Banking Blues - Part 2
Over the last several months I have needed to speak with major Banks in all of our capital cities regarding various self storage loan facilities coming due for refinance. On each occasion, it was apparent that most of the banking people I spoke with have little understanding of self storage.
At a recent Self Storage Associaiton meeting I was talking to members about various problems that have come my way in 2010. To my dismay, several people related similar stories. The “best” examples of financial obstacles my clients have faced include the following...
- One highly successfully facility, requiring finance to build and open another Stage (which it already had multiple pre-bookings for) was advised by its major bank that unless it could guarantee never to fall below 85% occupancy (by area/by unit number/by economic occupancy was not nominated) the loan funds would not be forthcoming.
Apart from any other issue, given the fact that occupancy would fall below 85% in the initial period of let up on the next Stage, the banker did not appear to understand he was almost black-balling the extension before it had even commenced. The bank was also requiring a loan performance guarantee. It took several phone calls, several letters and continued badgering by me and my (well informed) client to ensure that this requirement was dropped.
- A local banker only uses a local valuer. This major bank property officer had insisted a valuation of a provincial (small) self storage facility use the local valuer to undertake a going concern valuation, as he had previously done several years before. The major real estate firm involved is well known in this country.
The valuer involved, despite agreeing with the client that he did not really understand self storage, provided a valuation to the Bank which when I reviewed it, showed a distinct lack of understanding of pricing, unit mix, staging, access, management, rental increment and operational expenses containment, to the detriment of his client.
My overview of the figures, and the potential increase that the proposed next Stage would bring, suggested the valuation was understated by at least $300,000 - $400,000.
Despite the relationship between the Bank and estate agency/valuation firm, my client is no closer to getting a revaluation of his facility until he convinces the State management that his local bank should be overruled on this one.
- Loan discussions between a client and his bank continued for several months. Volumes of financial paperwork were provided to the bank in addition to the usual monthly financial records, and as the rollover date approached my client was told that his Loan to Value Ratio (LVR) would not be at its previous 65%, but would in this current climate be reduced to 50%. “Please tip in some more equity”.
It transpired that the bank’s credit department (in this climate of rising bank profits post-GFC) was putting its own funding requirements first, knowing it would come under pressure as its pre-GFC borrowings need refinancing in the world.
Certain asset classes are becoming too risky in the stable of assets banks are carrying in their balance sheets. Self storage, like similar going concern businesses, has gone from being “flavour of the month” back to the “too hard basket”.
It's presumed current risk profile puts the banks risk profiles at risk. Where banks are prepared to refinance (and I have some clients who need to change banks to do this) they want to see a lot more “skin in the game”.
Whilst I couldn’t do much about the reduced LVR, in the six months it took to negotiate the refinancing, the facility value climbed 10% due to strong fill-up and ongoing price increases for new customers, which at least took some of the pain out of doing the transaction.
PS: This is Part 2 of a two-part series; you can read Part 1 here.