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By Jim Davies
If you are contemplating financing, you’re not alone. Most self-storage owners are either working hard to lease up new developments in order to secure fixed-rate take-out financing or looking to refinance their existing higher interest rate loan to take advantage of today’s low fixed rates.
Self-storage remains a strong real estate segment with relatively high valuation; however, one of the key risks in the financing process is lack of proper preparation by loan applicants. When considering self-storage financing, the first step is to ask yourself critical questions about your business. Remember that it is crucial that you identify any potential issues up front and clearly mitigate those issues with facts because the information will eventually be discovered by the lender during its due diligence process. By doing so, you will prevent a minor issue from becoming a major problem in the eyes of the lender.
Making the effort to “do your homework” prior to approaching a lender can dramatically improve the terms of your loan package, simplify the overall process and positively impact the way your loan request is initially perceived by the lender. Here are ten questions to ask yourself when you are considering financing:
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10. What is my current occupancy trend?
One major concern of every lender is the sustainability of income. If the occupancy is trending down and a reasonable explanation has not been provided, the lender will begin to form a negative perception of your facility. If the downward trend is due to increased competition, focus on the factors of the surrounding market and whether the trend is temporary. A key component to mitigating the issue is proving that the market can support both the new inventory and your facility.
9. Have I outlined all of my sources of income?
If you lump all of your storage rent into one income line item, this may raise potential issues down the road with the lender. Buchanan Storage Capital has seen an influx of deals that have diversified sources of income in addition to storage rent, such as billboard and cell tower income. Depending on the structure and term of these leases, the lender may or may not have the ability to include the income in its underwriting analysis.
8. Is there a heavy concentration of one tenant?
If you have a large concentration of one or more tenants, you must disclose this to the lender upon your initial loan request. This issue speaks again to the sustainability of income, i.e., if one tenant leaves, how will it affect the cash flow of the facility? Additionally, if you have a heavy concentration of military personnel due to the proximity of a military base, you must quickly determine if the base is on a national closure list because this could adversely impact your occupancy.
7. Are my real estate taxes fully assessed?
You must thoroughly understand the taxing protocol in your municipality and clearly outline this information to your mortgage banker or lender. Each municipality is different depending on location and state, and you must disclose any special assessment requirements or supplemental tax bills. It is in your best interest to have this discussion upfront because if the due diligence process results in a higher property tax figure being used for the lender’s underwriting, it could potentially reduce your loan proceeds.
6. How do I currently own my facility?
Most fixed-rate lenders require that a facility be owned through a single purpose entity which will serve as the borrowing entity. If you are currently looking to refinance your property and own it as an individual or through a trust, it’s important to understand that you may be required to form a single purpose entity.
5. Are there any non-reoccurring expenses or capital items that I have included in my Operating Statements?
Every lender is looking for a way to differentiate itself when competing for your business, and the majority of borrowers are seeking maximum loan proceeds. One way for a lender to obtain additional loan proceeds is to identify any capital or non-reoccurring expenses that are included within your income and expense statement. Depending on the nature of these items, a lender will often remove these expenses from their underwriting. This will increase both the net operating income and the amount of loan proceeds.
4. What is the environmental history of my property?
Some borrowers don’t focus on the past environmental history of their property and assume that it will not be an issue for a lender. Even though an existing “clean” Phase I or Phase II report might exist, this does not automatically mean that an element of the environmental history won’t become an issue for a potential lender. Disclose any historical environmental reports to the lender upfront for their review.
3. What is the prepayment flexibility of my current loan?
When a new facility reaches stabilization, it’s an exciting achievement for an owner. This is also the perfect opportunity to refinance out the construction loan; however, the ability to do so may be buried in your existing loan documents. Before jumping into the loan process, make sure that you are not still in a lock-out period or facing too significant a prepayment penalty amount for it to make sense to refinance. Also, speak to a professional to help you analyze whether it might make sense to incur the penalty to capitalize on current rates and access additional trapped equity in your facility through refinancing.
2. What is the zoning designation for my property?
Understand the zoning designation of your property and provide the lender with applicable certificates of occupancies, zoning codes and regulations from the municipalities to avoid any potential zoning issues down the road. The majority of fixed-rate lenders utilize a zoning consultant, so you can expedite their analysis and help identify any potential issues by having these items ready ahead of time. Over the past couple of years, we have seen an influx of facilities that are considered “legally non-conforming,” and the owners were unaware that the zoning designation had changed for their property.
1. Am I working with a qualified storage financing team?
Selecting the right company is critical to the overall result of your financing process because self-storage is not fully understood by many lenders, underwriters and mortgage bankers. Ask questions and learn more about the company you’re considering to ensure that you are working with a team of professionals who have the knowledge, integrity and self-storage expertise to provide you with the best financing options to help increase your return on investment.
By fully answering these ten questions prior to beginning your loan process, you will dramatically increase your chances for both a successful and borrower-friendly outcome.
Buchanan Storage Capital is the market leader in arranging debt and equity for self-storage owners nationwide. Our customers receive the most competitive capital because we have earned significant leverage with the most aggressive storage lenders over the past decade. The principals of Buchanan Storage Capital, Jim Davies and Eric Snyder, have a $2.5 billion track record in storage financing, and the firm closed over $450 million in 2005. Parent company Buchanan Street Partners, a leading real estate investment bank, has completed over $10 billion of transactions since its inception in 1999. For additional information, please call 800-675-1902 or visit www.buchananstoragecapital.com.
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