Preparing a Loan Package
|Copyright 2014 by Virgo Publishing.|
|By: Eric Snyder|
|Posted on: 11/01/2002|
If you are looking for self-storage financing, the timing could not be better; but do not make the mistake of creating a poor loan package. The time and effort put into preparing a quality package will pay off substantially, whether you are looking for the highest loan amount or the lowest interest rate.
The self-storage financing market is providing borrowers the lowest interest rates in more than 40 years on construction, bridge and permanent loans. The key to taking advantage of the low rate environment is to prepare an A-quality loan package. Most lenders are budgeting large loan volumes for 2003, but not at the expense of funding loans on marginal properties. Lenders have not forgotten the consequences of their aggressive lending in the 1980s and are stringently underwriting your operating experience, the facilities' location and the subject market. All of these factors need to be presented to your lender in a detailed yet concise loan package to obtain the most aggressive loan terms.
The good news is once you find a competitive self-storage lender and successfully complete the due-diligence process, you should be able to secure some of the lowest interest rates in history. Many variable-rate loans will be priced over LIBOR (London Inter Bank Offering Rate) or prime, both of which are at historically low levels because they have continued to drop during the past 24 months. For example, as of press time, the prime rate was 4.75 percent and the three-month LIBOR index was 1.8 percent. When lenders add their margins to these indices, it equates to variable-rate loans in the low 4 percent to low 6 percent range.
The fixed-rate lending market is just as favorable as the variable-rate market. Many of the fixed-rate loans today are priced over the 10-year U.S. Treasury rate, which was 4 percent at press time. If you add the lender's margins to the 10-year Treasury, it is possible to obtain 10-year fixed-rate loans in the low 6 percent range.
So how do you prepare a loan package that allows you to maximize your loan dollars and minimize your interest rate? The answer depends on the type of loan you request. For example, loan packages for construction loans need to be much more detailed than those for bridge or permanent loans.
Let's start with construction loans, since the interest rate for these is lower than what most of us pay on our credit cards. The majority of construction loans are provided by commercial banks for owners developing a new facility or expanding an existing one. Typically, banks with which you already have a working relationship offer the most aggressive loans. They will place an enormous importance on your experience, your track record and the results of a feasibility analysis
These loans are typically full-recourse, so the lender will need to scrutinize your personal financial statement to determine if you meet its net worth and liquidity requirements. The lender will thoroughly analyze your pro-forma statements, including projections of rental income, vacancy, lease-up projections, expense ratios, etc. All of your projections will be compared to the market, and you must justify the use of projections that are more aggressive than the market.
Once all the lending requirements have been met, you can expect to receive some very competitive pricing, since most construction lenders will provide variable-rate loans based on LIBOR or prime. Your overall interest rate can be anywhere from the low 4 percent to the low 6 percent range for a loan that equates to approximately 75 percent loan-to-cost.
Preparing a package for a bridge loan is almost as detailed as preparing one for a construction loan; however, the lender may be more lenient on the net worth and liquidity requirements for the property owner if it is a nonrecourse loan.
A bridge loan is usually a short-term, variable-rate loan used to replace a construction loan prior to the property achieving full stabilization. This may be necessary because the property failed to reach stabilization during the construction-loan term. Also, a bridge loan makes sense if you are replacing the construction loan with a lower interest rate or nonrecourse loan. Many property owners will use a bridge loan to acquire a facility that is poorly managed or collecting below market rents. Then they reposition the property and refinance it or sell it, since most bridge loans feature a minimal or no prepayment penalty.
A quality bridge-loan package will include all of the items included in a construction-loan package plus historical operating information and occupancy information. The bridge lender is going to compare your actual lease-up numbers to that of your original pro forma to determine your ability to lease up in accordance with projections. Therefore, you must keep very detailed logs and records to explain why your actual lease-up may have differed from your projections.
For example, you may have projected a nine-month construction period that turned into 12 months due to heavy rains. Lenders always want to be conservative, so unless you have a good explanation with back-up documentation for a delay in the construction or lease-up period, the lender will penalize you with lower loan proceeds or a higher interest rate.
The intent of a permanent loan is to capitalize on low, long-term, fixed interest rates. As of press time, you can secure a fixed rate in the low 6 percent range for 10 years. However, due to the restrictive nature of the prepayment penalties on these loans, your business plan should involve holding on to the facility for the entire length of the loan term. Additionally, this loan should be obtained once you have fully stabilized the property and determined you do not wish to pull additional equity out of the property during the length of the loan term.
Since most of these loans are based on the performance of the property, they are nonrecourse; therefore, your net worth and relationship with the lender are less important. The lender is concerned with the historical operating numbers, asset quality and market dynamics in making a lending decision. Although your experience, net worth and credit history are weighed, the key to getting the lowest fixed rate in the market is keeping good historical records on the performance of your facility.
Most permanent lenders will scrutinize your historical operating statements and compare them to other facilities in the market. If you keep good records, the lender will be able to give you credit when you are managing the facility better than your competitors. However, it will still default to some industry standards, even if you can prove your facility has lower expenses.
After the Package
Once the lender has reviewed a quality loan package, it will issue a loan application identifying the loan terms. If the terms are acceptable to you, the detailed due- diligence process begins. This entails submitting a substantial checklist of items and the ordering of third-party reports, such as the appraisal, engineering report, seismic report, environmental report, loan-document preparation, survey, title, etc.
This can be an arduous process, since the lender reviews all of your documentation in detail. It involves reviewing actual expense bills, bank deposits, general ledgers, payroll reports and other items necessary to determine the facility's actual income and expenses. This is the point in the process when the lender has the highest probability of discovering information that may affect the original loan application. Therefore, a quality loan package that discloses all the information about the transaction is your best defense from a lender who may try to amend the terms of the original loan application. An amendment to the original loan application typically results in a reduction of the loan amount or an increase in the interest rate.
The preparation of a loan package cannot be done overnight. To generate the level of detail necessary to disclose all the aspects of your transaction and to provide the lender market data takes time. Allow yourself at least a couple of weeks for the package preparation and then another couple of weeks for a loan application, since lenders are looking at many transactions in addition to yours. The time and effort put into preparing a quality loan package may save you thousands of dollars in loan amount or interest payments.
Eric Snyder is a vice president with Buchanan Street Partners and responsible for self-storage debt and equity originations nationwide. He can be reached at 949.219.1201.