By Eric Snyder
Are you looking to finance either a new or existing self-storage facility? There are a variety of factors to consider. You can save time and money by being prepared and knowing the right way to go about locating the lender you need. Here are some of the most commonly asked questions about self-storage financing.
Q: When is the best time to consider refinancing an existing loan?
A: When the note is approaching maturity, or when interest rates are lower than that of your current loan. Prospective borrowers should allow at least six months prior to maturity to shop for a loan: 90 days to find the most competitive lender and 90 days to close the loan. The borrower should factor in the cost of any prepayment penalties.
Q: What can I do to improve my odds of getting a loan?
A: Before sending photographs of the property, take care of any deferred maintenance. Then prepare an organized and thorough loan package. Having experienced management in place helps, so does keeping good records. Borrowers also should make sure they understand their market, by researching the occupancy and rental rates of competitors.
Q: Do I need to have previous experience in the self-storage industry to get a loan?
A: No. You can contract with an experienced management company to manage the property.
Q: What information must be provided to the lender for a loan quote?
A: You should have pictures of the facility as well as the adjacent property, operating statements for the last three years and occupancy reports for the past year. You also will need to provide market information, including rental and occupancy rates of competitors; the number of existing storage facilities within a three-to-five-mile radius and the population of that area; an analysis of factors that drive the local economy, including an evaluation of the diversity of businesses in the area; an assessment of any new facilities planned in the market area; a completed borrower questionnaire; and borrower financials.
Q: How long will the loan process take?
A: Banks and life insurance companies usually require at least a 60-day due diligence period. An experienced self-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, if there are no special circumstances. Legal fees will add another $5,000 to $10,000 to the cost, again, if there are no complications. The loan fee will cost an average of 1 percent of the loan amount. Title and survey fees also must be added to the total.
Q: How do I estimate the size of the loan for which I would qualify?
A: Because of the seasonal nature of the self-storage business, most lenders will underwrite cash flow and loan-to-value based on the trailing 12 months. The cash flow estimate is equal to the net operating income divided by the debt coverage. That ratio is then divided by the loan constant. Most loans have a maximum loan-to-value ratio of 75 percent. Lower leveraged loans will allow the lender to provide a lower interest rate.
Q: How does the lender determine if there are any environmental risks associated with the land?
A: Ultimately, the liability for any risk rests with the property owner. A three-stage environmental site assessment is required. Phase I includes both a document inquiry as well as a physical walk-through. Phase II includes taking soil and water samples to determine the level of potential contaminants. In Phase III, remedial work to remove the contaminants is carried out.
Q: What is meant by securitization?
A: These are lender bundles similar to mortgages, which are analyzed by rating agencies and then used as collateral for bonds purchased by institutional investors.
Q: Should I have a fixed- or variable-rate loan?
A: It depends on the needs of the individual borrower. The fixed-rate loan provides a secured interest rate without fluctuation. Right now, interest rates are at a historical low, so most borrowers are requesting fixed rates to lock in low-interest rates. However, if a borrower is looking for prepayment flexibility, then a variable-rate loan may be more appropriate.
Q: What prepayment options do I have?
A: Most loans have lock-out periods, then yield maintenance prepayment penalties. Declining prepayment schedules are available for a higher interest rate.
Q: What is the optimal occupancy rate preferred by lenders?
A: Most facilities operate at an economic occupancy of 85 percent to 90 percent and a physical occupancy of 90 percent to 95 percent. In today's market, a low occupancy rate may be a sign of poor management or an overbuilt market.
Q: Can I still qualify for a loan if I've had a bankruptcy or foreclosure?
A: A lender will consider your application if the creditors have been paid back. It also could depend on whether the bankruptcy was due to market conditions or to the management of the borrower.
Q: What is the preferred business organization for self-storage operators by lenders: a partnership, corporation or limited-liability company, etc.?
A: Lenders have no preference. However, if the loan is going to be securitized, it must be a single-asset entity affiliated with an individual who controls all material business decisions.
Q: When does a non-recourse loan become a recourse loan?
A: When there is evidence of fraud, misappropriation of funds, any material misrepresentation, intentional abandonment of the property, discovery of hazardous substances or breach of certain covenants in the loan documents.
Q: Will I have a grace period for my loan payments? What is the late charge?
A: It varies by lender. The rule of thumb is to allow a five-day grace period. The late charge generally is 5 percent to 10 percent of the payment.
Q: Can I pay the property taxes and insurance, or does it have to be impounded?
A: Most lenders do require an impound account for 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 loan requests throughout the United States and Canada. He had analyzed more than $1 billion in requests for financing since the program was launched in January of 1994.