If you took a loan or purchased your self-storage facility around 2018 and it is time to refinance, you better understand where you will stand with a bank.
I suggest doing this before calling a lender.
I was working with someone recently, and they were actually quite surprised.
There is a new term that has become used a lot today… “Cash-In ReFi’s.”
Let me tell you a story.
I worked with a guy who purchased a mixed-use facility in a small Florida market in 2018. A climate-controlled building had just been built. He was going to lease it up, increase the rents in the retail building, and run it the way a facility should be run.
The climate-controlled building was less than 50% when he purchased it.
He was able to put a 4.15% loan on the project. The future valuations were determined by 5.75% CAP. He told me, “Even at a 6% CAP, everything works.”
Year One NOI was $364,414. Year two…$568,799 up to year five $684,270. Good job. Year five was the NOI his lender would use to calculate value.
At the time of the initial underwriting, he used a 5% interest rate to determine the rate on his year five refinanced loan, which is what he was working through with me.
Really great proforma.
However, things have changed. The universe is in constant motion, and the only thing we can rely on is change.
Instead of a 5.75% CAP today, this market is most likely a 7%. On a great day, maybe 6.75%.
Interest rates are 7.75%.
So, let’s take a look.
Step One: Can you pay off your current loan?
The bank will value the project around $11,404,500 (year 5 NOI of 684,270 divided by .07).
A 75% loan is $8,553,375. The current loan balance is $5,923,463.
No problem. Enough cash to pay off the current loan and have some left.
Step 2: Will the new loan meet the Debt Coverage Ratio (DCR)?
Let’s take a look.
A new bank loan of $8,553,375 at 7.75% on a 20-year loan. Annual debt service is $842,626.
Problem. NOI is $684, 270.
Let’s look at a 65% loan.
65% LTV puts a $7,412.925. Still can pay off current debt.
Debt service for this 65% is $730,276. Still more than the NOI.
So, let’s consider just paying off the current loan with no cash-out. The current loan balance is $5,923,463.
Let’s assume you have the cash to pay the points and closing costs without putting it in the loan.
The debt service will be $583,543.
Under the current NOI, however, at a 1.30% DCR, your NOI of $684 270 is $74,336 short.
At a 1.25 DCR, the NOI would have to be $729,429.
At a 1.25% debt coverage ratio, my friend would have to add about $373,460 more cash to reduce the debt to get the right DCR.
It is a classic “cash-in refi.”
I suggested he work hard to have the bank give them a 25-year amortization rather than the normal 20 and work to see if he can negotiate a 1.25% DCR rather than a 1.30%.
The moral of the story is to know how your project is going to be looked at by the lenders. Figure out a strategy and then go to talk to them.
As entrepreneurs, we are not victims of the economy. If we are, we have no power.
I suggest knowing what is so, not what we wish were so. No judgments of good or bad, right or wrong, or I wish it were different… just what’s so…now.
Then, standing there, figure out what would work for you and what would work for a lender.
If his bank doesn’t allow for a 25-year amortization, find one who will.
Interest rates will most likely go down soon, but not by much.
Will they ever get back to 4.15%?
Probably not. But perhaps that is a good thing.
It really doesn’t matter what interest rates are. They will most likely always fluctuate over time.
Know underwriting from a bank’s perspective, then create a strategy to negotiate your refi.
Happy loan hunting.
