By Neal Gussis
If lenders were baseball 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 in order to create the best financing package for your property, we need information--and lots of it--to analyze and underwrite a loan request. For those of you who have financed and refinanced multiple properties, it may seem like we're covering too many bases and always looking for answers to the same questions about operating histories, vacancies, net operating income, environmental issues and facility amenities. We have to ask these questions in order to analyze our credit risk. Loan applications provide us with an abundance of information, but we need to go beyond the application to truly understand your 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, every self-storage facility owner--even financing and refinancing veterans--has probably questioned how a lender determines a loan amount, its interest rate and its terms.
Lenders have matured along with the self-storage industry. The lending community's underwriting and analysis expertise has become more sophisticated, and the industry's established lenders are extremely knowledgeable about facility strengths and weaknesses. The rating agencies and investors who buy securities originated by conduits (or securitized lenders) and collateralized by self-storage mortgages have also become more sophisticated. And, as we have become more sophisticated, the number of questions we ask potential borrowers seems to have increased accordingly.
But you shouldn't feel like a minor leaguer when you begin a loan transaction. You can help yourself during this process and better understand how to cover the bases. There's no doubt that, with basic financing-process knowledge, you can optimize permanent financing for your facility.
There are fundamental pieces of information we need to process a loan request. The more you know about our requirements, the smoother the transaction and the less frustrated you may be with the lender.
We created a game plan to help you cover your financing bases. The plan can help you understand a lender's requirements and prepare you for a smoother loan transaction. Take a few minutes to complete this game plan. You may see some real benefits the next time you seek financing, such as with a lower interest rate and/or a higher loan amount. It can also save you time.
Before we review the game-plan elements, you should recognize that no two deals are alike. You can't stack your transaction up to another self-storage deal and expect to achieve an apples-to-apples comparison. Every facility and borrower is unique.
The game plan includes seven categories:
- Loan information
- Property information
- Borrower/principal information
- Operating history (books and records)
- Market strength
- Neighborhood characteristics
- On/off-site management
Let's see how your loan request stacks up. The object is to shoot for a low score.
Your loan information includes three main factors:
1. Loan amount. A lender's earnings are primarily based on loan volume. Larger loans are generally more profitable to financing institutions. Is your requested 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 your equity level. A lower LTV means you put more equity at risk, thus creating a better credit risk for the lender. Is your LTV:
a) More than 75 percent? (3 points) (Loans for LTV ratios this high are frequently not available.)
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 the property's net cash flow (NCF) to debt payments. Note: Lenders generally include in expenses 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)
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 the facility'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? (0 points)
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 the competition? (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 of occupancy and the ability to continue operating as self-storage should be disclosed to the lender. Your property is:
a) not zoned appropriately for self-storage or does not have required permits or certificate of occupancy. (5 points) (Consult with lender.)
b) appropriately zoned and has all required permits as well as a certificate of occupancy. (0 points)
6. Environmental. There are a host of minor and major issues regarding environmental 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)
Even with non-recourse financing, lenders closely scrutinize the borrower's and principal'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 for your facility's historical operating results? Do you also have all required operating and organizational documents? If no, give yourself 1 to 3 points, if yes, give yourself 0 points.
One way to improve your income and expense record-keeping capability is to utilize the standardized "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 average occupancies above 90 percent in establishing loan amounts.)
3. Net operating income (NOI). This is the key measure of your facility's income-producing capability and your ability to repay a loan. Is your facility'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 permanent financing may be available.
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 and relative to your facility's amenities).
c) saturation level (the square footage of rentable space in proportion to the area's population).
d) future competition (the amount of supply being built and being proposed in your marketplace as well as availability of appropriately zoned land suitable to construct self-storage).
If your facility's market strength is favorable, give yourself 0 to one point, if not give yourself 2 to 3 points.
Lenders want to ensure your neighborhood supports a self-storage facility. Does your neighborhood:
a) not have a mix of nearby residential, multifamily and commercial properties that will support your facility? (3 points) (Consult with lender.)
b) have this combination of supporting properties? (0 points)
Strong off-site management is extremely important. Good management typically creates a solid on-site team, optimizes operating results and preserves the physical property. Management should have prior successful experience in managing self-storage and/or other income-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.
Remember, this is only a guideline and does not represent a complete scenario of how a lender determines your loan; however, if you scored:
a) 5 or below: You appear to be in the best position to obtain financing at the lowest market 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 areas where you scored poorly.
If you had any "consult with lender," notations, you may have an issue that could 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. FSCM is one of the country's largest and most established self-storage lenders. Mr. Gussis can be reached at (888) 425-9310.