The Keys to Successful SBA Lending on Self-Storage with Moe Kruger

Alright, enough out of us. Let's hit the road to family freedom.

Hello Krueger, welcome to the road to family freedom.

Thank you very much Glad to be here. Well, I

gave during the intro gave people a little bit of a breakdown of your your career in Live Oak Bank. But for those of us who don't know you, can you tell us a little bit how you ended up in being a self storage loan officer?

And correct me if I'm wrong Live Oak Bank is the top SBA lender in the country or top SBA for self storage in the country.

What both clarify the first just so don't misrepresent anything. We're the top SBA lender in dollar volume in the in the entire United States. And then self storage. We also our I'm not sure if it's both dollars and units. And we've been recognized by inside Self Storage thing for the last five years running as the top top lender. So we're real proud of that.

So when a new self storage investor comes to Live Oak Bank with a potential deal, what are some of the things that they can do to ensure a successful loan application?

Okay, good question. Here's kind of the process that I go through with them is first and foremost, you want to understand what what they're looking to do. So I try to just introduce myself quickly and then even though it's sometimes it's hard for me, then shut up and let them talk and let them verbalize what they're what they're currently doing what they have been doing to get to the point of reaching out to us. And then at that point, you know, there are a couple of things that I you know, I want to really try to help them out with and that is the pull down the curtain secrecy and what the bank likes. And really, if they have a good viable deal, what can get them to an approval and so we We spent a good amount of time walking through that process. And I'd be happy to go through that if you want. But you know, it's really understanding what they're looking for, not only with purchasing it, but you know, if they can look into the future what their exit strategy is going to be. Because ultimately, I feel it's important to try to give them a couple of options that can be available to them, and be able to help them with the, the financing is, as long as they know, kind of ranking one through five, what are their important items in being able to get the financing that they need.

So you often I've heard you say, tell people to brag about yourself, when applying for I definitely

do that, that throws people a little bit off, but I don't think there's a conversation I have with somebody that, that I don't bring that up. And honestly, the big part about it is there to two things with it. The one is, somebody is going to be putting their hard earned money into this deal. And they work hard, and you know, they want to get it. And I just, I don't want them to feel like they have to, they have to really, you know, just be very meek about it, I want to have the people who are real passionate. And the reason for that is I get the good fortune of being on the front end of talking to him. And well, a lot of times we'll talk for for quite a while I've had guys, I worked on their same deal for four years. So I want to have them have the ability after I recommended for approval and the the approving credit officer, I really hope that their business plan can jump off the page. And you know, I said don't you know, leave humility for another day, in a lot of people are uncomfortable with it. So let's just pretend like you're writing it about your best friend. But let's, let's get that out there. Let's Let's be confident, let's be passionate about what you're doing. And similar to that, we ask for projections. And you know, oftentimes that is a little bit tricky for people. But I tell him I said you know, it's not that I don't understand it. But I don't want worst case scenario. Because if you're you know if you're buying a facility and let's just take a you know, a nice, nice deal, let's say it's a $2 million facility, you're going to be putting a couple $100,000 into it, you're not going to do the worst case job you can do. So the worst case scenario, Performa doesn't represent what you're really going to do. So I want to have the ones that the two o'clock in the morning, you jump out of bed because you thought another way to generate additional revenue. Those are the numbers now they can't be pie in the sky have crazy numbers, because obviously, we see a lot of deals. So that's not going to work. But give me exactly what you're trying to hit, especially if you're gonna work hard, and not not trying to play banker, and you know, even say, you know, kind of generalizing a bit, but if, if they cut 10% of their projections, and I joke, put the disclaimer here, I love all my credit officers How's that, but you know, it's someone that you haven't been in a long time, it's kind of in the DNA of credit officers to cut, they give you a really good cut. So if the borrower cut 10%, the credit officer cuts 10% now I got 20% less chance of getting a good deal proved. Now here live, I was great, because we could talk out deals, but I just encourage them whether they come to live oak or wherever, don't be afraid to tell us that you're gonna work really hard to be successful. And this is how you're going to do it and and represent that and then take your chances from there.

So would you would you say that the sort of your job with the bank is to try and make sure that we get to a yes, with you know, with caveats. The credit officers job is to sort of say, you know, all the reasons to say no,

to agree. I think traditional banking would be that way live oak. One of the neat things about Live Oak is nobody's paid a commission on a deal. So what does that mean? Well, that means that I'm not looking to put money in my pocket. And it also means from a teammates standpoint, that the credit officer is not scared to death to make a deal because he's trying to have a you know, absolute spotless portfolio. And then he you know, you're on the same team, but you're butting heads at Live Oak, it's very, we really collaborate on deals and on the front end. And they put a lot of a lot of emphasis on, you know, Terry Campbell, who joke and say he's a walkie talkie encyclopedias of storage, they you know, they want us to be doing deals, but we want to do good deals. And I, you know, I'd say any idiot can lend money. So let's just make sure that we're doing the right deals, and then he can turn down a deal. So let's, let's look at the alerts really understand the industry. And we approach it as a partner that we want to do our best to be a good partner to. So it is unique here because you sit down with your credit officer, and you don't have to worry that they have a different motive than what you have. Ultimately, we all do well on how well the bank does. Yeah, so it's my my role to understand the deal represented as it goes through the chain, but also be able to sit down and explain If it is a deal that maybe is a little bit in between, you know, why have confidence in the deal. And a lot of times it goes to why have confidence in the borrower?

You know, I often describe for people who are trying to understand the whole banking ball relationship, when it comes to real estate, when it comes to self storage is that there there and you described it is that you're a partner, and you they're often a second or third set of eyes that are looking at your deal to maybe prevent you from making catastrophic decision.

That is true,

is there? Is there a common gotcha that you see Self Storage investors maybe miss when it comes to their own underwriting?

Well, I think that what happens is because of, let's say, the industry, so it will blame it on the industry, but it's a unique position. Because the industry is so hot, that there's a deal that's there. And it's like, I don't care what I have to pay for, I want to get this, this facility, and it's, you can't make money then. And so nobody's I don't maybe people are doing it just to be nice and have a storage facility for them to go to. But really, we were hoping that people make a lot of money and really do a great job. So I don't ever want them, I guess the gotcha kind of would be just falling in love with the first deal that they can get their hands up, you know, you hear it over and over, and you're a pro at this. So you know, better than I but you know, a lot of times you make your money on the buy. And so that's really the the aspect that I think can trip people up is acquisitions aren't really easy to come by, I encourage them to, to really, you know, maybe just go slightly off the beaten path. And I told them, you know, if you can find one that you can tell that grass needs a haircut, that the you know, maybe it's some new paint and different things like that, that truly might be the best one for you to get. Because the opportunities there. If you go the shiny, nice new one on the corner of Maine and Maine, that person knows what they have. So they're going to they're willing to sell it to you. He had tough time making money on it. But you know, I just encourage them to, to understand that sometimes No, is the best answer that they can have. Because it oftentimes we've been no on that project. It doesn't necessarily reflect on them as a potential owner or borrower. But I have seen our credit guys, in a sense, almost come to tears, because unfortunately, it's not self storage, it would be another industry. But if a deal goes bad, yes, the bank doesn't want to make money. But I have seen the credit officers, if you like they let down on the borrower and let down the borrower's family and the employees are that they you know, their business, their family. So it really is a lot of why I think we've had success is that we do look at it try to look at it from every angle, and it isn't let's just do deals to do deals so that we can increase, you know, our balance sheet. Because ultimately, we want to do good deals. And you know, sometimes No, doesn't sound good, but at the same time, no might just be on that deal. And let's keep working together. And let's figure out one that can be a yes. Ultimately, you

guys don't want to be the owners of a self storage facility.

We don't, I guess, I guess in some ways we have, we've got a little some built in advantages with Terry Campbell. But now we're we're a bank be horrified if anybody ever thought that we were in this the old facilities? Yeah, that, you know, several of us duvel are part owners of facilities. So we'll get our taste that way, not my bad deals.

Yeah, well, you brought up a good point, which is, you know, you've got that shiny, shiny, well run facility, you know, in the middle of town, and the great in the great location, letter read by that, you know, that should be your exit strategy to become then to take that deal that's got some hair on it and some grass that needs you know, mowing and take it to the point where read by that where a reader is borrowing money at 2% for you know, from insurance companies in there and they they're happy with a 5% return. And I don't know how their world works. I know they're very big on market share and, and those types of things our customer, we lend to the hardworking American people who want to be in business for themselves. So let's protect them.

Let's find the great thing about self storage is you know, ultimately, even though you know it's doesn't always look to be so exciting. It's still a great vehicle thing Terry refers to it as a perfect nudity. And you know, I will tell people, the American dream to me is more owning your own business. Because you I as corny as it sounds, I love to hear if I talk to somebody and say, my grandfather started this business and then my dad had it. Now I haven't how that is just to me that's that gives me chills. Whereas you know, somebody says, Yeah, I'm living in my parents basement, and I get a little worried. Maybe they had some trouble at some point financially, or having to live there. But so yeah, it really it's, it is it is great to be able to put people into business for themselves. And that is something that I think everybody on our team from carry the church on. And, you know, that's one of the things that, for us is, is very rewarding.

So what are some things that will almost surely sink alone application,

we struggle when I say some struggle, that's maybe a nice word, we we don't have a big appetite for borrowers that have, you know, character issues, and some that are, have had bankruptcies in the past are oftentimes hard for us to be able to overcome. We want to have credit scores above 650. Because we're doing government back loans. The we don't want to have default on on any type of government back loans in the past. So those are some things that are deal killer. And you know, what, when some people talk and they say, oh, okay, the SBA, it's a government, you know, the government loan, I try to explain to them there is a little bit difference between the SBA seven a loan and the 504. The seven a loan is a loan, that Live Oak Bank makes a decision on the money comes out of live Live Oak Bank Vault. So we register the deal with the SBA, we attest, we're going to be following your rulebook. But really, to the borrower, there shouldn't be a lot of feeling of Oh, boy, the government's gonna, you know, they're going to be involved in it. Because, you know, we get audited, I think, once or twice a year, and so they pick deals make sure we are following their rulebook. But it's a very streamlined process. And you know, when somebody calls us, how long is it gonna take? If they're going to be responsive? I want to, I want to have it closed in 60 days, I'll go for slightly different because yes, the SBA does, they do have to approve the second mortgage, the debenture, but the seven a is I think it can work very much like a conventional deal. So if they stay away from some of those pitfalls, I think that, you know, we have a ability to if it's a, you know, good deal, where can protect them and have them be successful, I think we have a real good opportunity to, to finance that deal.

Gotcha. Okay, so you mentioned I'm going to, I'm going to dig in a little bit here, because you mentioned a seven a loan versus a 504 loan, can you sort of, for somebody who's not familiar with those at all, can you sort of briefly describe what they are.

So the seven, so and they, they both have really, really good fits, and will do both. So kind of go to the back to the beginning, which works best for which person. So the seven eight loan is that would be a loan that Live Oak will do. And it's give an example of, let's say, an acquisition that I did in North Carolina, it was a million dollar acquisition, and we financed 972,000. So when we say we hired leverage, long term, 25 year term and amortization, high leverage long term financing. And that would be an example now with that doesn't mean that the person only came in with 28,000. We financed these as a project. So the acquisition price was a million, there was work that needs to be done on it. So we financed in improvements. The borrowers wanted some working capital, and they have closing costs. So the entire deal was 1,000,080, they put in 10%. We finance the rest 972 over 25 years. So that would be how the seven a, let's say works at its best. And ground up construction deals you have, you know several more items to it, where you're building in interest reserves for construction for post certificate of occupancy. So that's the part that really gets important. It's only if the cash flow is there, then we can lend up to 90% of the project on the fiber for a little bit different is the fiber for the bank live Oakwood take a first mortgage, a conventional first mortgage at 50% loan to value and then the you work with a local certified development company in whatever state it might be. And they work as I guess as a liaison, so to speak with the SBA. And they will do a second mortgage up to 40%. And the borrower comes in with 10%. Now, one of the very first questions the CDC will ask is do you currently own and operate a facility? If the answer is yes, then you have a pretty good chance to get that 40% Second, if the answer is no then immediately they'll say okay, you're you're going to be required to bring in an extra 5%. So at that time the the pie is broken up or 50% of the deal is the bank first mortgage 35% is the CDC the called the debenture the second mortgage and the borrower comes in with 15% the real real real attraction of the 504 is that that debenture, especially right now is priced very attractively and the current rate on that is I believe that 2.6 percent fixed for 25 years. So if you don't need working capital, or different things like that into the loan, and especially with an acquisition, the fiber floors is nice. Now, compare the two, what are some of the I, when I talk to people, I like to tell them, the good, the bad, the ugly. And so a couple of things that I'd say are a little bit of the punch in the nose. And the seven a, it has a very manageable prepayment penalty of three years, okay, 5% 3% 1%. If you win the lottery, you can pay down 25% every year with no penalty at all three years, one day, no more penalty. So a little flexibility 504, you get that really attractive second mortgage rate. But you do have a 10 year prepayment penalty. So if somebody says, Hey, I'm going to be in this facility for four years, then the 504 may not really be the right. right one for them. If they say, Hey, I'm going to be in this boat, my kids take over one day, it can be very attractive. And so that's part of learning, learning what the borrower is trying to do with with the deal.

So what are some of the ways that an SBA loan differs from a traditional commercial loan?

So I'd say the biggest thing with the SBA versus a conventional deal is the require there couple things. One is the requirement as far as the cash injection, other people say downpayment, whatever, however, you want to say, what is the borrower going to have to kick into the deal. So on an SBA deal, oftentimes, you can do it for as little as 10% cash injection for the borrower, it's very cash flow driven. And with that, then you get 25 years. And so that period of time is much longer. Right now, because of the stimulus package. They're running some real nice incentives also, but so I'd say the biggest differences between the two are one, you're not having to come in with as big a cash injection. Because conventionally, and granted, every little market can be a little bit different. So when I say this, I'm somewhat generalizing. But on conventional deal, you probably prepared to put in 25, or 30%, into the deal, if you have one, that's as turned around, they're not really going to be too open to try to help with that. So you have a much smaller cash injection on the SBA loans. And you also get a straight term and amortization. Whereas unconventional deals, oftentimes, you're looking at a five year term with a 20 year amortization, maybe 25 year amortization, but it has a balloon to it, maybe seven years with a balloon to it. So they're a little bit shorter. The term the amortization gets pretty, pretty close, if not matches. And I'd say those are the differences from the actual structure from the from the next standpoint, their covenants, oftentimes on conventional deals. covenants are where the bank is allowed to call your loan. So that means they are able to force you to pay it off within 30 days. And some of those covenants might be the loan to value. So if you buy it, and we hit a bad time in our economy, and maybe real estate prices drop, and they're only comfortable at its, let's say, 75% loan to value, and now you're at an 80% loan to value, then they have the right to be able to say, hey, you have to pay us in full within 30 days, well, if you're in a bad economy, and you're forced for that, that can be awfully scary. So that's the big thing, they might also do it on how the actual businesses performed and what your debt service coverage is. So basically, are you still making money, because the bank is going to be very careful, if they start to seem it maybe didn't make money, or maybe you know, it's a real struggle? Well, they want to get paid. And so they're gonna say, Hey, you got to pay us off. And if you're struggling again, you don't have that excess money to be able to just pay them off. So then you're struggling to go get it refinance real quickly, and then you're fed to the walls. And that, you know, that obviously, that can get really scary, because if you have a limited time to get a deal done and appraisal might take three weeks, yikes. can be can be a bad, bad time. So as with every loan, there are benefits to some and disadvantages to some. So I don't want to paint it that you know, it's the SBA is the perfect loan. But for the right people, it's it is a really good fit. And so that's what we really tried to have the borrower understand where the benefits come in, at the end of the day, I tell people this all the time. It's real simple. If the pluses outweigh the minuses, then I get something really good for you. If they don't, and we had a nice conversation and you learn a little bit about some different options and no harm, no foul, you know, you have a different way to go with it. So it's really I think, the approach that most of us use here,

I mean, there's a lot of capital chasing deals now. And so, you know, as a self storage investor, it's very popular. And so sometimes when you come to a deal, you may want to bring investors into a deal does that disqualify? Are you some an SBA loan?

No, it doesn't all with the SBA, one of the requirements with the SBA is that there has to be at least one guarantor, the deal. And that's who you're going to be really underwriting. Getting back to what our real core is, it does go back to, we're helping hardworking American people get into business for themselves. But we do see deals oftentimes with for six different investors. And then it becomes a situation of how is that structured? with them? How many what is their ownership, but ultimately, it's very cashflow driven. And we do have to have a personal guarantor. And so then it becomes within the group of investors who's willing to take on that role, because when that role does come more risk, so then it's a matter of figuring out okay, hey, for signing on it, you know, it's probably fair to be able to take a little larger percentage of the ownership, if it's a syndicate, and people are in and out, in and out and out, those get a little trickier. And that may not be really the folks that, that we're really going to be able to help.

Yeah, person would probably be better off going more conventional loan. Right, right.

Right. Yep.

So if you Is there a percentage wise, let's say, you know, you've got some, is there a threshold where if someone is a percentage investor on the equity, that they must be the guarantor? Or is there just somebody that just steps up and goes, I'm willing to be the guy.

So yes to both if they have 20%, or more ownership, then they're required to send a personal guarantee. Now, if you have multiples partners, and nobody has 20%, then we generally are looking for the person who has the largest share of the ownership. If they're all let's say, equal, then we do try to, you know, explain to them we do need somebody, ultimately, if you're applying, you probably want to try to get approval. So let's put our best foot forward and get the borrower the most horsepower, who's willing to sign on it to be the person who's guaranteeing it?

Gotcha. Gotcha. And it's important, it's important for people understand that this is very much a recourse loan.

It is. Yes, yes, of course. So it doesn't burn off. Yep. And, you know, at the end of the day, we do understand people hit hard times. But you know, we're saying it's, if we're lending the money, we're just asking you to repay us.

Yeah, gotcha.

So, storage is a very stable asset. It's one of one of the reasons that it's become so popular is that it's done so well. In good times and bad times. I think it's got the lowest default rate of any commercial real estate asset. You may know that better than I but can you recall an instance when a deal has gone bad and why?

well, and what you bring up is such an important point. And that's something I always tell people, if they're considering storage, is that if you're talking to a lender, the first question you should be asking them is, you know, they'll ask, what's your appetite for storage? And a lot of times, you'll hear people go, Oh, yeah, well, we love storage, we love so the next question should be, how many Self Storage deals Have you funded? exactly two years, in the last 24 months? And, and a lot of times, you'll get a, you know, one or two?

Yeah, cuz you can, you can think, II think of business if you don't know how to structure. Yeah, especially ground up deal. You know, I've had people call before and say, Hey, I got this, I got the doors open, but you know, I'm not paying principal and interest. And I only have two units. Least, what's not that they're doing bad. You know, they've only been open for a week. But they're looking down the barrel at a $10,000 month payment, they're getting $200 in the in for rentals, that bank, let that borrower down? Yeah. Because by not knowing the industry, they just created a real financial hardship for that that borrower. And that's to me, that's atrocious.

Yeah. Well, and I don't know, I can't think of any other lender, that's as experienced as you guys are in storage. I mean, Terry, met Terry several times. And and there's great, yeah, and you guys are, as you said, a lot of the A lot of you are passive investors in storage, you're not active investors. And so you know, the industry. And I think that's it. Again, if you if you approach, lending, as a partnership, it's important to be in bed with experienced partners.

I mean, it's, again, sometimes, sometimes our know will be, hey, we saw through whether it be the feasibility at a ground up deal, you know, we don't think you should go with the pace you're going because there's gonna be someone open up, you know, half a mile away from you, three months before you, you know, maybe maybe wait six months or so to get yours done. But I don't think other banks, you know, go to that extent to try to protect the borrower. And so that's, that is important to us, you know, that. I've heard other banks say, Well, you know, we don't require a feasibility study on a construction deal, because we know how to underwrite it's apples and oranges. I mean, that's to me, that's, you know, that's, that's kind of scary. How do you know, if permits have been pulled from a local municipality? How do you know what the competition is, you just, it has nothing to do with the underwriting. So to me, that's important for the borrower, and the borrower should want to know it. Because if if things start to go bad, everybody is is going to sink and Terry has preached for a while. We want to do what's right, for the borrower, for the bank, and for the industry. And the last thing any of us want is a lot of vacant self storage facilities. It's always the big question about well, is the market oversaturated? Well, let's all be mindful, and let's kill the golden goose. by just doing deals, let's just make sure that we're protecting everybody, including the industry and doing deals that people can be successful.

Yeah, well, I mean, often I hear people say that the worst enemy of storage is storage. You know, it's often and it's often people who have the attitude of I've got money, I've got land, build it, and they will call Yeah,

yeah. And that that's usually a scary proposition. I own the land. So I'm putting up Self Storage here that, you know, Chief credit officer Steve Smith's often talks to us about, you know, being careful the tail, and the towel can ruin the deal. If they're only looking at the beginning, and they don't know the back then you don't want to do that. And so, you know, sometimes you just have to say, Hey, we're gonna we're gonna pass on this and there are times that sure that borrowers think that we're completely idiots, but I think if we can be consistent with protecting the borrower, protecting the bank and protecting the industry, then we'll be in it for the long haul.

Alright, well, I want to finish off with just allowing you to take the floor for a minute and offer any advice that you might have for somebody who's you know, just now Getting into storage, I've decided this is what they want to do. And maybe they've they're close, they've gotten close on a couple of deals, what advice for you would have for them getting a deal to the finish line, as far as lending goes?

Okay. So the first thing I would say is put together a really good team, do your research and put together team, surround yourself with pros, I think there's a saying about if you want to get somewhere, you talk to somebody who's already gotten there. So you talk to some fake people that have done it before. And you have a an accountant who knows how to help you with that, whether just be with starting a business over, specifically storage attorney, so get get your team together, and do your research, I'd encourage people to go to some shows a national show would be really good. Because there are a lot of great educational classes there. I think that you know, on our website, I think we have some very helpful information, there was some articles and different things like that, that I think it'd be helpful for the borrower. And then after they, at that point, the patient, if you're looking for an acquisition, they're not always the easiest one to come by. But keep your thoughts open in regard to how you want to get into it, maybe the acquisition doesn't turn out to be your way. But you know, then maybe it's a ground up construction deal. I don't want to wait that long before I you know, get positive cash flow, that could be a couple years, Well, okay, maybe you want to look at a conversion. And you know, because retail, they did a lot, they spent a lot of money studying where they're gonna put their, let's say, Sports Authority. And although retail changed, they still the demographics are good, there are a lot of rooftops there. So don't overlook some of the opportunities that may be a conversion deal. And then at that point, interview your lender and try to figure out their experience and what they do in terms of being able to help you, whether it be from yourself, or just help align you with other people in the industry. You know, they can say, hey, we've worked with these people. And they're not just pulling names out of a directory. And then after that, that point, to be able to be real clear on your path to success. Again, I say brag, but you know, just be very clear on what you're going to do to be successful. And with a business plan, it shouldn't be something that is done just to satisfy the bank. But that in a lot of ways should be your playbook. And your goals. If you're giving a performer, those would be the goals that you want to challenge yourself to hit. And then you start to look at it you start going out three, four, or five, seven years, it can be a game changer, it can really be a game changer for free bowling, you know and the ability, the ability to to potentially make money when something is is going right. Without having to devote a tremendous amount of time to it should be very appealing to people. And you know, just I would really say to do your homework, surround yourself with people have done it. Be clear in your path to success. And then have that then you know the entrepreneur spirit kicks in and just believe in yourself and in you know, you can get there, it's very much within reach. So that's how I encourage people to get into it. Well Moe Kruger, thank

you so much for sharing with us today. It was really lovely speaking with you. If any of our listeners want to find out more about you and Live Oak Bank, where would you recommend they go?

again. Mo.

Thank you Have a great one. All right, take care.