Development Variables

DEVELOPMENT

Five Steps For Calculating Gross Square Footage

By Marc Goodin

ow many square feet of self-storage can be built with $1.5 million in owner’s cash and an SBA loan? Take a guess. If you guessed 80,000 to 85,000 gross square feet, you are pretty good at this. The bad news is a ton of data must be correctly obtained to do the calculations. The good news: If you know the data it takes to run the calculations, you can look for multiple ways to save money as you search for land and develop your facility.

The many variables are never the same from project to project. That’s why it is critical to learn how to determine your site-specific variables and run your calculations early and many times during in the process. Often these calculations are used to determine maximum size or phasing limits to match your available cash. They are also the basis for parcel size needed and preliminary profit and loss (P & L) calculations until you get site-specific information to run detailed P & L calculations and obtain bids from contractors.

The following is a scenario that illustrates the approximate magnitude of owner capital that may be required to build a facility that can provide a suitable retirement income for many owners when the facility is rented at premium rental rates.

STEP 1

Determine the assumptions or assumption ranges for your location.

Here is a list of the assumptions we used.

Owner’s cash (excluding bank loan): $1.5 million
Type of loan: SBA loan with 15 percent down
Site details: Single-story facility on 5 usable acres
Land cost: $900,000
Owner design and soft costs: $600,000
Most of owner’s carrying costs are borrowed.
Climate-control mix: 50 percent climate control
Interest rate: 7 percent (three year interest only)
Break-even: 18 months
Occupancy: 90 percent
Operating cost: 25 percent of income
The average income is $1.70 per net rentable square foot.
All-in contractors construction: Cost is $85 per square foot
Owner construction costs: $3 per square foot
Construction contingency: 5 percent
Construction period: 12 months

STEP 2

Determine the total project cost and loan amount.

A $1.5 million owner’s cash as a 15 percent down payment, the SBA loan allows a total project cost of about $10 million.

Owner’s equity: $1.5 million
Total project budget: $1.5 million/0.15 = $10 million
SBA loan: $8.5 million (85 percent of $10 million or $10 million minus $1.5 million equals $8.5 million)

In many cases, the owner’s $1.5 million cash covers the land purchase, pre-lending design/soft costs, and some contingency. That leaves the bulk of the bank loan ($8.5 million) to cover construction, construction contingency, and carrying costs to the break-even point.

STEP 3

Calculate the operating and interest carry costs to break even.

Based on the original assumptions, the carrying cost were calculated approximately as listed.

Operational carrying cost to break even: $285,000
Bank fee: $235,000
Construction loan interest: $320,000
Loan interest to break even: $480,000
Carrying cost: $285,000 + 235,000 + $320,000 + 480,000 = $1.33 million
Use $1.4 million for a 12-month construction period and the 18-month post-open period to the break-even point.

STEP 4

Determine the approximate construction budget.

The construction budget equals the loan amount minus land cost and design cost minus the carrying costs. The rounded math is $10 million – $1.5 million – $1.4 million = $7.1 million for the contractor’s construction (hard costs).

STEP 5

Determine the buildable square footage.

With $7.1 million available for direct construction and an estimated $85 per square foot construction cost, you can build approximately 83,000 gross square feet ($7.1 million divided by $85 per gross square foot). Assuming a net-to-gross efficiency ratio of 80 percent, the result is roughly 66,000 net rentable square feet (82,000 gross square feet times 0.80).

Calculations

It can take several hours to do the calculations by hand. Given you want to run the numbers many times with various parameters early on before you have all the exact parameters and then multiple times again as you obtain better data, a calculator (or Excel spreadsheet) is a must. This same data can be used to prepare profit and loss calculations at the same time.

Why Choose An SBA Loan?

Traditional construction loans often require 30 percent to 50 percent down and do not typically cover operating/interest-carrying costs through break-even. In practice, that can mean you need two to three times the down payment that the SBA approach requires to build the same size self-storage facility. For many busy professionals, leveraging an SBA loan is the pivotal factor that allows them to develop a substantial project with a lower out-of-pocket investment.

A Final Word Of Caution

This scenario was simplified for discussion purposes. Not all assumptions and nuances are included. Data is typically substantially different from location to location. You must do an in-depth review with your team of experts, including feasibility consultant’s engineers, accountants, attorneys, contractors, and owner’s rep., etc., to determine the buildability, feasibility, costs, and loan options for your specific site and situation.

As CEO of Storage Authority Franchising, Marc Goodin shares his passion, expertise, and unconventional wisdom with busy professionals to help them develop their own self-storage while they continue their careers. He owns three self-storage facilities that he designed, built, and manages. He can be reached at marc@StorageAuthority.com or (860) 830-6764 to answer your franchising, development, marketing, sales, and operations questions. His best-selling self-storage books are available at Amazon.

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