The lending market continues to be favorable for self-storage investors and owners. Whether you want financing for a new project or better terms for an existing loan, it’s a great time to obtain funds; but building a comprehensive loan package will be key to locking in the best rates and timelines. In fact, nothing quite impacts an owner’s cash-on-cash returns more profoundly than mortgage-loan terms, including the interest rate and amortization schedule.
The following is a concise summary on how to prepare a professional, effective loan package for lenders that’ll make them say “yes” and offer the best finance terms.
A self-storage loan package includes an offering memorandum and a description of the facility’s annual financial results (cash flow). Sometimes it includes a table or image of the financial results; other times a separate Excel-based sizing or underwriting model is submitted.
The offering memo provides a loan officer with a narrative description of the property, history of ownership, current business plan, demographic information, market overview, a description of the owner/borrower and, most important, the loan request. The following explains the most important components.
Your self-storage loan request should contain the facility’s physical address and provide a description of the property including acreage, total rentable square footage, number of units, occupancy, and square feet of climate- and non-climate-controlled storage. Include details about any additional commercial space such as retail or office, flex industrial, or billboards that generate income. Finally, describe any customer amenities such 24-hour access or keyless unit entry.
One of the easiest, most powerful ways to ensure your loan package impresses is to include bright, attractive images. Commercial real estate is product you can touch and see, so let the loan officer get a look! No longer do you need a professional-grade camera to take quality photos. Most smartphones can showcase your property in the best light.
Loan officers rely on pictures that reflect the condition of the property and demonstrate whether it’s attractive and clean or in need of capital expenditures, which can be indicative of poor management. Photos can also help them determine how well your property attracts customers on looks alone, which is one way to forecast future performance and the ability to service your future mortgage or debt-service payments.
The lender wants to see the facility frontage. Capture this (and all other photos) on a sunny day right after your landscaper has cut the grass and everything is tidy and swept. Add exterior photos focused on the most attractive areas of the site. One of the front office can be helpful if it’s good-looking. You’ll also want photos of building interiors if you have climate-controlled units as well as outdoor units with the doors open.
Pictures of any recent capital improvements are also a nice touch. Add any applicable notes such as “new fence installed in 2021.”
An ownership history is also vital to your self-storage loan package. Add the month and year you opened or acquired the facility along with the purchase price. Describe all major capital improvements completed with a timeline or schedule. This shows the loan officer you’ve made ongoing financial investments to improve the property’s long-term value. Provide a total cost basis or your capitalized interest in the business, which would be located as your basis in your tax returns after you add back depreciation.
Also, describe the non-capital ways you’ve added value in the self-storage project—your “sweat equity.” For example, perhaps shortly after purchasing the facility, you removed problematic tenants, increased revenue by adding a rate-management system, or upgraded the website to increase occupancy. Explaining your business plan along with your tenancy and why customers rent from you provides the lender with assurance that you understand how to successfully operate the facility.
Lastly, include the strengths of your self-storage operation. For example, if your turnover rate is below market or your average tenancy has been six years even though you’ve proactively increased rates, say so. It’ll provide the lender with an idea of how strong your market is and how loyal customers are to your business. Keep in mind that a loan officer is focused on term risk (the possibility of default during the term of the loan) as well as balloon risk (the possibility of default at loan maturity).
Whether you’re seeking self-storage financing from a local lender who understands your immediate market well or a national lender that may not, you need to define the demographics and demand drivers for your business. This includes items like median household income, current population and growth, and the percentage of apartment renters vs. homeowners. You can obtain much of this information online from websites like City-Data.com. It’s also important to mention the top employers in your town, city or county. You can get this info via online search or your local chamber of commerce.
Describe any new retail and housing developments going up in the area. This’ll help the lender understand the current commercial real estate and economic activity. Google Maps can provide distances from your facility to new major employers or developments. This provides a feel for the surrounding area and speeds up the analysis the lender will need to better understand your property and market.
You might also mention any local features that increase the need for storage in your area. For example, if there a lake or recreation area nearby, that might indicate a higher demand for boat and RV storage.
Your loan package should address how well your self-storage facility competes in the area. Include a report with the current saturation levels in your market (five-mile radius) or submarket (three-mile radius). If it’s greater than 10-plus square feet per capita, explain why your market can sustain a saturation level greater than the benchmark average of 7 square feet.
Include your self-storage rent levels relative to the market, particularly if there’s an upside in revenue or minimal downside in rents if a new competitor enters. Add the average occupancy and whether there are any real estate investment trusts in your region.
If you know of any new self-storage developments coming online, disclose this to your lender but mitigate the risk. For instance, let them know the market can easily absorb additional units because the average occupancy is only 95%, or that your facility offers climate-controlled storage and the new competitor doesn’t.
You’ll need to provide the self-storage facility’s ownership and sponsorship information, including a breakdown of every individual who has ownership interest and the managing members, presumably you and possibly others. Provide a résumé focused on your commercial real estate ownership and management experience with the number of facilities you own or manage, their cities and states, and total square footage. Describe your years of experience and specify if you have any in “turnaround” or “value-add” projects. Add in affiliations with any self-storage organizations.
Your financial wherewithal is important in encouraging self-storage lenders to consider your proposal, but an approximate net worth and your liquidity is enough. If you’re giving estimates, be conservative. As a rule of thumb, most lenders want sponsors whose net worth equals the loan amount and 10% liquidity. If there are multiple managing members in the sponsorship, you can provide collective net worth and liquidity.
If the managing members are shy of meeting these requirements, you may need to ask one of your limited partners to provide their financial information and check their interest in potentially signing either a recourse loan guaranty or a nonrecourse “bad boy” guaranty, depending on the loan. The other option is to hire an experienced mortgage broker who can identify the types of loans and lenders that’ll be more accommodating.
Finally, if you have any credit blemishes, including but not limited to foreclosures, deed in lieu, bankruptcies, significant litigation or litigation against a financial institution, disclose this to your loan officer but also describe the applicable mitigants or circumstances. The last thing you want to do is just hope it doesn’t come up. Lenders will find more than you think, and your credibility is the most important commodity you have to offer. A low credit or FICO score are important to local commercial lenders, so describe the circumstances relating to a low score.
Your self-storage loan package must identify the amount of loan proceeds you’re seeking and the associated loan-to-value (LTV) based on what you think your property is worth. Sometimes owners feel apprehensive about adding an “ask,” when in fact loan officers appreciate gaining a sense of what you really want.
In terms of the estimated appraised value you present in your offering memo, in general, knock off about 10% of the most recent assessment you’ve received from a real estate broker. You don’t want to set a hurdle so high that it isn’t realistic. However, you also don’t want to give the impression that your facility is worth less than what a loan officer would assume, or present an LTV so high that they pass on the opportunity.
Along with a narrative offering memo, you’ll ideally include an Excel-based sizing or underwriting cash flow that includes the historical financial performance of your self-storage facility, the operating budget for the next year, and an “underwritten cash flow.” This represents a lender’s annual estimate of next year’s performance while meeting relatively standardized underwriting requirements like a minimum vacancy allowance, which is the greater of the actual vacancy, the submarket vacancy and 5%. An underwritten cash flow also includes a 5% property-management fee, whether you pay a third-party company or yourself.
The underwritten expenses are a line-by-line estimate and generally represent the highest year’s expense during the last three years, unless there’s a legitimate explanation to use a lower figure. It includes a replacement-reserve deduction to account for ongoing capital expenditures, which can be $25 per self-storage unit or $0.15 per square foot.
Lastly, include cash-flow notes that explain year-over-year variations such as a sharp increase or decrease in any specific line item, and on what underwritten revenue your expense items were based. If providing an underwritten cash flow is beyond your capabilities, you can add three years of historical operating statements and a current rent roll along with the offering memo.
Include all of the above in your self-storage loan package, and it should put you on your way to improving the quality of your mortgage loan terms. Happy borrowing.
Gregory J. Porter is the founder of Summit Real Estate Advisors, a New York-based mortgage brokerage specializing in self-storage properties. Gregory is a 20-year lending veteran with commercial mortgage-backed securities lenders such as Deutsche Bank and JP Morgan, where he was a senior underwriter. He also served as the chief underwriter at Barclays PLC, with a $100 million signature authority. He has approved or originated more than $800 million in self-storage mortgages. To reach him, call 917.701.5145 or email [email protected].