balance sheet and debt schedule;
- Current profit and loss statements;
- Business and personal financial statements;
- For refinancing, a rent roll or occupancy record;
- For new construction, a market feasibility study; and
- A business plan and resume for borrowers that emphasizes real estate industry experience or experience with self-storage ownership.
Some lenders may be more lenient than others if you do not have all of these documents available when applying for self-storage financing. Yet it is always helpful to be prepared to present all documentation that may be required, if possible.
Concluding Thoughts
There are currently multiple types of financing available for self-storage funding options. Before applying for a loan as the owner or operator of a self-storage facility, you must first determine which type of financing will best align with your specific current business project needs.
It is true that certain types of loans are designed to meet the requirements of specific construction projects for self-storage buildings and units. However, considering all of the different possibilities, SBA loans are frequently rated as the leading options for financing the majority of self-storage business projects.