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Is Your Self-Storage Loan Overleveraged?

Around this time last year, I wrote a column for Inside Self-Storage titled, “The Credit Crunch: From Wall Street to Main Street.” Its two main points were that the economic situation was far worse than expected, and the credit crisis had extended beyond Wall Street capital markets to affect most consumers. A year later, I think few would debate the article’s premise.

As the recession deepens, I recall one of my mentors—a wise and experienced credit officer—telling me, “It is not until the tide goes out that you learn who has been swimming without their trunks on.”

Mortgage bankers field daily calls and e-mails from people wanting to better understand the current lending market. Media coverage has left self-storage owners and investors with the impression that banks are not lending. Meanwhile, owners with immediate financing needs are concerned about finding a lender who is willing to support their transactions. Perception is reality in our world, and the lack of real information, coupled with a healthy dose of headline risk, has markets paralyzed with fear.

The fact is banks are lending and deals are getting done in today’s market environment. Make no mistake though: Lenders are much more selective. There are fewer of them, and there is far less availability of non-recourse capital. Today’s deals likely bear no similarity to those transacted 18 months ago, but there is certainly money available for qualified transactions if you know where to look and have realistic expectations.
 
Covering Your Exposure in 2009

Banks are underwriting an average of 65 percent loan-to-value (LTV) and applying much more stringent underwriting criteria. To arrive at cash flow, they analyze a property’s extended history (trailing 12 months or more), use conservative expenses, and make sure amortizations are short enough to ensure some pay down of the balance over the loan’s life. This generally means the lender’s idea of reliable underwritten cash flow is different (read: lower) than the owner’s perspective and, in some cases, even the actual operating results.

The most challenging situation we face is many loans made in the past five years are likely overleveraged by today’s lending criteria. If you have a loan maturing, this can be a significant problem that results in the deal requiring an equity infusion to rebalance the capital stack.

Alternatively, if you are selling your property, you may encounter a bid/ask spread where the offers might not measure up to your expectations in light of financing parameters driving the deal. In this market, it is ultimately the underwritten cash flow that drives the loan amount. When the dust finally settles on the cap-rate debate, loan dollars are more likely constrained by debt-service coverage as opposed to LTV.

Many storage investors could ultimately find themselves in a situation where there are not adequate loan proceeds available to refinance the current outstanding loan balance. Overlay this with the new leverage standards and tougher underwriting criteria, and it becomes fairly obvious there is an equity gap in the capital structure in many of these maturing deals that will need to be filled.
 
Quick Calculations

If you have a loan coming due or you simply want to complete a “quick and dirty” analysis to determine if your loan is overleveraged, you can easily conduct a “stressed loan constant sizing analysis” to gain a better perspective of where you stand and what a lender is likely to conclude. The nice part of this do-it-yourself loan-sizing technique is it eliminates any debate about cap rates from the equation.

Start the calculation by taking your outstanding loan balance and multiplying it by 10 percent. The result is the amount of your debt-service payment when using a 10 percent loan constant. Next, take your underwritten net cash flow (revenue minus expenses, not including debt service or depreciation) and divide by the debt-service number you calculated.

It's critical to use a bank underwriting methodology to derive the cash-flow number, which means you need to include a management fee, even if you do not have one. Your revenue should include a realistic market vacancy with operating expenses between 30 and 40 percent. If the debt-service coverage ratio (DSCR) on a 10 constant is less than 1.25, there is good chance you may be overleveraged.

The following example shows two loan scenarios and helps explain the mathematical calculation.

Obviously, there are many factors that make a real scenario much more complicated. We could debate endlessly about cap rates, values, available leverage points, etc., and I will be the first to admit every situation is unique and requires special examination. The purpose of the exercise is to help you consider your individual deals and provide a useful tool to quickly determine potential hurdles in any near-term refinancing.
 
If Your Swim Trunks are Lacking

If after completing the stressed constant sizing analysis you feel your deal may be overleveraged, here are some useful suggestions. These tips are offered with the caveat that, at the time of this writing, there is no Congressional guidance requiring banks to work with borrowers on their overleveraged commercial loans, unlike in the residential mortgage market.

Be proactive. If you have a loan coming due in 12 to 24 months, be proactive and consider approaching the market now. Even if your existing rate is lower than rates available, it is possible this economy could create a declining trend in your operation and cash flow over the near term ... and that will be a harder story to tell when property refinancing time arrives. If 2008 was a strong year for your property, tell that story now to lenders to capitalize on these results.

Get started sooner rather than later. Don’t wait until the last minute to approach your bank about a storage loan coming due. Regardless of whether you think there might be a problem, meet with your bank or mortgage broker as early as possible to discuss the situation in greater detail. Deals are typically taking longer to complete in this market. Time can be a great asset, particularly when working on transactions with challenges. You can often ferret out those challenges by strategizing with a professional on how to improve the situation in the loan’s remaining time.

Develop equity shortfall alternatives. If you think there might be an equity gap in the transaction, start working now to develop some options. Lining up equity investors can be a tedious and time-consuming process, and if you wait until you are out of time, your negotiating position may be compromised. More important, equity is an expensive alternative. Depending on the situation and the time remaining, you may be able to sweep excess cash flow and accumulate funds to help bridge the gap. Recognizing the problem and developing an action plan are half the battle.

Consider loan workouts and modifications. Some banks will be forced to extend or restructure their overleveraged loans, but will likely do so unwillingly and with penalty. Proactive customers who can demonstrate a clear track record of diligent effort in attempting to refinance a loan will have the upper hand.

If you can demonstrate to the bank that you have worked with a broker or actively marketed the deal but are unable to find a workable solution, it will go a long way toward getting the lender to recognize the problem and cooperate on a workable solution. Alternatively, those who wait until the last minute and throw their arms up are more likely to find a lender with little, if any, sympathy.

With the passage of President Obama’s economic-stimulus package, many are once again cautiously optimistic that the worst is behind us. Let’s hope that is the case. But in the meantime, you might want to do a little homework to determine if you’ve brought your swimming trunks along for the dip.
 
Shawn Hill is a principal of Chicago-based The BSC Group, where he provides brokerage and financial consultating solutions to self-storage and other commercial real estate nationwide. He is a former senior vice president with Beacon Realty Capital. He can be reached at 773.517.8504; e-mail [email protected] 
             

Self-Storage Industry Trends: Second in Three-Volume Series Released

The second in three-part series of publications regarding self-storage industry trends is now available from MiniCo Publishing Inc. Comprising information drawn from 10 years of self-storage data, Volume II: Site Information & Customer Base can be purchased in a downloadable PDF format at MiniStorageMessenger.com. The cost is $24.95 per volume.

Part one of the “Tracking Industry Trends” series, Volume I: Rental Rates & Occupancy, was released in February 2009. Volume III: Marketing & Management is scheduled for publication in July. The data is a compilation of statistics from past editions of the annual Self-Storage Almanac combined with new analysis by industry experts.

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Florida Self Storage Association Summarizes 2009 Achievements

According to a recent release by the Florida Self Storage Association, the organization has exceeded its goals and is ahead of schedule for achieving the initiatives set forth in January 2009. The FSSA has cited the following accomplishments:

  • The association held a successful conference and expo in Orlando, Fla., in April. The event encompassed 10 seminars, 63 exhibits and a state-of-the-industry panel discussion. In addition, more than $3,500 was raised for Special Olympics Florida.
     
  • Six free education sessions have been offered by the FSSA so far this year. The events have taken place in three cities and been attended by more than 100 members.
     
  • The association is conducting a survey to update its member information. Margaret Steiner of StorSafe Self Storage received a five-day cruise for two as part of an automatic drawing related to the survey.
     
  • A 28-page edition of FSSA publication InPrint Magazine was distributed to 3,500 self-storage owners, operators, managers and vendors in March.
     
  • The FSSA officially affiliated with the national Self Storage Association on April 1.

The association’s plans for the remainder of the year include the unveiling of a new website, the offering of more free education sessions and the addition of new member services.

The FSSA is a non-profit organization comprised of individuals who have an interest in the self-storage industry in Florida. Members include facility owners, operators, developers, investors, managers and suppliers.

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Weinstock Joins Marcus & Millichap Oak Brook Office

Steven Weinstock has joined Marcus & Millichap as regional manager of the firm's Oak Brook, Ill., office. He will be responsible for managing the office and serving customers throughout Chicago and the Midwest.

Weinstock joined the company’s Detroit office in April 2001 as a multi-family and self-storage investment specialist. He was a director of the National Multi Housing Group and a member of the National Self-Storage Group. He achieved senior investment associate status in 2004, and was promoted to vice president of investments in 2008.

Weinstock received a bachelor's degree in psychology from the University of Michigan and a juris doctorate degree from Wayne State University Law School. He is also a Certified Commercial Investment Member.
 
Source: REJournals.com, Weinstock joins Marcus & Millichap in Oak Brook, Ill.

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Sovran Self Storage Stock Expected to Decline, Says Squeezetrigger

Buyins.net/Squeezetrigger.com is monitoring the performance of all stocks with earnings being released on May 6 and determining how the stocks have performed after their last 12 quarterly and April earnings reports. Among the stocks being watched is Sovran Self Storage, which is expected to be lower after the company’s earnings are released on Wednesday.
 
According to an article on TradingMarkets.com, most companies’ stock-price histories show random movement around earnings dates, but some seem to adhere to a pattern. The Squeezetrigger technology is designed to help stock traders identify companies that seem to have a consistent pattern of movement before or after the earnings release date, based on the history of earnings releases for that company.
 
Real estate investment trust Sovran engages in the acquisition, ownership and management of self-storage properties in the United States. Headquartered in Williamsville, N.Y., the company was founded in 1982 and currently operates approximately 359 facilities.

Squeezetrigger.com is a service designed to help shareholders of publicly traded U.S. companies fight short selling.
 
Source: Trading Markets, BUYINS.NET: CTB, MGG, SKYW, CPNO, SSS and NRGY Expected To Be Lower After Earnings Releases on Wednesday

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A Self-Storage Lesson From 'The Babe': Security and Marketing Make a Home Run

After a disastrous baseball season in which it seemed he was all washed up, Babe Ruth turned his career around with a well-executed marketing campaign. In these tough times, self-storage operators can do the same, using security as a hard-hitting promotional tool. 

The year was 1922, and George Herman “Babe” Ruth was larger than life. He broke his own home-run record nearly every season, and during a few, he hit more home runs than some entire teams! But young and reckless, the Babe rarely abided team or league rules in those days. At first, it didn’t seem to matter. The Yankees kept winning, he kept breaking records and everyone was happy.

Happy, that is, until a stern warning came from Judge Kennesaw Mountain Landis, a no-nonsense man who was also the Commissioner of Baseball. He told Babe that playing in exhibition games or “barnstorming” during the off season would not be tolerated by the league. In violation of his contract, the Babe ignored him, and was consequently suspended for the first 39 games of the 1922 season.

When Babe finally returned to the plate, things remained rocky. He was suspended two more times, threw dirt in the face of an umpire, and even attempted to fight a spectator. The season ended poorly, and it seemed the entire country had turned on its former superstar. Babe knew it was time for a change.

His new strategy? An aggressive marketing and public-relations campaign to clean up his image and come back better than ever―which he did.
 
Self-Storage at a Similar Crossroads

There are lot of similarities between self-storage and Babe’s story. As an industry, we’re at a crossroads like the one he faced after his disastrous season. In previous years, self-storage kept breaking records. Occupancy rates rarely dipped below 90 percent, business was booming and everyone seemed on top of the world. Today, some of us have gone from fat and happy to shaken and uncertain of the future.

Granted, the self-storage industry has not behaved as carelessly as the Babe. Our overall business remains healthy and growth continues. At the same time, occupancy rates are down, and the competition for a single customer is greater than it has ever been. It’s time for storage operators to do as Babe did and develop a hard-hitting marketing campaign. 

Security as a Marketing Tool

The question is what to emphasize in your marketing message? What truly differentiates you from the competition? Your site security can be a particular advantage as it addresses tenants’ underlying fears about storing. Your top marketing tools include:

Automatic gates with electronic access control. The first thing your prospective customer, existing tenant or potential thief will encounter is your access-control system. Remember, most thieves will pose as tenants to gain entry to the site. This tells them immediately that your site will not be an easy mark. It also tells honest tenants about the level of security at your site.

Self-storage management software. This tool is very powerful for your sales team before, during and after the rental. Management software interfaces with your access-control system and provides your staff with tools such as a facility site map, tenant management, billing management, reporting and a daily task manager. Imagine the impression you’ll make when you educate customers with customized reports tailored to their activity and needs.

Additional controlled access. The ability to secure elevators, building access and virtually any door in your facility will allow you to take your security to the next level. Customers can be assured that no one gains entry to the property who isn’t supposed to have it.

Peripherals. Additions to your system may consist of electronic gate operators, keypads, keyless entry, access cards, RF readers, video surveillance, interactive site graphics and much more.
You’ll win consumer confidence when your manager can say to prospects, “As you can see, we use a state-of-the-art access-control system for your peace of mind. Our system will restrict access to the property for those not authorized, while providing you with convenience during business and after hours.”

There are so many ways to use a professionally installed security system as a marketing advantage. The system, combined with a qualified manager, creates a team that will always hit home runs, one that uses all the tools and abilities at its disposal to help your business succeed today, tomorrow and beyond. That’s what you call a comeback in tough times. 

Randy Johnston, with more than a decade of self-storage experience, is the regional manager for DKS Doorking, which has provided access-control solutions for the self-storage, commercial, residential and industrial industries for more than 60 years. For more information, call 310.645.0023; visit www.doorking.com.

Business Tenants Dropping Self-Storage Units

As the number of self-storage auctions continues to rise around the country, more managers are trying to avoid that end by making more courtesy phone calls to business tenants.

Hit hard by the economy, many business tenants have fallen behind on rent. The self-storage industry has seen fewer business tenants who can afford to rent a storage unit. These type of tenants often stored equipment, furniture and inventory.

Homeowners losing houses to foreclosure have been able to fill some of the void in Sonoma County, Calif. 


Source:   Santa Rosa Press Democrat,   As Business Tenants Leave, Former Homeowners Fill the Void

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More Self-Storage Auctions in California's Bay Area

A growing number of online retailers have sprung up in California's Bay Area to buy and sell stuff from auctions at self-storage facilities.

The number of self-storage auctions has increased in Northern California by 10 percent over the past year, according to John Cardoza, owner of Storage Auction Experts. In a single week, Storage Auction Experts conducted more than 20 auctions at four self-storage sites in Santa Rosa, Calif.

There are also more bidders than in previous years. Buyers place their purchased auction items on Craigslist and eBay in hopes of earning money.

Source:  Santa Rosa Press Democrat,  A Bid to Make a Buck

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Hawaii Self Storage Honored With Torch Award

Hawaii Self Storage was one of two companies named top small businesses in this year’s Torch Awards, presented by Hawai'i's Better Business Bureau. The self-storage company tied for first place with ING Direct.

The annual award recognizes businesses and public charities for "their commitment to fair, honest and ethical marketplace practices," according to a press release from the Hawaii Better Business Bureau. The award was presented Thursday at a luncheon in the HiltonHawaiianVillage's Coral Ballroom.

Source:  Honolulu Advertiser,  BBB Salutes Fair-Play Businesses

 

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