How do I make myself more attractive...

7 Replies

So, I'm having some "difficulties" getting a cash out refi on a commercial self storage facility that I have owned for ~15 years. I've developed it from greenfield and, for all intents and purposes, it's been run as a side project/hobby business for most of that. It sat at about 8000rsf and was good enough to pay its expenses and put a little bit into pocket with little to no effort involved. 


In the last two-ish years, I've decided to pump it up and make it a "real" business; I've done an equity injection into it and more than doubled it's RSF in that time. First phase was an additonal 5100rsf which rented up and stabilized in 6 months; second phase was another 5100rsf and I just got occupancy in August on that. I am currently sitting at ~73% occupancy (normally I stabilize out at about 90+% with zero advertising/specials). Based on current comps, I have about a $1.1M valuation and I have a $65k promissory note from a partner buyout a couple years ago. No other debt.

YTD, I'm averaging $5500/month income on it with $3350/month expenses (of which $1250 is debt service). It's a long term asset play; I've got an approved site plan for an additional 8400rsf to fully build the site out and even if I fully finance that piece, my LTV is still really really low.

So; a couple of lenders I've been in discussions with balk at the cash flow. Historically it's been low as I've used it to generate losses to offset much greater cash flow operations I was involved in. I am now focused on this and it has a ton of upside via occupancy and rent increases, as well as future expansion.

What's the best narrative to pitch this to lenders? I am looking at a basic cash out refi of ~$320k with considerations on a $250k construction loan in the next 1-2 years. The refi is just to refill my market investment coffers, so it will still be available for use if need be, and the construction loan will only be tapped if the business is stabilized, market conditions support it, and I can't swing it out-of-pocket.

I'm of the opinion that it's a pretty safe bet all around and it seems that it's a pretty straight-forward no brainer to me. The lenders I've talked with are both local commercial CU operations, and they both have been pretty soft on the viability of this. Should I continue to try to talk and "convince" them; or should I just seek out a sluttier lender?? Does it seem really off base and I just can't see the forest through the trees??

Do both. I'm in Cumberberland, an old Hancock County boy from Fortville. I'd be interested to know where its located.  I can give you a few lenders, but it would just be a shot in the dark and maybe trying an option or two. 

Well, I see some problems here. First off, your expenses are running on the high side, at roughly 38% of revenues (5500 - 3350 + 1250)/5500. In turn, that results in an NOI of roughly $3400/month or $40.8k annually. So, I'm unsure you are arriving at the $1.1M valuation (if it is just asset valuation; as it doesn't seem like it is cash flow based).

I'm not sure how much exact debt you are looking for (if you are refi'ing the partner buyout and want $320k, for the straight cash, or $570k, refi and construction, on top of it), but as most conventional lenders will want at least 1.2 DSCR, the amount you are looking for could be a stretch (as far as DSCR and begin able to service it) based upon current NOI. So, by playing the game to reduce taxable income, you have also sort of shot yourself in the foot as far as how much you can finance. Though you could attempt to make the case that that was then and the situation has changed due to the expansion efforts. And as it hasn't been a full year, you will need to attempt to support this with month by month P&Ls that show increasing revenues and stable expenses (so increasing NOI). Though there will probably be banks that are turned off by the lack of seasoning.

So, you will probably need to hit up a number of banks to find one that will work with you.  As otherwise, if you have other business interests and lending relationships, you may try those bankers, as relationship banking can get you some more flexibility than just someone off of the street.  I mean, I'm not sure how many banks you have asked, but I've heard of people looking for specific debt that didn't find it at the 1st or 2nd bank, but instead found it on at the 14th or 20th.  And yes, local banks and credit unions are probably going to be your best bet at that loan size.

In addition, there is always the SBA routes.

Originally posted by @Dave Peirce :

Well, I see some problems here. First off, your expenses are running on the high side, at roughly 38% of revenues (5500 - 3350 + 1250)/5500. In turn, that results in an NOI of roughly $3400/month or $40.8k annually. So, I'm unsure you are arriving at the $1.1M valuation (if it is just asset valuation; as it doesn't seem like it is cash flow based).

I'm not sure how much exact debt you are looking for (if you are refi'ing the partner buyout and want $320k, for the straight cash, or $570k, refi and construction, on top of it), but as most conventional lenders will want at least 1.2 DSCR, the amount you are looking for could be a stretch (as far as DSCR and begin able to service it) based upon current NOI. So, by playing the game to reduce taxable income, you have also sort of shot yourself in the foot as far as how much you can finance. Though you could attempt to make the case that that was then and the situation has changed due to the expansion efforts. And as it hasn't been a full year, you will need to attempt to support this with month by month P&Ls that show increasing revenues and stable expenses (so increasing NOI). Though there will probably be banks that are turned off by the lack of seasoning.

So, you will probably need to hit up a number of banks to find one that will work with you.  As otherwise, if you have other business interests and lending relationships, you may try those bankers, as relationship banking can get you some more flexibility than just someone off of the street.  I mean, I'm not sure how many banks you have asked, but I've heard of people looking for specific debt that didn't find it at the 1st or 2nd bank, but instead found it on at the 14th or 20th.  And yes, local banks and credit unions are probably going to be your best bet at that loan size.

In addition, there is always the SBA routes.

 Yes. I agree with everything you said. I have always done (a wide variety of) everything on a self-financed and/or cash basis; which leaves me less than adept at a more "traditional" OPM type of structure, and with no real world experience with lending. With this, my desire to expand has outpaced my ability to self fund at this point. 

The local market is hot, and has seen an 80% turnover in ownership of self-storage facilities in the last two years, selling at substantial multiples of previous valuations. My valuation is just a conservative comp based on current sale prices of comparable facilities and not business cash flow. And yes, using it to reduce taxable income does me no favors at the moment, but was a necessary evil with the bought out prior partner. I do have month-to-month P&L's worked up that show increasing revenues (and I've got a solid recent rent-up history with the last expansion); although expenses are higher than normal, averaged out YTD, due to the last expansion and using cash flow to augment the equity injection and stay away from debt

What I am trying for is a total of $320k cash (with the ~$65k promissory note paid off as part of that, as any lender will want to be 1st lien), which is $255 cash to me. The $250k construction type loan would be future additional if market conditions warranted.

What is normal for this? Should I work up a packet with the basic financials and shotgun it out to multiple lenders all at once, or should I continue to work through lenders one-by-one?

@Bill Snyder , I appreciate your candid conversation, and if I were in those shoes, I would create a professional-looking package to shop to potential lenders.  Just as importantly, I'd meet with them personally - it might help to explain what the previous goals were versus your new expectations.  At the same time, even if they didn't want to move forward with the deal, you have the ability to ask what, exactly, they weren't excited about.  This can give you insight into when they might be more open to your deal (for example, a year of numbers with the additional space, etc...).

Even if you weren't successful in this first round, you'd have local feedback from lenders who now know you and you can follow up with in the near future.  We've seen this ourselves where lenders really wanted at least a year of financials on a new facility we had taken over and improved (despite our professional reputations) before they would "play ball."

In my experience, banks really like Self Storage, but they still worry about financials.  I think getting clear on their expectations - and developing a timeframe that works for your goals and theirs will get you exactly what you need.  

I would also add that no one includes debt service as an expense. Thats a highly variable number that doesn't go into GL "expenses" that may be throwing off banks who don't even dig deeper to see that.

EBITDAR

Gross revenue, gross Income, expenses, net income, debt service, depreciation, taxes, etc ...

Ha. Just got an email; the loan committee has approved the deal, I just need to update some occupancy information and they are supposed to send me an offer to lend, and we can then move forward with checking off the additional DD boxes.

I guess the best way to make progress is to get on here and vent...    ;) 

So, just an update:

I closed on the loan yesterday! 

In talking with the lenders Commercial Loan Manager, the SNAFU in the process was that they used the same underwriter as an institution I was in-process with at the beginning of 2019, but pulled the plug on due to lack of progress and disagreement on the terms.

So when the information on the new loan came in,the underwriters were "We've already reviewed this loan, and it doesn't work" while the financial institution was "This absolutely works, let's move forward". They finally just put their foot down and said "We are doing this!".

Lessons learned; stay engaged, know your numbers, ensure that the right people are getting the right information (and make sure it's the 'latest and greatest'), make sure key people believe in you and are on your side, and always be your own cheerleader. The process is not always a 'set it & forget it' thing.

The entire process from initial inquiry to check took just about an entire year, but I got what I wanted and I've set the framework for additional funding on a future construction loan, as well as a LOC on this, and another development.