November 1, 1997

5 Min Read
Inside Self-Storage 11/97

By Eric Snyder

Are you looking to finance either a new or existingself-storage facility? There are a variety of factors toconsider. You can save time and money by being prepared andknowing the right way to go about locating the lender you need.Here are some of the most commonly asked questions aboutself-storage financing.

Q: When is the best time toconsider refinancing an existing loan?

A: When the note is approaching maturity, orwhen interest rates are lower than that of your current loan.Prospective borrowers should allow at least six months prior tomaturity to shop for a loan: 90 days to find the most competitivelender and 90 days to close the loan. The borrower should factorin the cost of any prepayment penalties.

Q: What can I do to improve myodds of getting a loan?

A: Before sending photographs of theproperty, take care of any deferred maintenance. Then prepare anorganized and thorough loan package. Having experiencedmanagement in place helps, so does keeping good records.Borrowers also should make sure they understand their market, byresearching the occupancy and rental rates of competitors.

Q: Do I need to have previousexperience in the self-storage industry to get a loan?

A: No. You can contract with an experiencedmanagement company to manage the property.

Q: What information must beprovided to the lender for a loan quote?

A: You should have pictures of the facilityas well as the adjacent property, operating statements for thelast three years and occupancy reports for the past year. Youalso will need to provide market information, including rentaland occupancy rates of competitors; the number of existingstorage facilities within a three-to-five-mile radius and thepopulation of that area; an analysis of factors that drive thelocal economy, including an evaluation of the diversity ofbusinesses in the area; an assessment of any new facilitiesplanned in the market area; a completed borrower questionnaire;and borrower financials.

Q: How long will the loanprocess take?

A: Banks and life insurance companies usuallyrequire at least a 60-day due diligence period. An experiencedself-storage lender can have the loan processed in 45 days.

Q: What costs are involved?

A: Third-party reports for appraisal,engineering and environmental analysis will run about $10,000, ifthere are no special circumstances. Legal fees will add another$5,000 to $10,000 to the cost, again, if there are nocomplications. The loan fee will cost an average of 1 percent ofthe loan amount. Title and survey fees also must be added to thetotal.

Q: How do I estimate the size ofthe loan for which I would qualify?

A: Because of the seasonal nature of theself-storage business, most lenders will underwrite cash flow andloan-to-value based on the trailing 12 months. The cash flowestimate is equal to the net operating income divided by the debtcoverage. That ratio is then divided by the loan constant. Mostloans have a maximum loan-to-value ratio of 75 percent. Lowerleveraged loans will allow the lender to provide a lower interestrate.

Q: How does the lender determineif there are any environmental risks associated with the land?

A: Ultimately, the liability for any riskrests with the property owner. A three-stage environmental siteassessment is required. Phase I includes both a document inquiryas well as a physical walk-through. Phase II includes taking soiland water samples to determine the level of potentialcontaminants. In Phase III, remedial work to remove thecontaminants is carried out.

Q: What is meant bysecuritization?

A: These are lender bundles similar tomortgages, which are analyzed by rating agencies and then used ascollateral for bonds purchased by institutional investors.

Q: Should I have a fixed- orvariable-rate loan?

A: It depends on the needs of the individualborrower. The fixed-rate loan provides a secured interest ratewithout fluctuation. Right now, interest rates are at ahistorical low, so most borrowers are requesting fixed rates tolock in low-interest rates. However, if a borrower is looking forprepayment flexibility, then a variable-rate loan may be moreappropriate.

Q: What prepayment options do Ihave?

A: Most loans have lock-out periods, thenyield maintenance prepayment penalties. Declining prepaymentschedules are available for a higher interest rate.

Q: What is the optimal occupancyrate preferred by lenders?

A: Most facilities operate at an economicoccupancy of 85 percent to 90 percent and a physical occupancy of90 percent to 95 percent. In today's market, a low occupancy ratemay be a sign of poor management or an overbuilt market.

Q: Can I still qualify for aloan if I've had a bankruptcy or foreclosure?

A: A lender will consider your application ifthe creditors have been paid back. It also could depend onwhether the bankruptcy was due to market conditions or to themanagement of the borrower.

Q: What is the preferredbusiness organization for self-storage operators by lenders: apartnership, corporation or limited-liability company, etc.?

A: Lenders have no preference. However, ifthe loan is going to be securitized, it must be a single-assetentity affiliated with an individual who controls all materialbusiness decisions.

Q: When does a non-recourse loanbecome a recourse loan?

A: When there is evidence of fraud,misappropriation of funds, any material misrepresentation,intentional abandonment of the property, discovery of hazardoussubstances or breach of certain covenants in the loan documents.

Q: Will I have a grace periodfor my loan payments? What is the late charge?

A: It varies by lender. The rule of thumb isto allow a five-day grace period. The late charge generally is 5percent to 10 percent of the payment.

Q: Can I pay the property taxesand insurance, or does it have to be impounded?

A: Most lenders do require an impound accountfor taxes and insurance.

Eric Snyder is vice president of Belgravia Capital Corp.,based in Irvine, Calif. As head of the self-storage program, Mr.Snyder is responsible for the analysis and negotiation of loanrequests throughout the United States and Canada. He had analyzedmore than $1 billion in requests for financing since the programwas launched in January of 1994.

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