As a former member of the Boy Scouts of America, I remember their motto was “Be prepared.” It’s something that also applies to self-storage owners who are looking to refinance a loan in the current capital markets. The same types of loans exist today as a few years ago, however, underwriting standards have changed, and with these changes come new challenges for borrowers.
In today’s market, borrowers face decreased property values and reduced loan proceeds, along with lenders who are now incredibly selective about the properties on which they'll extend a loan. A borrower can feel boxed in, like there’s nothing he can do to resolve these issues. But there are ways to position a refinance transaction to make it as simple as possible for a lender to approve.
Obtain a Fresh Perspective
When it comes to refinancing, starting the process as early as possible can work to your advantage. The first thing you should do is evaluate where the property stands.
With the commercial real estate market still in flux, it’s recommended that you contact a mortgage broker, banker or commercial real estate broker one year before the loan is due to determine your property’s value. Any of these individuals can underwrite the property to find the true net operating income (NOI) it is producing on a trailing 12 months of income and expense. This is the current industry standard almost every lender will look at to see how the property is performing.
Once the NOI is established and a capitalization (cap) rate is known, there’s now a realistic expectation of what the property is worth. The self-storage owner has to understand that the market has changed dramatically during the fiscal crisis that began three years ago. An updated NOI and cap rate establish the true value of the property today, not what you paid for it several years ago.
Of course, the cap rate used in a property sale will most likely be more aggressive than one an appraiser gives for a refinance. If you take a look at the numbers a year before the loan is due, you'll have time to make adjustments if necessary.
What adjustments can a borrower make? Let’s start with property taxes. Unfortunately, most properties have diminished in value since the last time their taxes were assessed. Many owners have not gone to their local counties to get their property taxes lowered.
When was the last time a competitive bid was initiated on the insurance for your property? Just because the insurance premiums and coverage were appropriate last year, there’s no guarantee they're correct today. Perhaps the insurance environment had become competitive due to the economic crisis. It’s important to ensure all money being spent on the property is being spent wisely.