by Winnie Hsiu
February 12, 2010 5:42 PM
Although the self-storage market is one of the strongest commercial real estate investments available today, self-storage facility owners are still vulnerable to foreclosure if they become overleveraged. In some cases, owners who built their facilities or acquired them at the market's peak, using short-term, high-leverage debt, or who acquired their facilities based on pro forma rents or leasing activity, find that they are no longer able to make payments on their businesses now that the economy has soured.
Perhaps that is what happened to the owners of Overland Self Storage, in Morgan Hill, California, this week. Tenants who stopped by Overland this week were startled to find that Overland's normal security gate had been disabled and that the facility was apparently being foreclosed on by a lender. Overland had a steel gate that was usually kept closed and locked, and could only be opened by customers or staff members who knew the electronic code. But this Tuesday, it was locked open instead of closed. Renters who went in to check on their self-storage units found that nobody was in the office, and instead a sign taped to the door read, "Closed! This is now the bank's property." The note did not say which bank now owns Overland, and did not list any contact information. In one exterior wall, a space that once held a window is now covered with
a loose piece of plywood. Signs on the building's remaining windows said that the building is now "for lease." Overland's listed phone number is out of service.
Industry analysts say that owners who fear they might find themselves in a similar situation need to take action as soon as they realize that their properties might be in danger. Writing in Inside Self-Storage last July, senior vice president Devin Huber of Beacon Realty Capital offered the following tips to self-storage owners who are trying to save their businesses:
- First, if the business loan is maturing soon, contact the lender to discuss a workout. If the lender is uninterested, it may be necessary to refinance or to prepare for a sale. If so, it is better to receive that news earlier rather than later. Refinancing in today's economy means having the business re-appraised, possibly at a lower value, and lenders today are implementing lower loan-to-value constraints, so it might be necessary to plan on bringing a significant amount of cash to closing.
- Set aside or reserve some of the current excess cash flow, if any. It's important to have liquid assets in case it becomes necessary to sell and it turns out that there's an equity gap.
- If it becomes necessary to default on a loan even though the business has enough cash to cover its operating expenses, business owners can use that fact to make an argument to lenders that it would be more economical to modify the loan or work out a forebearance agreement, rather than foreclose.
- Ask for help from a mortgage professional in researching alternative financing. Then present the current lender with alternatives.
Although trying to cope with an overleveraged loan during an economic recession can be frustrating and challenging, it frequently is possible to work out a solution with lenders. The key is to ask for advice from the lender and a lawyer early in the process, rather than later.