Unfortunately, this situation typically results in the need for a new relationship with a lender whose footprint is within the property’s market. With new relationships come questions, however, and until the lender and borrower develop a track record of success, the new lender will likely look for ways to safeguard against perceived risk in the transaction. Furthermore, the lender may have questions about the operator’s ability to effectively manage the asset remotely, particularly if the operator has an investor mentality and lacks operational expertise, which is commonplace today.
In situations where investors without self-storage operation experience are looking to capitalize on opportunities that are in remote markets, often the solution is to present the use of third-party management as a viable solution that will help the lender gain comfort with the transaction.
Digging Out Troubled Borrowers
A final area where third-party management can be compelling for a lender or, in this case, an equity-capital source, relates to transactions with a troubled history that are in need of a workout or debt restructure. Regardless of whether the existing owner is deemed capable, in these situations bringing in third-party management can be a useful strategy to attract new debt and equity to the transaction.
In virtually every workout or restructure situation, there’s a “story” that needs to be told about the history of the asset, combined with an outline of a strategic plan that will be implemented to restore value. Third-party management is often a key component of this strategic plan.
If an equity infusion is necessary to rebalance the capital stack and demonstrate a renewed equity commitment to the debt lender, a logical source for the capital may be a large operator of self-storage. This company will likely stipulate its management platform be implemented to participate in the transaction. Alternatively, if the equity capital is more institutional and fund-driven in nature, the capital provider will likely rely upon an existing operating partner relationship. Either way, third-party management in all probability would be a component of the new strategic plan for the asset.
Regardless of the reason for a transaction’s troubled history, it can be difficult to attract new debt or equity to the deal without instilling a level of certainty about the operational capabilities of the management. Bringing in experienced, institutional third-party management is a viable way to demonstrate a renewed commitment and ensure management and operations will not be problems with the asset going forward.
Valuable Multi-Use Tool
For smaller self-storage owners, third-party management offers a number of compelling applications. It’s a valuable tool that, with the right affiliate, can help alleviate financing issues that were difficult to overcome a few years ago.
Shawn Hill is a principal at Chicago-based The BSC Group, where he provides mortgage brokerage and financial consulting solutions to self-storage and other commercial real estate owners nationwide. He can be reached at 773.517.8504; e-mail email@example.com ; visit www.thebscgroup.com .