When trying to secure a commercial mortgage to complete the purchase of an existing self storage facility, there can be a number of different financing challenges that can become evident during the application process.
Our goal today is to discuss the three major challenges that are most typical to this type of deal.
Being aware of each of these challenges and why they occur in the first place can allow you to take a more proactive approach to eliminate them or reduce their impact
The first major challenge I find when trying to arrange commercial financing for self storage is meeting the historical financial information requirements of the lender.
For an “A” credit lender, most will require three years of accountant prepared financial statements as well as detailed occupancy statements for the same period of time.
Most bank or institutional commercial lender criteria will require that the historical financial statements show enough available cash flow to service the proposed mortgage.
If you are purchasing an under performing property with the intent of marketing it more aggressively to reduce vacancy and make it more profitable, the financing available to you will be limited in most cases to the historical cash flow, not the future cash flow.
And if you are unable to qualify with an “A” lender initially, it may make sense to secure a sub prime commercial loan or a private mortgage to complete the purchase and provide the time necessary to improve the financials and allow for a mortgage refinancing in a year or so.
A second major challenge is getting an appraisal completed with a valuation that optimizes your loan to value potential.
While this is an income producing property, an appraiser may lien more to a cost approach or comparable sale approach to establish value which may end up providing a market value that is lower than what you paid for the property.
Or, even if the appraiser comes in with the same value as you paid, he or she may provide other remarks about area competition as an example that may end causing the lender to be more conservative with respect to the amount of financing they are prepared to extend, which will increase the equity you’re going to have to put into the deal.
The third major challenge I see with self storage purchase financing is meeting the lender’s borrower covenant and experience requirements.
If you are looking at acquiring your first self storage property, there will be considerable scrutiny towards the management team you are proposing as well as the net worth you own outside of the operation being acquired that would support the guarantee for the loan.
Or if you have existing self storage assets, there may be considerable due diligence required to review past financial performance of those assets to provide lender comfort that both experience and guarantee are sufficient for further financing.
If you are looking to finance the purchase of an existing self storage property, I suggest that you give me a call so we can go through your situation together and discuss the different financing approaches available to you.
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel