These are difficult times for most businesspeople to maintain a bottom line let alone start a new venture, but self-storage may still represent a secure investment opportunity. If we consider the financial changes that have occurred over the past year, we realize it’s not self-storage as an industry but lenders that are having difficulty.
Many financial institutions have collapsed or do not have the funds to be in the finance business. Although the government has provided funds to banks for well-founded business ventures, very little of that money is finding its way to new commercial or industrial enterprises.
The Canadian self-storage industry began about 15 years behind that of the United States. Interbay Funding LLC, a commercial lender based in Fort Washington, Pa., saw an opportunity to harvest Canada’s budding industry by investing in small to mid-size self-storage facilities. The company was a driving force in Canadian development for five years, until the sagging economy fueled its withdrawal from the country in 2008.
Did Interbay simply forget to take stock of its own potential or that of the Canadian self-storage market? Yes, the economy is in trouble. Yes, there are changes to consider when seeking financing today. No, self-storage development in Canada is not a dead issue.
Changing Lending Requirements
When considering the requirements for financing a new self-storage project, we have to recognize the new parameters lenders use and why they have evolved. Lenders have pulled in their horns as they reel in the shockwave of losses faced in other areas. Once burnt, twice shy does not mean business is nonexistent, it means it has gone ultra-cautious. Lending institutions, banks, trust companies, credit unions and private lenders have increased their standards to qualify financing on any project.
These standards start with examining the board of directors of the prospective company―the members’ personal financial status, expertise in the industry and past business accomplishments. The team is now a major consideration, and any flaws in its members’ credit history or ability to raise additional capital weighs heavily in the lenders’ decision to finance a project. If the team is strong and the risk of management is nonexistent, the project moves to the next level of qualification.
Lenders always need an exit strategy, especially with a single-purpose property such as self-storage. However, in a market where unloading a property to withdraw financing is unrealistic, they will look at other means to ensure the exit strategy, like attaching personal guarantees from the principals. This means they must now look harder at the viability of the principals to repay should the venture not come to fruition of the business plan.
The next step is increased scrutiny of the business plan and financial forecast, which needs to be completed by financial professionals (i.e., chartered accountants or certified general/management accountants). The do-it-yourself business plan without reference to industry standards and how the key ratios are established will not cut it. The lenders are looking more at who is doing the plan and how the numbers are developed.
A reference often used by banks and lenders is a business report compiled by The Risk Management Association (RMA), formerly known as Robert Morris Associates. RMA financial reports are completed annually on all types of commercial and industrial operations. The group collects information from financial statements provided on all types of businesses including self-storage. It then compares key ratios based on actual sales volumes, allowing lenders to compare your projections to business financials of companies already in operation.
Should the test of your forecasted numbers be out of line with RMA averages, your business is likely to pose a financial risk to the lenders in this economic climate. Banks manage risk, and if they cannot mitigate it, the deal is turned down. Therefore, it is best to compare your financial projections to RMA standards prior to submission for financing and explain any irregularities in the business plan.
Project costs and timelines are the next to be addressed. The permits and licensing for new operations should be in place, or there should at least be verification that permits are available for the project. A marketing plan based on demographics and competition should also be assessed. The marketing team with its track record will help in determining the projected time it will take to lease up the project. Initiatives should be detailed and include team members’ personal resumes.
A complete, detailed construction budget with timelines and a provision for possible extras (supported by a Phase II environmental assessment and an appraisal on the property) should complete your credit application. A plan without the above provisions and information has little likelihood for gaining successful financing from the lenders.
Light at the End of the Tunnel
While the economy has many developers and owners running scared, there are lenders available to assist with self-storage ventures. But only if you proceed with a strong business plan that addresses ownership, financial projections and marketing plans will give you be considered for financing.
So there is light at the end of the tunnel. All you have to do is modify your approach and seek out the lenders that are still prepared to do business. Many lenders have unwisely committed their operating capital to unworthy mortgage ventures and are now simply short of funds to lend. This makes funding any venture a challenge. However, there are still Canadian lenders ready and able in this economic climate, with funding available at reasonable fees and rates.
Dan Cardinal is the vice president of commercial lending for the Ontario office of Asset Capital Mortgage Corp., an Alberta, Canada-based company. Cardinal has more than 35 years of experience in commercial financing as a banker and mortgage broker. For information, call 905.672.5626; e-mail [email protected].
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