Yezco Concrete Polishing has created sustainable flooring solutions for self-storage facilities. The Superfloor process starts with a 25-grit grinding and goes up to a 3,000-grit polish to produce a dense, polished surface that is:

·   Protected against absorption of oil and other contaminants

·   Resistant to tire marks from fork trucks and other traffic

·   Flat and level

 

Superfloor has a dust-free grind process that filters out 99.9 percent of all airborne dust. In addition, there are no urethane or waxes applied, and no slurry, so no protective gear is necessary for application. New water-based dyes are used for environmentally friendly coloring. There is no down-time for chemical processes to cure. Info: www.yezco.com

It’s the peak of football season. Each weekend, we see coaches analyzing down situations, pondering options, whispering into headset microphones and calling in plays.

Deciding whether to refinance your self-storage property is not much different. You must size up the financing field, especially since credit markets have tightened lending requirements in the past 18 months. You have to consider your facility’s operating history and borrowing ability given today’s lending environment. And you need to think how available credit will affect your investment returns. Only then will you know if it makes sense to make the call to refinance.

While the credit crunch has all but eliminated the go-to play from recent years (conduit financing), you don’t have to throw a desperation Hail Mary pass to obtain a loan in today’s market. You will certainly have to grind out some yardage in order to score storage refinancing, but with up-front analysis and educated play calling, you can be a winner in this arena.

The Playing Field

Let’s start by briefly examining today’s refinancing playing field. Conduit lenders have been on the sidelines for 12 months, and it is difficult to predict when they will suit up again for an appearance. For years, conduit loans were a great tool for borrowers to refinance stabilized or near-stabilized properties with long-term, non-recourse debt at attractive rates and long amortization periods.

These loans also allowed investors to pull out cash and equity based on the debt coverage and loan to values. Many experts offer two reasons for conduit lending’s return from the disabled list:

• Commercial property fundamentals remain strong with stable operating results and low default rates.
• Credit markets need a Wall Street securitization vehicle like conduit loans to provide marketplace liquidity since banks and life insurance companies alone simply do not have this capacity.

Upon their return, do not expect conduit loans to display the same dramatic pass-play style of recent years. They will be more akin to a conservative ground game that offers terms similar to those from the conduit rookie years of the mid-1990s.

For the past 18 months, banks have been—and will continue to be—the self-storage sector’s primary credit source. Unless it’s a large loan, these institutions keep loans on their balance sheets and are limited by the amount of capital they have and can raise. Banks face increasing regulatory pressures, and many have some exposure in residential or condominium construction projects, which is resulting in greater risk and fewer loan pay-offs.

Accordingly, many banks are now more selective with new loan originations by lending only to existing clients and select new customers, and quoting more conservative terms. You may find a bank’s risk-management condition will determine your financing request. While many lenders seeking to eliminate portions of their portfolio will politely ask clients to seek financing elsewhere, others are in stronger positions and wish to build clientele.

These days, the primary players on the refinancing field are storage owners whose current loans are coming due. The majority of this group is owners with maturing construction loans, but others are coming off permanent loans. According to the Self Storage Association’s Industry Trends, 6,835 new facilities were built in 2005 and 2006; so it’s now time for many owners to revisit their leverage options.

Borrowers should have these expectations as they walk onto the refinancing playing field:

• They will need to be more diligent in covering the market for a potential lender.
• Debt-service coverage will be higher, loan-to-values or costs will be lower, amortization periods could be lower and recourse will likely be expected.
• Property and sponsorship will be scrutinized much more intensely.
• Interest rates should be manageable, yet inflation is looming and rising rates could change field conditions soon.

Today’s refinancing playbook offers many game plans depending on the owner’s situation. Regardless of your field position, it’s a good call to maintain your existing banking relationships as the institutions currently holding the lending cards. Here’s a breakdown of various loan types, and suggested plays to ensure the best possible outcome.

Maturing Loans

If your construction loan matures in 2009, your request for permanent financing is easier to obtain if your property leased up as planned. Historic operating results will be your biggest obstacle in reaching a desired loan amount. While you may be stabilized today, or have reached lease-up in the past few months, it’s also possible that on a trailing 12-month basis your numbers are weaker because you were in lease-up phase. Expect lenders to look at your operating history beyond just the most recent months and underwrite conservatively. If you cannot make the case for a higher loan amount, ask the lender to build in a provision to increase the loan after you’ve achieved additional historic performance.

Further, although interest rates may be reasonable today, you should not lock into long-term deals with high prepayment penalties. The market will change and you likely will not want excess equity locked into your financing. Many construction loans are arranged as mini-perms and, in this market, the mini-perm option may be your best bet.

If your construction loan is coming due and your property is not stabilized, try to negotiate an extension with your existing lending institution. Even if it charges an extension fee or changes your interest rate, you will generally be better off than trying to find a new lender. If you do shop for a new loan on an unstabilized property, be prepared for scrutiny, highly conservative underwriting and additional equity investment. You’ll also have to justify when and why the project will lease up in the future. Your game plan will likely involve a take-out bridge lender willing to offer loans at 50 to 75 percent of original cost with varying degrees of financing fees and interest rates on a fully recourse basis.

Expansion

For storage properties expanding in phases, your best refinancing option is your existing lender which has completed the initial homework on you and understands the project’s strengths within the local market. The key is to present documented successful performance of the existing phases.

The best structure for expansion-phase financing is to create a new interest-only loan similar to the original construction loan and have the existing phase demonstrate sufficient cash flow to cover the new debt-service requirements. Keep in mind:

• Construction costs have risen and should be factored into your cost and profitability calculations.
• Overall market supply and demand conditions may have changed since your earlier building phases.

Your lender may not be in a position to meet your financing request or provide any financing at all. (If this happens, seek other local lenders and present your refinancing similar to a construction loan request.)

Increase Leverage/Cash Out

Typically, self-storage investors make an initial equity investment of 20 percent or more when building or purchasing a facility. Many will then want to increase their bottom line and increase their leverage to recapture some, if not all, of their initial cash equity. With conduits currently out of the market, it is now tougher to leverage equity; however, it can still be accomplished.

Your current lender is less likely than others to increase the loan, as they usually want property owners to still have “skin in the game,” but may increase your loan to 90 percent of original cost if the property’s operational performance meets their guidelines. Otherwise, competing banks will likely look at historic operating results and apply a 1.25-1.35 debt-service coverage test to determine a new loan amount.

Lower Interest Rate

Today’s market offers good opportunities to obtain highly favorable interest rates. It is not uncommon to obtain a three- to five-year fixed-rate loan in the low to mid-6 percent range. If your loan currently has a high interest rate, try renegotiating a lower rate and term extension with the current lender. It will get tougher though if your lender does not renegotiate. If you find another lender with lower rates, weigh the cost, time and current lender relationship to determine if running this play is worth it.

Better Amortization

This is a cash-flow tactic that is part of the mix in a financing decision. With higher amortization, you lower your monthly principle pay down and improve monthly cash flow. Pre-credit crunch, self-storage deals typically had a 25- to 30-year amortization, and the first several years could be negotiated with interest-only provisions. Now, expect 25-year terms or less.

Lower Personal Recourse

In today’s conservative lending market, expect personal recourse to be a requirement. The higher the leverage, the less willing a lender will be to offer a break on recourse. Some non-recourse loans are now offered at a 60 or 65 percent loan-to-value basis, but come with interest rate premiums of .5 to1.5 percent. If conduit loans return, more competitively priced non-recourse options should be available.

Lengthen the Loan Term

Seek a loan term long enough to avoid placing you in a compromising position caused by market factors, but short enough to not lock you into refinancing that can’t be paid off without expensive prepayment penalties. A three- to five-year loan term is a reasonable position given today’s market conditions. Loans over five-year terms are now being offered at rates in the mid-7 percent range and higher.

Regardless of your position on the refinancing field, you shouldn’t view your situation as fourth and long. While lenders are playing more conservatively and will likely expect you to have a higher equity position, there are also many healthy banks actively lending. Remember, the wind is still at your back with attractive interest rates. Finally, if you need some extra coaching, consider seeking advice from a storage-industry mortgage broker who is on the lending field every day regardless of market conditions.

Neal Gussis is a principal with Beacon Realty Capital, a Chicago-based full-service financing firm and provider of self-storage mortgage services. He can be reached at 312.207.8240; e-mail [email protected].

With Dr. Shrink's premium shrink-wrap products, designed to inhibit water and UV damage, storage companies can store boats and RVs while protecting them from the elements. Unlike tarps, which can move in transit or storage, shrink wrap will not chafe or scratch boats and RVs. According to the manufacturer, the shrink wrap is easy to apply, and can be ventilated to eliminate mold and mildew on covered boats and RVs.  Dr. Shrink has also designed zipper doors for entry into the covers without cutting or removing the wrap. The company also provides REBAG®, a recycling program for shrink wrap. The wrap is engineered from 100 percent virgin resin and is available in blue, white and clear. Info: www.dr-shrink.com

 

Lok'n Store Self Storage plans to pull the plug on capital expenditure and run its business for cash until economic conditions improve. The company has 22 facilities across the Southeast England. Following the opening of its new facility in January, the group will have net debt of about £26m, which compares favorably with its borrowing facilities of £40m.

Trading has held up well for Lok'n Store. In the year to the end of July, like-for-like revenues rose 8.4 per cent to £10.8m, and like-for-like cash profits were 2.7 percent ahead at £2.7m. The group also says it has continued to see resilient demand from its business customers since the year end, and its reputation as a low-cost self-storage provider may help it to face the tougher times ahead. For more information, visit http://www.loknstore.co.uk/.

Today, the fastest and safest answer from your friendly banker is, “No.”

No, you don’t have enough equity in the deal.

No, we don’t care how long you owned the land; the entitlements you secured are not worth what they were worth last year, and other people are selling similar types of property at significant discounts to your alleged value.

No, you need a larger financial statement with a greater amount of liquidity to cover any potential cost overruns in your new project.

The lending community—from national to local banks, savings and loans to credit companies and other providers of credit—has serious concerns about today’s real estate market. Regulators are struggling with the worst credit market we’ve seen in decades amid serious questions about the soundness of the financial institutions in the United States.

How do we change a no to a yes? The answer is by understanding what the lender needs to make your transaction work. Currently, construction lenders are few and far between. Many are out of the market temporarily; some will be out longer. Construction loan transactions need to be underwritten and documented to comply with what the lender is going to need, not what the borrower wants.

Interest Rates

We see construction lenders that are still in the market and transactions based on interest rates floating over Wall Street Journal Prime, or alternatively, interest rates floating over LIBOR (London Inter Bank Offered Rate). The margins over the index range from prime plus .50 basis points to 30 day LIBOR plus 350 basis points. This provides an interest rate for your construction loan at 5.5 percent, based on prime plus a half of one percent and 5.9 percent based on LIBOR plus 350 base points.

Underwriting the Risk

Underwriting is considerably more conservative; lenders want more skin in the game. The loan-to-value would be a maximum of 75 percent of the future value based on a stabilized project. The loan to cost would be in the range of 75 percent, which requires the developer to invest 25 percent of the total project cost in hard cash. Lenders do not take into account imputed equity in new construction financing.

The real determination in the construction lender’s opinion is when the loan matures will there be permanent loans available for this project? Or will the construction lender provide a mini-perm for a one- to three-year term? This facet of the underwriting is very subjective in the current market.

Construction lenders are looking at their own internal mini-perm rates at 7 to 7.5 percent, using a 1.35:1 debt-coverage ratio based on a 25- to 30-year amortization schedule to underwrite the amount of money the project is capable of supporting for a permanent mortgage. This permanent loan amount would also be the maximum construction loan offered.

While this sounds good, when you take a look at the real estate market for storage facilities, the cap rates for existing storage facilities sold in the last 12 months may be 6 percent in any given market. The lender is adding 100 basis points to the cap rate and calculating value from net operating income based upon a 7 percent cap rate, even though the current market might reflect a 6 percent cap rate. The lenders are concerned the Federal Reserve Board will increase interest rates at some point next year. Cap rates will also increase for all classes of income-producing real estate assets.

Support Your Loan Request

No matter how good you think your project is, the lender cannot see it through your eyes. You need to supply as much support as possible to convince your lender to deliver an acceptable construction loan. A professional feasibility study from a well-recognized company in the industry will be beneficial to show the lender your project has merit. This feasibility study should cover your market area, potential rental rates, existing competition and projected competition. This information can be obtained from the city and county planning departments. These proposed projects could conceivably compete with your venture, if and when they are built.

For the most part, appraisals are ordered by the construction lender processing your construction loan. Most construction-loan borrowers do not invest the money to have an appraisal completed prior to going to the bank. A solid appraisal from a recognized appraisal company would provide a significant amount of information to your lender. It can help the lender underwrite your transaction, and could make the difference between you receiving a letter of intent for your construction loan or not.

Build the Right Team

In the storage industry, there are the behemoth publicly traded companies, which are national in scope, and then the rest of the owners, which are not as large. In today’s market, the construction lender is very concerned about the track record of the developer and the builder of the project. Lenders want developers with solid track records, successful development experience and long histories of self-storage property management. So, if this is not you, what do you do? You build a team.

Align yourself with a successful builder who has experience building this product, has excellent references and a solid financial statement. The lenders want to know your builder is substantial and can afford to run operations and pay employees during construction while waiting for the loan draws to be advanced to pay his invoices on your project.

The marketing and management for your project can be undertaken by a professional management company that can assist you in taking your new project from construction completion to full occupancy in the shortest amount of time.

If you are not comfortable presenting your business plan and financial package to the lender, you would be well advised to seek professional assistance from a loan broker who has strong relationships with the lending community. These are the people who know who is in the market and can assist you in the professional presentation of you loan request. Think about this: You can hire better qualified talent in five minutes than you can become in the next five years.

Permanent Lending

Permanent loans are typically written with 65 to75 percent loan-to-value ratios, with debt coverage ratios of 1.25:1 to 1.35:1, and will use the lenders capitalization rate, which may be 75 to 100 basis points higher than the prevailing cap rate on existing projects sold in the current market. Permanent lenders are focused on the management of your facility. The credit committees are concerned about the experience of your management.

Permanent lenders want you to have skin in the game and a minimum of 15 percent, hard cash equity left in your project after you’ve refinanced your construction loan. They’re looking for stabilized properties—12 to 24 months of trailing income and expense information—proving this project is successful, profitable and well-managed. To stabilize your property you need to operate at a 90 percent occupancy level over this time period.

The permanent lenders will underwrite the cash flow of your property, and in the case of life insurance companies, can provide you with non-recourse financing. Interest rates vary dependent upon the term of the loan requested. Currently, we have lenders providing 6.25 percent interest rates for three-year loan terms, 6.5 percent for five years, 6.75 for seven years and 7.25 percent for 10-year loans. These are fixed rates with the majority having either a prepayment penalty or a yield-maintenance requirement, as is the case for the life insurance industry. There are some lenders that will provide long-term fixed-rate financing without prepayment penalties.

Face to Face

Identify the best potential construction lenders in your market, find the highest ranking bank officer in the real estate lending group you can meet with and arrange a meeting to present your transaction. A loan transaction, properly packaged with the required documentation for the lender, including site and aerial photographs and a good narrative description of your transaction will allow you the best opportunity to make a good first impression. Although the Internet is good for e-mail and sending additional information to your lender, it should not be the medium of choice for submitting your loan.

Remember lenders are people who operate in a very stressful environment. Everything you can do to provide a well-documented transaction will make life easier for the lender and, hopefully, faster for you to receive an approval for your new construction loan.

Richard Hill Adams is chairman & CEO of American Realty Capital Advisors Inc., a Laguna Hills, Calif., company providing financing for land acquisition, debt and equity loans and construction loans for self-storage and mixed-use projects. To reach him, call 949.455.4100; visit www.arca-money.com.

We tend to toss around words that relate to the self-storage business—class-A property, cap rate, NOI—but not everyone may know what they mean. In addition, software applications may use different terms for the same calculation. Here is a Storage 101 review of some common industry terms.

Actual rent: The sum of actual rental rates for occupied units. (Does not include fees, insurance, merchandise, etc.)

Break-even occupancy: The occupancy level at which a facility’s expenses and revenue are equal. A facility will exceed break-even and show a profit when gross rent exceeds expenses plus debt service.

Capitalization rate: A measure of performance and an indication of value. The expected rate of return on a property. A cap rate is expressed as a percentage. A cap rate of 10 can be expected to return an annual return of 10 percent. NOI/Cap Rate = Value

Example: NOI of $130,000/8 percent = $1,625,000

(In general, the lower the cap rate, the lower the investment risk)

Classifications (property): Many experts will grade a potential project’s competitors by weighing factors such as appearance, accessibility, visibility, security features and whether there is onsite management. (A property’s classification can change with renovations and upgrades or neglect.)

Class-A properties: Properties featuring above-average design and construction quality. They generally command the highest rental rates and have a superior location in terms of desirability or accessibility.

Class-B properties: Properties with adequate design and construction quality, which may not be reflective of current standards and preferences. These typically command average rental rates and are generally well-maintained and desirable to most tenants.

Class-C properties: Properties that offer adequate functionality but few amenities. Their physical condition is acceptable but may have some deferred maintenance. They generally command below-average rental rates and are usually in less desirable locations. 

Conversion: The process by which an existing structure is re-designed for use as a self-storage facility or the process of converting units to support supply and demand. (Example: a former Kmart store is transformed into a self-storage facility, or two 5-by-10s are reconfigured into a single 10-by-10 unit by removing a wall.)

Concessions: Dollars not received as a way to obtain more rentals, i.e., discounts, free truck or unit rental. (Remember, every dollar not collected reduces the value of the facility.)

Closing ratio: The number of prospect leads or contacts needed for a rental. For example, if you have 10 people who contacted you for a unit and eight rent, your closing ratio is eight divided by 10 or 80 percent. Track your own closing ratio and the store’s to see how you measure up.

Deferred maintenance: The overall impact of postponing or neglecting maintenance and periodic repairs. This saves money in the short run but frequently results in shortened asset life or more costly repairs later. This is different than preventive maintenance.

Due diligence: The process of investigating and obtaining the details of a situation, often in conjunction with the purchase of real estate (Doing your homework).

Debt service: Payments made on the facility’s loan. This is the interest, fees and principal due to the bank on a monthly basis.

Diversification: The technique of reducing risk by investing in different things.

Economic occupancy: The occupancy in terms of dollars compared to gross potential.

Gross Rental Income divided by Gross Potential Rent = Economic Occupancy.

Feasibility study: A study to determine the likelihood of the success of a project. It usually contains assumptions on rates, market conditions, construction costs, etc. It is one part of the due diligence process.

Generations of storage facilities: To date there are three generations of self-storage facilities:

• First generation 1965-1988: Metal buildings with rows of garage-type storage in industrial parks or on other land that otherwise would have no real use. Usually no climate control.
• Second generation 1989-1993: Characterized by improvements such as better locations, paved driveways, security technology, computerization, climate control, etc.
• Third generation 1993 to present: State-of-the-art facilities in prime locations with high drive-by-traffic counts, excellent visibility, signage, temperature or humidity control, business-oriented areas. Some are designed to resemble upscale hotels or office buildings. Offer ancillary services such as wine or firearms storage, boat/RV storage and upscale amenities such as WiFi and business services.

Gross income: Income minus expenses before taxes.

Gross potential rent: The total dollar amount the facility would gross each month if every unit were rented at the street rate.

Lease up (aka absorption period): The period of time needed to fill a self-storage facility. A storage facility is usually considered fully rented or leased up at 85 to 90 percent. Occupancy must be held for three to six months.

Market radius: The area surrounding a self-storage facility in which the facility is competing for customers. According to the National Self Storage Association, 95 percent of the average facility’s tenants either work or live within a 3- to 5-mile radius. As the number of facilities increase, the radius decreases. Additionally, the density of the market area and natural barriers such as bridges, bodies of water, freeways, etc., also have an impact on a facility’s market radius.

Net operating income (NOI): Income minus expenses before taxes or debt service.

Net rentable square feet: The number of square feet of the facility allotted for rental units. (Does not include hallways, office, lobby or common areas, maintenance or electrical rooms, etc.)

Physical occupancy: The number of square feet of the facility that is rented.

Potential rent: The dollar figure the facility is expected to bring in each month based on the current tenants and current rental rate. (Assumes everyone pays their rent.)

Traffic reporting or lead sourcing: This has a number of different names but the point is to track and measure where your leads and tenants originate, answering the all-important question: “How did you hear about us?” question. Tracking is critical to determine what is working in your marketing plan so you can be more efficient with your advertising dollars.

Unit occupancy: The percentage of units rented at a facility. Example: Total 700 units with 546 rented. 546 divided by 700 = 78 percent unit occupancy.

Vacancy rate: Percentage of the facility not yet rented; the opposite of occupancy. (Example: Total 700 units with 546 rented = 78 percent unit occupancy, 22 percent vacancy rate. 700 divided by 546 = 154; 154 divided by 700 = 22 percent.)

You will encounter these and many more terms in your self-storage career. Learn them, understand them fully, or ask others to explain them clearly until they make perfect sense. Remember: Knowledge is power. Understand the above terminology and it will empower you and your self-storage business.

Linnea Appleby is president of PDQ Management Solutions Inc., a Sarasota, Fla.-based company that provides full-service facility management, consulting, startup services, auditing, management training and more. She is also the managing director for the Florida Self Storage Association. For more information, call 941.377.3151; visit www.pdqmanagementsolutions.com.

Smart Payment Solutions aims to deliver a cost-effective alternative to self-storage businesses looking to reduce credit card fees. With Smart ACH payment-processing solutions, owners/operators can automate recurring payments and accept checks by Web or phone via electronic funds transfer. Smart ACH is designed to automatically bill tenants for rent or lease using a recurring-payments option; reduce credit card processing fees; and improve cash-flow management. Info: www.smartpaymentsolutions.com

U.S. Door & Building Components is helping the Hill Family to build a better community for underprivileged youth in Geneva, N.Y. The company recently donated materials and labor to the construction of a new boxing gym that the Hills included as part of their new home, courtesy of “Extreme Makeover: Home Edition,” a weekly show that airs on ABC. The gym is used to train kids ages eight to 21 who come from broken or impoverished homes in the area.
 
Tim Hill founded the Geneva Boxing Team for the purpose of training local youngsters, though he never charged for lessons and paid himself for the makeshift gym he created in a small office building downtown. He and his wife, Michelle, were living with their four children in a home that was more than 200 years old and in dire need of repair. “Extreme Makeover” chose the family as the beneficiary of the episode that aired last Sunday.   
 
About to enter its sixth season, “Extreme Makeover: Home Edition” is an Emmy Award-winning reality TV series providing home renovations for deserving families. Each episode showcases a family that has faced a recent or ongoing hardship. The show's producers coordinate with a local construction contractor, which then coordinates with various companies in the building trades for the makeover that includes interior, exterior and landscaping. All of the work is performed in seven days while the family is on vacation, paid for by the show's producers. All materials and labor are donated.

U.S. Door, which provides a broad range of self-storage components and related construction services, donated a 16-by-8-foot Model 626 rolling door and a Gliderol motor operator to the boxing gym, built behind the Hill’s new house. Installed by U.S. Door employees Joe Burkhalter and Tony Domicolo, the insulated door features a Galvalume finish to match the exterior décor of the gym, which is equipped with new, state-of-the-art exercise equipment and a full-size boxing ring.

To read and view details about the Hill Family project, visit http://abc.go.com/primetime/xtremehome/index?pn=greenprojects.
 
U.S. Door has been an international self-storage supplier for more than 30 years. In addition to roll-up doors, the company offers a portfolio of products including hallway and corridor systems, swing doors, lockers, EZ Access wicket doors, relocatable buildings and mezzanine systems. For more information, visit www.usdoor.com.