by Marc Goodin. Location, Location, Location, you have heard it a thousand times. Now as we have hit a new high in the fed rate/interest rates, it is time to think loan Terms, Terms, Terms. Terms are more important than ever. Most new developers do not realize how much you can negotiate loan terms with a lender or even what to ask for.
Here are 5 musts:
1) Always ask for 3 years minimum interest only, even when refinancing. Interest only to break even can mean additional money out of your pocket to pay the principal.
2) Always ask for a 30 year amoritization. Self storage is all about cash flow and not paying off your loan. Items 1 & 2 will help with cash flow and are often overlooked.
3) The typical self storage ( commercial loan) is a 5 year term loan. When interest rates were low (4%) your goal was a to ask for a 10 year term. I paid a slightly higher interest rate to get a ten year term but it was well worth it.
Now with rates high and the belief that they will be going down you want a shorter term, maybe an initial 3 year term that converts at no cost to the rate in 3 years and can be converted to a 5 year term.
4) In any even you are liikly going to be refinancing in 3 years or less, especailly if you have an SBA loan so you want a reasonable prepayment penality. Year 1 - 3% , Year 2, 2% and year 3 - 1%
5) And finally request a better interest rates. Right now I have seen interest vary from 6.5% to 9.25% for well qualified developers.
Keys to getting better loan terms:
Preparing a detailed bank application/executive summary cover letter. Not only will it have the financial details but the many reasons why you are qualified and why your project is different than other projects. Include pictures, building elevations, the site plan and your marketing plan. It will let the bank you are a professional and their money is safer with you.
Shop your loan to multiple banks. You might want a to use a loan broker to give you a hand. Call me if you need a name.
Portions of SBA loans can be negotiated as well. First you have to chose if an SBA 504 or and SBA 7A is best for you based upon rates and how much your are borrowing. The SBA 7A can be prime plus 3/4% ( 9 % today) The SBA 504 has a lower rate but a higher/longer pre payment requirements.
SBA funds are often broken down into various uses. It is important to clearly understand what the funds can and can not be used for. And it is super important to confirm if money is not used in one catagory iit can be used in another catagory. For instance you many have a construction contingency catagory. If you don't use it during construction can you use for operating costs and interst payments?
Often a lender loans a significant portion of the loan so their rates do not have to follow SBA rates. ( prime + 1)
If you are going to use the SBA 7A loan only for the carrying or interest costs you may want to consider a conventional loan on you home if you have the equity for a much lower rate.
Don't let the current rates deter you. If you are just getting started looking for land your timing is good. If you wait for rates to come down to look for land you may be to late by the time you find land and get approvals.
I built 2 facilities in the Great recession of 2008/9. I had super high interest rates and construction costs. But now I have great rates and have not worked for a paycheck since I was 50 years old. If you are building self storage for your long term future now is the second best time to buiild. The Best time to build always seems to be 5 years ago. Where do you want to be financially in 5 years? In 10 years?
Timing the market is next to impossible. In fact if one was to time the market they would have build in the last 10 years when we had the low interest rate. Read the whole timing story here.
If you want to have a 15-minute call to learn how Storage Authority helps insure the above items and more are accomplished at your facility and how we help you find land and get your facility built please send me an email or call me – no appointment needed:
marc@StorageAuthorityFranchise.com or 860-830-6764
Get more information on Storage Authority Franchise at www.storageauthorityfranchise.com/opportunity3
Marc Goodin is the President of Storage Authority Franchising. www.StorageAuthorityFranchise.com He owns 3 self-storages he designed, built, and manages. He has been helping others in the self-storage industry for over 25 years. He can be reached at marc@StorageAuthority.com or directly at 860-830-6764 to answer your franchising, development, marketing, sales, and operations questions. His best selling self storage books are available on Amazon.