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Storage Financing- Broad Discussion

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  • Storage Financing- Broad Discussion

    Was reading "Newstorageguy" refinance interest rate topic and it tweaked my interest. Don't mean to highjack the topic. New to the forum, if this Broad topic has been covered earlier, please disregard.

    Below is a broader financing discussion to include prospective and current operators.

    Just finishing our financing on our latest location. Below are some thoughts in general on Storage financing.

    1. Lender size- decide how large you want to potentially become. Find out your lenders loan cap rate. "How much they can lend to one customer." This is a Federal Banking regulation, not your banks decision. They can farm out any additional loan, but it is quicker and easier to have all your loan decisions under one roof. It is very hard giving multiple banks, your tax returns, loan to value schedules for all properties, moving cash between banks automatically, etc.
    2. Lender size- Collaterallization. If you end up with multiple banks, you may be over collateralized for one bank, and need more collateral for another. You can't transfer this position. Banks don't like taking 2nd mortgage position. Try to get a big enough bank.
    3. Picking a Lender- Don't go with a large National or Regional bank; or a small Low cap bank. Most Loan officers at Large national or regional banks move within 2 to 3 years. You want a longterm relationship, that you have already established a trust factor. Not everyone knows storage; you and they have to learn together. Pick someone that has done Apartment rental property financing.
    4. New Construction or Existing Facility- If you have a New Construction make sure your Bank will do a "Lease Up" period. You want "interest only". Even if you have the funds, you don't want to put it into the project. Try to stay liquid in case, if Rent up doesn't go well or if you want to do another project. I ask my Lenders to give me "Interest only" until I hit 65% occupancy or for 18 months. Bargain. Whatever you get, takes pressure off your cash position.
    5. Loan to Value %- Check with all your banking options and your checkbook. Traditional Banks (40%), SBA (10 to 20%), Farm Bureau(??%), etc have different Collaterallization %'s. This will determine how much you have to put in, up front. For your Collateral, don't borrow from your relatives, you won't pay them back for 10 to 20 years. Storage is like a piggy bank, the more you pay the banker, the more wealth you have. But it is tied up in your storage facility. The only way to get it out is to re-finance when you have a higher Collateral position or when you sale.
    6. You- Would you rather lend to someone who has done storage before or not? Start small or work at a Storage facility before requesting a bigger loan. Would you loan to a person who wants to open an Italian restaurant, who doesn't have a great recipe or ran a restaurant? Work your way up. Reduces both the Lender and your exposure.
    7. Terms- Traditional lenders will only loan out to 3 to 5 years. Some/most will give you a 10 year loan with the first 5 years fixed and the next five years to be Prime plus ?%.
    8. Terms- SBA loans can go out to 20 years fixed, with the participating bank required to do a 10 year participation as noted above.
    Amortization- ask for a 20 or longer Amortization period no matter who you bank with. Don't do a 10 year loan and plan to pay it off in 10 years, because your payback calculation said your could. Make sure you have some cashflow built in. You can always pay it off early, unless there are some early pay penalities.
    9. Speed- How fast do you need to close the deal. If an SBA loan, it can take up to 6 months. You had better have the land already acquired and just looking for funding for the facilities.
    10. Rent up Period- SBA does not do Rent up periods. They sell their bonds monthly to finance your loan and they lock you into Principal/Interest day one.
    11. Loan Amount- If doing a construction loan, you better have extra cash available or a Fat budget. Example: The Building group requires you to do a Bathroom. No problem. You see a fire hydrant on your proposed property and you know you have water. Find out later that is a "Private" hydrant for the Apartment complex you bought the excess land from. You can't use it. Nearest water is a quarter mile away and you need another $130,000. Start small and make your big mistakes early. Even later, you still make mistakes, but you can absorb them as you get larger.
    12. Covenants- read them. Early payoff penalities, etc.
    13. Refinance- a. SBA- make sure you qualify, b. Your local banker. If we move into a recession, make sure your Loan to Value is in a good position or you may need to come up with some cash.
    14. Insurance- Identify your insurance carrier, the bank will want it insured. Do both a Construction coverage and then move into a Business coverage policy. Insurance companies won't cover both necessarily. I started off with State Farm, because that was where my buddy worked. Found out they really don't cover that market, thus their policy was twice as high. Moved on to Ponderosa Insurance (not making and ad), because all they do is storage. I want to buy a "Free" move in truck, they won't cover that, so I have to find another Insurer for that. "Still learning". This will be another Topic I post, in the help section.
    15. Relationships- make sure your marriage, relationships, partnerships, wills, trusts, etc are all tight. This is at a minimum an 8 to 12 year payoff, perhaps 20 if you used cash to fund your life style. If you have to cash out early in the first 5 years, you will lose big.
    16. Business- get your business set up first before the loan. Personal, Corporation, LLC, partnership, etc.

    Date Stamp: 05/21/2020
    The SBA loan we are closing on will be about the following terms:
    Loan to value- We had to put in 15%.
    Amortization period- 20 years for both the SBA and bank.
    Interest Rates- SBA fixed for 20 years 2.98%; Bank 4.5% first five years, then prime plus 1% the next 5 years, with a total term of 10 years.
    COVID- SBA for existing and in process loans will pay first 6 months principal and interest. Helps during the rent up period.

    We sought a longer term note since the interest rates are so low. This is one more thing we can control long term. Downside- took a process that took longer, that will expose us to cash flow issues during the rent up period, has early pay penalties, also overcollateralized (we have 8 acres, built phase 1 on 3 acres, SBA wanted the whole 8 acres collateralized, even though they didn't need it).

    Lets say you screwed up on all of the above; Start small and get your big mistakes out of the way early. I'm still learning. The location before this, I was still learning the difference between triangles and rectangles when I bought the property (all 3 acres aren't the same). Something I should have remembered from 1st grade.

    Readers please add different views and points to this topic. Don't trust anything I said, "own" your information, it's your money. Thanks.

  • #2
    Welcome to the forum!
    Throw kindness around like Confetti - But don't get glitter in your eyes!


    • #3
      Clarification on items 8, 9, and 10 for those who may actually be looking for financing. These items above are obviously talking about an SBA 504 loan. You can also get a 7a loan which has other benefits.

      8- this can go out 25 years for both loans
      9- if it takes 6 months, the lender most likely isn't very well versed in the SBA programs. It shouldn't take that long, but a 504 can and usually does take longer to close because you have more parties involved in the approval process....but it is a good program when used in the proper situation.
      10- SBA 7a CAN include money for working capital and lease-up payments.

      The bottom line is if you want or need to use an SBA loan, work with a bank that knows the product very well and does a lot of them and you also want them to be familiar with self-storage.
      Terry Campbell
      General Manager - Self-Storage lending division
      Live Oak Bank
      [email protected]


      • #4
        good info, thanks for sharing


        • #5
          I investigated going the SBA route before for my properties. But I determined it was better to stay with the local bank I have been dealing with for a long time.

          There were going to be a lot of up front costs to change to an SBA loan. There was the brokers fee ( was 1-1.5%) Appraisal fee, there were also additional assessments required of the properties as well to qualify for an SBA loan.

          Since I had an existing relationship with my local bank there were zero costs to get my loans refinanced, and no appraisals needed due to our great LTV Ratio.

          If I was starting a new project I think I would likely look more into going the SBA route.


          • #6
            Finding the down money for any commercial loan is difficult and the SBA can have lower %ages for them.

            I'm trying to find some sort of deal for Veterans but coming up empty so far


            • #7
              Thanks for further experiences and inputs. All of the above are options. Each decision is situational.

              Low collateralization, you might not can handle 40% up front. Can't cover rent up period, go another way. Weighing heavier towards a finance decision, you might want to lock in longer terms 20-25 years so that interest is something you don't need to watch over the years. The more you can reduce your fixed costs; electric, property tax, interest, insurance, etc; the better your profit margin.

              Hey, another topic, Best ideas to control Fixed Costs.

              Please keep sharing your experiences and judgment calls. Your always right, when its your money.

              Happy Memorial Day weekend. Was checking out another product, Contractor building rentals with a friend. Got called in to do a U-Haul rental. Guys car was broke down, glad to help him. Forgot to ask for a good review.


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