The lending market continues to be favorable for self-storage investors and owners. Whether you want financing for a new project or better terms for an existing loan, it’s a great time to obtain funds; but building a comprehensive loan package will be key to locking in the best rates and timelines. In fact, nothing quite impacts an owner’s cash-on-cash returns more profoundly than mortgage-loan terms, including the interest rate and amortization schedule.
The following is a concise summary on how to prepare a professional, effective loan package for lenders that’ll make them say “yes” and offer the best finance terms.
Offering Memorandum
A self-storage loan package includes an offering memorandum and a description of the facility’s annual financial results (cash flow). Sometimes it includes a table or image of the financial results; other times a separate Excel-based sizing or underwriting model is submitted.
The offering memo provides a loan officer with a narrative description of the property, history of ownership, current business plan, demographic information, market overview, a description of the owner/borrower and, most important, the loan request. The following explains the most important components.
Property Description
Your self-storage loan request should contain the facility’s physical address and provide a description of the property including acreage, total rentable square footage, number of units, occupancy, and square feet of climate- and non-climate-controlled storage. Include details about any additional commercial space such as retail or office, flex industrial, or billboards that generate income. Finally, describe any customer amenities such 24-hour access or keyless unit entry.
One of the easiest, most powerful ways to ensure your loan package impresses is to include bright, attractive images. Commercial real estate is product you can touch and see, so let the loan officer get a look! No longer do you need a professional-grade camera to take quality photos. Most smartphones can showcase your property in the best light.
Loan officers rely on pictures that reflect the condition of the property and demonstrate whether it’s attractive and clean or in need of capital expenditures, which can be indicative of poor management. Photos can also help them determine how well your property attracts customers on looks alone, which is one way to forecast future performance and the ability to service your future mortgage or debt-service payments.
The lender wants to see the facility frontage. Capture this (and all other photos) on a sunny day right after your landscaper has cut the grass and everything is tidy and swept. Add exterior photos focused on the most attractive areas of the site. One of the front office can be helpful if it’s good-looking. You’ll also want photos of building interiors if you have climate-controlled units as well as outdoor units with the doors open.
Pictures of any recent capital improvements are also a nice touch. Add any applicable notes such as “new fence installed in 2021.”
Ownership History
An ownership history is also vital to your self-storage loan package. Add the month and year you opened or acquired the facility along with the purchase price. Describe all major capital improvements completed with a timeline or schedule. This shows the loan officer you’ve made ongoing financial investments to improve the property’s long-term value. Provide a total cost basis or your capitalized interest in the business, which would be located as your basis in your tax returns after you add back depreciation.
Also, describe the non-capital ways you’ve added value in the self-storage project—your “sweat equity.” For example, perhaps shortly after purchasing the facility, you removed problematic tenants, increased revenue by adding a rate-management system, or upgraded the website to increase occupancy. Explaining your business plan along with your tenancy and why customers rent from you provides the lender with assurance that you understand how to successfully operate the facility.
Lastly, include the strengths of your self-storage operation. For example, if your turnover rate is below market or your average tenancy has been six years even though you’ve proactively increased rates, say so. It’ll provide the lender with an idea of how strong your market is and how loyal customers are to your business. Keep in mind that a loan officer is focused on term risk (the possibility of default during the term of the loan) as well as balloon risk (the possibility of default at loan maturity).
Market Overview
Whether you’re seeking self-storage financing from a local lender who understands your immediate market well or a national lender that may not, you need to define the demographics and demand drivers for your business. This includes items like median household income, current population and growth, and the percentage of apartment renters vs. homeowners. You can obtain much of this information online from websites like City-Data.com. It’s also important to mention the top employers in your town, city or county. You can get this info via online search or your local chamber of commerce.
Describe any new retail and housing developments going up in the area. This’ll help the lender understand the current commercial real estate and economic activity. Google Maps can provide distances from your facility to new major employers or developments. This provides a feel for the surrounding area and speeds up the analysis the lender will need to better understand your property and market.
You might also mention any local features that increase the need for storage in your area. For example, if there a lake or recreation area nearby, that might indicate a higher demand for boat and RV storage.