So we now have a self storage project under contract!
Way to go!
In last week’s episode, we covered the first few spaces a self storage buyer goes through today to get to the finish line and either close on the project or let it go.
In this episode, we are going to complete what I think are the major spaces all Self Storage Buyer’s need to work through.
Remember, last week we covered:
-
- Inspections
- Feasibility Reports
- Review of books and records of the Seller
This week we will cover:
- Loan approval
- Legal & closing
Loan Approval
In many episodes and all of the classes offered at The QuickStart Academy.com, I cover putting a loan package, or a Request For Loan Proposal together. I don’t want to rehash and duplicate those articles.
This episode is about best practices today ion dealing with lenders.
If you are interested in a loan package we have put together for a lender requesting a self storage loan, click here to see it.
I don’t think that my process is the gold standard for the industry. I just know it has worked for us as well as the people I coach one-on-one.
Quickly, our package is usually in a binder. We also scan it for lenders that request it digitally, but I almost always send them a binder as well).
In the binder are tabs separating the following areas.
- Before tab one is a one to one and a half executive summary.
- Cover the highlights of the deal, why you are buying it, main numbers like “purchased for $1,000,000, expanding for $1,000.000, and we estimate value upon stabilization at $3,000,000.”
- Proforma
- Here is where we put all the reports from the Storage World Analyzer.
- You should walk the loan officer through our assumptions and reports on the project page by page. At the end of that conversation, they get you know what you are doing, have thought the project through, and are the type of person to which they’d loan money.
- Marketing Package
- Here we put the Sellers Marketing Package
- Feasibility Report
- This is where the feasibility report goes. Usually, when you first give this to the lender, you won’t have the report back yet, so insert a page saying “Feasibility Report To Be Inserted Here Upon Completion.”
- Financials
- If the lender is just you or you and one other person, you can put net worth sheet and last years’ tax returns here. We usually have a dropbox ready to go, so this information is not floating around.
- Resume
- Include a resume highlighting your experience. Even if this is your first project, highlight experience that will make you and this project attractive to lenders.
What you should think through before you complete the Executive Summary is what type of loan do you want.
Loan type depends a lot on your business strategy.
There are a lot of types of loans out there, and perhaps it is good to apply for different types. Just remember to adjust the Proforma to reflect the loan you are choosing.
If you are early in your self storage career, SBA loans are a good type of loan to consider. They allow you to put less money down; usually, they will also finance any negative cash flow as well as furniture, fixtures, and equipment in the loan, and they are self-amortizing 25-year loans that can stay in place as long as you want.
The downside of these loans are that they are usually indexed to prime, so interest rates are not locked in and float, they cost more money and have more closing cost (which can be financed, however), and there are usually payoff penalties for the first three years or so.
But all in all, not a bad option.
Another thing I see many people do that I may coach against, especially if you are using other people’s money (i.e., working with investors), is not putting enough money down.
I firmly believe that if you are using other people’s money, you should put a minimum of 25% equity.
Leverage is good and reduces your cost of capital in the deal, but it is also a double edge sword.
High leverage can bite you. If you are using other peoples’ money, I think you have a responsibility to have enough equity to absorb any market changes and not have the project become underwater (i.e., loan is more than market value).
Markets go up and down. Even underwater projects will most likely turn around, but if the loan gets called, and you can’t refinance, you have a problem.
Another thing to keep in mind is that although many lenders are playing hard to get, they are in the business of placing loans. The job of the person you are talking to typically depends on placing good loans on projects that do well.
If you are requesting a self storage loan, I suggest you come from the space that you are the best type person this loan officer can talk to.
Self storage is the lowest foreclosed on asset class there is, and just as it is a safe investment for you and your investors, it is safe for the lender as well.
You are offering this person perhaps the safest type of loan they can lend on. Come from that space.
Much of the time, you may have to be educating the lender about self storage. They will never say they don’t know much about it, but if they have not done many self storage loans, just assume they don’t know that much about it and are relating to self storage like multi-family or retail.
If you are considering an SBA loan, I always recommend Live Oak Bank, because they knew more about self storage than you and myself combined. You will spend no time educating them, and they are an excellent partner to have.
One thing to keep in mind today, especially around SBA loans, or any loan that does not have the interest rate locked in, is rising interest rates.
Toady SBA loans are usually 1% to 1.5% higher interest per annum than conventional loans. This usually doesn’t matter that much because of the 25-year amortization. Most conventional loans are 20 years, and the amortization period has more to do with the monthly payment than the interest rate.
Of all the spaces in the due diligence period, this space usually takes the longest and is the most uncontrollable. We will get a loan proposal letter within a week or two after the lenders have approved the financials of the guarantors.
Then all the lending due diligence happens, and in a month or so, they will commit to the loan proposal they sent, or they will send a change of what they will do. Often, to stay on track time-wise with our contracts, we will fund the appraisal, knowing that if they don’t end up offering us the loan, it may be money we can not re-coupe. I am not advising you do this; just know it can be an option to speed things up.
Usually the bank will not order the appraisal until you have committed to the loan. Today this can add an additional three to four weeks because appraisers are so busy.
Legal and Closing.
Here is where having a good relationship with an attorney makes the real difference. I, and the people I work with one on one, usually have excellent relationships with quality attorneys. Here are the times during a transaction that “legal” comes up:
- Generating and negotiating the contract.
- Forming the LLC docs or ownership entity.
- UCC searches.
- Review of lender’s documents.
- Review of closing documents.
In the classes at Quick Start Academy and the book Creating Wealth Through Self Storage, we go into detail about this and share the forms we use.
However, here let’s cover best practices today.
Remember, you are not just buying a piece of real estate.
You are purchasing an ongoing business.
You are purchasing this businesses’ customers, their contracts, and you are purchasing the way this company did business for the last however many years.
It’s all yours at closing.
You want to make sure that you are not purchasing any lawsuits people may have with this company.
Imagine paying for the right to defend yourself against something the previous Owner did wrong.
Sounds like fun, right?
That is where the UCC search comes in. Make sure your attorney is aware of the need for one and will let you know exactly what you are buying and has the correct representations and warranties in the contract.
When it comes to this aspect of the transaction, I do 1005 what the attorney says and in no way try to negotiate or represent myself.
End of The Due Diligence Period
After your inspections reveal no major issues….
After you have gone through the due diligence period, you have replaced assumptions with real numbers, and the deal still allows you to achieve your business goals…
After your feasibility reports show more demand than supply…
After you get the loan….
And after your attorneys give the green light….
Well…you close.
Now your work starts.
Believe me, it’s fun, a little scary, but really fun.
Next week we will end this Getting Started Series with what to do then, Best Practices for putting a new facility into service.
Until then, let us know where you may be in the process of getting started and/or growing your self storage business by leaving a comment below.
Thank you, and I hope you find this series helpful. Let me know where you may want an expanded resources and more details to support you.
