How to Use a Non-conforming Loan to Buy Your Next Self-Storage Facility or Get You Out of a Pickle
- Whichever You Prefer -
Featuring Wisdom From Trading Places, 2 Finance Gurus & A Sensei
What if I told you that you could get a loan to buy a self-storage facility in three to six weeks start to finish— even if you have credit issues—with more flexible terms than you could get from a bank?
If you don’t know much about non-conforming loans, you might say I’m crazy.
Crazy like a fox, that is.
Non-conforming self-storage loans are simply loans made by non-bank lenders. Because they are regulated mostly at the state level and do not have to comply with the federal regulations that banks do, they can make loans that do not meet banks’ criteria. Non-conforming lenders are also known as non-bank, non-traditional and sometimes as hard-money lenders.
Why would you get a non-conforming self-storage loan instead of going to a bank?
Because non-bank lenders are everything that your bank wants to be but can’t.
They are fast.
“When you are acquiring a piece of real estate speed is critical in many cases,” explains Gary Bechtel, president of Money360. “We can react faster than a traditional lender and fund typically in 3-5 weeks. A traditional lender usually takes 2-3 months on average.” Thirty-three years ago, Gary started his career focused on self-storage, an industry of interest for Money360 as well.
Credit and Property Challenged? They still like you.
Bad credit? No tax returns? Property issues? No problem.
“South End Capital focuses on nonconforming
loans and our rates start in the 5% range. We offer fixed rate loans up to 30 years and financing up to 80% of a property’s value—things that sound a lot like what a bank would do,” says Noah Grayson, president and founder.
“The difference is we’ll do that for borrowers with credit down to 600 without tax returns. Perhaps the occupancy level is not high. We’re looking just at the cash flow and value of the property while a bank will require a lot more documentation. We are a lot more streamlined.”
Like Jamie Lee Curtis in Trading Places, they are flexible and easy.
“We can be more flexible and creative in our loan structures for borrowers than more traditional lenders. A traditional lender is generally bound to more conservative underwriting standards and have more stringent guidelines and are more restricted within the confines of their institution. We can go higher on loan to value, offer more flexibility on prepayment and future advances than traditional lenders are able to,” says Bechtel.
Grayson adds, “Many banks don’t process and underwrite loans using tech-based, customer service-minded applications that are intuitive and user-friendly. We use a lot of automation in our processes to make it simple.”
What can I expect from a non-conforming self-storage loan?
Non-conforming loans generally provide financing for acquisitions, refinances, rehabilitation, bridge loans, and even hard money for emergencies (hold tight, I’ll explain these options in a minute). They usually do not provide ground-up construction financing.
Generally speaking, non-conforming self-storage loan rates are not as competitive as bank rates. “A traditional lender, like a life insurance company or a CMBS lender, is going to be more competitive than a nonbank lender from a rate standpoint,” Bechtel explains. “We are getting paid for speed and flexibility. The pricing differential is going to be all over the board, but there is generally going to be 150-250 basis points (1.50%-2.50%) difference in pricing from what a traditional lender would charge compared to a midmarket nonbank lender. For example, if a bank charges 2.50%-3.00%% over the 30-day LIBOR rate, we are going to charge 4.50%-5.00%% over the same index. Other non-bank lenders might be in the 3.50%-4.00%% range over, and others might be in the 6.00%-8.00%% range over, it just depends.”
According to Grayson, “The most appealing thing about non-conforming loans is the ease and speed. People have the expectation that they are going to be put through the wringer for any type of loan, but non-conforming loans offer competitive terms with an easy process—making them very attractive to self-storage borrowers.”
Bridge loans
Bridge self-storage loans are short-term loans providing a one- to five-year “bridge” loan that is then generally taken out by a permanent lender who
provides long-term financing of five- to 25-years. Bridge loans allow self-storage borrowers to acquire, refinance, stabilize, rehabilitate or lease-up a property.
Just like there are varying types of non-conforming loans, there are many types of lenders. Some lenders do a bridge-to-permanent loan to provide the interim financing to stabilize the asset and then provide the long-term loan. There are others that are only in the permanent space, like insurance companies, CMBS lenders, or non-bank lenders.
“Money360 is solely a bridge lender. We focus on people who are acquiring a facility or need to rehabilitate or lease the property up,” Bechtel says.“ In a lot of cases, we have borrowers come to us who have just completed a property and want to take out their construction loan.”
“Because this is typically a loan that ties up their borrowing capacity with a particular financial institution, in a lot of cases a borrower will come to us and say, ‘I want to take out my construction lender,’ when the property is only 30% occupied. The borrower will get a bridge loan from someone like us to take out their construction lender and lease the property up until it stabilizes. And once stabilized, will either sell or put long-term financing on the property.”
Bechtel elaborates, “Generally, construction loans are full recourse to the borrower, and bridge loans are non-recourse and are advantageous, so the borrower doesn’t have a contingent liability on their balance sheet. It frees up their borrowing capacity with that financial institution, so they can go out and either buy or build another property. Occasionally we see self-storage owners use a bridge loan to build climate control units or canopy storage as they expand.”
Get you out of a pickle
Hard money is a loan secured just by the asset and can be funded in a week to ten days. In most cases, hard money loans are made without the borrower’s income factored in because it is not
sufficient to get a loan, the borrower’s credit is not sufficient, or has derogatory aspects such as bankruptcy, foreclosure, or default. Because hard money loans are much riskier loans, the lender is not going to give you as high of a loan to value ratio: expect 50-60% not 80-90%.
“There is a stigma out there that hard money lenders can be predatory, and they want you to default on your loan so they can take your asset, but that is an antiquated perspective,” explains Grayson. “Hard money lenders are solving your problem; we are giving you short-term financing to get you into a better situation. We want to know how you are going to get out of our loan, and we don’t want to own your property.”
And don’t worry, even hard money loans at the highest end of the interest rate spectrum are not loan shark territory. Grayson says, “The highest rates are usually in the 14-16% interest rate range—most people have credit cards with higher interest rates than that in their wallets.”
South End Capital provides both non-conforming and hard money loans, and its hard money financing interest rates range from 7% to 12%.
Hard money loans are short-term in nature, generally about 12-24 months. According to Grayson, the borrower’s exit strategy to get out of the hard money loan is most important. “Are you selling your property, are you refinancing, will you win the lottery [laughs]—how are you getting out of the loan?”
“In our case, since we also provide long-term permanent financing, we want to be able to transition you out of our short-term loan into a lower rate long-term program with us,” he says. “I would say most lenders do one or the other—we are one of the few that do both.”
Less frequently, hard money lenders will provide more expensive construction financing for self-storage facilities for borrowers that can’t get it through traditional sources. Hard money is for borrowers looking to buy a property or who already own one. Hard money is not for projection-based loans like ground-up construction.
Borrower: Know Your Lender
Can they fund your entire self-storage loan?
“There are a number of nonbank and hard money lenders that do not have the capacity to do a million-dollar loan,” says Bechtel. “You have to pick the right lender. Money360 can fund loans as large as $25-30 million loans off of our balance sheet. You need to make sure that the lender you are going with has the balance sheet capacity to fund the entire loan off of their balance sheet or warehouse lines versus possibly you having to go out and syndicate or participate with other lenders.”
Are they legit?
Self-storage developers should always research a lender before working with them. Grayson offers these tips:
Google is your friend.
Make sure there is plenty of realistic media coverage.
If the lender says they lend in your state, check your state’s website to locate deeds that have been recorded to that lender. Also check with your Attorney General’s office to see if any complaints have been filed against the lender.
Third-party reviews are crucial. Trustpilot shows reviews by real customers. LendVer.com, FitSmallBusiness.com and Business.com research and review business and commercial lenders, and they cannot pay to be on these sites. Any lender making loans on a reasonable scale should have third-party endorsements that they’ve been doing a good job.
Although some lenders don’t want to disclose proprietary information, you can ask for documentation that shows they are a direct lender.
Don’t be afraid to ask questions to make sure a lender is real. Be suspicious of websites that look fishy, be wary if you can’t identify a real person associated with the lender, or a website has obvious formatting or grammatical errors.
Beware up-front fees—it is ok to pay an appraisal or reasonable due diligence fee, but not thousands of dollars for miscellaneous charges.
Non-conforming lenders want to work with self-storage developers if…
…This is not your first rodeo. “For us experience is critical,” Bechtel says. “Our ideal borrower is someone who has experience in this asset class—self storage—who owns multiple properties within the same market that they are looking for us to finance a property in. I don’t want to be somebody’s first project.”
…You or your property are not perfect. It may sound like a cliché but “If you have less than perfect credit or don’t qualify for bank financing for any reason, if you can’t document your income, or if your property is in a secondary or tertiary market, we want to work with you,” elaborates Grayson. “Anyone who doesn’t qualify for a bank loan is our potential customer.”
…You have your ducks in a row. “Make sure you’ve done your homework and you can provide us with all of the information we’re going to need to make an assessment of the project. Have a good loan package, historical operating expenses, projections, information about the borrower from a resume and financial standpoint, and make sure you have all your information in an organized fashion so we can determine quickly if it is something we can finance or not and at what level,” says Bechtel.
Non-conforming lenders are an important source of capital for self-storage borrowers to know about. You too can get quality short-term, permanent long-term, and even emergency hard money loans for your storage facility at
affordable terms with non-conforming financing. You have options!
About the Author
Katherine D’Agostino is the founder and sensei of Self-Storage Ninjas, a feasibility-analysis firm delivering unbiased reports resulting in facilities with high occupancy and the highest possible returns. She offers a free, weekly newsletter that provides insider techniques, ready-to-use calculators, downloadable spreadsheets and data sources. For more information, visit www.selfstorageninjas.com.