These are difficult times for most businesspeople to maintain a bottom line let alone start a new venture, but self-storage may still represent a secure investment opportunity. If we consider the financial changes that have occurred over the past year, we realize it’s not self-storage as an industry but lenders that are having difficulty.
Many financial institutions have collapsed or do not have the funds to be in the finance business. Although the government has provided funds to banks for well-founded business ventures, very little of that money is finding its way to new commercial or industrial enterprises.
The Canadian self-storage industry began about 15 years behind that of the United States. Interbay Funding LLC, a commercial lender based in Fort Washington, Pa., saw an opportunity to harvest Canada’s budding industry by investing in small to mid-size self-storage facilities. The company was a driving force in Canadian development for five years, until the sagging economy fueled its withdrawal from the country in 2008.
Did Interbay simply forget to take stock of its own potential or that of the Canadian self-storage market? Yes, the economy is in trouble. Yes, there are changes to consider when seeking financing today. No, self-storage development in Canada is not a dead issue.
Changing Lending Requirements
When considering the requirements for financing a new self-storage project, we have to recognize the new parameters lenders use and why they have evolved. Lenders have pulled in their horns as they reel in the shockwave of losses faced in other areas. Once burnt, twice shy does not mean business is nonexistent, it means it has gone ultra-cautious. Lending institutions, banks, trust companies, credit unions and private lenders have increased their standards to qualify financing on any project.
These standards start with examining the board of directors of the prospective company―the members’ personal financial status, expertise in the industry and past business accomplishments. The team is now a major consideration, and any flaws in its members’ credit history or ability to raise additional capital weighs heavily in the lenders’ decision to finance a project. If the team is strong and the risk of management is nonexistent, the project moves to the next level of qualification.
Lenders always need an exit strategy, especially with a single-purpose property such as self-storage. However, in a market where unloading a property to withdraw financing is unrealistic, they will look at other means to ensure the exit strategy, like attaching personal guarantees from the principals. This means they must now look harder at the viability of the principals to repay should the venture not come to fruition of the business plan.