5 Factors to Consider When Refinancing Your Self-Storage Loan
|Copyright 2014 by Virgo Publishing.|
|Posted on: 08/09/2013|
By Jeffrey Turnbull
You’ve weathered the financial storm and the turbulence in our industry, and your self-storage property is back on track and performing well. Interest rates are down and banks (and other types of financial institutions) are lending. Now’s the time to refinance your facility if you haven’t already done so.
Most self-storage owners know the cost and terms of borrowed capital are significant and can make or break any project. Most lenders only want to know two things: How much do you want to borrow, and how are you going to pay it back? Owners with good-performing, stabilized properties can now negotiate loans with excellent terms and interest rates. Here are five important factors that can put you on track to get a great deal from your lender.
The Loan Request
Probably the most overlooked document in the whole loan-submission process is the one-page cover sheet stating how much you want to borrow, the legal name of the borrower, the proposed terms of repayment, the proposed rate, the collateral to secure the loan and the guarantors (if any). Your cover sheet should look similar to this:
The Self-Storage Financials
You need to pull together the last three years of tax returns for your store. Look at the documents and make footnotes to highlight significant income or expense items. Recalibrate the tax returns as a quick, one-page recap to show net rental income like the example below.
Be sure the numbers you show tie directly to your tax returns. You may want to note that you’ve been making nice gains in revenue while operating expenses (all costs to operate the self-storage facility less depreciation, amortization and interest expense) have been held to small increases.
You also might note that you were able to increase rates on several unit sizes, or that you were able to collect a greater percentage of late fees. Whatever your numbers are, make some footnotes to summarize what you’ve been doing to financially strengthen your facility over the past couple of years. Your numbers may look much better than the example shown, so all the better for you!
Most lenders also want to know you have a debt-service coverage ratio of 1.35. This means that based on the above example, your NOI of $300,000, or $25,000 per month, will exceed the minimum monthly payment by at least 1.35 times. In other words, most lenders will look favorably on your loan request since your fixed-monthly payment of $15,816.23 per month is “covered” by almost 1.6 times of your NOI. Since 1.6 is much greater than 1.35, you can withstand significant disruptions to your income stream and continue to make your monthly payment to the lender.
The Personal Financials
You’ll probably need to include a personal financial statement with your loan request. Certain lenders such as commercial mortgage-backed security (CMBS) conduit lenders may not require a personal guarantee, but might still want to see your personal financial statements and pull a credit report on you and/or your partners, the ones who own or control at least 20 percent or more of the self-storage facility.
Try to clean up any outstanding credit card balances (pay off all credit card and installment debt with a home equity line, if possible) and make sure all loans are current. Hold off on buying new vehicles and major consumer purchases for a period of at least three months prior to the closing of your self-storage loan. Your goal here is to show your lender you’re managing your personal finances as well as you business finances.
You need to footnote and discuss in a summarized fashion any past problem areas in your personal financial statements as well as company financial statements. It’s better to handle these issues up front with any lender. Finally, you may want to show future projections of income and expense items based on your past historical numbers. Most lenders don’t lean too heavily on this, but projections show how you’ll continue forward toward a stable and financially sound loan-repayment plan.
The Self-Storage Property
Make sure your property is clean and neat prior to the submittal of your loan request. Have your manager check and clean the office, all empty units and overlock all delinquent tenants. Check to ensure facility records are up to date and accurate. You’ll want to submit a rent-roll report, a current unit-listing report and an operating-income (occupancy) report with your loan request.
Arrange to have your loan officer visit your property and point out security features, gate-access controls, CCTV cameras and the overall cleanliness of your property, just like you’re showing off your facility to a potential renter. Rehearse a quick five- to 10-minute presentation and facility tour, especially if you’re dealing with a new lender. You’ll need to repeat this presentation again with the appraiser prior to closing the loan.
Other Documents and Cost Concerns
Your lender will probably require a new appraisal, a phase one environmental audit, a survey and title insurance at the closing. If you have these documents from a past financial package, it can help reduce the costs associated with preparing new documents.
Finally, remember to negotiate with your lender for the best deal on interest rate, terms and upfront loan points as well as the elimination of any prepayment penalties. These are important areas where additional costs can add up for you unnecessarily. The best way to accomplish this is to price your loan with several different lenders, and perhaps a CMBS or life-insurance loan broker. Good luck, and hopefully you’ll be able to reduce your monthly payment and put some cash in your pocket for a rainy day.
Author’s Note: This article assumes you’ll be represented by competent, independent advisors during the refinancing of any self-storage facility.Jeff Turnbull is president of Kodiak Mini Storage LLC, which operates two locations in North Carolina. He has been involved in the self-storage business as a developer, owner and operator for more than 18 years, and is a licensed attorney in North Carolina, and a licensed real estate broker in North Carolina and South Carolina. He’s also a past president of the North Carolina Self Storage Association, a frequent contributor to Inside Self-Storage and a speaker at self-storage tradeshows on various industry topics. To reach him, e-mail firstname.lastname@example.org.