Self Storage Financing for Construction
Self storage construction financing is 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:
- 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.**
- 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).
- 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:
- 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.
- 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.*
- The “other income” could also be from another business you own, a pension or other retirement income and even income from a spouse.
*SBA self storage lenders are aggressive with their loan program guidelines, but there are logical limitations to what they will approve. Every SBA lender takes a risk when they approve a loan but most are not reckless and they need to be comfortable that your income situation is solid to be able to approve a loan.
SBA Self Storage – Acceptable Down Payment Options
All or part of the down payment/equity injection can also come from the following:
- Investors – usually friends or family willing to fund part of down payment in exchange for a percentage of ownership.
- Equity in land you already own.*
- Tax and Penalty Free Retirement Account Rollover
- The property seller as the SBA allows seller held funds on “full standby” for 24 months to be considered as equity
*For land owned less than 1 year before closing, you can count funds invested in the land and funds spent towards getting the project done. For land owned more than 1 year, you can count the above as well equity in the land due to appreciation/improved value during that 1 year, but you can only do this with the SBA 7a program, which will limit you to max loan proceeds of $5 million to $10 million depending on the lender and your assets. For land owned more than 2 years, you can count most money invested to date as well as equity based on current appraised value for either the 7a or the 504 which makes much larger loans possible.
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 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 refinance (or sell) at that time without having made a payment from your cash on hand.
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 another 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.
Third Party Management
Additionally, you can hire others to manage the property for you and/or you can build a fully automated facility as this is acceptablet to some lenders.
Third Party Management was largely frowned upon by SBA during the past few years but recent changes as of August 1, 2023 have made it possible for borrowers to hire even the largest management companies (think CubeSmart, Extra Space, Life Storage, Public Storage, etc.) to run their facilities.
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.
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 your self-storage construction project should be a success then this SBA program could be a very good fit.