Attractive mortgage terms play an important role in the success of any self-storage operation, which is why it may be a good idea to consider refinancing. Not only do favorable terms allow owners to maximize their investment and their returns, but long-term fixed rates can provide security in a rising and falling market.
The problem is that many borrowers are unaware of some of the most important criteria that commercial lenders look for when considering a loan application, especially for fixed rate, long-term, no-cost mortgages. appeal. Why should you want a non-recourse loan? Because it exempts the guarantor (borrower) from being held personally liable for the debt. This is especially important in the event of default, as the lender can only seize the collateral.
Let’s review some of the things that will help you prepare for and get the most out of a self storage refinance.
Getting a new self-storage loan can take an average of 60 days from start to finish. It is important to review the repayment instructions for your current mortgage, as you may have a window of three to 12 months before the due date to refinance without penalty. It is imperative to be aware of the details, so that you have enough time to obtain new debts.
Borrowers often wait to contact a lender until 30-40 days before their note is due, which is a mistake. When you limit your loan window, you potentially narrow your financing options, especially if there are unexpected delays in the process. I recommend reviewing your options at least one to two years before the maturity date. By budgeting your time wisely, you can avoid any problems and prepare your self-storage property for optimal conditions.
When determining their ability to provide financing, lenders consider all aspects of a transaction. Fortunately, an apparent undesirable aspect of your self-storage asset will not necessarily prevent you from obtaining new debt without recourse. Here are some of the main criteria to focus on when preparing for a refinance.
State of the property. The general condition of your self-service warehouse plays an extremely important role in the evaluation process. During the subscription period, an inventory will be made of the site’s infrastructure. Being prepared to repair any deteriorated paving and fix any structural building issues while ensuring that all utilities are in working order can go a long way to maximizing the appraised value and minimizing the extent of immediate repairs required by the lender. In terms of upgrading your facility, a cash refinance can allow you to access some of the accumulated capital to make necessary improvements.
Occupation. Most lenders prefer a self-storage facility to have a physical occupancy above 75% or 80%. If the property is slightly below this level, be prepared to provide an explanation. For example, maybe occupancy is trending up due to a recent expansion, or you can discuss your efforts to actively increase performance. Another thing to consider is how your occupation fits into the market context. Being well prepared to explain a lower number can be essential to getting a new loan.
Expenses. Many self-storage lenders largely base their loan amounts on a facility’s net operating income. Review your last few years of income and expenses well in advance. It’s also important to note any one-time or capital expenditures on your statements. In fact, these expenses may be analyzed separately. Also be aware that lenders typically charge an off-site management fee of 4-5% for underwriting purposes.
Survey, Title and Legal Requirements. A recurring stumbling block during the self-storage loan process is delays or complications with these items. A new ALTA (American Land Title Association) survey of the property may be required. If changes have been made to the package in question, meeting title requirements may take time. It is strongly recommended that you hire an attorney experienced in self storage and non-recourse mortgages to help you navigate the legal requirements specific to the loan.
Perceived deficiency. If your self-storage asset has a potential problem, have a detailed explanation and short-term solution to correct the problem. For example, if there has been a slight drop in revenue recently, explain why and provide a business plan to drive growth. Proactively addressing issues helps give lenders confidence to quote your transaction.
Guarantor’s balance sheet. In addition to the asset, non-recourse lenders must see certain minimum requirements from the guarantor(s) of the loan. Generally, any borrower who owns more than 25% of the borrowing entity must be underwritten and provide financial information.
Lenders prefer borrowers with a minimum credit score of 680. If there are credit issues, such as foreclosures, bankruptcies, late payments, etc., it is important to provide sufficient explanation upfront . Most lenders also like to see a minimum combined net worth at least equal to the requested loan amount and in a sufficient liquidity position.
A word about acquisitions
By the way, if you’re looking for a self-storage home equity loan rather than a refinance, most of the criteria above still apply. During due diligence, it is important to work with the seller regarding any issues with the property and their explanations. Acquisitions are sometimes delayed because a seller is frustrated with these detailed requests from the lender, but the more clarity the seller can provide upfront, the more peace of mind you will have as a buyer. This will also help the lender preemptively address any concerns.
In addition to non-recourse terms, many lenders may offer a few years of interest-only payments on acquisition debt. This approach can help immensely with immediate cash returns.
Prepare for approval
Preparing your self-storage facility for an upcoming refinance can result in optimal valuation and superior, non-recourse loan terms. Remember that your current debt repayment window and any prepayment penalties are key factors in moving forward and securing favorable terms.
With low long-term 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 on-the-spot 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 company has been providing commercial loans and self-service storage since 1989. For more information, call 585.423.0230.