Today we are going to be going over some of the major challenges that can occur when attempting to arrange construction financing for a self storage facility.
The first major challenge that comes to mind is the demonstration of debt servicing by the applicant to a lender.
Because there is no cash flow at the beginning of construction and projections can be subject to considerable variation, it can be difficult to establish what the available cash flow to service debt is going to be in there early part of the mortgage term.
Self storage facilities typically do not have a lot of presales and bookings prior to opening so getting a lender comfortable on the first year cash flow can definitely be a challenge.
The real issue here the exit strategy available for the construction financing source.
If debt servicing cannot be properly qualified with a long term take out lender, then its going to be difficult to get the construction loan in place to start the provide.
Another major challenge is that self storage units are typically built in more rural areas, or developing areas that are near to established neighborhoods.
Part of the reason for this is that the land is going to be cheaper and because a considerable amount of land is going to be required the related capital cost is going to be important.
The related financing challenge is that the value of the land contributing to the construction lender’s security is going to be marginal which will require the borrower to invest a higher percentage of their own funds at potentially each stage of construction in order to have sufficient equity in the project at any point in time to secure the construction financing source.
A third major challenge revolves around the lenders that will be interested in doing this type of financing.
For the most part, self storage construction financing is very much a niche market so its going to be important to only be concentrating on the lenders that understand the market and regularly advance funds into the market for this application.
If you target commercial lenders at large, you run the risk of going through an application process and incurring costs for appraisal, environmental, accounting, and so on, and not getting approved or funded in the end. Commercial mortgage lenders, especially banks and institutional lenders, can be notorious for putting you through their whole application process even though there may be a very low probability that they can fund the deal.
So targeting the right lender or lenders from the outset is going to be very important to keep your project on track and keep your application costs down.
If you have a self storage construction project that requires financing, I suggest that you give me a call so we can go over your situation together and discuss different construction financing options that may be available to you.