Oil and vinegar. Fire and water. There are many things that just don’t go together well. And one of those is financing and time. In this Self-Storage University podcast we’re going to review how hard it is to get financing for you facility to match the time given, and how to best plan for the eternal conflict between getting a loan and meeting your time deadlines.
Episode 39: Financing And Time: A Dysfunctional Union Transcript
Oil and vinegar, fire and water. There are so many things that don't go together. What you can add to that would be financing and time. This is Frank Rolfe, the Self Storage University podcast. We're going to talk about the problem, that very dysfunctional union you have between financing a storage property and time.
Now why is there such a conflict? Why can't time and financing get along well together? Well, part of it is simply the fact that when you're financing a property or refinancing a property, you're trying to meet a defined timetable, whereas the actual process of getting financing is often like nailing Jell-o to a wall. Let's start off with when you're trying to buy a storage facility. So what are the steps towards financing? Well, first, you have to build your package to get the loan, then you have to go out into the marketplace and find a lender, then you have to convince them that it's a good loan. Then they have to run through a committee to make sure they want to do it, then you have to get a number of third party reports - survey, appraisal, property condition report - then often is back to the loan committee again to make sure they still want to do the thing, then they have to have the attorneys write up all the information and get the loan all together. And then you have to meet and sign and then you have your loan.
The problem is that's a lot of steps. And how many of those steps do you really have any control over? The answer is nearly none. From the very beginning, when you first go to them and say, "Ah, here's the package on the storage facility, would you like to make the loan?" that's kind of the last moment you ever have any control. Because everything thereafter, it's all in the bank's court. They choose the folks they want. They have the meetings when they choose, conference meetings, decisions, they just don't work well under any kind of timetable. There's just too many chefs in the kitchen, and too much opportunity for disaster.
Many times we've had loans that we thought we were in great shape on. We thought, "Wow, we seem to be ahead of the curve on this one," only at the end to fail miserably, and have to go get an extension from the seller. What happened? Well, there's so many things that could happen. The bank's attorney could be on vacation, the banks attorney can be too busy. The surveyor can't get the job done on time, the property condition guy called in sick, the bank can't have their regular meeting because of COVID. They've had to delay it for a month. Any one of these items sets off a problem. And here's the other issue is it's like the whole supply chain problem in America today. If one piece of the supply chain makes a mistake, it impacts every piece following. It's like a giant conveyor belt, a giant assembly line where if one person doesn't get the part placed in time, the whole thing comes to a screeching halt. And there's no way you can recapture the time because there's nobody who can do it in less than the allocated time to begin with. That's the problem with financing. So many things to go wrong. So much sense of urgency, yet so little ability by you the borrower to have any control at all.
The same is true on refinancing. There's no more painful call that I ever get than someone who calls me up and says, "My loan is coming due and I can't get a replacement bank." And I say, "How much time do you have?" And they said, "Oh, about four days." How in the world could you do that to yourself? When you ask the person "How did this happen?" "Well, I thought the bank was going to renew the loan. But they just told me they were not." Seriously? That's what you did to yourself? When did you ask them if you would renew? Oh, you know, about a month ago? Oh, my heavens. The key item when you're working with a lender, given the fact that they go at their own pace, they have their own ideas of time, and you have your idea of time, you've got to give yourself plenty of time. That's issue number one, you've got to think worst case analysis with that bag, because you really don't know when they're really going to get the job done.
So in your contract, you need to put as much time as you can on the front end into that financing provision. Now, some sellers will say, Well, I won't give you more than 30 days or 60 days. Okay, then well then just expect that you may have to go in and ask for an extension. Because none of us really have a complete mastery over how long it will take. Now, the good news is typically the seller is pretty flexible on extending it if in fact you've kept them in the loop. And particularly if your bank will tell them, "Yeah, we're doing the loan. But you know, Larry Smith in the legal department, you know, he got sick and he's going to be delayed by a couple of weeks." We've never had a case where we were down to that wire and the seller would not go forward with us. But it was always scary, and maybe we were just lucky. I'm sure there's people out there with stories where they wouldn't, they wouldn't in fact, do that.
And when you're doing the refinancing, that can sometimes be even scarier. Some of the banks, they don't want to give you any extension. You have a balloon payment on a certain day and, well, tough. If you can't get it, I guess we'll just take the property back. Now, of course, they don't really want to. So by and large, they're going to go ahead and extend with you again, because they don't really want to have that happen. But the bottom line is all the time you as the person buying the property or refinancing the property, you're in a horrible, horrible position, you're between a rock and a hard place because you have to hold up like Charles Atlas time, and the bank doesn't care. The bank doesn't care about time at all.
So if we're all in agreement, that banking and time just don't get along well together, then what can you do to better your position under the realization that banking and time just are a lousy couple? Well, as we said, the first thing you do is try and get yourself as much time as you can. On your contract, try to put as much time as you can for a financing contingency. On your refinancing, start the process as far ahead as you humanly can. I would say for most people, you want to start at least one to two years ahead on a refinance. Why is that? Because if after you do all the steps, you can't get the refinancing done, it still gives you time to sell the property off before the loan becomes due. That would be your worst case scenario. But give yourself tons and tons of time. Do not for one second when the bank says, "Oh, gosh, yeah, I think we could get this loan processed in 30 days," well, then you know you're talking 60 or 90. They never ever meet their deadlines. So give yourself as much time as you can.
Number two, don't be the hold up. You know the steps of what you have to have typically in the loan, talk to your loan officer on what those steps are. Ride herd over those things to make sure you can get those in good position as you can so at the end of the day, you aren't the hold up. That means if you need to go out there and help push the surveyor along, if you need to be out there and help push the property condition guy along, if you need to make sure that the manager is there on a certain day at a certain time to help the property condition guy to scout around, well, then you need to do those things. Because every day is highly precious. And if you take that little extra effort, then maybe you can get it done or get it done more effectively.
Finally, you've got to always be ready for the inevitable extension because so often, that's where these things and up. So when the bank can't get its job done on time, when the lender's attorney doesn't show up, you will be put in a very difficult position of going back to the seller, hat in hand, wanting them to sign an extension. Just get ready for that moment. Remind the seller all along when you reach the financing portion following due diligence, "Oh, you know how the lending world is. We're doing our best. This is what they think of how long it will take. These are the steps they're going to do. And I will push them to the best of my ability. But you know how banks are." Sometimes when you remind the seller how banks are they remember back how it was when they were trying to get loans. And they say, "Oh, yeah, I do remember. They're awful, aren't they?" But just always keep everyone prepared, including yourself. Because it's almost a given that you're probably going to have to go back and ask for some form of extension. You might almost get the extension document written now so that it's ready to be signed up.
Now is there anything you can do to like solve this process? Is there anything you can do to make it better? And the answer is sadly, no. Even letters that we've used on multiple deals, you know, they still always have some kind of hiccup or hurdle at the end, and we either missed a deadline or we nearly missed a deadline. There's nothing scarier than having some kind of Raiders of the Lost Ark ending in your life with a giant stone rolling to block the final path out of the pyramid but that seems to be how it always goes in financing. So just brace yourself.
You know that it's often said that disappointment only happens when things don't work out as you thought. If you expect the worst with financing and time, then you'll rarely be disappointed and therefore those stressful moments won't be quite so bad. This is Frank Rolfe, the Self Storage University Podcast. Hope you enjoyed this. Talk to you again soon.