By Scott Lee Shabel
In this booming economy, you may be interested in refinancing the debt on your self-storage facility. If you are fortunate, you have contacted one of the handful of mortgage brokers who specialize in refinancing loans to self-storage operators.
Your first concern, of course, is: What interest rate is being offered? And what are the repayment terms? Can you get cash out of the loan? How can you qualify for the loan? These basic loan considerations should only be the beginning of your inquiry. Once you have approved the basic financial terms of your loan, you (and, hopefully, your attorney) will receive a rather voluminous loan package, containing numerous documents drafted by the lender's sophisticated attorneys. These documents contain many traps for the unwary borrower. Buried deep in this documentation are hidden features and charges, as well as restrictions on the manner in which you may conduct your business during the term of the loan.
Even if you consulted with a loan broker to obtain your refinancing loan, remember that he is usually working for the lender and receives his commission only if the transaction is consummated. The broker may not be motivated to negotiate on your behalf with respect to these hidden fees and charges, or the legal pitfalls in the loan documentation. The following is intended to constitute an overview of a typical refinancing loan. It is not--and should not be construed as--legal advice for your particular situation. You can consult with an attorney to assist you in understanding and negotiating the terms of your particular loan.
Your Loan Application
The first step in obtaining your refinancing loan, whether through a broker or directly with a lender, is a submission of your loan application. Warning: This is the most important document in your loan transaction. It is also the most often overlooked. The loan application may be presented to you as a mere formality, but its language--more importantly, what is missing from the application--may serve to undo much of what the borrower seeks to accomplish with the loan.
The borrower is generally required to invest significant sums of money at the time the loan application is submitted, including the expense of appraisals, engineering reports and environmental studies. These expenses can often run tens of thousands of dollars. Before committing this money and submitting your loan application, you and your counsel must be sure that all of the follwing issues are addressed:
- Loan Terms: The financial loan terms, including principal amount, interest rate, payment date(s), grace period, late charges and the default interest rate.
- Rate Lock: The borrower should negotiate a "rate lock," the lender's promise that the interest rate shall be fixed, provided the loan funds by a specified date.
- Costs and Expenses: All of the costs and expenses the borrower is expected to pay in connection with the loan-approval process should be set forth in the loan application. Depending upon the situation, the borrower may be able to negotiate a cap on the amount of some or all fees and expenses.
- Security/Recourse: In most cases, the facility itself will secure the loan, either by way of mortgage or deed trust. Additionally, the lender may require the owner to assume personal liability for the loan. It is a crucial aspect of the loan negotiations. In many cases, it may be possible to negotiate the personal liability of the business owner for the loan, limiting such recourse to specific situations.
- Loan Assumability/Transfer of Interests: Whether the loan is assumable, or whether the owner is permitted to make certain transfers (i.e., to family members or other investors) should be specifically addressed in the loan application.
- Prepayment Issues: If the lender intends to securitize the loan--and in certain other cases--he may require a prepayment penalty in the event that the loan is paid prior to maturity. In such cases, careful attention must be paid in the loan application as to the terms of the prepayment penalty clause. Consideration must be given to prepayment, not only in the event of a sale or transfer of the facility, but in the event of a casualty that results in the payment of the insurance proceeds.
- Loan-to-Value and Cash-Flow Verification: Inevitably, your loan will be subject to the lender's verification of the loan-to-value ratio of your property and the prospective loan, as well as verification that your facility satisfies the lender's debt-service coverage ratio. The better these members are, the better able you will be to negotiate more favorable loan terms. It is essential that you and your counsel review and understand the formulas used by the lender to determine your facility's loan-to-value ratio and cash flow.
- Insurance and Impound: The lender's requirements for coverage and impounds for taxes and insurance should be spelled out in the loan application. Often times, this aspect of the loan is overlooked, and the borrower receives several nasty surprises in the loan documentation submitted by the lender.
- Supporting Documentation: In order to hold the lender to its obligations under the loan application, particularly in the event that the negotiated and locked interest rate does not change, the borrower should insist that the lender include, as part of the loan application, a detailed list of the documents and conditions that must be satisfied before the lender will issue its loan commitment. This will prevent the lender from later making necessary and unjustified demands for additional documents and/or conditions, as well as from attempting to change the loan terms or simply refusing to fund the loan.
Appraisals & Reports
To the extent possible, the borrower should attempt to negotiate fixed amounts, or at least "cap" the fees to be paid to the various appraisers, engineers and consultants to be employed by the lender. In many cases, it may be possible to participate in the selection of appraisers, engineers and consultants.
Review of Loan Documentation
Congratulations! Your carefully negotiated loan application has been accepted by the lender. The lender and its appraisers, engineers and consultants have verified that your facility meets the lender's qualification requirements; and you and your counsel have received the lender's rather hefty loan package and its voluminous legal documentation.
The package will include your promissory note and the deed, trust or mortgage documents securing the loan. Depending on the nature of the transaction, the package may also include a hazardous substance indemnification agreement, a proposed attorney opinion letter, financing statements and escrow instructions. These documents must be carefully reviewed by an attorney to ensure they comport with the terms of the loan application. Your loan documents will invariably contain a clause that states they are the final agreement of the parties. If there is any variance between the terms of the loan and the terms of your final documentation, the latter will prevail. It is not uncommon for the loan package to vary, by inadvertence or design, from the terms of the loan.