Before making a formal application for commercial construction financing for a self storage, or even before you start planning out a potential self storage build, there are few key financing challenges that you may be faced with and should try to avoid as much as possible in order to get your project properly funded.
While each project can have its own unique challenges, here are some of the more common ones I come across with the self storage construction financing requests we work on.
The first main challenge that we see is when the property owner or builder does not start with the end in mind.
What I mean by this is that one of the challenges of getting a construction loan arranged for self storage projects is getting a prospective lender comfortable with the exit strategy that will be in place to repay the construction loan at the completion of work.
The exit plan or take out loan is going to depend on the borrower’s ability to qualify for a long term commercial mortgage, which will require cash flow for debt servicing that will not be established until well after the project is complete. And while projections can clearly slow enough cash flow to meet a lender’s debt servicing requirements, they cannot guarantee a lender when sufficient cash will be generated on a monthly basis to cover off the costs of a construction take out mortgage.
A second challenge common to a lot of projects is the equity available in the land to secure the lender.
While the finished property may have considerable equity, the lender advances against the current value of the land the the value of the improvements to the land as they are being made.
Because self storage properties are typically in more rural areas, or in areas where the land value can justify the use for self storage, there may not be very much equity in the land to provide security to the lender during the construction draw period which can result in the borrower putting in a considerable amount of their own cash either to cover off the initial construction work, or as a percentage of each proposed draw.
The third major challenge is that self storage is very much a niche market when it comes to construction loans, so its going to be important to be focusing in on individual lenders or lender groups that work in the self storage industry and make construction loans for similar projects.
It can be easy to waste considerable time with the wrong lender where there is very little if any chance of getting the financing you’re looking for.
In many cases, self storage construction is financed through sub prime lenders or private lenders that have a higher level of specialized knowledge for funding these types of projects as compared to many of the banks and other institutional lenders.
One of the best ways to determine what lender or lenders are both willing and capable of funding your self storage project is to work with a construction mortgage broker with the experience and track record necessary to place these types of deals.
If you are planning out a self storage project, or are in the middle of one, and require a construction loan, I suggest that you give me a call so I can go over your requirements and provide relevant construction financing options for your consideration.