Financing a self-storage acquisition has never been simple, though it can be time-consuming. Knowing about the loan products available to buyers and understanding the process will help. The first step is determining which financing best suits your needs is to define your investment goals.
These days, it’s easier to buy an existing facility than to build a new project. This is especially true for properties that have stabilized occupancy of 80 percent or higher. You can finance an acquisition at up to 85 percent of the purchase price with fixed interest rates for 10 years and amortization periods of up to 30 years. These terms, coupled with relatively low interest rates, will help you meet or beat your cash-on-cash return objectives.
If your aim is to be a long-term facility owner- either as an operator or investor- and the property is stabilized, you would typically choose a long-term, fixed rate mortgage (let’s say 10 years.) If you’re not concerned about cash flow in the short term, you may want to go with a short amortization period. If you want to maximize cash flow throughout the length of the investment, a 30-year amortization is more appropriate.
Take a look at the impact of amortization period in cash flow. Let’s say you purchase a facility for 3 million. You secure a loan for 85 percent of the value (2.55 million) at a 5.85 percent interest rate. If you choose a 20-year amortization period, your monthly payments will be $18,049. If you go with a 30-year amortization, your monthly payments will be $15,043. That’s a difference of more than $36,000 over the course of a year.
Buy and Improve or Flip
If your objective is to buy a poorly managed or underdeveloped storage business to turn it around or sell it, choose a short-term bridge loan or a three- to five-year term loan. This will allow you to make improvements to the property and increase net operating income before securing a long-term mortgage.
A loan for a property below stabilized occupancy (less than 80 percent) is best provided by a local bank with which you already have a business relationship. Expect to invest 20 percent to 25 percent of the purchase price. This type of loan is also full recourse; in other words, you’ll be personally liable.
Are interest rates still favorable for a self-storage acquisition? Yes, especially if you’re looking at a 10-year, fixed rate loan. These loans are based on the 10-year Treasury yield, which means you can expect a rate of less than 6 percent. If you’re using a bridge loan and your lender is using the Prime rate as the index, you’re probably looking at an interest rate of more than 7 percent.
The Application Process
When it comes to financing, the application process is critical, particularly the timing. Acquisitions are generally time-sensitive with specific closing dates. Sometimes they’re ties to tax-deferred 1031 exchanges that have strict deadlines. For this reason, it’s important to provide all information requested by the lender in a timely fashion.
Lenders don’t ask for more than they need, thought it may appear that way. Many buyers and even real estate agents don’t realize the requested information is either part of federal regulatory compliance or, in the case of a conduit loan, part of the loan-securitization process. Submitting all necessary documents when necessary will prevent delays in underwriting process.
Following are some items that are traditionally required. In addition to basic information about the property and purchaser, the lender will order an appraisal as well as an engineering and environmental review.
- Signed loan application
- Monthly income statements for the last three years
- Current rent roll
- Occupancy history for the last three years
- Tenant-delinquency report
- Deposit slips and bank statements for last three months
- Last insurance-premium notice
- Most recent property-tax bill
- Copy of the management agreement
- Site plan
- Copy of the existing title policy
- An “as built” survey
- Applicant’s and principals’ tax returns for the previous three years
- Principals’ personal financial statements
- Purchase’s bio and profile
- Copy of the executed purchase agreement
- Articles of organization (LLC) or incorporation (corporation)
- Executed operating agreement (LLC)
- Certificate from secretary of state
Once you pull your application together, there’s still a lot to coordinate. Because so many parties are involved in an acquisition, it’s important for everyone to work cohesively toward the same goal: completing the purchase and funding the loan as quickly as possible. This harmonization is often best suited for the loan broker who works with the buyer.
Now is a great time to finance your self-storage acquisition. Understanding the basic steps will help the process go smoothly.