Sample Development Budget & Proforma.
You will do multiple budgets proformas for yourself along the way to a final one for your bank. The first is one based on several assumptions and estimates so you can have some initial discussions with your banker. The second, one after you have a site plan, so you can provide a proforma based upon your actual design plans, including the exact number and size of units to be rented to get an updated pre-approval. And the final application with real construction cost from contractor bids and expenses from your feasibility report and other investigations, for the final loan approval. Your loan request will include several items in addition to the proforma. This information will help your banker make a positive decision on your application. It will provide valuable information about yourself, your business plan and your expertise and an executive summary which help your banker quickly understand your project and find the major data they need without looking everywhere for it. It is one more item to let the bank know you are a professional day one. Self storage is loan friendly because self storage loans have one of the lowest failure rates for real estate development. But part of loan decisions are based directly on you and how you present yourself, your project and your team.
There are no one size fits all standard construction cost, expenses or profits for self storage. Typically, the first semi accurate development and operational cost and profits come after you have found land, obtained a conceptual plan and obtained a feasibility study by a self storage expert. But it is important to understand the basic general magnitude of construction, operating expenses, rental rates and various financial information to determine if self-storage makes sense for you. The concept budget below is based upon assumed costs & expenses that may vary greatly. Be cautious as it would be easy to tweak one or several factors to eliminate the profits or double them. Many items and details are not included in this example such as carrying cost to get from empty to break even.
This is an example for educational purposes only and should not be used to make any final self-storage investments or development decisions.
CONCEPT BUDGET & PERFORMA*
50,000 Square Foot New Single Story Construction
TYPICAL LAND REQUIREMENTS*
Single Story Self Storage: Typically, 5 +_ usable acres when storm water detention is required and or subject to certain zoning restrictions. Land requirements can vary on local zoning requirements and land quality.
Typical Construction Cost vary on many factors from design, amenities, locations, land quality and more and must be determined by actual construction bids. Cost below have been assumed and will vary.
PRELIMINARY DEVELOPMENT COST* – 50,000 SF Single Story
Land $800,000 + –
Construction: $3,250,000 +_ $65/sf x 50,000 sf
Unusual land etc.**. $0 if none
Unusual City regs. ** $0 if none
Soft cost $400,000+_
Carrying costs $300,000+_
Total $4,750,000+_ Single story 1 phase
Phase 1 -25,000 sf $3,300,000+_ Note land/office/soft carrying costs in phase 1
Loan Equity $1,155,000 Phase 1 owners’ equity required
Loan Equity $412,500 Phase 1 owners’ equity required
As you can see there is a vast difference in equity required between a traditional bank loan and a SBA loan.
Typically, when phase one occupancy reaches 70% it is time to get started on phase 2. Most of the time you will use the same bank for both phases so you do not have to pay a prepayment penalty. Often your equity in phase one will be enough for most if not all of the loan equity required for phase 2. You should have these discussion with your bank when you apply for the phase one loan as this is not the case for every lender.
STORAGE RENTAL INCOME* FOR A 50,000 NET RENTABLE SPACE
Rental income varies upon many factors and are very dependent on location, unit mix, managers experience, marketing and several other factors. The SSA reported the 2015 national average rental rate for Q4 2014 was $1.18/sf for a 10’ x 10’ non climate control unit and $1.51/sf for a 10’ x 10” climate control unit. It is important to get data from your local area.
Typically, we consider 90% rented at premium rental rates full. For this example, 90% Rented at an assumed average rate of $1.35/sf is used.
50,000 sf x .9 x $1.35/sf = $60,750 monthly income = $729,000 Annual income
PRELIMINARY OPERATION COST*
Operation cost vary on many factors. Often, they range between $5 to $6 a sf.
Use $5.75/sf for this example.
Assume $5.75/sf x 50,000 sf = $287,500/ year or $23,958/month (Before Debt Service)
NET OPERATING INCOME* (Before Debt Service)
$60,759 – $23,958 = $36,729/month = $441,504/Year (Before Debt Service)
Assume 5 Cap rate – $8,830,080
Assume 6% Cap Rate = $7,358,400
Assume/use a 4,000,000 loan at 5.5%, 25-year amt. = $24,563 month (P & I)
CASH FLOW AFTER DEBT SERVICE*
$36,729 – $24,563 = $12,166 per month = $145,992 Per year cash flow before taxes.
Will this be your cash flow? Of course not. There are too many variables. Your land could cost more or less. You could put in more or less equity. Your rental rates may be higher or lower. Your expenses could be more or less. You could do more or less marketing and sales then the typical self storage.
The goal is to build a self storage that provides a six-figure income while you can still continue your career if you want to and down the road to have a retirement nest egg that many people could never even dream of. Once you have found a property that meets your initial review and requirements you will get a 3rd party feasibility study that will not only provide you with a demand review but also all the above financial information above based upon data to your specific location and facility size.
Disclaimers: This informational and example is for preliminary education and overview purposes only and should not be used for investment purposes. This is an over simplified financial review. Once a property is located a detailed feasibility study, site investigation, site designs, construction costs and regulatory investigation are required in order to determine the feasibility of a project and projected profits.
*Development cost can vary widely based upon location, zoning, standards, your experience and a variety of factors. You should consult with a local self storage expert for development cost in your area. This is an example and there is no representation these numbers will represent your development costs. Industry rental rates, income & expense can and do vary upon many factors including, competition, local property taxes, location and owners experience. Typical rent up periods for the industry are between 18 months and 3 years and can be longer.
** Unusual construction requirements such as ledge, significant cuts or fills, retaining walls, unusual zoning requirements, off-site improvements, local pricing etc. are not included and can significantly increase construction cost.
Multi story facility cost more and typically can’t be phased, so they require significantly more capitol and initial equity. This is why first time self storages developers typically build one story facilities. Many multi story self storages will even have a higher price tag because they are often in areas of higher populations and are larger to offset the development cost per unit, to get better returns.
A word of caution, never develop a parcel of land simple because you own it or the purchase price is low. It must have several important features including significant drive by traffic and enough unmet demand for self storage.
Now based upon your liquid assets you can start determine the best options for your needs and investigate land, design, regulatory and banking requirements in more detail. At this point you are either ready to charge forward or realize you don’t have the capital required. If you don’t have the capitol don’t give up. Finding a more aggressive lender and or finding a partner with either the land equity or cash equity may be a great option.
Working with an experienced self storage development expert can also help reduce the construction cost, operational expenses and increases profits. You can look at building a smaller facility but they tend to be significantly less profitable and more of a hobby than a business.
If you want to learn more about how you can start your own Storage Authority self storage Franchise send me an email. Marc@StorageAuthority.com