A positive contribution to your self-storage operation's bottom line can come from many sources, such as a revenue-management system, additional services and retail products, and collections, to name a few. But beyond these income streams, theres a crucial make-or-break moment when you submit a property financing request, as it will have huge bearing on your net cash flow. When that time comes, among managing daily activity, you must make your financing a top priority.
A complete, accurate, concise and compelling loan-request package can make the difference. Make the lender's decision easy. Make or break? The result is in your hands.
Starting 2014 With New Perspectives
As we kick off the new year, there are three fundamental reasons why now is a great time to consider seeking self-storage financing:
- More lenders have embraced self-storage as a preferred property type.
- Todays interest rates are still near historic lows.
- Most lenders are more eager to originate new business in 2014 than in the past several prior years.
Given the ever-changing financing environment, you may want to expand your horizons beyond your current lenders. Working with a mortgage broker to prepare and market a professionally prepared loan-request package allows you to maximize exposure, obtain competitive quotes and minimize your efforts in finding potential lending sources.
A well-constructed package presents five primary information categories. Let's examine each.
The overview is the packages foundation and paints a picture for the lender that entices him to read further and, ultimately, provide you with competitive financing. In the overview, youll want to define the desired type of loan and terms that form the basis for what you believe is a reasonable request. Be sure to include:
- Property overview
- Requested loan amount and desired terms
- Overview of ownership/management credentials
- Salient operating results that support the loan request
- Occupancy highlights and trends
- Summary of existing debt and purpose of seeking a new loan
Property Details and Location Attributes
In this section, your goal is to make the lender comfortable about the storage propertys attributes and location. Make the impression that it is competitively located with features that will attract and sustain new and existing customers. Photosespecially those taken on a sunny dayalso speak a thousand words. At a minimum, this section should include:
- Property address
- Gross and net square footage
- Year(s) built and renovated
- Total number of units (traditional, climate-controlled, parking, other)
- Construction attributes (masonry, metal, asphalt vs. concrete driveways, etc.)
- Security attributes (fencing, gate access, cameras, door alarms, etc.)
- Onsite management office and applicable apartment information
- Amenities, unique attributes and competitive advantages
- Photos (property layout, office, location, visibility signage, etc.)
Dont be shy about bragging about your facility! If you are the local market leader, let prospective lenders know it. Paint a great picture so they can visualize the asset.
You also want to demonstrate your knowledge of your customer base and the propertys demand drivers. Go beyond providing basic demographic information. With modern self-storage software, you can plot where your customers are actually located. This will help impress lenders that you have a good handle on your business model.
In addition, describe the propertys immediate surrounding area, as well as local and regional characteristics. You may also want to address land use and the ability/probability for new competition to arise in your market. Describe potential barriers of entry for new competition that may result from zoning restrictions or local government processes/ordinances. With construction lending gaining momentum in 2014, this will be of increasing concern to lenders.
Ownership and Management Qualifications
Recovering from the recent credit crisis, lenders today place greater focus and emphasis on sponsorship than ever before. Even if you are seeking a non-recourse loan (which uses only the property as loan collateral), your financial strength will be closely scrutinized. Simply put, you need to prove you are a worthy customer.
You can do this through two primary information presentations: proving your financial wherewithal and creditworthiness, and describing your real estate operating experience and track record. Be sure to include:
- Property ownership structure and its principals. You may want to present an organizational chart if the ownership is complex.
- Financial strength of the managing and majority ownership. Subsequent to the loan-request submission, be prepared to provide financial statements, tax returns and global cash flows, and a schedule of real estate owned.
You will also want to stress your self-storage management success track record and ability to achieve positive operating results. Consider including recent efforts to improve your operation, such as revenue-management techniques, website improvements and operational software upgrades/changes. Demonstrate that you are on top of managing the property and fiscally responsible.
For obvious reasons, failure to disclose any credit issues up front can be cause for lender concern and the deal may not make it to the closing table. However, I have managed many requests in which borrowers disclosed past credit problems and their subsequent resolutions, and these concerns became a non-issue going forward with the loan-request process.
Property Operating Performance
The meat and potatoes of your loan request-package, this section demonstrates that the property has the historic and future operational ability to sustain the requested financing. This section should include:
- Year-end financial results for the prior two years
- Trailing 12 months income and expenses (presented monthly)
- Occupancy statistics for past 36 months
- Pro forma income and expense statements for next 12 months
- Current summary gross potential income report
- Current tax bill
You absolutely must present this information in an organized fashion. Remove non-cash items such as depreciation and either remove or explain non-recurring or non-business related expenses.
Ultimately, each lender will establish a net operating income amount that it will use to establish a loan amount. If you are acquiring a property, the pro forma becomes essential because the expense structure is likely to be modified, and the anticipated income may be different based on the owners proposed business plan.
Your loan request should demonstrate that you are well-positioned among your self-storage peers. The competition in most markets is generally those facilities located within a 3- to 5-mile radius. The lender will want to see what the competition is charging for units sizes similar to those offered at your property. You will need to shop your competition to obtain this information. You may want to describe multi-tiered pricing, as many operators offer various price points for the same size units. Provide the lender with explanatory comments on price/quality variations and competitive locations.
Make or Break!
Having structured hundreds, maybe thousands of self-storage loan requests over more than 20 years, I can confidently proclaim that a well-organized, professionally prepared loan request will result in obtaining more favorable lender responses and, ultimately, more aggressive terms. Make the right impression at this point and the resulting financing can contribute to improved cash flow for years to come.
Neal Gussis is a principal at CCM Commercial Mortgage, a mortgage-banking firm that secures financing for self-storage owners nationwide. The company works with an extensive network of capital providers and has funded more than $1 billion in self-storage transactions. For more information, call 847.922.3750; e-mail [email protected]; visit www.ccmcommercialmortgage.com .