One of the top questions self-storage professionals are asking during this recession is, “How are bankers looking at self-storage deals?” The answer is they are looking at loans with the proper level of interest and caution, just as they should always have done.
Over the last decade, there were many loans that shouldn’t have been made. Some deals have turned sour for the investor and banker. Most of these deals haven’t gone bankrupt or even entered foreclosure, but many have not realized the success the developer expected. Some have not broken 70 percent occupancy after four or five years. Anyone want to be invested in a deal that calls for more cash injection? Anyone want a deal in a market that is overbuilt by a wide margin? Anyone?
One of the best “war” stories I have is about a developer in Florida who contacted me about financing. It was around 2004, a time in which a lot of educated people were saying things like, “You just can’t go wrong in self-storage.” The developer had just exited a small apartment deal and decided to build a large self-storage business with approximately 800 units on five acres. This prospective developer, who had a little money in his pocket, said he was doing the deal because “all the competitors were full,” and he “knew the town like the back of his hand.”
Apparently, if I wanted his business, I would be competing with several banks that had already approved his loan. He e-mailed me a two-page loan request that summarized his rather marginal financial position, and two term sheets from competing lenders. When I requested the loan package, he replied, “I sent you my loan package.” No feasibility study. No tax returns. No balance sheet. He believed the project was good and, in his mind, he didn’t need to spend money on a feasibility study. Plus, he was going to get the deal done, whether I participated or not.
I asked the good questions: How would he manage the store? How did he know it would be successful? He did not have good answers. When I informed him I had one project under construction and another in permitting, both within five miles of his site, he seemed to think it didn’t matter. Needless to say, I was not interested in being his lender. But somebody was. The deal happened. He was the last of four new competitors to open in that market.
Not long ago, I was able to reconnect with this store, which was hovering around 60 percent occupancy—well below breakeven. The manager indicated the store had dropped prices by 50 percent since opening, and it had been at the current occupancy for more than a year. Six of its 12 competitors were below 70 percent occupancy. Rates were declining as everyone struggled to survive a severely overbuilt market.
The point is bad decisions make big problems. Who else has war stories like this one? Your banker.
Plan Your Strategy
The financial landscape has changed. When discussing how capital markets responded to the recession, my local banker put it this way, “We didn’t just turn a corner, we jumped off a cliff.”
Before you meet with your lender, you must have a solid strategy for how you will introduce your deal and gauge the bank’s interest in making the loan you need. You’ll likely need to educate the bank’s decision-makers about the self-storage industry, your market, and the expected investment performance of your deal to win a satisfactory approval. Banks are in the risk business, but the banker’s job is to effectively manage and mitigate those risks with the loan he puts in place for your business.
Your job is to provide the lender with as many reasons to do your deal as possible. A banker wants to invest with you after you have found the right deal, invested in the right research, identified and mitigated risks, and put together enough capital to leverage a loan. He also wants to know that when the deal is born, you have the proper team in place to make it profitable quickly.
Banks that have been bitten recently by regulators, deals gone bad and under capitalized clients will pay particular attention to the financial details you present. In this lending environment, it’s best to not discuss any particulars of a deal with a banker until you’re ready to answer the tough questions.
As you identify potential lenders, gauge their interest in self-storage. Some may come right out and tell you they don’t have room for another self-storage transaction. They may want to see the deal first. Keep in mind that most local bankers will have seen maybe only a handful of self-storage deals from the beginning of development.