In this video, Fernando would like to talk about finance options and strategies when it comes to self-storage.
Starting from the end then move his way to the beginning.
The last on the list for Fernando’s finance options is to have stabilized senior debt that is non-recourse.
A non-recourse loan means that even though you are signing for it, if anything happens, for instance, if the market goes down you are not liable for that loan.
This is one of the best types of loans to get to limit your liability.
Usually, to get these seniors loans or “the stabilized debt”, the property has to be at its maximum potential. It has to be fully occupied, it’s bringing a high revenue and net operating income as much as possible.
A non-recourse type of loan is one of the most favorable because it has longer terms and has lower interest rates.
Your next finance option for your property can be a bank loan. This is a recourse loan meaning that you are fully liable regardless of what happens in the market.
If you want to learn more about the other types of financing options and strategies that Fernando is willing to share just continue watching this video.
Fernando O. Angelucci is Founder and President of Titan Wealth Group. He also leads the firm’s finance and acquisitions departments. Fernando Angelucci and Steven Wear founded Titan Wealth Group in 2015, and under his leadership, the firm’s revenue has grown over 100% year over year. Today,
Find out more at
https://www.TheStorageStud.com
https://titanwealthgroup.com/
Listen to our Podcast:
https://thestoragestud.podbean.com/e/finance-options-strategies/
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Hi! This is Fernando Angelucci, I'm The Storage Stud. Today, I'd like to talk about some finance options and strategies when it comes to self storage. So, I guess we should start from the end and move our way to the beginning. You know, the end of be all is, to have stabilized senior debt. That is non-recourse. So, when a loan is non-recourse, that means that even though you're signing for it, if anything happens, you know, let's say the market turns or there's some type of Black Swan event. You're not on the hook for that loan. If there is a loss to the property, or if, say for example, you have to fire sale it and you can't get more than, what the loan amount is for. So, that's a non-recourse loan. Now, there are what they call carve-outs, primarily bad boy carve-outs. So, you're not, you know, purposely defrauding anybody, you know, you're not engage in illegal activity.
If that were the case, then it would become recourse. But, if it's just something that has to do with, you know, factors that are out of your control that's where you'd have a non-recourse loan. So, those are always, you know, the best types of loans to get, just to limit your liability. But usually to get these senior loans or these stabilized debt, the property has to be at it's maximum potential. It's already stabilized. It's fully occupied. It's bringing in as much revenue as possible. The net operating income is as high as it's going to be, you know, aside from maybe growth in inflation. But those types of loans are usually the most favorable because of how long they are and how low the interest rates are. For example, a senior loan on a stabilized property might come from a life insurance company, or it might come from the Commercial Mortgage-Backed Securities market or CMBS as some call it.
It may even come from some of the big lenders such as you know, JP Morgan and Morgan Stanley and Barclays. So, these types of loans are typically up to a 10 year balloon. So, you have up to 10 years to either sell or refinance. And they're usually amortized over a longer schedule, usually 25 to 30 year amortization. Recently, in the last few months, I've been seeing quotes as low as 3.3% interest with some options going, you know, allowing for interest only, through either a portion or the entire balloon periods all the way up to 10 years paying only the interest with no principal pay down. These loans are typically, they're a little bit more difficult to get. You need to know, kind of people in the space. We typically go through brokers that have these relationships in the CMBS markets with the life insurance companies that will lend on these types of assets.
So, those are kind of the goal that you're trying to get to always is, you know, stabilize the property, get some senior debt on it, take it off your balance sheet. So, it's no longer, you know, it's no longer recourse. Now, one step ahead of that is, let's say a like a bank loan, a local bank may finance a property. These are typically recourse, which means you're on the hook for that loan amount, regardless of what happens in the market. And they typically have shorter, not only balloon schedules, but also amortization schedule. So, a typical bank loan that we see and we use, are you know five-year balloon with a 20 or a 25 year amortization. Typically these loans are going to require about 20 to 25% down. Now, there's a caveat because self storage is a business that also qualifies for SBA financing, which we'll get to in a little bit here.
And these are good loans for property that already shows income. It already shows that it's producing positive cashflow. It has a solid debt service coverage ratio or debt covers. Some people say your debt service coverage ratio is the amount of payments that you have to make, or the dollar figure per year, your debt service divided by your net operating income. And that will, I'm sorry, it's the other way around your net operating income divided by your debt service. And then that will come out as a ratio. It's usually, you know, banks want to see a 1.2 or 1.25, that covers. So, that means that your net operating income is 120 to 125% of what the debt service is. Again, so that's really good loan. If you can show financials from the seller, now let's go even one step ahead of that.
Say you are working with a seller that, decided that instead of paying taxes on his property, he was going to hide the income by taking cash and not reporting that income. So, his tax returns do not reflect what the property's actually bringing in. This is very typical, especially with smaller operators. These mom and pop owners, we find that, you know, one in three chance that the income that they're showing is not the true income potential, but here's the problem. These sellers, they want to get the value based off of all the income that it's producing, even the income that they can't prove on their tax returns. So, they basically chose, you know, Hey, do I want to make my money now, by not paying the, my proper fair share of taxes on these returns? Or do we want to make my money later by actually showing the income so that when the bank appraises it, or when a seller comes and looks at my last two to three years of tax returns, that the true value is represented.
The true net operating income is represented in those tax returns, and then you get a higher purchase price, but most of the time people want to have their cake and eat it too. So, they'll hide income, but they still want to get the value at where it was if all of the income was actually shown. So, there's two ways or three ways that you can handle those types of situations. The first is, to ask the seller to finance the property for you. Saying, hey, Mr. Seller, you know I understand you want a million bucks for your property, but based on what your tax returns are showing, I can only pay you 500,000 and that's what the bank will allow me to buy it at. So, we're at an impasse here, unless you are willing to be the bank for two to three years, for me, as the seller financer.
And that way I can properly, you know, show the income that this property is producing on a couple of tax returns. And once I'm at two to three years worth of showing the proper income, then I could refinance you out with the bank. So, that's option number one. Typically, it goes 50 50, you know, it's, if the seller needs the cash immediately. They usually won't go for that type of strategy. But if, you know, they, they still like to receive passive income and residual income by getting those interest payments. And they don't need all the cash right now, then we'll structure something like, you know, 15% down or 20, 25% down, you carry the mortgage for us for, you know, three years. And we'll have an amortization schedule over 25 or 30 years. And I like seller finance deals because you can dictate all the terms.
Usually when you go with a bank there's very little, you can really negotiate on because of the golden rule. The golden rule is he who has the gold makes the rules. So, I do like seller financing. Now, if the seller is unwilling to do that, another option you can do is go with an asset based lender or a hard money lenders as they're called colloquially the hard money lenders. They're going to look at asset value and they're going to lend up to a certain amount of that value. These lenders are typically experienced with real estate investors. They understand that we buy things at a discount, and we do a value add to raise the value of the property over two to three years, and then either refinance or sell. So, these hard money lenders are a good option when you have tight timelines.
And maybe you don't have as much down payment money as you need, but you do pay for it on rate. So, as opposed to say, you know, CMBS or senior debt life co companies, or you know, Morgan Stanley or some of these big firms where they're, you know, you're paying 3.3 to 3.5% interest, a bank might give you a loan anywhere between four to 5.2% interest in today's world, but a hard money lender. You're going to be paying anywhere between 10 to 14% after all the points and fees are included in this, because it truly is one of those situations where, you know, they're taking a risk and they want to be compensated for that risk. Typically these loans are short-term and they're not amortized or they're interest only loans. They will be one, two years, maybe three years interest only with the whole point of you taking them out as soon as possible, because those interest rates that they charge are pretty high. Now, suddenly between the bank and the hard money lenders or the asset-based lenders are the bridge lenders.
So, the bridge lenders are there specifically to be a bridge, bridge you from where you are now to the debt. That's going to be a little bit longer term. These are also typically interest only. I have seen them amortize as well. They're a little bit cheaper than the hard money loans, but a little bit more expensive than the bank loan. So, we have seen bridged at anywhere from, six and a half to 9% interest storage. So, the last couple of months these are typically they come from private equity firms or hedge funds. There are some banks that do bridge lending, but it's not very common. So, those are some of the options that we use as far as like traditional real estate financing. But as I alluded to before, there's also a caveat that self storage is also considered a business.
So, you can qualify for SBA loans, which are the Small Business Administration. These loans are pretty favorable, but they just come with a ton of extra documentation and rules. The two that we typically look at are the SBA 7 A and then the other one is the SBA 504 loans with these types of loans, you can get into a property with 15% down. And the amortization schedule is usually very favorable. 25 to 30 years, the rates are also decent. You know, they're going to be comparable to bank debt, maybe even a little bit cheaper than bank debt. And I won't get into it now because it's a whole other conversation, but the way they structure it is by having participation from other banks on one of the loans. And the other one is direct, a direct loan from the SBA.
So these, types of loans are great. If you have a lot of time on your hands, you know, if typically SBA lenders say they can get deals done in about 60 days. I have not seen that in my experience with storage, especially on the types of properties you're purchasing with these SBA loans. Typically, the documentation is not real good, let's say from the seller side. So, I usually will tell the seller, Hey, I'm going to need 90 to 120 days to close if I'm going to be using an SBA loan. So, those are some of the options that we use when it comes to financing self storage properties, and each loan has kind of its own little bucket. And they kind of blur a little bit at the very edges. So, when you're going from bank that a senior debt stabilized that there's a little bit of blurb on the edge of each same thing from bridge debt to bank debt, same thing from, you know bridge to hard money.
And then, you know, our favorite of course, is the seller financing. And one of the main reasons we really like it is cause it's a win-win not only do we get to set a terms, the underwriting is almost non-existent. The seller also takes advantage because now they're making interest on their purchase price and they're able to spread their capital gains and depreciation recapture taxes across multiple years, instead of just taking it in a, you know, a one-off transaction where you may have to pay two, $300,000 in capital gains in depreciation recapture. So, if you can spread that over time, that really helps with the sellers. So, let me know if you guys have any questions on, you know, financing options and strategies, when it comes to self storage, feel free to leave a comment below or reach out to us on our website or social media. And until next time, you know, it's good to see you.
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