Cover the Bases

A solid game plan can lead to better interest rates

By Neal Gussis

If lenders werebaseball players, they would be in the Hall of Fame with all the bases they cover.

As self-storage lenders, it seems we're always looking for something. That's because inorder to create the best financing package for your property, we need information--andlots of it--to analyze and underwrite a loan request. For those of you who have financedand refinanced multiple properties, it may seem like we're covering too many bases andalways looking for answers to the same questions about operating histories, vacancies, netoperating income, environmental issues and facility amenities. We have to ask thesequestions in order to analyze our credit risk. Loan applications provide us with anabundance of information, but we need to go beyond the application to truly understandyour property and its operations.

For many, it may seem the lender requests too much information for a property,especially for one with a long track record of good performance. At some point, everyself-storage facility owner--even financing and refinancing veterans--has probablyquestioned how a lender determines a loan amount, its interest rate and its terms.

Lenders havematured along with the self-storage industry. The lending community's underwriting andanalysis expertise has become more sophisticated, and the industry's established lendersare extremely knowledgeable about facility strengths and weaknesses. The rating agenciesand investors who buy securities originated by conduits (or securitized lenders) andcollateralized by self-storage mortgages have also become more sophisticated. And, as wehave become more sophisticated, the number of questions we ask potential borrowers seemsto have increased accordingly.

But you shouldn't feel like a minor leaguer when you begin a loan transaction. You canhelp yourself during this process and better understand how to cover the bases. There's nodoubt that, with basic financing-process knowledge, you can optimize permanent financingfor your facility.

The Basics

There are fundamental pieces of information we need to process a loan request. The moreyou know about our requirements, the smoother the transaction and the less frustrated youmay be with the lender.

We created a game plan to help you cover your financing bases. The plan can help youunderstand a lender's requirements and prepare you for a smoother loan transaction. Take afew minutes to complete this game plan. You may see some real benefits the next time youseek financing, such as with a lower interest rate and/or a higher loan amount. It canalso save you time.

Before we review the game-plan elements, you should recognize that no two deals arealike. You can't stack your transaction up to another self-storage deal and expect toachieve an apples-to-apples comparison. Every facility and borrower is unique.

The game plan includes seven categories:

Let's see how your loan request stacks up. The object is to shoot for a low score.

Loan Information

Your loan information includes three main factors:

1. Loan amount. A lender's earnings are primarily based on loanvolume. Larger loans are generally more profitable to financing institutions. Is yourrequested loan amount:

a) less than $1 million? (3 points)

b) greater than $1 million? (2 points)

c) greater than $2 million? (1 point)

d) greater than $4 million? (0 points)

2. Loan-to-value ratio (LTV). This measures yourequity level. A lower LTV means you put more equity at risk, thus creating a better creditrisk for the lender. Is your LTV:

a) More than 75 percent? (3 points) (Loans for LTV ratios this high are frequently notavailable.)

b) 70 percent to 75 percent? (2 points)

c) 51 percent to 69 percent? (1 point)

d) less than 50 percent? (0 points)

3. Debt-service coverage ratio (DSCR). This is a ratio of theproperty's net cash flow (NCF) to debt payments. Note: Lenders generally include inexpenses an imputed capital reserve of 15 cents per rentable square foot. While lenders'thresholds vary, a higher DSCR is more desirable. Is your DSCR:

a) less than 1.30? (4 points)

b) 1.30 - 1.40? (3 points)

c) 1.40 - 1.50? (2 points)

d) 1.50 - 1.75? (1 point)

e) greater than 1.75? (0 points)

Property Information

This includes six main factors:

1. Property condition. Is your property:

a) in need of repairs and/or capital improvements? (2 - 4 points)

b) well maintained overall? (0 point)

2. Size. Is your property:

a) less than 40,000 rentable square feet? (1 point)

b) more than 40,000 rentable square feet? (0 points)

3. Location, Exposure, Visibility and Accessibility.Is your property:

a) Poor: poor access, limited exposure, minimal signage? You will need to explain thefacility's viability. (3 points)

b) Average: has good exposure, but average accessibility, average signage? (1 point)

c) Good: located on a main arterial street and easily visible and accessible? (0points)

4. Amenities. Does your property:

a) lack a management office or fencing? (5 points) (Note: Limited financing available.)

b) have a management office and is fenced, but amenities are inferior to thecompetition? (2 points)

c) fenced, have a management office and other amenities comparable with local market?(1 point)

d) have state-of-the-art amenities, superior to local competition? (0 points)

5. Zoning. All zoning variances and permitted uses, a certificate ofoccupancy and the ability to continue operating as self-storage should be disclosed to thelender. Your property is:

a) not zoned appropriately for self-storage or does not have required permits orcertificate of occupancy. (5 points) (Consult with lender.)

b) appropriately zoned and has all required permits as well as a certificate ofoccupancy. (0 points)

6. Environmental. There are a host of minor and major issues regardingenvironmental compliance. For this game plan's purposes, your property either has:

a) environmental issues. (5 points) (Consult with lender.)

b) a "clean" environmental report. (0 points)

Borrower/Principal Information

Even with non-recourse financing, lenders closely scrutinize the borrower's andprincipal's financial histories for creditworthiness. You and your principals have:

a) past or current bankruptcies, major credit problems or major litigation. (5 points)(Consult with lender.)

b) minor credit issues or limited net worth. (1 point)

c) a strong credit history and high net worth. (0 points)

Operating History (Books and Records)

Here, lenders review three key areas:

1. Organized records. Do you have complete and organized records foryour facility's historical operating results? Do you also have all required operating andorganizational documents? If no, give yourself 1 to 3 points, if yes, give yourself 0points.

One way to improve your income and expense record-keeping capability is to utilize thestandardized "Chart of Accounts" offered by Self Storage Data Services (SSDS).Call (626) 792-2107 for more information.

2. Average occupancy. Is your average occupancy:

a) less than 70 percent? (3 points) (Consult with lender.)

b) 70 percent to 80 percent? (2 points)

c) 80 percent to 90 percent? (0 points) (Note: Most lenders do not count averageoccupancies above 90 percent in establishing loan amounts.)

3. Net operating income (NOI). This is the key measure of yourfacility's income-producing capability and your ability to repay a loan. Is yourfacility's NOI:

a) declining? (2 points)

b) stable? (1 point)

c) increasing? (0 points)

If your property is in lease-up, consult with lender to determine when permanentfinancing may be available.

Market Strength

In general, a lender's analysis includes a review of:

a) occupancy consistency (a high consistency level is desirable).

b) competitive pricing (whether your rents are proportionate to the competition andrelative to your facility's amenities).

c) saturation level (the square footage of rentable space in proportion to the area'spopulation).

d) future competition (the amount of supply being built and being proposed in yourmarketplace as well as availability of appropriately zoned land suitable to constructself-storage).

If your facility's market strength is favorable, give yourself 0 to one point, if notgive yourself 2 to 3 points.

Neighborhood Characteristics

Lenders want to ensure your neighborhood supports a self-storage facility. Does yourneighborhood:

a) not have a mix of nearby residential, multifamily and commercial properties thatwill support your facility? (3 points) (Consult with lender.)

b) have this combination of supporting properties? (0 points)

On/Off-Site Management

Strong off-site management is extremely important. Good management typically creates asolid on-site team, optimizes operating results and preserves the physical property.Management should have prior successful experience in managing self-storage and/or otherincome-producing properties.

If your off-site management characteristics are not noted above, give yourself 5 points(consult with lender), if they are give yourself 0 points.

Scoring

Remember, this is only a guideline and does not represent a complete scenario of how alender determines your loan; however, if you scored:

a) 5 or below: You appear to be in the best position to obtain financing at the lowestmarket rates available.

b) 6 to 15: You can obtain attractive financing quotes.

c) above 15: Your financing choices may be limited or you may want to improve areaswhere you scored poorly.

If you had any "consult with lender," notations, you may have an issue thatcould preclude you from financing at this time.

Neal Gussis is a senior vice president at First Security Commercial Mortgage (FSCM)in Chicago, where he directs the firm's self-storage financing programs nationwide. FSCMis one of the country's largest and most established self-storage lenders. Mr. Gussis canbe reached at (888) 425-9310.