Day 29: Conventional Financing Structures for Boat and RV Acquisitions

And welcome to day 29 of the Boat and RV 100 series. I'm Joe Downs with Storage Moguls. Today I'm pulling back the curtains on how most boat and RV deals in the $400,000 to $2 million range actually get financed. It's not theory, it's the actual structures that close. So most investors assume SBA is the only path because it's talked about the most. That's fine. In practice though, plenty of deals that close cleanly and quickly are financed with community bank conventional loans, sometimes with a seller note layered in. The operators who know what that structure looks like walk into lender meetings with a clear ask. The ones who don't are making it up as they go. There are a lot of people talking about storage. Not many of them are still doing it. We are. Every deal we teach, we've touched. Every framework we share came from something real, not a textbook, not a seminar from 5 years ago. We're made up of our community, made up of couples and real people. We've actually called them couplepreneurs, solopreneurs, entrepreneurs who are actively evaluating acquisitions right now. And again, deals between $400 grand and $2-3 million bucks. Why? Because they're financeable, they're digestible, and it's where the big institutions aren't playing. They're not in our sandbox. We stay out of theirs because in our sandbox are the kinds of deals that actually get done. The word mogul means something specific here. A sophisticated operator of inanimate assets is the definition, which is kind of weird, but in our case it's storage assets. Some will focus on the word, on the word mogul and think icon. Our definition is sophisticated. You need to be sophisticated to become an icon anyway, though you could argue you don't, you don't anymore. Regardless, I choose mogul. I chose moguls for a reason. True storage moguls can look at any opportunity in storage to determine if there's a real deal there or not. And that's what I mean by becoming a storage mogul. You'll become someone who's learned the full arc from finding the deal to running it and knows something that knows that acquiring and optimizing is very different than just buying. And the difference between storage moguls and everyone else will be measured in tens of thousands to hundreds of thousands of dollars per deal. So if you want a community that's actually in the field with you, That's storage moguls.ai. That's your home. That's where you'll have the opportunity to go from a curious investor to a storage mogul. And it doesn't have to start with a credit card. You can start for free and only pay for what you need, and you can advance yourself along the way. All right, let's get into today's episode. A mogul knows there are 7 loan parameters. You got to know all of them before you walk into a lender meeting. An operator who quotes these numbers confidently signals to the banker that they've done this before. Or that they've prepared as thoroughly as someone who has. LTVs of 65% to 70% are the typical range. A stabilized facility with 24 months of documented occupancy and a waiting list will get you closer to 75%. A value-add deal, or maybe it's a first-time operator, you might be closer to 65%. The lender's going to measure the risk. The gap between those 2 numbers is tens of thousands of dollars in required equity. Amortization at 20 to 25 years matters for DSCR as well. A 20-year amortization on the same loan amount has materially higher monthly payments than 25 years. So push for 25 on a stabilized deal gives you more NOI headroom above the debt service threshold. DSCR minimum of 1.2 to 1.25x the lender's underwriting floor. Build your base case pro forma to that 1.25x. X minimum. If your seasonal model shows 1.18 in a soft summer, the lender's stress test will fail it. So know this number going in. Full recourse is standard at this deal size. So you're signing a personal guarantee. It's not the end of the world, folks. You join Storage Moguls and I'll tell you why. But build that into your risk assessment anyway. It's not a reason to avoid the deal. It's a reason to be confident in your occupancy assumptions before you close. Here's the 3 common structures. Most boat and RV deals close through one of these. Knowing all 3 means you can pivot based on what the seller will accept and what the lender will approve. Structure 1, clean conventional. The bank provides 70 to 75% LTV. Borrower brings 25 to 30% down. It's the cleanest structure, fastest close, lowest paperwork burden, requires a strong borrower balance sheet. Probably a stabilized deal and a lender who's comfortable with the asset. When you have all 3, it's probably the most optimal path. Structure 2, conventional plus seller note. This is where the bank provides 60 to 65%. The seller holds a subordinated note of 20 to 25%, and the borrower brings 10 to 15%. This is the structure that closes most deals in that $400,000 to $2 million range. It reduces the cash requirement at close, gives the seller a monthly income stream at an attractive rate, And gives the bank adequate first lien coverage. And we'll cover this in depth on day 30. Structure 3 is the SBA plus a seller note. So SBA 7, that'll cover 80 to 90%. If 80, seller holds a subordinated note for approximately 10%, and then you'll bring 10% as the borrower of equity. This is the first deal structure when equity is thin and the SBA guarantee is needed. to get the bank comfortable. It requires an SBA lender experienced with outdoor storage though, and a seller willing to subordinate their note. The decision tree goes like this. Start with structure 1 if you have the equity and the lender relationship. If the equity is a constraint, move to structure 2. If the lender won't approve without the SBA guarantee, go to structure 3. Now, DSCR is a term I just mentioned. I'm going to break it down for you. It's a term we throw around a lot. You're going to need to get used to it and understand it. It's not complicated. It's very simple, actually. It stands for debt service coverage ratio, and it's the annual NOI, the annual net operating income. What does this thing make before debt service divided by the debt service? The lender's minimum is typically 1.2 to 1.25. That means for every dollar of debt service, the property needs to generate $1.20 to $1.25 in NOI. So the boat and RV specific discipline, always use stabilized NOI, the 24-month average by calendar month, not the enhanced NOI from the value-add projections. Lenders are going to underwrite to what the property does, not what you plan to make it do. The enhanced NOI goes in the package as context for the upside thesis, but it's not, not on the underwriting basis. Use the annual total from your monthly model, not a monthly average multiplied by 12. Those are the same number mathematically, but a lender who sees you working from a monthly model and summing it up properly builds more confidence in your underwriting discipline than the one who sees an annual average with no visible monthly foundation. Check DSCR in the downside case. If your base case is 1.25 and the downside case, say the fall occupancy case where it's 10 points softer, drops to 1.08, for instance, You have insufficient margin. So a lender who runs that stress test and finds a DSCR below 1.2 is going to decline it. So run it yourself first. That's why prepared, know going in. The 3 DSCR scenarios, 1.1 times is below minimum and the deal will be declined or require restructuring with lower purchase price, higher down payment, or lower loan amount. At 1.25, that's a minimum and approvable. So 1.4. And above gives you lender plenty of headroom and makes the conversation significantly easier. This also might be where you look to the SBA as they require— as their requirement can be slightly lower in year 1 depending on your business plan. The most common reason a qualified buyer doesn't close a qualified deal is down payment, not deal quality, not lender willingness. It's cash at closing. So here's 5 ways operators can solve the equity gap. One, seller note might be the most powerful equity gap tool in this vertical. We cover the full structure on day 30. In summary, the seller holds 20 to 30% of the purchase price as subordinated lien or second lien note. The bank takes the first position. The buyer then brings 10 to 15% cash. The seller gets a monthly income stream. The buyer closes with significantly less cash than a clean conventional deal requires. Partner equity is usually through a GP-LP structure. A capital partner contributes the down payment in exchange for preferred return, and the operator runs the asset. This is how operators with strong deal finding and operational skills but limited capital get their first deal done. The economics need to be modeled carefully though. The preferred return comes off the top before the operator participates. So you can use, um, also you can use cash-out refinance. On another asset. If you own other real estate with equity, cash-out refi extracts that equity for the down payment. You're going to need a clean source of funds documentation there. Just document everything that you're doing. The new debt service on the refinanced property will likely affect your personal DSCR calculation though as well. Depends on how it's all structured, but probably going to. Seller price reduction. Every $50,000 reduction in purchase price is real equity at close. If you've identified deferred maintenance, access constraints, or operational deficiencies that justify price reduction, negotiate them explicitly. Each one is an equity gap solution potentially. And then deferred CapEx concessions. Kind of works with the one we just talked about. Negotiate specific CapEx items, a broken gate system, an aging air compressor station, Get— see if you can get a seller concession at close. The seller addresses the item here or reduces the price by the cost. So last 2 are similar, a lot of crossover, same effect as the price reduction, often easier to negotiate because it's tied to a specific identified issue. Here's what the lender is looking for. These 7 items. This is the credit committee's checklist. So build your submission around it. DSCR on stabilized NOI first, not enhanced, not in place on value-add deal, just stabilized. The credit committee's floor is 1.25. Build to it from the monthly model. LTV and collateral. The appraisal needs to support the loan amount. So on a thin comp deal, the appraisal's methodology matters. Make sure your lender uses an appraiser familiar with outdoor storage. A self-storage appraisal, uh, appraiser applying self-storage cap rates to a boat and RV facility will produce a valuation that may not support your loan. Uh, global cash flow, they look at that. The credit committee looks at all of your income and debt obligations across all entities. So if you have other real estate with mortgages, those payments affect your personal DSCR. So know this number before you submit it. Occupancy history with consistent seasonal pattern, they're looking for that. 24 months monthly. Annotated, consistent. An unexplained dip in year 1, a summer that was significantly softer than the prior year, is going to generate questions. So have the answers ready. Show them environmental clearance. Phase 1's complete, no open RECs. Remember, RECs are recognized environmental concerns for near waterway sites. The credit committee is going to ask. So have the Phase 1 report in the submission package. Have your exit or your refinance path too. Community banks, they're 5 to 7 year terms, so 5 to 7 year balloons. So they're going to at the 5 or 7 year mark, depending on what you negotiate, you're going to be required to refinance or sell at the maturity there. The credit committee is thinking about whether you'll be able to do that. So a stabilized facility with rising rents and a documented track record, that's going to be refinancable. A value add deal that didn't execute is not so. Have an honest answer for this question. The 5 to 7 year balloon is a checkpoint, though. It's not a problem if you've been building towards it from day— from the day you close, you won't have a problem. Operators who execute their value-add plan, raise rents to market, stabilize occupancy, and maintain the asset well are refinancing at that, maybe at the 5-year mark, into better terms than their original loan. So higher appraised value, lower LTV, proven track record, existing lender relationship, all of those work in your favor at refi. Operators who bought a value-add deal and didn't execute, they're going to face a harder refinance scenario. So the balloon comes due on an asset that hasn't appreciated as planned and the options narrow. A forced sale at a disadvantage— disadvantageous time is the worst outcome, and it's entirely preventable by executing the plan you underwrote to. Just got to execute. So plan from day one. Build your 5-year pro forma. What does the asset look like if you execute the value add completely? What's the NOI, the estimated appraised value, the likely refi LTV? That model tells you whether the long-term return thesis is real and it gives you a roadmap to work toward from the day you close. Know your refinance drivers. NOI growth from rate increases, documented occupancy stabilization, completed improvements, and the existing lender relationship. What are your exit drivers? Cap rate compression in the market, institutional buyers beginning to enter the vertical, value-add fully realized, or a capital redeployment opportunity that makes the exit more attractive than the hold? The deal structure matters as much as the deal quality. A well-underwritten boat and RV acquisition, the wrong financing structure might have insufficient equity. A DSCR that won't survive the stress test. A lender who doesn't understand the asset. None of it's going to close. Know the parameters cold before walking into a lender meeting. LTV of 65% to 75%. The DSCR minimum of 1.25 on a stabilized NOI. 20 to 25-year amortization. The 5 to 7-year balloon. Don't be shocked by the personal guarantee being required. Those numbers tell you exactly what the deal needs to look like to get approved. So pick the right structure for your position. Clean conventional when you have the equity and the lender relationship. Conventional plus seller note when equity is the constraint. SBA when the bank needs the guarantee to get comfortable with the asset. Most deals in this range close on structure too. Model year 5. Know what the asset looks like at the balloon. Build toward it from the day you close. The operators who do this refinance smoothly and redeploy capital. The ones who don't face a harder path. All right. Next up, day 30, seller financing. I'm doing a deep dive. The structure that closes more boat and RV deals in this price range than any other and the exact terms you need to get it right. So like this video, if you wouldn't mind, if the 3 deal structures gave you the clear picture that you're looking for and what to do in your next acquisition. It could actually look like from a financing standpoint. Subscribe by ringing the bell so you don't miss day 30. The seller financing episode is where the equity gap problem gets solved for most operators at this level. And share this with somebody who's working on a deal structure right now, trying to figure out whether they have enough down payment, what options exist if they don't. This episode answers all of it. Remember, structure closes deals. Operators who walk into a lender meeting knowing their DSCR, their target LTV, and the 3 deal structures they can offer Close faster and at better terms, and operators are learning the vocabulary, vocabulary in real time. StorageMoguls.ai has the resources, the education, and the community to help you run these structures before you sit down with a banker. Remember, it's free to start. Tools are there when you need them. If you join soon, the GPT we built for deal analysis is yours. All right, we are 5 episodes into Section 3. The next 4 close out the financing and acquisition playbook, so stay with us. Join Storage Moguls, structure the deal right, close it. See you tomorrow.