[Storage Unit Facility] Good Deal for a Letter of Intent (LOI)?

Question

Hi,

I am in the process of starting my first deal for a storage unit facility. I have been researching and analyzing deals for about 2 years now, and I am ready to move forward. I would like to get some insight on what is fair/reasonable/good deal for this storage unit facility I am looking at for my Letter of Intent (LOI)

The broker is telling me that the next step is to put in a Letter of Intent. This is the info that the selling broker is asking for that I am looking for insight on:

-Due diligence time frame (What is reasonable here? 30 days?)

-Closing time frame-Earnest money - we are looking for at least $10,000 to be held by a title company (Is this fair and reasonable?)

-Evidence of cash and of financing (Does this have to be a Financial Qualification Letter or can it be something else?)

- Any contingencies - however - my owner is sensitive about that - he won’t do a financing contingency - our view is that you have 30 days to look at everything and pursue financing. (I am doing a SBA loan for this, and the bank is asking for a LOI. BUT, the LOI is asking for evidence of cash and financing. It's like they are both dependent on one another. How do I navigate this?)

Any assistance would be greatly appreciated!

-Andrew

Courtney Duong · Answer

For due diligence try to push for at least 45 days. 30 days is a little too short to do thorough due diligence. We had a 30 days when we acquired ours and that was a brand new building but we were still feeling like we were rushing too much.

Joseph Gozlan · Answer

We work with first time and not so experienced buyers all the time here’s my take:Realistically, for a self storage property you don’t need that much time for due diligence but if you have to merge it with then financing period then I’d stick to 30-40 days (give your lender some time to work).Commercial deals these days require about 1% of purchase price and earnest money. Show the seller proof that you have the down payment funds and ask your lender to give you initial letter that say they reviewed the deal and your finances and they they don’t think there’ll be any issues providing the loan (doesn’t have to be hard commitment)Attach a strong bio to the LOI to show the seller you are serious and capable of closing the deal.good luck!

Henry Clark · Answer

@Andrew SpikesGreat learning experience. Build off this experience. Did you develop a checklist along the way for your next deal? How did your financing alternatives turn out? Do you have your finance solution for your next offer? Cap rates are pretty useless if that’s your only metric and hide issues, especially for your first several deals. Did you prepare a full projected income statement? If you didn’t, who did you get the cap rates from and do you trust them with your “life”?

Andrew Spikes · Answer

This input from you guys was awesome. I put in the LOI. Here were the numbers.Listed for $550K, and I put in an offer for $420K. At this price, it was a 6.15% CAP. The list price CAP was 5.59%. I offered a 45-day due-diligence/60-Day Closing. He turned it down. He said that mine wasn't the lowest, but it wasn't the best. Thanks again for your help.

Dan Wallace · Answer

@Andrew Spikes some great advice here. Since you may be new to operating/owing a storage unit facility, the SBA 7a may be a great option. The credit flexibility with a 7a loan may be your best option.As for timing, I would agree that at least 45 days for due diligence and adequate time to get an appraisal/financing in place. Being an actual 7a lender, I give my clients financing LOIs frequently. As for timing to close a 7a loan, only deal with a Preferred 7a lender. We frequently close 7a deals within 30 days with a complete package using our preferred status.

Ronald Rohde · Answer

My advice is to make the LOI as specific enough to cover your/and sellers deal breakers, but short enough to be easy to prepare and read. That may be 1 page or 2-3 pages.Definitely don't stress about LOI, just throw it at them and gauge the response.

Henry Clark · Answer

@Andrew Spikes1. Due Diligence time frame. 30 days is more than enough. The only item that may push that is a title search or insurance (which you just put down as part of the closing requirements). a. Rent Roll- see how many are the owners or related that might go away, how many are past due, compare rates to competition, b. Property Taxes- look online and/also see if it will increase after you buy, c. Insurance- call a broker and get an estimate, d. Electric- ask for one bill showing annual usage by month, e. Management costs- just go with how you will run, f. Maintenance- check buildings, wood/metal, roofs/leaks, door repairs, g. Determine costs you want to put in- fences, lighting, painting, cleanup, security systems, roads, etc get estimates, 2. Earnest Money- $10,000 is fine or more. As long as it is not non-refundable.3. Financing- you should have this already, or you shouldn't be making an offer.4. Contingencies- financing. No one is going to accept your offer in today's market subject to financing. Plus you should already have your financing in place. An SBA loan due to Covid/PPP and other issues, will take up to 6 to 9 months. Ask your bank where you will do the SBA loan thru, for a Construction loan with interest only. This will carry you through the SBA approval period, plus any upgrades you do. Make sure you qualify for an SBA loan though beforehand. This will mean the difference between 10% SBA collateral versus 25% to 40% Conventional loan collateralization. You have to be able to cover. Your Bank just show them the Broker financials and your estimates.Looks like this is your first deal. What are your numbers?

Nick Belsky · Answer

@Andrew SpikesIts just a good ol' DSCR loan. The lenders will collect a few more docs than a typical, residential DSCR. They look at Operating Statements, P&L, Rent Rolls, etc... Definitely more discerning than residential loans. Usually 70-80LTV, 3-5yr PPP, no balloons, 30 year fixed rate, fully amortized. Some lenders even offer I/O options of 5/7/10 years for their 30-year loans.Cheers!

Andrew Spikes · Answer

Hey @Nick Belsky, great insight! I’m looking at an SBA(7) loan at this point. It’s technically a business, so it makes sense to me. Do you mind telling me what type of loan you are referring to (30-year fixed) ?

Andrew Spikes · Answer

Thanks so much Brad. This is great.