If Your Swim Trunks are Lacking
If after completing the stressed constant sizing analysis you feel your deal may be overleveraged, here are some useful suggestions. These tips are offered with the caveat that, at the time of this writing, there is no Congressional guidance requiring banks to work with borrowers on their overleveraged commercial loans, unlike in the residential mortgage market.
Be proactive. If you have a loan coming due in 12 to 24 months, be proactive and consider approaching the market now. Even if your existing rate is lower than rates available, it is possible this economy could create a declining trend in your operation and cash flow over the near term ... and that will be a harder story to tell when property refinancing time arrives. If 2008 was a strong year for your property, tell that story now to lenders to capitalize on these results.
Get started sooner rather than later. Don’t wait until the last minute to approach your bank about a storage loan coming due. Regardless of whether you think there might be a problem, meet with your bank or mortgage broker as early as possible to discuss the situation in greater detail. Deals are typically taking longer to complete in this market. Time can be a great asset, particularly when working on transactions with challenges. You can often ferret out those challenges by strategizing with a professional on how to improve the situation in the loan’s remaining time.
Develop equity shortfall alternatives. If you think there might be an equity gap in the transaction, start working now to develop some options. Lining up equity investors can be a tedious and time-consuming process, and if you wait until you are out of time, your negotiating position may be compromised. More important, equity is an expensive alternative. Depending on the situation and the time remaining, you may be able to sweep excess cash flow and accumulate funds to help bridge the gap. Recognizing the problem and developing an action plan are half the battle.
Consider loan workouts and modifications. Some banks will be forced to extend or restructure their overleveraged loans, but will likely do so unwillingly and with penalty. Proactive customers who can demonstrate a clear track record of diligent effort in attempting to refinance a loan will have the upper hand.
If you can demonstrate to the bank that you have worked with a broker or actively marketed the deal but are unable to find a workable solution, it will go a long way toward getting the lender to recognize the problem and cooperate on a workable solution. Alternatively, those who wait until the last minute and throw their arms up are more likely to find a lender with little, if any, sympathy.
With the passage of President Obama’s economic-stimulus package, many are once again cautiously optimistic that the worst is behind us. Let’s hope that is the case. But in the meantime, you might want to do a little homework to determine if you’ve brought your swimming trunks along for the dip.
Shawn Hill is a principal of Chicago-based The BSC Group, where he provides brokerage and financial consultating solutions to self-storage and other commercial real estate nationwide. He is a former senior vice president with Beacon Realty Capital. He can be reached at 773.517.8504; e-mail firstname.lastname@example.org.