Compiling a Quality Self-Storage Loan Package: Get the Deal Done

Benjamin Burkhart Comments
Posted in Articles, Finance, Loans
Print
Continued from page 1

Just because a bank has self-storage in its portfolio, doesn’t mean a banker will understand the nuances of the business—and it’s those nuances that are important. Don’t send pieces of the deal before you anticipate all of the potential questions a banker might have. Showing a banker only pieces of a deal might raise red flags before you have a chance to fully investigate a project.

After you’ve identified an acquisition or development deal, you need to do your own due diligence before sending any details to a lender. During your feasibility period, identify market trends, supply and demand dynamics, expected costs and financial performance, as well as create a pretty well-defined budget. A lender will probably require environmental studies, particularly if you’re dealing with a parcel that might have been occupied with another use by a previous owner.

Bankers will demand site plans, pictures, surveys, market reports, demographic analysis and pro forma financials related to your project. Put these items together before you sit down to make your presentation and request for financing.

Anticipate the Questions

Bankers want to identify the risks in a deal and be sure there is a counter-balancing mitigating factor associated with those risks. Your feasibility study should clearly identify the market risks or site risk of your project, and enable you to map out the answers to the questions. For example, a new self-storage project might take three years to achieve a stable cash flow or break even. You must be able to present the appropriate mitigating factor to bankers, because when they look at negative cash flow for two years, it will make them cringe.

In self-storage, however, a cash reserve, or dedicated supporting income, is a critical development cost. A banker will understand that it takes time to make a project’s cash flow positive. What he might have trouble with is the fact that operations deficit financing is a true development cost. You need a cash war chest in reserve from Day 1 or your project will not work. Quantify this risk with a careful, conservative, month-by-month pro forma, and let your banker see that the loan he is making is secure because you have the cash in reserve to pay the bills and his interest through breakeven economic occupancy.

Any banker who has studied a self-storage project will remember that a seasonal trend in occupancy may occur. Know what impacts seasonality in your market. Is there a college nearby that generates a high tide of rentals in the spring and summer? Are you in a vacation market that derives income from winter visitors? Be sure your cash-flow projections reflect seasonality during lease-up and following “stabilization.”

Many in this industry will build a pro forma for a new project based on leasing a certain percentage every month. Lease-up doesn’t work that way, so don’t try to sell that to your banker. You rent units, not percentages. People move in and move out. You give discounts to win business, and some people won’t pay you. Lease-up is rarely linear, and economic occupancy—the important measurement—doesn’t mirror physical occupancy. When you present a pro forma to your banker, make it tight and accurate and reflective of market conditions.

A good loan package will also include detailed information on the personal or corporate financials you present to support the deal. On the personal side, provide the highest level of detail on individual debts and assets, cash and investments. For example, if you own multiple companies that flow through to your personal tax returns, provide detailed descriptions of those entities, their cash flows, debts and assets, and how they impact your financial position. The more information you provide, the better your application looks to a detail-oriented lender.

Recall that bankers are in the risk business. When a banker looks at your loan application, he will grade it on the risk it poses to the bank. How things can change in a hurry is “top of mind” with lenders these days. Your job is to clarify that your deal, even in a stressed scenario, will perform well. Be certain to anticipate the correct “what if” scenarios, and prove to your banker that the loan he makes to you is secure and safe, even if the market softens, rents decline, interest increases, or leaseup is slower than projected.

Comments
comments powered by Disqus