This article provides basic information to the self-storage owner who is facing a maturity date of less than 12 months on a note payable or experiencing difficulty keeping the interest and principal payments current on an existing note. The goal is to negotiate a solution that allows you to maintain control of your property until the economy improves.
If your loan is maturing in the next 12 months or you’re having trouble keeping it current, begin with a thorough review of your loan documents. Normally, you would hire an attorney to perform this examination.
As a borrower, you need to know if there are any mistakes, errors or omissions in the loan documents that would hurt the lender’s position to collect the full outstanding debt or give rise to potential lender-liability claims. Has the lender neglected to have you sign the notes and guarantee agreements? Has the deed of trust or mortgage been properly recorded? In general, are there flaws in the lender’s loan documents? This review is an important first step to negotiations with your lender.
Communicate and Be Proactive
Most lenders want to work with you and will be accommodating and reasonable in a loan-workout process. However, in today’s economic environment, your lender (or its counsel) will be reviewing the loan and, about four months out, will send you a nice letter stating that your loan is maturing, and they may not be interested in renewing or extending it.
It makes good sense to contact your lender first. Always conduct all communication with your lender in a professional manner, preferably in writing so you have a paper trail. E-mail works well here, too.
More than likely, the appraised value of your self-storage facility has declined, and you may be required to inject additional equity to renew the note. Amortization time frames have shortened, which will cause the monthly payment to increase. Finally, with credit continuing to be extremely tight, your interest rate will likely increase, adding further to a larger monthly payment. Debt-service coverage ratios have also tightened, creating less borrowing capacity.
The bottom line: Be ready with a plan to accommodate your lender and, of course, shop this plan among multiple lending sources. Your goal is to maintain control of your property and get your lender to extend the maturity date of the loan, hopefully on the same terms and conditions.
Monetary and Non-Monetary Defaults
First, determine if you’re in default. If you’ve failed to make a payment on time, you’re in default. This failure is a monetary default. You may also be in non-monetary default. A common example of this would be the failure of the borrower to submit various financial reports as specified in the loan documents.