Mapping Out a Loan Request
|Copyright 2014 by Virgo Publishing.|
|By: Neal Gussis|
|Posted on: 11/01/2005|
Finding your way around is easy these days. Forget unfolding a printed map and searching for the most convenient route (and later trying to refold it to original form). That’s old school. Today, you simply go online to a mapping website, type in your starting location and destination, and in less than a minute you have complete directions from point A to point B. You know how far you have to go and where to make turns. You can even get information about key landmarks along the way.
Preparing a loan-request package for refinancing is a lot like mapping. As a borrower, it’s your job to lay out the information so your lender can comprehend your request; navigate your financial and operating history; understand how far you want to go with your financing; and quickly get from point A (your request) to point B (the loan disbursement). Only then can he can make a decision about the best loan product for your property.
Preparing a financing road map is among the most critical aspects of your self-storage business and long-term profitability, as the type of loan you obtain will have a direct impact on your bottom line for many years. When seeking to refinance your property, take the time to create a complete, accurate and compelling loan request.
Get Informed and Target Lenders
Despite recent doom-and-gloom headlines, it’s still a great time to seek refinancing. Rates for longer-term, fixed-rate loan products remain attractive; and property values have generally appreciated, even for properties that have not experienced increased income. In recent years, self-storage owners have found themselves in the driver’s seat as the lending community embraced the opportunity to lend on storage sites. That being said, be careful which lender you choose, as many still do not fully comprehend the industry and its unique attributes.
Generally, owners seeking refinancing want to lock into fixed-rate loans. This philosophy diverges from that of the past five years during which many owners were more comfortable with floating-rate terms. At the time of this writing, the Prime rate is 6.5 percent, up from 4 percent just one year ago. It is widely expected that the Federal Reserve will continue to increase the Federal Funds rate by at least 25 basis-point intervals, which will have a corresponding effect on Prime-rate increases. The LIBOR (London Inter Bank Offer Rate) rate will also continue to rise at about the same interval.
Prime and LIBOR are used as indices for short-term rates. Treasury yields are primarily used for longer-term, fixed-rate loans and have continued to remain steady. Long-term rates have barely risen from the 40-year lows recorded in 2003. Today, you can lock in a loan for three, five, seven or 10 years at rates lower than a short-term adjustable-rate loan. Unless you’re in a construction loan or still in lease-up, there’s little reason to remain on a floating-rate debt instrument. But remember, the interest rate is merely one loan term.
Your refinancing roadmap begins with targeting appropriate lenders. Following initial conversations and research, narrow your list to the few who truly understand your property and the industry, are serious about competing for your business, and will work with you to fine-tune the loan terms. The obvious first choice is to select your current lender or others with whom you have conducted business. Typically, they will offer the most aggressive deals because of your proven track record.
However, you may want to expand your horizons to other lenders or hire a professional who is adept at minimizing interest rates and can negotiate the best overall loan. Some borrowers seek the services of a mortgage broker to arrange their financing. A broker works with a property owner to develop a financing-request package and market it to various lenders. Such positioning allows the owner to maximize marketing and minimize effort in finding lending sources.
It’s important to note that very few lenders market directly to the self-storage industry. Banks, conduits and credit companies generally obtain a high percentage of their loan volume through mortgage brokers. Often, the cost of financing is the same whether you work through a broker or go directly to the lending source. Mortgage bankers have the advantage of knowing which lenders actively and aggressively lend to the industry as well as their current programs and terms.
To map out a well-constructed loan-request package, organize your financing information into seven categories:
Summary of Loan Request
This is your map’s starting point, where you launch the general route for the lender so he is inclined to read further into the package. Define the type of loan and terms you desire. If you are seeking to maximize the loan, be careful not to be overly aggressive or unrealistic. Include the following information in your summary:
Now that you’re on your way, the property-information section will give the lender a better sense of where the site is located and its size, building structures, security features and amenities. Don’t be shy—if this is the best facility in the market, let the lender know it. If he isn’t personally familiar with the property, provide him with ample physical characteristics so he can visualize the asset. At a minimum, this section should include:
Neighborhood and Demographics
In this section, you need to map out the neighborhood and demographics for the lender. Provide detailed descriptions of the area surrounding the property, as well as local and regional characteristics. Include maps and demographic information. You should also address land use and the ability for new competition to arise in your market. Include the following:
Before you take any trip, you want to be assured your vehicle is trustworthy and will get you safely to your destination. Financing companies also need a level of trust when making lending decisions. They want to be certain that if they lend you money, you’ll hold up your end of the deal and make the agreed-upon payments in a timely manner. A lender’s comfort level is derived from your financial wherewithal and creditworthiness as well as your operating experience.
Even if you’re seeking a non-recourse loan (which uses only the property as loan collateral), the lender will closely review your financial strength. As a general guideline, most lenders like to see a net worth of the ownership that is at least equal to the amount of requested debt, and you should have at least enough liquidity to equal one year’s debt payments.
Typically, the lender will examine all principals who have a 20 percent or larger interest in the property. Include a resume of each principal that specifically highlights his real estate holdings and experience. If you are a first-time owner, consider hiring a third-party management firm. You can essentially use the firm’s experience and expertise to impress the lender, which should increase your likelihood of financing success.
In addition to including individual financial statements in the package, inform the lender if there have been past credit issues, as he will run credit checks. Credit issues that are not disclosed up front can leave a bad taste in the lender’s mouth and keep your deal from closing. However, there have been many successful deals in which the borrower openly disclosed credit problems.
In short, this section should include:
In this section, map out your ability to run the business effectively. Highlight your management experience, including information regarding the training and background of your managers as well as an overview of management and accounting software, advertising and marketing campaigns, public-service campaigns, etc. Describe your customers’ satisfaction, the length of time customers remain with your facility, repeat customers, the distance people travel to rent from you, etc.
If you are self-managed, much of this section will be redundant with the ownership information previously discussed. However, if you use a third-party management company, highlight its capabilities and credentials. In this section, include:
As lenders navigate your loan-request package, they will typically spend the most time in this landmark section. You want to demonstrate the property has the historic and future operating ability to sustain the requested loan, so this section should include:
If you simply want to get a general sense of the kind of loan your property will support without creating a comprehensive loan request, compile and submit the first three items on the list. With this minimal information, most lenders or mortgage brokers can provide a solid idea of general loan amounts. If that is not sufficient for you, submit a complete loan package.
The lender will size the loan to a minimum debt-service coverage and maximum loan-to-value coverage. Both requirements will be affected by the property’s operating results. You should explain any nonrecurring income or expense items, as the lender will disregard them in his analysis. The lender will also exclude all non-cash entries, such as depreciation and amortization.
After making adjustments to your cash flow, each lender will determine a “sustainable income amount,” but understand that no two lenders will derive the same figure. A mortgage banker can help you maximize the loan by anticipating the adjustments the lender is likely to make.
Market and Competition
A lender will want to know how your property sizes up to local competition, typically defined as facilities within a three-to five-mile radius. You should be able to demonstrate the comparative position of your prices and occupancy level with these facilities.
The lender needs to be comfortable with sustained occupancy and market saturation of available units in comparison to demand. He will want to see what the competition is charging for select unit sizes on climate-and non-climate-controlled spaces, and you may need to “shop” your competition to get this information. Since all facilities are unique, you’ll want to comment on variations. For example, one property may have low occupancy because of temporary road construction, while another may have lower rates and occupancy because it is in lease-up.
Reaching Your Destination
By mapping out an informative and organized loan-request package, you’ll increase the likelihood of a timely lender response and, more important, allow the lender to provide an aggressive quote—exactly the destination you want to reach. With a well-prepared road map of information, the lender will not need subsequent due diligence that could change or jeopardize the loan. So map carefully, and enjoy a successful journey.
Neal Gussis is a principal at Beacon Realty Capital Inc., a mortgage banking-firm that arranges financing for all types of commercial real estate and secures financing for self-storage owners nationwide. For more information, call 312.207.8240; visit www.beaconrealtycapital.com.