by Marc Goodin, No cliffs for me, please. Many new self storage developers are planning on using an SBA loan to cut their required cash equity infusion by over 50%.
In March of 2020, prime was 3.5%. Six rate increases have brought prime from 3.5% to the current prime rate of 7.75%. More than doubling the cost of funds for an SBA 7a loan. Even a 3% interest rate difference, during the interest-only period, for $5MM is $150,000 less cash flow a year. Holly cow that's a lot of positive cash positive flow lost.
A lot of people are simply deciding to hold off until rates fall. Unfortunately for most that may mean they will never get into the self-storage business. Often the people that get started in tough times make the most money down the road because they have to pay attention to every detail and be an expert in the development process, the operations process, and in the sales & marketing process.
So how is an expert going to succeed now? Here are FIVE things many may consider:
1) They are going to realize that the vast majority of loans being made today are for self-storage and industrial projects. which means less land is going to be purchased in the next year. So they are going to aggressively negotiate the land purchase price down as much as possible. Land buyers must also do better due to diligence on the property. Gone are the days when you buy land that requires $300K extra site work without getting a $400K reduction in the land cost. If you do not get input from your Architect, Engineer, and self-storage expert on the land before you make an offer you are on the wrong track.
2) They have to move the development process swiftly and have complete plans & specifications and a complete bid package to reduce the time development time frame and reduce construction overruns. It takes significant time to properly prepare a bid package. Many new developers will need significant help.
3) They are going to find multiple ways to increase their income, from requiring renters insurance to the complete elimination of discounts to better marketing. Raising your rates 10 cents a sf for 60,000 sf is $36,000. Two extra rentals a month is another $50,000/month. It is not impossible for a premier facility to make well over $100,000 extra a year.
4) Back to the topic of interest rates. New educated developers are not going to borrow money at 9.75%. The reason most people go with an SBA 7A loan is because they often wanted to aim for 10% down vs 15% for an SBA 504 loan. And include the carrying/interest cost to break even as permitted in most 7a loans. Also, an SBA 7a loan is easier than an SBA 504 loan because there is less paperwork, takes less time for approvals because you are working with one entity, (your bank) vs multiple lending sources. Not too long ago before the recent fund rate increases the 7A and 504 loan interest rates were similar.
The SBA 504 loan is partially tied to long-term rates so the rates are now significantly lower than the 7A loan. I did not call a lender but online today I observed it around 6.5% Using a 504 loan does mean more money down, often 15%, and you should plan on a longer time for the loan closing.
5) I suspect many entrepreneurs are going to take the risk that in 3 to 5 years after they open they will be refinancing with a conventional bank loan at lower rates and at the same time their rental rates have also increased more than their expenses for additional profits.
Here is my wife & self storage partner GP at the Florida Self Storage Association last week. Nine floors down is a dangerous cliff if you go over the railing but not too bad if you take the elevator. And even better if you take the express elevator. Let's talk
If you want to have a 15-minute call to learn how Storage Authority helps insure the above items and more are accomplished at your facility and how we help you find land and get your facility built please send me an email or call me – no appointment needed:
marc@StorageAuthorityFranchise.com or 860-830-6764
Get more information on Storage Authority Franchise at www.storageauthorityfranchise.com/opportunity3
Marc Goodin is the President of Storage Authority Franchising. www.StorageAuthorityFranchise.com He owns 3 self-storages he designed, built, and manages. He has been helping others in the self-storage industry for over 25 years. He can be reached at marc@StorageAuthority.com or directly at 860-830-6764 to answer your franchising, development, marketing, sales, and operations questions. His best selling self storage books are available on Amazon.