FINANCING FOR PROSPECTIVE AND CURRENT OWNERS
Just finishing our financing on our latest location phase 1 (phase 1-230/ 2-200/ 3-200). Below are some thoughts in general on Storage financing. Basic for most investors. More useful for folks starting out.
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 long-term 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 504(10 to 20%), Farm MAC(??%), 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 25 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 504 does not do Rent up periods. They sell their bonds monthly to finance your loan and they lock you into Principal/Interest day one. Check on an SBA 7, or have the participating bank hold the loan open till 18 months or 65% occupancy; to cover the rent up period, then submit to SBA.
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 an 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".
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 504 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.
Don't trust anything I said, "own" your information, it's your money.
Update- my banker is going to check on a Farmer MAC loan. He said this would cover my locations in small towns less than 10,000 (??). Would go long term like an SBA, but without a participating bank, thus more of the loan will be longer term. Versus a participating bank will do a 5 year, then 5 year refinance terms. I like to lock in issues (financing) and take them off the table.