By Noel Cain
So you have decided it’s time to refinance your self-storage property. Maybe your construction loan is maturing, or perhaps you just want to take advantage of the currently favorable interest-rate environment. Most financial experts agree that 2011 looks to be much more active for commercial real estate lenders than the past few years. Not to mention a number of new sources including commercial mortgage backed securities and Small Business Administration lenders have jumped into the self-storage finance arena.
While you might know that lenders will underwrite an asset’s cash flow and its ability to cover expenses and debt service, you may not be aware that lenders will spend just as much or more time focusing on your personal ability to cover liabilities―business or otherwise. Lenders call this underwriting the “global cash flow.” Not only is it important to get your property financials in order, you need to pay attention to and organize your personal finances.
Let’s examine in closer detail this concept of global cash flow and what you can do to be prepared when dealing with lenders.
What Is It?
Global cash flow is a borrower’s net cash flow from all sources of income, less all expenses and interest, both personal and business. Lenders include income from employment, dividends, businesses and real estate. As part of their due diligence, they will likely require both a personal financial statement and multiple years of tax returns to document all sources of income. Expenses will include all business as well as personal operating costs, including personal debt such as home mortgages, credit cards and auto loans. To document the expense side of the global cash flow, lenders will again use tax returns to capture all business expenses, and will also run a credit report to capture any business and personal debts.
The Impact of Other Real Estate Holdings
Much of the global cash flow underwriting process will be spent understanding your other real estate holdings and their financial implications. Lenders will require a schedule of real estate owned, which will summarize holdings and their net income. You should anticipate this schedule to include detailed cash flows and a summary of debt terms for of all the properties in your portfolio, including those for which you may be a limited partner. The lender will underwrite each property focusing on the ability of its cash flow to cover its respective debt service. The goal of this analysis is to determine what your total cash obligations are outside of the subject loan.
To the extent there are properties in your portfolio that do not cover their own debt service, lenders will want to know if there is a loan structure in place (i.e., interest reserves, etc.) to cover those deficits. In the absence of such structure, they will focus on how you propose to cover that shortfall and how long it can be supported. In some cases, excess cash from other properties may be a reasonable explanation; however, if the investor groups are different―which limits disbursements―then cash from other sources will need to be available.
What Lenders Seek
In conducting this extensive analysis, lenders are looking to determine that a positive global cash flow exists, typically with an income to expense ratio of 1.25 to 1. They are also analyzing all of your current recourse obligations to determine the extent of your contingent liabilities.