Looking For Lenders

Posted by Poppy Behrens on Jan 2, 2018 12:00:00 AM

Solid Construction Financing Exists For Your Self-Storage Project

Today’s self-storage facilities are more than concrete walls and steel doors; they have architectural elements and amenities that attract thousands of customers each year. These new and improved facilities are equipped with the latest technology, and sometimes offer energy saving solutions, kiosks instead of on-site managers, and much more.

Development has increased drastically over the past five years after a pent-up demand from years of no building due to the economy. The reality: As the population continues to grow, the need for storage is apparent, and more storage equals more competition.

According to information released by Sparefoot in August of 2017:

  1. According to IBISworld, annual self-storage revenue was estimated to be about $32.7 billion in 2016. That figure is expected to grow at an annual rate of 3.5 percent over the next five years.
  2. There are over 54,000 self-storage facilities nationwide.
  3. 9.5 percent of households rent a self-storage unit.

From initial site plans to full occupancy, constructing a self-storage facility that is aesthetically pleasing and secure will allow you to stand out from the competition. To start, you will need financing and a comprehensive plan. Let’s dive into this a little deeper.

Where To Start

Step one is assessing the market where you plan to build and selecting a site. There are many factors you need to consider when selecting a site including visibility, competition, and timeline. 

Your next step is to retain an experienced feasibility expert with a proven track record to conduct a feasibility study. A feasibility study is an assessment of your facility, including the potential strengths and weaknesses of the project, market research, and financial data. These factors will determine if you should move forward with your facility.

In addition to a feasibility study, a licensed general contractor will be needed to oversee your project. Most problems on projects occur from unqualified or inexperienced general contractors. Your general contractor should have adequate commercial or self-storage experience, as well as financial stability.

Finally, before you apply for a loan to finance your self-storage project, there are a few things you should do to make the process as efficient as possible:

  1. Know your personal credit. Most financing institutions look for clean credit histories and solid scores.
  2. Gather important documents including your personal tax returns, as well as requesting information on the businesses you may already own. To save time once you are ready to start the application process, it’s good to have these items handy. 
  3. Do your homework. Know what trends will have longevity and what renters are looking for in the market.
  4. Have a detailed business plan and resumé. You won’t have the opportunity to present your story to the bank, so highlight what makes you a qualified and driven business owner.
  5. Open a bank account to build equity for your project. Due to banking regulations, funds being used for the project must be sourced and tracked for at least two months. This will help with consolidating funds from different accounts.

“Smooth and seamless” begins with streamlined communication. When seeking financing for your project, it pays to do your homework. Search for a niche lender who understands your business, helps you to avoid delays in the loan process, and delivers a positive experience from origination to loan closing. Having a knowledgeable lender on your team who can shoulder much of the loan process will make it possible for you to devote more time to your preparations for ownership and focus on doing what you do best: running your business. Number one on your to-do list: Find a lender that understands your unique financing needs.

Construction Loans

Now that you’ve done your due diligence, it’s time to start looking for a lender. Traditionally, owners and operators have used conventional loans to finance their facilities; however, over the past couple of years, more lending options have become available.

In 2010, self-storage became eligible for SBA loans. Does the mere mention of SBA financing cause anxiety? If so, relax. If you place yourself in the specialized hands of a niche lender, it’s far more likely that you will have a satisfactory–or even exceptional–experience.

Here are some benefits of SBA loans:

  1. SBA 7(a) loans have a 25-year fully amortizing term
  2. Flexible down payments 
  3. No balloons or financial covenants like LTV and DSCR
  4. Most importantly, SBA loans are based on cash flow not collateral. This is ideal for someone trying to break into the industry.

Additionally, most conventional bank loans require anywhere from a 25 percent to a 35 percent down payment depending on the bank, the project, and the borrower relationship. Interest-only payments during construction and the lease-up period, as well as working capital, may be included in SBA 7(a) loans. Because of these advantages, small business owners who lack the full amount needed for a conventional bank loan may be able to utilize the 7(a) program.

Ultimately, the 7(a) Loan Program allows a borrower a better opportunity to be the sole owner of his or her business. Aside from the borrower’s relationship with the lender, he or she may not need additional partners. This is not as likely with conventional loans, which emphasizes why this program is a viable option for those looking to get into the industry. SBA 7(a) loans help the independent business owner stay independent without having to engage equity partners.

Qualifying For SBA Loans

There are five definitive traits that lenders seek in borrowers when financing an SBA 7(a) loan often referred to as the 5 Cs: credit, collateral, character, cash flow, and commitment. These components vastly affect your ability to secure financing.

•    Credit is a direct reflection of the borrower’s financial patterns. Most lenders prefer to see a credit score of 700 or higher and a detailed track record of the borrower’s spending habits. Criteria may differ depending on the bank, including what they view as an acceptable credit score.

•    Collateral is measured by the number of assets a borrower has to secure the loan and their saleability in the event of liquidation. A benefit of SBA 7(a) loans is that they are not collateral-driven; however, the loan must be fully collateralized if possible.

•    The character of a borrower is evaluated through a borrower’s historical working accomplishments and his or her plan for the overall success of the business.

•    Cash flow is the most significant factor for an SBA loan. The bank will perform a cash flow analysis to determine whether the business can be profitable while also supporting its expenses and new loan debt.

•    Commitment is how involved a borrower is with the project and is frequently determined by his or her willingness to “have some skin in the game” and by reviewing his or her employment history. It is important to have a very thorough business plan in place.

An additional C to add is Confidence, or having the eye of the tiger. Confidence, drive, and dedication make an impression on lenders. Having these traits will help you set yourself apart from the competition.

Now, let’s discuss the eligibility requirements for SBA loans:

  • You must be actively involved in the management of your business. Basically, this means that you can’t hand over the keys to someone else and have him or her send you a check each month. You need to be active in overseeing the managers of the facility, budgeting, and other aspects of the business.
  • As a rule of thumb, you cannot have any prior bankruptcies. This rule applies to Live Oak, not the SBA.
  • You cannot have any defaults on any other government loans, such as student loans or FHA. The SBA requires you have good credit; at Live Oak, our minimum is a credit score of 650.
  • You must be a U.S. citizen or legal resident alien.
  • You cannot be on probation or parole.

Having both your personal and business financials in order will dramatically increase your chances of receiving financing and aid your ability to build, acquire, or renovate your self-storage facility. There are many financing options available, however the 7(a) loan program is a promising option for the industry.

Now that we’ve covered your financing options, let’s discuss current industry trends.

Ground-up construction projects have increased greatly since 2015. They allow the owner to design a facility to desired specifications and include popular modern amenities like climate-controlled units, security enhancement, and cutting-edge technology for convenience.

Below are some of the construction trends happening today.

Unmanned Facilities

In today’s age, it seems everything is online. Why does renting a unit need to be any different? Depending on the size of your facility, you may be able to use technology for payments, interacting with customers, and more. Without a full-time manager, you can save on your payroll. Payroll is typically the second largest expense after property taxes.

Update Your Facility

The curb appeal of your facility is very important to consider. Landscaping, fencing, and entrances are just a few things to keep in mind. Most of the decision makers for renting self-storage are women. They take these things into consideration, looking for facilities that are well-kept and safe.

Energy Trends

Energy trends are on the rise, especially in the northeast part of the country. Solar panels equate to lower energy costs. You may have the ability to make money from the sale of energy to local power companies and reap the tax benefits from adding solar panels to your facility. They also attract people looking for eco-friendly businesses.

Tax Savings

Many people are capitalizing on tax benefits of cost segregation. This will allow accelerated tax savings in the first few years of business, thus increasing your cash flow.


If you are considering a conversion instead of a new build, it’s important to consider the possible pros and cons associated with conversions. The key to a profitable conversion requires research. Once you find an existing building that is easily accessible, has little damage, and major curb appeal potential, you are headed in the right direction.

Pros of Conversions

Most buyers are looking to convert a vacant warehouse, grocery store, or other large indoor facility that can be remodeled in a short amount of time because of its existing structure. When purchasing a building or facility, visibility and accessibility are crucial. When you consider a conversion, ask yourself, “Would I build a ground-up facility at this location?” Typically, an existing building has an easier time getting through the zoning process. Moreover, a community tends to be more lenient with conversions because the building already exists. For the potential buyer, there is little construction risk involved.

You may also avoid extra costs because a new facility must meet current codes, and the existing facility may be grandfathered. Converting can also bring down the overall costs of a facility structure because HVAC systems or other equipment may already exist on the site. These factors can influence the success of your facility.

Cons Of Conversions

Conversions can be costly if the building has infrastructure flaws; roof and HVAC systems are often issues. If the existing building’s points of access are blocked or it has multiple internal stairwells, it may be hard to change the layout of space without incurring steep costs. Are there environmental issues such as asbestos? If so, this could be a costly remediation. In addition, if the facility you are considering converting is in a poor location, you may need to spend funds marketing the property or consider paving a larger parking lot for easier access. These hiccups can be both expensive and time consuming.

Conversion Trends

Self-storage conversions have drastically changed over the past two decades. Today, if you find a building that has enough interior height clearance, you can put in a mezzanine and double the potential rentable square feet. If your conversion has enough parking space, you can add an exterior freestanding building or extra parking as an additional phase. These are just a couple of examples of what you could do with your conversion project.

Banks Like Conversions

Finding the right lender who has knowledge and experience in the self-storage industry is critical to the success of your conversion project. Banks tend to like conversions because they are less time consuming than ground-up construction, which allows the borrower to open, be in the market, and break even faster. Overall, fewer surprises can occur with conversions compared to ground up. The right lender will help you move through the process quickly and easily. Live Oak specializes in loans to the self-storage industry and has structured our lending and funding solutions around the industry’s specific needs.

Consult A Specialist

Your loan approval process should begin with an interview; you are interviewing lenders to find the right match for you. The best match could very well be one of the large conventional lenders. Or, it could be a “niche” lender that specializes in financing self-storage projects.

There are plenty of lenders who can finance your self-storage project. However, if you scratch the surface by asking how frequently they handle projects like yours, you will probably find that their experience falls short. Most lenders provide small business loans, along with other financial products and services, across all industries, never fully understanding the needs and potential complications that come with lending to self-storage owners. By finding a bank that understands your industry, you will likely encounter fewer roadblocks throughout the loan process.

Why Live Oak?

Finding a lender with direct industry experience enables borrowers to work through the loan process with ease and transparency. Live Oak Bank offers a team dedicated solely to self-storage and SBA lending with decades of self-storage experience.

Terry Campbell is general manager for the self-storage lending division of Live Oak Bank, which offers financing for self-storage facility acquisitions, construction, expansion, refinancing or renovation. He has more than 23 years of self-storage industry experience as a supplier as well as having ownership in self-storage projects. Terry has served on the board of the North Carolina self-storage association and speaks at tradeshows, seminars, webinars, and frequently provides articles for publications.