We are continuing our conversation with Billy Brown, the Vice President of Business Development for Alternative Capital Solutions, he has been in the mortgage lending industry for several years, and he focuses on working with real estate investors. He is a commercial investor himself, which is a very important quality for a lender to have.
As my mentor used to say, it's not about real estate. You're not a real estate investor. You're in the business of finance. And the asset is real estate. You are in the finance game. You can exploit that into your own profitability.
Self Storage Loans
Did you know that SBA will lend on self storage? SBA has a lot of options for self storage if it's the right size. Even for ground up investments.
What would be a typical loan size?
Probably over a million. If you're going to do anything ground up on the self-storage, it's going to be over a million because the price of steel right now and the price of land. But you can get up to four years interest only. This is one where you come in and do some fun stuff where you go build it, lease it up, let it season a few years. Then once you have a couple of years tax returns, the property becomes more valuable because the NOI goes up and then you can do a cash out refinance.
Is that only for build up loans?
The SBA will do existing as well. Typically if you do an existing property, then you have the property's tax returns, and that's something more in the lines of a traditional bank loan. There are a lot of banks that have a bucket just for self-storage. We were recently approached by a borrower locally that was buying a vacant self-storage building, they had a good purchase price on it and were trying to raise all cash to go buy it and rehab it to get it rented up. He had trouble finding people who wanted to invest in a vacant self storage building. Months went on and he reached out to us. I said "Well, you're buying for less than the taxed value. We can see the value in this deal because it's self-storage. You have a little bit of clean up to do. Why don't we do a bridge loan to acquire it, you can use some working capital, you take the proceeds that you raised and go improve the property. And at the same time we'll be underwriting an SBA loan for the take out in three to four months once it gets to a certain occupancy, usually 50-60% of lease up is what we're looking for."
And sure enough, we did it. The bridge loan is an "in and out" type of deal with higher interest rates, but they executed it. We were parallel to them in underwriting the other loan. And as soon as they got the property to the point that the lender wanted, we moved them to the SBA loan. And not only did we pay off the bridge loan, we paid off the money he raised for the improvements, and we also gave him a $100,000 cash out, all within four months.
What was the requirements from the second bank in terms of occupancy?
Debt servicing is one of those things, it's such a low loan amount that once you get to a certain point, it's pretty easy, it was in the 60-70% range. We have different lenders that will do different things, and they love self storage, they get it, and there was a strong pro-forma. Imagine if you're a syndicator and come across something like this. No bank wants to land on something vacant. You also get longer amortizations on self-storage, 25, and sometimes 30 year amortization loans, and there are non-recourse options out there on the bigger loans. And then there are a lot of ways to go play with lending when you do that infinite cash on cash. Assumable and supplementals are not common in that world unless it's a big deal. Cash out refinance is fairly easy once you get the net operating income up there to replace your investor's money, and replace your working capital.
Self-Storage is great. Those tenants, those light bulbs, they don't complain much. Your replace springs. Your replace locks. You replace light bulbs. You don't need running water. In many places you don't need a site to even park. Fortunately and unfortunately, the cap rates have come down. But there are still some smaller mom and pop deals out there that are for sale.
Who is the absolute best commercial lender in the market?
The seller. Why would a commercial lender like myself, and an investor, want to tell you "Go get seller financing"? Here's a little secret: commercial lenders are much better at refinances than they are at purchases.
For how long should we stabilize the property until we do the refinance?
I would start on the front end because sometimes I can even help you give me some tips on negotiating the financing because I love seller financing. The triplex we bought, as well as the office complex that we're buying is under land contract, also called seller financing. You can do some fun stuff with the seller financing. There are many strategies when you have seller financing, for the triplex that we bought, I negotiated a low interest rate of 4% and I negotiated 90 days before my first payment. And you'll justify by saying "I want to give you your price, but my term, and my terms are this: lower interest rate, 90 days before my first payment because I have to stabilize the property. I've to get tenants in there, I've to put a lot of money into this I don't have more money into it for somebody to back out. And I want a longer loan with a couple extensions built in. And they did it for me. You can also negotiate a limited recourse or non recourse.
How long was the loan for?
It really just depends on the terms that you're negotiating. If you get decent terms, why would you want refinance? Most sellers want an in and out in six to twelve months. As a lender, we want to see 12 months of financials from the owner. The story also helps, and we can help with that as well.
Many sellers, especially the mom and pop deals on self-storage, or multifamily, or smaller multifamily don't have very good financials. They mix their personal expenses in with the deal, therefore, they can't get the prices they want. So you can come in and say "I'll give you your price, but under my terms". But because you don't have proper bookkeeping, I need at least a year, 18 months, two years, to go run the property professionally so I can go get a proper loan. I usually start at two years and negotiate down to one if needed. Typically we can get some decent lending after a year if we get twelve months of bank statements, or P&L's, etc. That's the fun part, you can go do many with that. The bigger the improvements, the bigger of a stabilization that is needed for the property. If you really see a good deal, you'll need a bit longer timeframe to be able to prove that you can do what you have to do.
If you ask us to help negotiate with the seller, we're going to charge you for that. You have to pay someone to go do the loan for you. The difference in us is that we're going to make you money, more money than what we charge in fees to go do it.
I'll leave you with this. I put my investor hat back on: it's scary. If you've never done this before, if you're just starting out, or you're trying to go a different asset class. It is very scary. And it's OK to be scared. Just take that next step and go find somebody who's done what you want to do. And sometimes that's a lender, and the lender can help introduce you. I can help introduce you to people who have done this before and get you a working knowledge of what's going on. And there are teams of people in place to make sure you don't screw up. With the lending today and everything around it, they're going to make sure that you're going to screw up and that it's not a bad deal. So you have to go out there and take those aggressive steps to go find something if that's what you really want.