90% Self Storage Financing for Construction

Self storage construction loans are possible via the SBA real estate loan programs at 90% loan to cost up to approx $9 million*, 85% loan to cost above $15 million and in some cases, 80% loan to cost to approx $20 million.

This post is primarily about 90% financing offered by some SBA lenders and banks who specialize in self storage.

10% down is excellent in and of itself, however 3 features of this program really stand out:

1. You are allowed to borrow the down payment and in doing so you can effectively create 100% financing.  Borrowing the down payment is acceptable as long as you can show that you have “other income” with which to make the payments on that borrowed money.**
2. You can finance all construction interest and possibly 2+ years of payments into the loan.  (It is possible you would not make a payment for 3 years – see below for more info).

3. You do not need self storage industry experience.

*90% loan to cost to $9 million requires significant outside collateral/equity in other properties.  The outside collateral could be released once loan is refinanced – typically after 3 years when prepayment penalty expires.

** You can also use funds (tax and penalty free) from various retirement accounts or a 401k from a former employer AND if you currently own a mini-storage facility with at least 10% balance sheet equity AND your new facility will have the same ownership as your existing, then it might be possible to borrow 100% of what you need for the construction of the new facility.

Here is the fine print on the above benefits:

Borrowing the Down Payment:

1. This is obviously easier to do on smaller facilities/projects.  For instance, we have helped quite a few clients secure self storage construction financing by simply borrowing against their home equity or against an investment property they own.
2. The most obvious source of “other income” is the income from your “regular” job, which is important to point out, because this program is very difficult to get approved for unless you have “regular/steady” income.  Self storage construction lenders will not let you live off the working capital they build into the loan.  You need to be able to prove that you have stable/reliable income.  For these types of loans the self storage facility income is looked at by the construction lender (at least initially) as a future secondary source of income for you – not your primary source.
3. The “other income” could also be from another business you own, a pension or other retirement income and even income from a spouse.

This is a very aggressive loan program, but there are logical limitations to what is possible.  These lenders are taking risk, but they are not reckless.  They will need to be comfortable that your income situation is solid to approve a loan.

FYI:  All or part of the down payment/equity injection can also come from the following:

1. A gift
2. An investor
3. Equity in land you already own*
4. Tax and Penalty Free Retirement Account Rollover
5. The property seller as the SBA allows the seller held funds on “full standby” to be considered as equity

Post-Closing Liquidity

Keep in mind, that in all cases where you are creatively coming up with the down payment you will need enough of your own cash/skin in the game to get a lender comfortable that you are committed to the project and lenders will also want to make sure you have some post-closing liquidity.

How much of your own cash must be put in and how much access to cash you must have post-closing is a judgement call for a lender based on the merits of the individual transaction.

SBA self storage construction lenders are flexible but they will not allow to put your last dollar into a project.

SBA Storage Construction – No Payments for 2+ Years

Some SBA self storage construction lenders allow you finance not only construction interest and closing costs, but the first 2+ years of payments. This is aggressive but it makes sense as it is way for a lender to make sure your facility gets off to a good start by insuring that you have the ability to make the payments during construction as well as when you are ramping up occupancy.

So if you it takes 12 months to build and the lender puts all other costs including the first 2 years of mortgage payments into the loan then you will not have a come out of pocket for a payment for 3 full years AND given that the prepayment penalty under the SBA 7a program expires after 3 years you could refinace (or sell) at that time without having made a payment from your own cash.

To be eligible for this, you will need a solid plan with realistic projections.  Most of the time a lender will require a good feasibility study from a respected self storage industry consultant that includes detailed projections while others will rely on the information you provide in your business plan.  Either way, the information provided needs to show a comprehensive level of detail re: all aspects of the project.  These lenders will not fund a construction loan for a borrower with half-baked plans.

Self Storage Construction Loans – No Experience Necessary

SBA self storage construction loans do NOT require that you have industry experience.  However, lenders will not make a loan to someone who lacks what they feel is appropriate experience for a ground up construction project OR someone they feel will not be a competent owner, so your non-self-storage experience matters.

What does this mean in real terms? 

Well, it is good if you have some management expertise or investment property ownership experience, but neither of those is required.  Essentially, this is a “judgement call” for lenders.  They realize that mini-storage is a somewhat passive business type and not as complex as managing a business with many employees, but they also need a level of comfort that you can handle owning/managing the facility, so your past and current work experience will matter and the quality of your proposal and business plan will go a long way towards getting a loan approved.

Bottom Line:

The self storage construction lenders that offer this program know it is aggressive.  They understand the risks involved and they know how to identify a good candidate for this type of financing.  They also know the industry and they have a very good grip on the construction process, costs and potential pitfalls.

Smart borrowers do their homework and the proper due diligence before attempting a self storage construction project.  The good news with the financing is that the SBA programs lower the barriers to entry and the lenders participating recognize a good loan when they see one.

As with any type of financing you need to understand what you are getting into, so if you have researched it well enough, you feel good about it and either your own data or that of a feasibilty consultant confirms that the project will be a success then you are probably on the right track.

We have helped a lot of smart people with no mini or self-storage experience get financing and this program has had lot to do with that.  Feel free to call us directly at 1-800-414-5285 for more info or visit this post or this page for more detailed info.

FYI: this same info applies to RV and Boat Storage as well.