Financing a Self Storage Facility
Financing options for investing in a self-storage property.
Financing a Self-Storage Facility
Investors have many options when it comes to financing the purchase, renovation, or construction of a self-storage property. In fact, some of the most popular self-storage loan options include traditional bank financing, CMBS, and life company loans — not to mention Small Business Administration financing options like SBA 7a loans for commercial real estate and SBA 504 loans.
Self Storage Financing Eligibility Criteria
Self-storage lenders often place a heavy focus on the financial performance (or potential financial performance) of a facility — with the value of the real estate, the state of the local market, and the credit profile of the borrower receiving particular scrutiny.
With such a large range of financing options available, there is a ton of flexibility when it comes to what makes a good borrower. If an investor doesn’t fit the requirements of one loan, chances are he may be a good candidate for a different self storage loan. Even so, in most cases, self storage lenders tend to require:
A minimum debt service coverage ratio of 1.20x
15% to 30% down payment
Credit score minimum of 650
No recent bankruptcies, foreclosures, or tax liens within five to seven years of application
Popular Loan Option for the Construction of a Self-Storage Facility
Construction costs for self-storage facilities vary but typically range anywhere from $1 million to $50 million. Many investors choose SBA loans for the new construction of self-storage facilities because they allow all of the construction interest to be financed, and loan terms typically span up to two years. Pending the results of a market study, the SBA will finance up to $5 million per approved borrower. Market studies play an important role in a lender's decision to approve a loan.
Popular Loan Option for Self-Storage Acquisition
For investors looking to finance a self-storage property as a first investment, SBA loans can be an ideal option. That said, many veteran investors turn to CMBS or conduit loans for the acquisition of a self-storage facility. The reasoning is pretty straightforward — CMBS loans offer the ability to lock in relatively low fixed rates for terms of up to 10 years. Additionally, CMBS lenders are usually willing to offer this financing with amortization periods of 25 to 30 years. In many cases, an investor can also get an interest-only period during the initial term of the loan.
These benefits can lead to a substantial additional cash flow for the investor — which can play a crucial role in the early performance of a business. To further highlight why conduit financing appeals to veteran investors, CMBS loans are also nonrecourse. Nonrecourse loans insulate the borrower from personal liability.
Popular Loan Options for Self-Storage Renovation
It’s good practice within the industry to keep an existing self-storage facility as modern as possible — after all, owning a well maintained facility with modern features and new equipment is seldom bad for business. Sometimes, business can be so good that existing units must be reconfigured in order to make room for more. In either case, bridge loans are often deployed for the renovation or expansion needs of investors in self storage.
Bridge loans can range from $1 million to $10 million, typically with term lengths between six and 48 months. Bridge financing is normally backed by collateral. A slight disadvantage investors face is that because these loans are short-term arrangements, they frequently come with higher interest rates than longer-term financing options. Bridge loans typically are used as a form of temporary financing until a permanent loan can be obtained.