The Refinancing Of A Self Storage Property Can Provide A Number Of Commercial Mortgage Challenges”
Today we are going to cover what I find to be some of the main challenges that borrowers and property owners experience when they attempt to refinance a self storage unit or property.
By being able to proactively address these issues before even applying for a new commercial mortgage, you’re going to be more likely to get the financing you’re looking for in the time frame you’re working in.
The first main challenge is the quality and strength of the financial statements that are provided by the tenants.
This is extremely important when you’re trying to refinance a construction mortgage where you most likely only have partial occupancy at the point at which construction is complete.
The lender is going to focus in on cash flow, and if you have recently opened your doors to the public, you may only be at 50% occupancy or less, which is not likely going to provide enough cash flow to provide adequate debt servicing for a long term mortgage. Yes, the projections can likely demonstrate repayment once occupancy is increased. But from a lender’s assessment of risk, they are going to be concerned as to when you will actually be able to achieve the planned level of average occupancy.
A second major potential challenge is the commercial appraisal.
Because a self storage property is income producing, one would think that the appraised value would predominantly be based on the income or cash flow generated now and in the future.
That’s not always the case due to the fact that there can can significant cash flow swings in self storage as a result of average occupancy periods being short in duration. As a result, appraisers will tend to lean towards a cost assessment of value instead which can result in a lower market valuation for the purposes of commercial mortgage financing.
The potential consequences of this is that you might not be able to get the amount of mortgage funding you require to retire the existing mortgage and potential provide additional capital for other purposes if that was part of your reason for refinancing in the first place.
This leads into the next challenge which relates to trying to increase the amount of mortgage funding to generate funds for other purposes.
With “A” mortgage lenders, there can be a high level of focus on the use of funds for a new mortgage. If you are increasing the mortgage amount on a self storage property and are planning to reinvest it into the property, thus increasing its market value, then its more likely that particular utilization of mortgage proceeds will be acceptable to an “A” lender.
However, if you’re looking at taking the funds out of the equity in the property and utilizing the money for an unrelated activity, such as starting up another self storage facility, or consolidating other debts, then its less likely that an “A” level commercial lender will approve that application of funds.
This may require you to focus more on sub prime commercial lenders or private money lenders that are less concerned with additional mortgage proceeds being applied elsewhere. These secondary financing sources will likely come at a higher cost of financing, but may still be worth it if there is enough benefit gained from being able to have more flexibility with the use and application of incremental mortgage proceeds.
If you are considering refinancing a self storage facility or require a refinance action right away, I suggest that you give me a call so we can go through your requirements together and discuss the different financing options that may be available to you.
Click Here To Speak With Toronto Mortgage Broker Joe Walsh
