Attractive mortgage terms play an important role in the success of any self-storage operation, which is why it can be smart to consider refinancing. Not only do favorable terms allow owners to optimize their investment and returns, long-term, fixed rates can provide security in an up-and-down market.

The problem is many borrowers are unaware of some of the most important criteria commercial lenders seek when reviewing a loan request, particularly in the case of nonrecourse, long-term, fixed-rate mortgages. Why should you desire a nonrecourse loan? Because it relieves the guarantor (borrower) from being held personally liable for the debt. This is especially important in the case of a default, as the lender can only seize the collateral.

Let’s review some of the items that’ll help you prepare for and get the most out of a self-storage refinance.

Timing

Obtaining a new self-storage loan can take an average of 60 days from start to finish. It’s important to review the payoff instructions for your current mortgage, as you may have a three- to 12-month window before the due date to refinance without a penalty. It’s imperative to be aware of the specifics, so you have sufficient time to obtain new debt.

Borrowers frequently wait to contact a lender until 30 to 40 days before their note comes due, which is a mistake. When you limit your lending window, you potentially shrink your financing options, especially if there are any unforeseen delays in the process. I recommend reviewing your options at least one to two years in advance of the due date. By budgeting your time wisely, you can avoid any issues and prepare your self-storage property for optimum terms.

Refinance Criteria

When determining their ability to provide financing, lenders review all aspects of a transaction. Thankfully, an apparent undesirable aspect of your self-storage asset won’t necessarily prevent you from obtaining new, nonrecourse debt. Following are some of the main criteria on which to focus when leading up to a refinance.

Property condition. The overall condition of your self-storage facility plays an extremely important role in the valuation process. During the underwriting period, a property-condition report will be performed on the site’s infrastructure. Being prepared to repair any deteriorated paving and fix any building structural issues while ensuring all utilities are in working order can go a long way toward maximizing the appraised value and minimizing the breadth of immediate repairs required by the lender. In terms of upgrading your facility, a cash-out refinance can allow you to access some of the built-up equity to make necessary improvements.

Occupancy. Most lenders prefer that a self-storage facility to have physical occupancy above 75% or 80%. If the property is slightly below this level, be prepared to provide an explanation. For example, perhaps occupancy is trending upward based on a recent expansion, or you can discuss what efforts you’re implementing to actively increase performance. Another thing to consider is how your occupancy fits in context with the market. Being well-prepared to explain a lower number can be critical in obtaining a new loan.

Expenses. Many self-storage lenders base their loan amounts in large part on a facility’s net operating income. Review your trailing few years of income and expense figures well in advance. It’s important to note any one-time or capital expenses in your statements, too. In fact, it may be possible for these expenses to be analyzed separately. Also, be aware that lenders will typically require a 4% to 5% off-site management fee for underwriting purposes.

Survey, title and legal requirements. A recurring stumbling block during the self-storage loan process relates to delays or complications with these items. A new ALTA (American Land Title Association) survey of the property may be required. If any changes to the parcel in question have occurred, it may take time to satisfy the title requirements. It’s highly recommended that you use an attorney experienced in self-storage and nonrecourse mortgages to help you navigate the loan-specific legal requirements.

Perceived deficiency. If your self-storage asset has a potential issue, have a detailed explanation and a near-term solution to rectify the problem. For example, if there’s been a slight decrease in revenue lately, explain why and provide a business plan to foster growth. Addressing problems proactively helps give lenders confidence in quoting your transaction.

Guarantor track record. In addition to the asset, nonrecourse lenders need to see certain minimum requirements from the loan’s guarantor(s). Typically, any borrower who’s more than 25% owner of the borrowing entity must be underwritten and provide financials.

Lenders prefer borrowers with a minimum credit score of 680. If there are any credit issues, such as foreclosures, bankruptcies, late payments, etc., it’s important to provide a sufficient explanation upfront. Most lenders also like to see a minimum combined net worth that’s at least equal to the loan amount requested and in a sufficient liquidity position.

A Word on Acquisitions

By the way, if you’re seeking a self-storage acquisition loan rather than a refinance, most of the above criteria still apply. During due diligence, it’s important to work with the seller regarding any property-related issues and explanations thereof. Acquisitions are sometimes delayed because a seller becomes frustrated with these detailed lender requests, but the more clarity the seller can provide upfront, the more peace of mind you’ll have as a buyer. It’ll also help the lender preemptively address any areas of concern.

In addition to nonrecourse terms, many lenders can offer a few years of interest-only payments on acquisition debt. This approach can help tremendously with immediate cash-on-cash returns.

Prepare for Approval

Preparing your self-storage facility for an upcoming refinance can result in optimal valuation and superior, nonrecourse loan terms. Just remember that your existing debt-payoff window and potential prepayment penalties are key factors in moving forward and securing favorable terms.

With long-term low interest rates and 30-year amortizations available, you can increase your property’s monthly cash flow and use excess loan funds at your discretion to make onsite improvements. This will help ensure the long-term financial success of your self-storage operation.

Gerard D. DiMarco Jr. is a managing member of Security Mortgage Group LLC. Based in Rochester, New York, the firm has provided commercial and self-storage loans since 1989. For more information, call 585.423.0230.