Have you been trying to get a loan today for self-storage?
It doesn’t much matter who you are trying to borrow from. Bank, national SBA lender, CMBS, Life Company; it has most likely been challenging.
Are you trying to refinance?
I am sure you are experiencing the same thing.
Let’s create some context.
Just as we discussed in our last episode, seeing the world from the eyes of a self-storage seller enhances your chances of success if you are a buyer; the same principle applies to lenders.
Let’s see what commercial lenders are looking at.
Moody’s Analytics found that 69% of maturing office loans did not pay off in 2023 and believes 76% of office loans have a “high refi risk” in 2024.
You may say, “I have a self-storage project, and they are very safe. The safest asset class there is.”
This is true.
But it may not help if the bank has loans out on a lot of storage that went in place in, let’s say, 2016 or 2017. And believe me, a lot did.
We never ran into this because we always used high CAP rates in our Proformas for future values.
But many developers and small investors, and I mean a lot, did not.
Let’s look at an example.
Let’s say you are applying to a local bank.
Let’s also say that banks made a number of self-storage loans in 2016 and 2017.
Let’s say they have three loans similar to this:
The small investor did an expansion or conversion. They projected the value would be $5,000,000 when done and borrowed 75% LTV to buy the property and do the rehab.
Their NOI was scheduled to be $250,000 when stabilized and at a 5% CAP rate, which put the value of $5,000,000 on the project.
They had a 20-year amortization, two years of interest only, and the interest rate was 4.25%. Their loan was for five years.
Now, as a small investor, they had not taken my Bootcamp or anything like that. They did not track all the metrics they could have.
Their taxes went up, their insurance went way up, and they were concerned about occupancy, so they did not raise rates as much as they could have.
Five years later, their NOI is $280,000 (a $30,000 increase or 10.69% increase in five years).
Now it’s time to refinance.
The bank says you need to put a minimum of $204,618 cash into the deal to refinance.
The owner, who has never missed a payment, asks why.
Bank CAP rates today are 7% (not 5% like the owner thought they would be five years later). The value of your facility is $4,000,000 with a $280,000 NOI.
That means the maximum you can borrow is $3,000,000 (75% LTV), and you owe $3,204,618 (balance after two years of interest only).
In reality, the amount they would have to bring would be higher because with higher interest rates, the debt coverage ratio would be short, and more cash would most likely be needed.
Now imagine a bank with office, retail, multifamily, and storage loans in this shape.
Then you show up and want to borrow money for a new deal.
It’s not that they won’t lend to you, but they are going to make dang sure your loan does not turn out to be another problem they have to deal with.
I see more equity in the deals required, stronger guarantors, tighter underwriting around yearly income increases, and increased operating expenses.
As you go through your Request For Loan Proposal, as I teach in the Bootcamp, explain why your loan will not end up like some they are dealing with.
Now, if you are dealing with a local bank, one thing I have seen done is to ask if they have taken back any real estate on defaulted loans.
If you have the ability, or the ability to form another investment group in addition to the one for the requested loan, offer to take that property off their hands if they give you a loan on the original ask with terms closer to what you originally ask for.
In other words, solve a problem they have (in a way that works for you) and get better terms on the loan you need. And, by the way, they will most likely have to give you the loan on the bank-owned property.
You will most likely be getting that one close the defaulted loan balance, so it should be considerably below the minimum value the previous owner bought it for or thought it would be upon completion (if a construction project).
This doesn’t always work, but I have seen it do so on a number of occasions.
Conclusion
Just be aware of what your bank may be experiencing as you apply for your next loan.
Present your deal in a way that shows you understand the risks and have created assumptions and strategies to deal with the risk, like higher CAP rates on determining future values.
Know your breakeven occupancy.
Run sensitivity analysis.
If possible, do a little research on the banks you may be dealing with as you do your next value-add project.
Just like when you deal with sellers, try to create some win-win scenario, and you will do very well in this fantastic self-storage business.
