By R.K. Kliebenstein
What should an owner do before refinancing or applying for a construction loan? What are the expectations? Are you ready? This article will help prepare you to work with a lender so he can efficiently process your financing request and make the process as simple as possible.
I remember the days of the dreaded "site inspection" after talking to a client who was clearly not prepared for any audit or examination of his facility. In fact, those transactions went less smoothly because it was obvious funding was going to be an uphill battle, and that much of the work the borrower should have done would have to be done by the lender. In fact, the pricing will usually reflect this added work. I won't go so far as to say that you will always get a reduced interest rate if you make proper preparations for your lender, but I would take a gamble and make the process as efficient and easy as possible.
The Process Begins Before You Make Application
Long before you pick up the phone to inquire about financing, you should be preparing yourself, your store and your records for scrutiny by a lender. Even the most sophisticated of borrowers can be surprised by a lender's needs, and by the fact that the anticipated loan amount is not realistic because of a failure to prepare for the underwriting process.
Site Computer Bookkeeping
A full year before the application, begin a file with clean, crisp printouts from your site computer of the following:
- Rent roll for last day of the month (end of month or EOM): A tenant-by-tenant list, in unit order, accounting for the status of each space.
- Management summary: The EOM report showing the cash, credit and occupancy summary for the month. Make absolutely certain you have monthly amounts collected for the following categories: rent, late fees, security deposits, administrative fees and merchandise sales.
- Unit mix and potential income report: EOM report by size category with the gross potential rent and scheduled rent for each size.
- Occupancy report: EOM report showing by size category the physical occupancy and economic occupancy.
- Accounts receivable or aged receivables report: In two formats, the EOM unit-by-unit listing of tenants and the delinquent or current status, and a summary of the facility's receivables indicating the dollar amount of delinquent tenants for less than 30 days past due, 30 to 60 days delinquent, 60 to 90 days in arrears and more than 90 days past due.
Collect clean, unmarked copies of the following:
- Month end income and expense statement
- Detailed general ledger
- List of accounts payable and receivable
- Bank statements
- Utility bills (last six months)
- Most recent property-tax bill
- Most recent insurance policy
- Competition and rent survey
- Copies of building plans
- Copies of formerly completed appraisals
- Copies of formerly completed property survey
- Copies of formerly completed property environmental reports, including all test results (if any)
Prepare Yourself for the Process
You are likely to have several visitors to the property:
- First, if you are working with a broker or correspondent, it is worth the expense to have them spend (at your cost) a few days understanding your property and the market. This will typically cost $2,500 plus expenses.
- You are likely to have a visit from one or two representatives of the lender. One is likely to be a senior member of the team who will be presenting your deal to the loan committee or investor. The other is likely to be an auditor, who will be examining the records, and taking an in-depth look at the market and property. These visits are often called site inspections and are normally paid for by the borrower from a required deposit.
- There will likely be an environmental consultant who will be interested in the on-site activities (they really get concerned over business activity from tenants, with great attention paid to painters, automotive-related activity and the appearance of prolonged on-site activity). This is normally paid for from the third-party deposit account, funded by the borrower.
- A survey will likely be performed. This may be an update to an existing survey or a new survey. Again, this is normally paid for from the third-party deposit ... Are you beginning to see a trend here?
- Many lenders require a structural or engineering report. These folks will need a set of plans, preferably "as-built."
- Some lenders have third-party auditors examine the books and records. They will need copies of the financial statements, tax returns and bank statements. Make available to them the paid invoices. This cost may be passed through to the borrower.
- Appraisals are often an integral part of the process. I do not suggest ordering one ahead of the lender as not all appraisers are acceptable to all lenders, and sometimes there are in-house appraisers. After the former, you know who is going to pay for this. Make certain the financial statements, building plans, survey and competition study are ready to be shipped to the appraiser.
Treat each of these visitors cordially. If you are working with a correspondent or broker, offer as much information as you can. With each of the other visitors, answer questions as completely as necessary. Be honest. Do not hide the negative facts when asked, but unless it is a material fact, omit the details, particularly opinions or emotional thoughts. Offer to spend the time they need, but let them work independently. Inform your staff to answer questions that are asked. Again, dispense with nonfactual comments. If you do not know an answer, do not make something up. Simply admit you do not know and, if you think you know how to find an answer, volunteer to find out. If you have no idea how to get the answer or do not want to take the time to investigate further, do not commit to getting the information.
Here is an example: The visitor asks, "What percent of your tenants are business (not residential consumers)?" How do you respond? A guess? Go to the rent roll and count each of the names that are business names? How do you account for business units that are rented in a person's name, but are actually used for the sole purpose of business storage? How do you accurately assess space that is part business and part personal storage? In my personal storage units, I would guess that 80 percent of the junk (and I do mean junk) stored is old business records or materials, but my space is listed under my personal name. It is tempting to say, "Most of my customers are businesses," but if you cannot back it up with factual data, it may be an inaccurate statement.
If you do not have or cannot generate a detailed competition survey and market study, then pay to have one done. You can use consulting firms, or often real-estate appraisers who specialize in self-storage projects. The cost is usually around $2,000 to $2,500 and should include maps of each competitor, color photographs, rates and an evaluation of each property. The survey should address occupancy, the number of units and square footage.
Prepare the Property for Inspection
This is a great opportunity to give the place a little facelift. Make certain that the landscape is fresh, bare spots in the grass patched and that everything is clean. If you cannot afford to repair or replace it, make certain it is at least clean.
- All signs should be computer-generated or printed. There should be no handwritten signs inside or outside the office.
- The managers' personal effects are not appropriate for the view of customers or visitors.
- Clean up the office. Get rid of dead files and broken furniture.
- Clean all glass and windows (remember the glass on the fire extinguisher covers).
- There is no place for a television in the office. Watching Days of Our Lives during business hours is an absolute sign of unprofessional management.
- If you cannot repair or replace broken equipment or fixtures, then have at least three estimates from solid contractors to present to the lender for completion after funding. Prepare for large expenses such as roofs, paving or major repairs--an escrow account may be established to make certain these are done as a condition of the loan. If you do not want the lender to make his own estimates (and I can almost guarantee they will be high), then have the three estimates or proposals ready.
- Patch holes in the driveway smaller than one foot in diameter.
- If you can paint it, do so. A fresh coat of paint shows attention to detail.
- Let the correspondent or broker make suggestions on what can be done to make the property look better. Remember, after something is 90 days old, it is typically out of our eye to memory processing.
- Pets are great and sometimes cute, but they have no place in a professional office.
- Children of customers are enough to deal with. The owner's or manager's children should simply not be a part of the daily activity of the property. Their safety is much too important to risk them being hit by a car in the parking lot or being a nuisance in the office.
Only you can control the presentation of the property. Remember, you only get one chance to make a first impression. Consider a lender as a silent partner. Treat them as though they are making a direct investment in your property. Be informed about your property, the competitors and the neighborhood. Do you see new construction within a half-mile of the property? If it is not obvious what the construction is for, take the time to find out. Visit the local chamber of commerce (of course, you are an active member and your manager has attended the last three meetings), and get the inside scoop on new businesses to the area. Doing your homework, though it can be tedious, will more than pay off in the end.
R.K. Kliebenstein is president of Coast-To-Coast Storage, which provides construction financing and refinancing for quality self-storage projects, as well as feasibility and market studies for new and existing facilities. Mr. Kliebenstein can be reached at his South Florida office at (877) 622-5508 (toll-free) or visit www.self-storagemortgage.com, www.askRK.com or www.realestateinvestor.org.