Commercial Lending Tips for Self-Storage with Mandy Monson

Mandy Monson is the VP of Finance for resort lifestyle communities, which manages a portfolio of senior independent living communities. But she's also the co founder of store 365 with previous guests, Victor Diaz, and today she's here to talk to us about commercial lending on self storage. Mandy is a finance professional and real estate developer that also works with other women to help them crush their limiting beliefs and fear of failure so that they can determine their own destiny in the realm of career in money. She has spent a career in finance with everything from managed money portfolios to commercial loan underwriting during the Great Recession today, where she consults with potential borrowers on how to structure loans for the acquisition of self storage and senior housing. In this episode, we talked to Mandy about her background in finance, how she found herself in the Self Storage business, what a self storage borrower should do to ensure a successful loan application and the five C's of credit and the big one you should pay attention to as a self storage owner. I'm Neil Henderson, and this is the road to family freedom. Before we get to this week's show, we'd like to make you aware of something we are self storage investors, we buy existing self storage facilities and vacant buildings that can be converted to self storage in the Sunbelt. We buy them with cash and some with loans, and we use private lenders who have become equity partners in our deals, these equity partners share in the cash flow and profits when we sell when we find a deal that we're considering. We call the equity partners and offer them a share of the ownership secured by the property. So if you've ever driven by a self storage facility and thought I wonder who owns those things, and you have any interest in learning more about the storage business, we'd love to chat with you head on over to row to family freedom comm slash storage. That's road to family freedom, comm slash s t o r a g and set up a time to check we look forward to speaking with you. Alright, enough out of us. Let's hit the road to family freedom. Well, Mandy moms and welcome to the road to family freedom. I always do this I always introduce the people riders, they're taking a drink. I did this exact same thing to your partner, Victor yesterday.

It's not a problem. I was just like, I better get ready. I gotta have a drink of water.

Well, welcome to the road to family freedom.

Thank you. It's great being here. Thank you for the opportunity. And I'm excited to be on the show.

Yeah. So your career has been in finance or banking for most of your your working life. Can you talk to us about when and how that crossed paths with self storage?

So, you you started a debt procurement consultancy, when a new storage investor comes to you with a potential deal. What are some of the things that they can do to ensure a successful loan?

Yeah, you bet. So, when I work with my clients, I always tell them, you know, the better prepared that they can be in the realm of when they approach a bank, the more success they will have. And so in the banking World, or in the underwriting world, I should say, you know, what we call that is the five C's of credit. And the five C's of credit is character, that's the first. And so character is really credit behavior. And it's credit behavior that's based on indicators like a credit report, right? A credit score a payment history. So when we think about retail lending, right, when we go and get our mortgages for our homes, majority of what, when you initially do an application, it's all based on credit, right? The mortgage officer, you know, inputs, you know, the value of the home, then puts all your W two information, and they basically do a credit check. And they can pretty much tell you right away if you're approved or not approved. So first is character, which is how have you performed personally, historically. So the second of the five seizes capacity and what capacity is, especially when you think about real estate assets, and the asset classes self storage is included? Is it's the real estate current performance. The other term you could say is cash flow, right capacity and cash flow. So what is this current performance? And what is this forecasted performance demonstrating the borrower's ability to pay the lender back. So for example, if you have a current self storage asset that's in production, right, that's why it's really important for you, the purchaser to get the rent roll to get the profit and loss statement to get the balance sheet also, so you can see transactions that have been going on via balance sheet and also to get those tax returns. Because the bank wants to know, well, how has this been performing? So in the realm of if you're doing ground up development, right, so then you really need to understand well, what's your what's the cost of development? What's the cost of the land? What's the cost to build, which would be hard costs, and soft costs? And then when you're forecasting out, right, what is your forecast look like to Lisa? So cash flow capacity, meaning, okay, if I'm doing ground up development, or let's say, I have an underperforming current property? How long does it take me to get to stabilization? How long does it take me to get to break even based on interest only payments are based on principal and interest payments. So again, the more that the borrower can demonstrate, they understand the project and they understand the metrics, the more successful they're going to be. So the third piece to underwriting and when requesting credit, it's good for borrowers to understand before they approach the bank is, okay, well, how much capital Do you have? Right? So how much capital can you invest or ingest into the project is based on the kind of financing that you're going out and trying to procure, right, those capital requirements are going to be different. So right now, a lot of smaller, I don't want to say smaller, but kind of independent self storage owners, if they're just getting into the business, or maybe they don't have a large portfolio yet, they can take advantage of SBA financing. So SBA financing is very popular, because one, it has very low capital requirements as far as what you have to inject, it can be as low as 10%, if you're just doing an improvement to a project, or it can be 15%. If you're just buying or starting ground up development. Now, if you're doing something outside of an SBA program, and like you and I could do a whole show on what's the difference between SBA and conventional, and if you're, you know, clientele wants to be happy to do it. But really SBA the value of SBA and why they have lower thresholds, by the way doesn't guarantee that you still might not have to put in additional capital, but essentially, the SBA, which is the government says they'll guarantee a portion of that, which then makes the bank more interested in doing the loan. Because if you the borrower, if it doesn't work out and everything falls to head, at least the bank can then say they can go to the SBA and say, hey, now we want you to pay us on that guarantee. Great, not a problem. So but some borrowers don't want to do SBA, maybe it's because the fees are more or it's just a more time consuming deal. Well, they can just do regular conventional commercial financing, which then typically right now I see for self storage, you really need to be prepared to put anywhere from 25 to 30%. In now, the benefits though of doing that, to the Self Storage owner or developer is, you know, there's not as many fees typically involved with that. Sometimes you can get around doing feasibility studies, things like that. All you have to have is an appraisal. So the other piece too is not only just upfront fees, but more prepayment penalty. So if you're say, you want to purchase that asset today, and you know, your strategy is in three to five years, you're going to either refi it into non recourse debt or you're going to sell it, then probably SBA is not necessarily what you want to do, because that's really more long term financing. And if you put yourself into that type of structure, you're going to be paying prepayment penalties that are pretty hefty to get out of it. So that then is capital. So just going down then that the two remaining as far as when, when a purchaser or developers buy, what do I need to know about when I go and ask the bank for debt? Well, you got to understand what your collateral is, which, you know, it's yes, it's self storage. But what is that? How has that property performed historically, especially if it's already in production? What's the occupancy today, I find it very interesting, because now obviously, I'm also in the realm of being an active owner, for example, my partner and I have Victor Diaz out of Ohio, it's our businesses store 365, we are purchasing a property in Ohio, but essentially kind of what our strategy is, and as we're looking at, you know, basically a four hour drive circle around where he is, or where I am. So he's, he's in kind of the Cincinnati area, I'm in Lincoln, Nebraska. And so we're, you know, we're looking at properties in a four hour drive, and I find it really interesting, especially see, it's usually a lot of the larger brokers that do that. But you know, putting a cap rate of, like, whatever 5% to 9% on a pro forma doesn't mean a whole lot to me, like, that's great, if everything is going fine. And it's unicorn world that you want that you think you can sell it for $2 million. But if that asset is only at 60 to 65%, occupancy, that that doesn't work. And so well, listen, if you're willing to pay that, but you know, people really need to think about, especially when they're looking at some of those, those values and how they got to that value, you know, what does that mean? Because the reality is, is when you purchase that asset, you're gonna have to get an appraisal on it. And you know, the appraisers are going to look at it as what is that asset value data today? What it is in production? If it's a new bill, okay, what is what is the as built value? And then what does it look like once it's stabilized? So, again, if you if you are, if you're so excited to get into the business, but you don't necessarily understand what you're purchasing, and how you know that, that pre that current owner and how that broker is basically valuing that asset on you, it could, it could provide you some hurdles to get over with the banks, and when you go to make your request. And so then the fifth, the fifth, C of the five C's of credit is conditions. So conditions are what's the market analysis of the trends of your industry, like self storage, it's a great real estate asset class to be in right now. Because Self Storage historically, has performed very well in any type of economic environment. And so for me, another reason why I want to actively get into self storage is right now most of my exposure is in seniors housing, which is a wonderful asset class, amazing asset class. But with the pandemic over the last 12 months, our asset class, whether it's warranted or not, for me, it's going to be a nice offset to exposure that I already have, which I would think for other real estate, you know, folks that are in real estate that have exposure to multifamily, you know, multifamily, still great asset class, but there are things that those landlords are coming up against during this pandemic environment as far as moratoriums, etc. And so that's the macro level of conditions. The micro level of conditions, though, is any bank is going to ask you, what are your competitors look like in the market? What is the occupancy of the market, right? I mean, if you're buying an asset, is it 65% occupancy, but all the other competitors are also as it's a 65 70% occupancy? Well, what does that tell you? Probably tells me that the market has too much inventory, right? Because there's two things when you look at real estate, right if the asset isn't performing, and it could be maybe if it's performing too, right, performance is either based on the market or the marketing. So so when you look at a self storage asset, you as the purchaser, you as the developer really do need To understand what's going on in that micro market, you know, what's the net rentable, square feet per, you know, person per net rentable, square feet, those kinds of metrics, because when borrowing money from the bank, they're not and I felt this way. And if you go to my LinkedIn profile think it says, you know, successful businesses are ran by business owners, and senior executive management, that one understand their product, to understand their people, which includes their employees and their their customers, and understand their financials, is one of those things is not is not very good, the business can still make it, if two of those things are gone, they're probably it's going to be really tough for that owner to be successful. So the five C's that I just talked about, just to recap, which is character, capacity, capital, collateral and conditions, any analyst at any bank is going to use that type of criteria when looking at you. And if they want to loan money to you, because banks are not in the business of taking excessive risk. They are in the business of evaluating and determining what the potential is for that borrower to pay them back their money at the rate that they have lent to you.

So we got a lot, we covered a lot there. It was great. I've got some follow up questions. Sure. So one of the things that you brought up, and I think it's such a great point is that, you know, brokers will, you know, they'll come to the table, and they'll attach a five and a half cap to whatever asset they're trying to sell, because they they know what the NOI is, and they just go now my my, my owner wants 2 million for it. So I'm going to figure out a way to back into that number and give and get them that number out on the market. But what you're saying is that a question that you should have, my guess is for the broker is Have you arranged bank financing at that, at that rate? Because if they haven't, and now you're going to a bank? And the bank is going to look at that and go no way we're lending on that cap rate for that asset. So Is that Is that a question that you should have? Because sometimes you'll see with an offer memorandum, where a broker has already arranged financing for you. But my guess my question is, if they haven't arranged it, should that be the question for you?

Yeah, absolutely. I mean, obviously, if the broker has that fit together, then okay, then that then that makes that means that asset me the the sniff test, or the smell test, I heard something the other day that I completely agree with, you should never buy real estate and you should never date date, this was in regards to women, but you should never date a man based on potential. So the same thing holds true, right? Because the reality is, is that when the bank looks at how that asset performs, they look at what is the capacity today, because you're going to go out and you're going to make a request. And let's say you do it under the scenario where essentially, and by the way, I don't blame brokers for doing this, it is their business to sell assets for owners at the highest value that the market will will pay not a problem. That is what their job is, but your job as an owner. And your job as a borrower is to understand what is truly the capacity of that asset, which results in the ultimate value of the asset, right? I mean, when an appraisal is done, there's an appraisal based on okay, what would it cost to rebuild the asset, but the value really comes from what is the cash flow of that asset of that going concern business, you apply a cap rate to it based on the asset class, which you know, self storage is getting very popular. So the cap rates are coming down, the lower the cap rate, the more the more of a safe investment is, which then means the higher the value, but, you know, as, as owners, we really need to be careful, which is why we need to do our due diligence and understand what is the asset actually occupied at and then what is what is the net operating income coming off of that asset? And also what is the economic occupancy? Because, you know, let's say an owner knows they want to sell the asset. So, you know, maybe they'll do some things like really drive down the rental rates to really get the occupancy showing better. Again, you can't follow them for that but as a purchaser I need to understand, okay, what is the true economic occupancy then? In addition to what's the current occupancy, because event that all drives down to net operating income, net operating income, is what else determine the value, which in the bank side, the bank is only going to loan you so much money against the value of that asset.

Yeah. Well, I mean, you run up against this all the time with owners, you know, who, who want you to essentially pay for the pro forma that they're selling. You know, they're they're basically they've got their in whatever their NOI is. And, and, you know, they'll basically try and get you one of the first cell storage facilities ever underwrote the owner wanted to, they wanted to 1.8 million for it. Well, it was in a tertiary market, and his noi, and the cap rate for that area was saying that it was no more than 1.1. And he was just wildly wildly, you know, but he was absolutely stuck on that price. He wanted that price. And then he knew, then after a couple of months of people telling him, You're crazy, and banks telling him he was crazy, he then tried to fall back on, he then tried to fall back on well, I'll do seller financing at 1.8. Because he knows that a bank is not going to do it. And again, as a as an as a potential buyer, that should be a warning sign for you. Because that essentially what that seller is trying to get you to do is pay upfront for the work that you are going to do to try and get that asset up to that value.

Correct? I mean, yeah, you make you make such a great point. I mean, even if that seller just does so well, no heroes will do it for you. Oh, no, you're you are you are doing that for them. And again, you really have to think about, okay, what is the return that I want to get on the asset, because there are more assets out there. I mean, I know that it's a very exhilarating process to be looking for an asset, to put it off all of that, all of that is, but I think that's where you as the investor and active operator have to understand the financials that make up that deal. So that as you go out and execute, you execute on your strategy, and sometimes that means you find a great asset you'd like to buy, but unfortunately, the selling part party doesn't quite have a concept of what, you know, you actually your your purchasing strategy and their selling strategy just doesn't line up. Because there are some people that have their there's a lot of cash right now, they're even still on the sidelines. And, you know, not everybody's investment in return criteria is the same. That's where you as the owner and investor really have to understand what yours is, and what your what you're willing to put out in order to get the assets that you want.

And don't be shy about making that point to a potential seller, I say, Listen, I'm I'm in this business, to make money for myself and for my investors, and I would love to be able to pay, you know, your wildly, you know, exorbitant price, but it doesn't make sense for me financially or, or, or for my investors and, and to be okay with that. And, and, and I'm okay with walking away and saying, okay, it doesn't, it doesn't work for what your goals are, you know, you're, you're out there trying to find a win win for yourself and for the seller.

Totally, totally, like, here's an example. So my partner and I, we looked at a conversion project for an old Kmart. And previously, the owner of the of the ground had received a pretty premium offer from a REIT. And the reason why the project and go through is because the city where this Kmart is located, they were they were not going to allow this REIT to put additional storage in the front and allow basically, you know, trucks and stuff like that the city just didn't want that. And so, you know, we approached them, but you know, we were only going to convert the Kmart because the city has already said no, you can't put additional storage on therefore, like that source of income has gone. And so we could only pay an X amount on on that asset, because you're only going to be able to generate so much revenue and ROI from it. And, you know, listen, if another large REIT is willing to come into that market and pay that like good luck. I mean, I you know, they can get that great. I don't think they're going to and for us, it didn't make sense for us to pay that premium of a price because the problem is and this is, this is any real estate, like you win When you buy it, you don't when when you sell it. And the reason why I say that is because if you buy it at too high of a price, if you don't understand the cost of your improvement, it puts pressure on your operations, which does puts pressure on it when you want to sell or refinance the asset. So it is really good for a person to again, understand the financial mechanics of that asset at the point of buying it. Because essentially, what you do is you give yourself more cushion or margin than in the operations of IT. And especially when it applies to if you're using bank financing, or any sort of debt that you're going to use to fund the capital of that, because it is not a very fun experience to be in when you have over leveraged an asset, whether you're operated efficiently or not. But if you don't buy it at the right price, you put too much debt on it, and then you're not operating efficiently. It's just very, it's very uncomfortable. Yeah.

So, you know, one of the things that you talked about the five C's of credit, which is character, capacity, capital, collateral and conditions, and, and one of the things that we you really have to focus on with storage is you can improve a storage facility, you can improve its operations, you can improve its curb appeal and things like that. You can't change its location, you can't change its market. And, you know, we we've passed on some deals recently, where it was like, it was a fantastic location, it had, it had indications of under supply in the area. But ultimately, the market just gave us the heebie jeebies. And you cannot, you're not going to overcome the demographics of a city that's been declining in population for 20 years. Correct. And that's really, and that's really where I think often, you know, a bank will tell you, No, we're not going to lend on that. And they're doing you a favor.

Yes, yes. And you'll, you'll even see banks directly say that, like, you know, we just we're looking at, we're doing our own due diligence on the market. And it doesn't make sense. And that is something actually in my corporate role at our LLC that we talk about all the time, because we build 180,000 square foot buildings. But again, that that concept holds true to any asset class in real estate, which is you can't move the building, you cannot move that parcel of ground. So you really better understand what the macro and the micro is in regards to conditions. And looking at, you know, actually Victor and I looked at another property in Ohio, and actually the data as far as the population was good, it just, but when we looked at that market, we're like, oh, I, you know, I just don't know, in the asset was like at 65% occupancy. So we were like, Okay, what can we do with this asset? Do we still competent enough that we can get it where it needs to be, which we did, but then when we looked at it on the investment and the return horizon, there were other assets that we could go on to that were performing better that over the horizon, we were going to make a greater return. So so we passed and that was mean that that was market?

Yeah. So, you know, I often describe a good bank as being a partner in your deal. Yeah. And, you know, it's a second and third set of eyes helping to prevent you from making a bad decision. Is there a common gotcha that self storage investors miss when it comes to their own underwriting?

That's a good question. Let me pause. You know, I think anytime you go and request credit, this is just basic, you know, if the if the bank already knows you that house, right? So if you already have a relationship with a commercial bank that knows you, because then that kind of goes back to actually character, right? If they weren't, even if they've only had your your deposit personal accounts, right. Have you been a good steward of your money personally, right, because you have other businesses. Okay. Have you been a good steward of your business money? I mean, the reality is, is that there are banks across the country and how I look at banks is there's local commercial community banks. Then there's you know, in those banks are smaller banks up to about I don't Now 250 500 million, and asset size, maybe a little bit bigger, depending on the region that you're in, I'm in Nebraska, so then you kind of get to those, in really, they're family owned banks, right. And those are banks that are state chartered within the state that they reside. And therefore, you know, they really only lend on assets that are either within their state or, for example, I've been placing a loan for a client that lives in Florida. So some of those community banks, they literally only lend on assets that are within a three to four county region, right. So it's kind of understanding where the bank likes to loan money. So that's a community bank. So then as you kind of move up the ladder, and what happens is the bank sizes, traditional asset size gets bigger, that means they have a bigger footprint, and what footprint means is where they're willing to lend. So let's say you get kind of like a semi regional to a regional bank, that, okay, it's located here in Lincoln, Nebraska, but they are willing to go lend money on assets in Colorado, Kansas, Missouri, right, kind of in those states that you know, border, then they feel comfortable in rolling in on that asset class. And then you get to regional, Super Regional, okay, that that area gets bigger, and then you get to national. What's interesting, is that, right? There's always little nuances, right? Some community banks, they don't want to lend outside their community footprint, because they're about engaging in the community. So again, if you, let's say, just, if I'm Mandy, and I'm buying an asset here in Nebraska, it is, you know, in Lancaster County, which is where Lincoln Nebraska lives and Okay, probably my first step is I'm going to go to one of my local community banks, because they want to lend on assets there and, you know, have probably a pretty good response rate of banks wanting to compete over that. But let's say I'm an owner, like I'm going to be and I have an asset that's in Ohio. Okay, well, it kind of depends on what my relationships are, like in Lincoln, Nebraska, but then I'm probably also going to call on some community banks in Ohio, but then maybe some national banks might come into play. And then there are specific banks that lend to just self storage, right? They're self storage, they're specialists in that. And so my advice to people is, anytime you're going out and requesting credit, again, once have yourself organized to like it's it's also a numbers game. And every banks money is green, but not every bank is in the same situation as far as how they want to lend what borrowers they want to lend to, because I had the example of clients that I that I worked with, they were in, they live somewhere different than the asset was some banks and in where they lived, did not want to lend money on an asset that was out of state. And some of the community banks that were in that locale didn't want to loan money to borrowers that didn't live in the community. So when it came down to it, we've we've found multiple banks, where the criteria works for them. The other piece to that I have seen in all asset classes within the last two, three years, as some banks of times have been really prosperous, right. And so they've loaned a lot of money out. So that's another reason sometimes why they might say, you know, we just really can't take your project on. Going back to my example of my customer that lives in one state and has an asset in another. You know, if you were a customer that already worked with us and had dollars with us, we'd be able to do that, but we've lent so much money out. So what I'm getting at is one Don't be don't be overly frustrated. But you really just have to understand what are the mechanics of that bank? Are they a community bank? What is again, what is their footprint? Where are they willing to lend money? Not only where does the borrower live, but where that asset has to be? And then what are the programs that they have available? So obviously, if they have SBA available, then you can look at it in two different ways you can go well, I'd like to research my opportunities by using SBA financing, which could include seven A and 504 financing. Or you know, what I'd also like to explore what would my opportunity be if I just do a conventional commercial real estate loan with

you? Gotcha. Do you ever maybe steer a potential borrower away from a bank because that bank while that bank may express an appetite for self storage, they have very little experience in the asset.

Yeah, absolutely. I think yes, you should look at that as a borrower, because I think initially, what you asked me about was, you know, a bank is really your partner. And you really do want to go into business with a partner that understands your product. So anytime that you can ask those clarifying questions, you know, how much lending have you done to self storage? How comfortable are you with that asset class? Those are great questions for you as the borrower to ask when interviewing the bank, so that you can get a good feel for you know, do do they understand what the conditions in the industry are of self storage. And, you know, when you initially do the loan, everything's great, everybody's excited. But you really figure out what a relationship is, like, when you come up against stuff that's maybe not so great, either, you know, you got to change order, because you're doing a development ground up construction deal, or something's not going right in your lease up process, when you were, you know, improving operations on an assets that was already in production. So, yeah, those are all that's always very good to think of, when you yourself are interviewing things, as far as, what does that look like? If I come work with you? And how much do you know about self storage? For sure,

we're running short on time here or not. But I want I want to get a couple more questions in, you've been in commercial lending for years. And this doesn't have to be on self storage. But can you think of some times where maybe you know, a deal has gone bad? And you know, what has gotten the borrower in trouble?

I think anytime you use a borrower go into a silo, and you don't let the bank know that you are seeing something that is not quite right. You What do you what do you mean

by silo? Oh,

kind of, you know, again, you're, you're in partnership. And numbers don't lie, right. And typically, within a credit agreement, you have to provide financials, right, you have to show what the performance is. And so if you kind of isolate yourself, because you know, something is not going right, that that could lead to trouble. So what I would say is, you know, no, there's, there's also you have to, if something's not going right, you also don't necessarily just want to call the bank right away in an emotional frenzy, you need to collect yourself. And again, you need to understand what is the market? Or is this the marketing? You know, is it my product? Is it my people? Is it you know, what's going on with this asset right now as to why it's not performing? But the Listen, the banks, basically not loaning money because they want to eventually go through foreclosure and own the asset? They just don't? I mean, that is not, I think, sometimes there's a perception of our the bank just wants to have money. No, they really don't, they actually literally don't want that. Because that means typically, that they're probably going to, they're going to lose mine on that they're not, you know, there's going to be some sort of deficiency on it. So I think if you really feel like something is not going right with the asset, and it is going to affect your performance and your ability to pay on your loan, you should have some conversations with the bank, and you should be candid and transparent about it. Because if you are the bank is going to be more willing to work with you to help work through the process to get everybody where they want to go, which is getting us a borrower and the asset on the right road so that you can make your payments on time and in full.

Well, Mandy Monson, thank you so much for sharing with us today. You've got your your loan broker services, you're offering a 30 minute discovery call to discuss, you know, all the basics of all the things that we just discussed. Can you tell us how people would go about booking that call?

Absolutely. So they can go to my website, which is www dot Mandi monson.com. And there's a button that says how can we do business together? And so they can, they can click on that button. And yes, it's a 30 minute discovery call. I learned a little bit about you, you learn a little bit about me, and then we see if there's an

opportunity. As we mentioned, you're partnering with your partner Victor Diaz on store 365 dot com. We'll put that in the show notes as well. And I hope next time we I hope next time we speak you've got a facility up and operating and and so the best place for someone to contact you would be at Mandy monson.com Correct.

I would Yes. And you can contact me via by setting up an appointment via Calendly. Or you can email me and we can we can set it up that way.

Okay. Great. Well, thanks so much for sharing with us today.

You bet. Thank you. Thanks for your time.