Telling Your Self-Storage Loan Story: Getting the Money You Need

As 2015 begins, the capital markets continue to offer many low-rate loan options for self-storage borrowers. Loan originators and banking officers are eager to lend, but they’re still working within tightened regulatory and credit-policy environments. While visiting the local bank and getting a loan based on a virtual handshake isn’t realistic today, you can make a lender’s job—and its decision of whether to provide you with financing—much easier. How? It’s as simple as telling your story.

Getting a lender’s attention and obtaining aggressive loan quotes starts with thoroughly organizing and packaging your loan request. While this package has many features, its goal is to tell the story of your property, operating experience and lending needs.

Most owners start telling their story to their current lender, since they already know the company and may encounter fewer information requirements. However, with so many new sources now available that weren’t in the market even a few years ago, you may consider expanding your horizons. Further, some owners use mortgage brokers to prepare and market their loan requests, which allows them to maximize marketing effectiveness, minimize their effort in finding potential lending sources, and improve their ability to obtain a competitive loan quote featuring aggressive interest rates and terms.

A loan package has five essential components:

• Loan-request overview
• Property details and location attributes
• Ownership and management qualifications
• Financial presentation
• Competitive landscape

Let’s start telling your story.

Loan-Request Overview

The overview lays the foundation for the loan-request package. This is where you paint the big picture for the lender so it’s inclined to read further into the story and, more important, provide you with competitive financing. You want to define the loan type and terms you desire, and the basis for what you believe is a reasonable request. Your overview should include:

• Property overview
• Requested loan amount and desired terms
• Overview of ownership/management credentials
• Salient operating results or pro forma projections (in the case of a construction loan)
• Occupancy highlights/trends or lease-up timing (for a construction loan)
• Summary of existing debt and purpose of seeking a new loan
• Sources and uses of loan proceeds

Property Details and Location Attributes

This section should assure the lender about the property’s attributes and location. Emphasize that it’s competitively located, with features that will attract and sustain new and existing customers. Add photos, too, since pictures speak a thousand words (hint: take photos on a sunny day). For a construction loan, provide renderings, elevations and site plans. At a minimum, include the following information:

• Property address
• Gross and net square footage
• Year(s) built and renovated
• Total number of units (traditional, climate-controlled, parking, other)
• Construction attributes
• Security attributes
• Onsite management office and applicable apartment information
• Signage
• Zoning
• Unique facility attributes and competitive advantages
• Photos highlighting property layout, office, location, visibility, signage, etc.

Describe why this location attracts your customer base. If you’re the area’s superior facility, let the lender know it. Put yourself in the lender’s shoes and ensure you have provided sufficient physical characteristic information for it to visualize the asset and its competitive marketplace position.

Demonstrate that you fully understand your customer base and the location’s demand drivers. Don’t simply provide demographic information. Using modern self-storage software, you can actually plot where your customers are located. This will show lenders you have a good handle on your business.

Describe the property’s immediate area, as well as local and regional geographic characteristics. You may also want to address land-use issues and the ability for new competition to arise nearby. Describe potential barriers of entry for new competitors that may be due to zoning restrictions or local government processes.

For a construction loan, review your site-identification process and prove the location’s feasibility. First, you’ll need to describe the proposed facility with supporting architectural and civil-engineering drawings and plans. Then you must convincingly explain why the facility can thrive at this location. For this, a third-party feasibility study is highly recommended—unless you have the proven experience to quantify and objectively present the data needed to support additional market supply and provide adequate investment returns based on the proposed development budget.

Ownership and Management Qualifications

Lenders place significant credit-decision emphasis on the strength of the ownership team. Prove that you and your business partners are worthy of being in a credit and banking relationship. The two key elements are: 1) your financial wherewithal and creditworthiness, and 2) your experience and track record. Even if you’re seeking a nonrecourse loan (which solely uses the property as loan collateral), expect your financial strength to be fully underwritten and scrutinized.

Be sure to include:

• Ownership structure and principal identification (best presented as an organization chart)
• Overview of financial wherewithal of the managing and majority ownership (be prepared to provide personal financial statements and tax returns)
• A schedule of real estate owned (supported by the global cash flows of each partner’s real estate investments)
• Any major credit issues and related explanations (these should be disclosed even prior to sending a package to a lender)

Stress your successful track record in managing self-storage and other commercial real estate investments, and your ability to achieve positive operating results. Share what you’ve done recently to improve property operation, such as revenue-management techniques, website improvements and upgrades/changes in operating software. Demonstrate that you’re on top of managing the property and fiscally responsible.

As the self-storage industry matures, many owners seek regional or national companies, including the real estate investment trusts, to manage their facilities. Owners with one or two stores that are institutional—or near institutional—quality are now relying more than ever on third-party management options. Third-party managers have advanced greatly beyond their original mom-and-pop ownership structures to offering fully staffed call centers, state-of-the art management software, revenue-management processes and, most important, the ability to stay relevant with high website search engine positioning. Lenders look favorably at these types of advantages.

With a construction-loan request, you should also describe the site-development process. Describe how you intend to obtain the required zoning, permits and entitlements as well as the timing. Lay out your plans for managing the construction process and pertinent information about the general contractor’s and builder’s qualifications.

Financial Presentation

This is the “meat and potatoes” section where you prove the property will have the operational cash flow to sustain the loan. For an existing property, this section should include:

• Year-end financial results for the prior two years
• Trailing 12-month income and expenses (presented monthly)
• Pro forma or budgeted income and expense statements for the next 12 months
• Occupancy statistics for the past 36 months
• Current summary occupancy statistics report
• Current tax bill

Remove non-cash items such as depreciation, and either remove or explain non-recurring or non-business-related expenses.

Ultimately, each lender will establish a (sustainable) net operating income amount which it will use to determine a loan amount. If you’re acquiring a property, the pro forma is essential because the expense structure will vary given your management approaches/team, and the anticipated income may be different given the owner’s proposed business plan.

With a construction loan, be sure to provide:

• Detailed construction budget
• Timeline of construction and anticipated construction draws
• Proposed unit mix
• Monthly pro forma operating budget through lease-up
• Operating and interest carry calculations
• Five-year schedule of income, expenses and value projections

Be realistic and slightly conservative with your timeline for the facility’s completion and stabilization since you want to obtain a loan that’s long enough to match the timing. Here’s an example of a timeline from inception to stabilization:

Competitive Landscape

Demonstrate that you’re well-positioned among your peers. In most markets, competition is typically defined as facilities within a three- to five-mile radius. Lenders want to see what other facilities in the market are charging for unit sizes similar to those offered at your property. You may need to “shop” your competition to obtain this information, and provide explanations for potential variations on competitive prices, quality and location.

Making the Decision Easy

Whether you prepare a loan-request package yourself or use a mortgage broker, presenting a compelling, organized loan request is the key to lending success. The fuel that builds sustainability and continual real estate growth is the ability to obtain capital at favorable terms.

Make the loan originator’s job easier by proving why your proposed loan isn’t only worthy of the lender’s time but an aggressive loan quote. If you effectively tell this story, it may just be the beginning or continuation of a highly valuable lending relationship.