Seasoning Periods and Blanket Mortgages: Two Common Storage Banking Questions.
While I have used blanket mortgages to buy or refinance properties in the past, I’m not sure that I would again unless I had a very good reason to do so. In case you aren’t familiar with the concept, a blanket mortgage is a loan where more than one property is used as collateral. There are certainly some efficiencies in using them. Among the potential benefits is the possibility of negotiating a lower interest rate (because your loan amount is higher). Additionally, because you are using one loan to buy multiple properties, you only have to pay for one round of closing costs. Another plus is the convenience of not going through the application process two (or more) different times.
And though there may be an occasion where those benefits justify the use of a blanket mortgage, more often than not, the drawbacks to these types of loans lead me to steer clear of them. To me, the decrease in long term flexibility outweighs all of the aforementioned benefits. You never know what the future holds. There may be an opportunity to sell one of those properties. Selling a property is harder when a blanket loan encumbers it even with seemingly adequate “release of collateral” clauses. Loan agreements tend to be, as one would guess, written in favor of the bank. The contracts are often drafted in a way that would discourage you from ever selling one of the two properties until the loan is paid off in full or, at the very least, rewritten. So, all of the convenience that you gained by creating one loan will be cannibalized by the inconvenience of trying to make moves in the future.
Another common banking/funding question that I often here centers around the concept of seasoning. Those of us that buy Value-add, turn-around properties, often have the need to restructure our debt at some point during our course of ownership; sometimes sooner than later. Perhaps a real life example will be helpful here.
A client bought his first self storage property using a combination of cash and private money. He wondered how soon he might be able to get his money back and pay off his investors. Paying them off sooner is clearly an attractive option as the more conventional debt will cost less over time than will the higher interest private money he used to purchase the property. If successful in obtaining a refinance, he will no longer have to share any of the profits with his investors. Generally speaking, the industry standard answer for how long banks usually require you to own a property before refinancing is 12 months.
In full disclosure, I have been able to successfully refinance a property sooner, but it was an uphill battle. My first self storage property was 50% full when I bought it. Within nine months, I was able to increase occupancy to over 90%. As such, the value skyrocketed from $350,000 to $750,000. I had an appraisal completed to show that increase, and still received five “NOs” from the banks. They all cited seasoning as the issue, which is pretty obnoxious. It’s almost as if they wanted me to move people in and increase my occupancy more slowly. Banks rarely operate logically though. They have guidelines that direct their decision making. Those guidelines are there for a reason and certainly have their place. Sometimes though, those guidelines do little more than create bureaucratic red tape that actually hinders the banks ability to do deals that make perfectly good sense. When it comes to seasoning, what banks are looking for is an established track record. They want to make sure the move-in was not a seasonal fluke or something similar.. The bottom line is with persistence; you might be able to get a refinance done sooner than 12 months. But I think six to nine months is your best-case scenario unless you get really lucky or have some very helpful extenuating circumstances working in your favor.
My sincere hope is that you are finding some value in these articles that I put out each week! If you’d like to explore concepts like these more deeply, I’d encourage you to check out The Storage Rebellion University. You can see what it is all about for FREE with absolutely no long term commitment or obligation. If you get the value, you can come back each month to further your storage education. And if it’s not for you, you can simply unsubscribe with the click of a button.