n the last five years, the self-storage industry has seen an unprecedented boom, becoming one of the most sought-after real estate asset classes. This surge in popularity is largely due to the sector’s stable cash flow, limited employee management, and high margins, all of which have been attracting new investors. Amidst this burgeoning interest in acquisitions and new developments, financing has emerged as a pivotal element propelling the industry’s growth. However, it’s crucial to note that banks and other lending institutions exercise caution by prioritizing strong applications to mitigate lending risks. So, what are banks looking for when they receive a loan application? They are looking for a good project and a good borrower, but what does that mean? This article will discuss the importance of securing financing for self-storage projects and the factors lenders consider when evaluating loan applications for self-storage facilities.

First, let’s consider why banks prioritize strong applications. By carefully selecting projects with a robust cash flow capable of repaying the loan, banks mitigate risk, increase the likelihood of repayment to protect their capital outlays, and help maintain an overall positive portfolio. Simply put: Banks are looking for projects that can repay the loan. In Live Oak’s case, we also want to help prospective borrowers succeed, and part of that is not lending money for projects with a high probability of failure. This approach ensures a win-win situation for both parties involved.

Several key factors should be considered when choosing a solid self-storage acquisition or development opportunity. The facility should be in a good location with favorable demographics, high visibility, and easy accessibility. It should offer modern amenities, such as advanced security features, climate-control options, and various tenant conveniences. It should be well-maintained, ensuring structural integrity, pleasing aesthetics, and full functionality.

From a market analysis perspective, the facility should demonstrate healthy occupancy rates, indicating existing or projected demand. Understanding the competitive landscape is vital, as it involves assessing local market saturation and pricing strategies. Considering future development plans and market trends, the facility should also have growth potential.

Another crucial factor is the borrower’s experience. They should have a proven track record in self-storage or related commercial real estate ventures and demonstrate strong financial management skills for effectively managing budgets and maintaining profitability.

Lastly, a clear business plan is fundamental. This includes realistic revenue projections, expenses, occupancy rates, and a loan repayment schedule. The borrower should also outline an exit strategy to address future scenarios, such as selling the facility or refinancing the loan. These elements collectively contribute to the success of a self-storage business venture.

Projections will look different for acquisition versus new development opportunities. For acquisitions, banks may focus on the seller’s historical financials to gauge the repayment ability and the amount of leverage the facility can support. They may also request borrower-prepared projections to understand the facility’s potential cash flow under new management. This is especially important if the facility has been mismanaged. We see many acquisitions where the seller has not managed their rental rates, letting them lag local market rates. A new buyer may create projections showing the facility’s rental rates catching up with the market and projected expenses under their management. While forecasts may show some expense savings, it’s important to project out any increases in insurance costs under new ownership or increased property taxes if the sale triggers a reassessment. It is a good project if an acquisition shows good repayment on historical financials, buyer projections, or both.

More due diligence is required for new development opportunities, which typically lack historical financial records, and banks rely on feasibility studies to confirm market demand. With so much interest in storage, a feasibility study can be an invaluable tool to confirm enough demand in your market for a new facility. While this study contains market rates and demographic data, a good study will also check for other development projects in permitting or construction, as the most significant risk to a development project is other new supply entering the market around the same time. A feasibility study also contains detailed projections that banks can use in their underwriting to confirm the project can cover debt payments in a reasonable amount of time. Good lenders will also use the projections to calculate appropriate working capital reserves and interest-only periods to help support the project during the lease-up period. The projections may also inform the proper amount of leverage for the project. New construction projects are inherently riskier than acquisitions with in-place cash flow, so banks will likely have pursued these on a lower leverage than acquisition requests.

A good project will get you halfway to approval, but you must also have good borrower support. While some lending may be non-recourse, many banks’ lending practices require a personal guarantor. This guarantor provides additional security for the loan by promising repayment should the facility fall short and the borrower defaults. A strong guarantor bolsters the strength of the application by demonstrating additional financial backing as well as expertise or experience that can increase the likelihood of success in the proposed project.

Banks collect various information to gauge the strength of a proposed guarantor. A credit report and corresponding score give a good overview of financial obligations and repayment history on those obligations. Delinquency on other debts, collections, and high revolving usage can hurt a guarantor’s chances of approval. Conversely, a clean credit report with a high credit score can give banks more confidence in a guarantor.

A personal financial statement outlining assets and liabilities is another crucial piece of a loan application. Guarantors with strong liquidity and higher net worth inherently add strength to their loan applications. Tax returns give a good sense of historical income and tax obligations, which are crucial to bank underwriting. The larger the loan request, the higher the expectations around income and liquidity may be. Apart from those documents, banks collect resumes and business plans. These two documents provide qualitative data on whether the guarantor has the experience, expertise, and tenacity to make the project successful. A prior track record of success in other projects, especially within self-storage, lends credibility to the guarantor.

Banks may have different underwriting criteria to define what a good project or guarantor is to them, but the key to unlocking the vault of bank-approved loans lies in crafting a strong application that showcases both a promising project and a reliable borrower. This involves a thorough understanding of the market, a clear business plan and a proven track record. It’s also crucial to understand the lending institution’s underwriting criteria to align your application accordingly. Remember: A successful loan application is not just about securing funds; it’s about building a partnership with your lender that will contribute to the success of your self-storage venture. We highly recommend working with a self-storage lending expert who can best guide you through the unique ins and outs of self-storage business financing. As the industry continues to thrive, so does the opportunity for investors to make their mark. So, equip yourself with the right knowledge, prepare a compelling application, and step into the promising world of self-storage investments.