The ‘Average Guy’

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Dear ISS,

I’m writing to you on behalf of the average guy. I’ve been reading your magazine for about three months now and have enjoyed all of the articles—from how to build a self-storage facility to where to build one, from financing to refinancing. But I was wondering if anyone has ever written an article that would address self-storage financing for someone like me?

I’m an average guy who works construction 40 hours a week. After reading articles like “Cutting-Edge Finance Trends” by Jim Davies and Eric Snyder (November 2005), I have hope for guys like me—especially when I read statements like “The latest statistics outlined in Standard & Poor’s CMBS Quarterly Insights report show that less that .25 percent of the $4 billion in self-storage loans the agency currently rates are delinquent. Of the 30,000 CMBS loans S&P has rated over the past 10 years, those for self-storage have the lowest delinquency rate of all property types.”

But after reading that, I still don’t understand why most banks and loan facilities are not willing to give 100 percent loans on self-storage. You can get a house or duplex with a 125 percent loan, but when it comes to a business, banks are very skeptical. If self-storage is such a big moneymaker and has such a small delinquency rate, why is it so hard for the average guy to purchase a facility? I know there are buyers out there who know how to do creative financing; unfortunately, I’m not one of them.

Why does the average guy get treated like he has the plague? Just because he doesn’t have a million dollars in assets or make $100,000 a year doesn’t make him a high risk. When it comes to buying a house, lenders look at your credit, tax returns and income. Why don’t lenders do the same with a business, i.e., look at the business you’re purchasing and check its credit, tax returns and income history? After all, that’s where the loan payment is going to come from, not the buyer himself. If you had to make the payment out of your own pocket because the business didn’t make enough money, you wouldn’t have purchased it in the first place!

I hope the banks can give an average guy a chance. If not, is there someone out there who can help get him to a financial point to purchase a self-storage facility?

Ryan Anderson
West Valley, Utah


Dear Average Guy,

If the lender were going to lend 100 percent, then it would own the property, not the average guy. To be blunt, “Money talks, bull**** walks.” Lenders want you to have some blood in the game, even if you are a nice guy.

In reality, many self-storage owners started as average guys with smaller investments that became larger investments over time. If an average guy is good with construction, he may be able to team up with a developer and contribute his investment in the form of “sweat equity.” The banks can offer creative financing, but I would throw it back in his court—he needs to be creative first.

Neal Gussis,
Principal Beacon Realty Capital
www.beaconrealtycapital.com


Dear Average Guy,

Banks won’t loan 100 percent on investment property because they’re not in the business of owning real estate. They’re instead making an investment in the real estate and the borrower’s character, capital, capacity, condition and collateral (the five C’s of credit).

Most collateral will not support 100 percent financing, as the debt-coverage ratio would be too low. Borrower character is important, but character won’t pay the bills if the economy turns and the borrower doesn’t have the capital or capacity to keep the project going through the bad times.

Would the average Joe be comfortable loaning $500,000 or $1 million to another guy like himself if that person didn’t have adequate reserves in the bank, or the property cash flow was minimal due to a high loan-to-value (LTV)? If so, Average Joe the Lender would not be making a smart business decision; and odds are he would foreclose some time in the future.

Banks don’t typically lend more than 75 percent to 80 percent LTV because the borrower would have very little in the project to lose should he decide to walk away from a bad situation—and he would! Mr. Anderson seems to think it’s a lender’s job to take all kinds of risks and look only to the property for repayment—if the property fails, too bad. His comment about a business not being able to make payments as a reason not to buy it is the same reason a lender will not make a loan higher than 75 percent to 80 percent LTV. It puts too much stress on the business and will likely cause it to fail.

Nonrecourse loans, which look only to the property value, are available. But lenders usually limit the LTV to 75 percent or less; and they still look at the borrower’s financial strength to make sure they have the ability to step up and carry the property in bad times if necessary.

Comparing a home loan with a commercial loan is like comparing apples and oranges. You’re more likely to protect the home you live in than an investment property, which is why banks are willing to lend so much more on a home. Average Joes typically don’t get wealthy without taking risks. Unless they inherit money or property or are fortunate enough to own real estate that increases in value, most of them will remain average Joes, which is OK. Most of us are!

It sounds like Mr. Anderson is a motivated individual looking to do something different, and I applaud that. I myself left a 40-hour-a-week job to start my own business 10 years ago, and it has paid off handsomely. But I took risks: no salary, no benefits, etc. I had a skill and motivation and found my niche. If the reader wants to buy, build or own a self-storage facility, he needs to do one of a few things:

  • Talk to a U.S. Department of Agriculture lender about a business loan, as the USDA is making all kinds of loans on nonagricultural property. For more information, visit www.rurdev.usda.gov/recd_map.html
  • Find a money partner to invest with him. Maybe he’ll have to split the profits 50/50, but it’s better than nothing.
  • Find a private lender to loan him the funds but expect to pay a high interest rate.
  • Continue to work extra jobs and hours to raise more capital and look financially stronger.
  • Find a property that isn’t doing so well and talk to the owner about turning the business around for him in exchange for a percent of ownership based on performance.

Good luck!

David Smyle,
President Benchmark Financial
www.benchmarkfin.com

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