Somehow we survived Black October 2008, but now found ourselves in the worst credit crisis since the Great Depression. Americans are stressed out. Investors have seen their savings and 401k accounts shrink to unimaginably low levels. It’s estimated that as many as 30 percent of Americans owe more on their house than its worth. All sorts of what-if scenarios are bantered about, with worst-case predictions openly contemplated by business news pundits on a daily basis.
As a nation, and as individuals, we are closer to the breakpoint than we have been in more than a generation or two. What exactly is the “breakpoint?” When you are playing tennis and are on the losing side of a breakpoint, you are one point away from losing the game, even though you’ve been serving the ball.
That sounds eerily similar to our nation’s economic position and the situation many storage owners find themselves in at the outset of 2009. We had been easily holding serve with property financing for several years thanks to historically low interest rates and generous loan program terms.
But as the residential subprime mortgage fallout gained momentum through 2007 and 2008 to morph into a full-blown credit crisis, we found that holding our serve was much more difficult, even if our self-storage businesses were performing well operationally. What became readily apparent is that we need to constantly be cognizant of how macro market conditions can make us more vulnerable and force us into a breakpoint situation.
Working Hard for the Money
The U.S. government has joined with nations worldwide to fashion multiple solutions to the financial crisis. One of the main objectives is to shore up the banking system to better support lending to businesses and consumers. As we’ve seen, the crisis will not be solved overnight and will likely take several months (maybe even years) with many twists, turns and wild gyrations in the stock and bond markets along the way.
Undoubtedly, borrowing will be more difficult for everyone in 2009 and you will have to work extraordinarily hard to obtain commercial real estate financing. There is good news though: For the most part, interest rates are still reasonable and some banks are still making loans on self-storage properties.
Today, banks are controlled by their risk management, with even the strongest institutions scrutinizing loan-request packages more closely than they have in a decade. Lenders are evaluating borrowers’ risk profiles primarily on two main factors:
The ability to borrow based on the credit and financial wherewithal of the borrower and his partners. Banks now review actual credit and balance sheets for reasonableness of values. They’re also giving more weight to liquidity, as they view cash on hand through liquid investments as a positive sign of your ability to repay the loan.
Lenders are examining the historic performance of a property to size up a borrower’s new loan. Remember, though, lenders today use stricter guidelines than in the past, which curtails loan dollars. Therefore, on a case-by-case basis, a borrower may be exposed to a lender denying a request because of credit, or providing him with a loan quote that is less than the current outstanding loan.