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.
A monetary default normally causes an immediate problem for the lender. Do not default on a note payment, if at all possible. It will immediately move you to the top of your lender’s “problem loan” list, and will cause you severe problems in today’s regulation-heavy environment. Contact the lender prior to missing any payments, and always send required reports on time, with notes on the financial statements, if necessary.
When a loan is in default, a lender has several options:
- Waive the default
- Agree to modify the loan, in which the default is cured or waived
- Enter into a forbearance agreement, in which the default is acknowledged and the lender agrees to delay foreclosing and suing for a set period of time
- Foreclose and sue the borrowers and guarantors
A loan modification is normally the best bet if the borrower can’t get the lender to simply waive the default. The most important benefit to the self-storage owner here is the lender will not be able to foreclose or exercise other remedies unless there is a new event of default.
Normally, the lender doesn’t want to run your self-storage facility. A modification agreement may allow you to get a lower payment for a period of time or lengthen the maturity date, perhaps as much as several years. This “amend and extend” policy of many major lending institutions will come under more regulatory pressure in the future; however, it will yield the best result for both lender and borrower in the self-storage setting.
A forbearance agreement will buy the borrower some time, normally between 90 days and one year, and the borrower normally waives all claims against the lender and admits default of the loan. These agreements pave the way for the lender to foreclose on your property and take control. A forbearance agreement is to be avoided, if possible, because it requires you to admit default and normally doesn’t allow for enough time to correct the financial problems of the self-storage business. A foreclosure limit’s the options of the borrower. A significant financial loss is normally the result for the lender and borrower.
The Best Negotiation
If you have a loan coming due, review your loan documents with your legal counsel and understand your options. Next, communicate with you lender to work out a modification that allows you to remain in control of your self-storage business. Let it know you need to renegotiate and extend the term of your loan. The interest rate on your loan may increase, and you may be required to put up additional collateral.
Keep working hard at renting self-storage units and holding down costs, which will lead to improved operating income. Your lender doesn’t want to own your self-storage property. It simply wants to be paid the outstanding balance on the loan. Negotiating a successful loan workout can accomplish this goal.
Jeffrey B. Turnbull has developed, owned and operated self-storage facilities in the Charlotte, N.C., market for more than 15 years. He’s a licensed attorney in North Carolina, a licensed commercial real estate broker in North and South Carolina, and a past president and founding member of the North Carolina Self-Storage Association. To contact him, e-mail [email protected].
Learn more about self-storage financing at the Inside Self-Storage World Expo.