This analysis will include an in-depth review of your net worth and liquidity to determine your ability to repay your “other” liabilities and what capacity is left to service the prospective loan. This presents you and your partners with a decision outside the simple “who is willing and has the wherewithal to sign the required personal recourse guarantee.” There is also now the question of who has the borrowing capacity.
Many times in this market, the lender will simplify the process by requiring all the property’s owners to sign recourse in an effort to ensure they will be repaid. But before you put your name on the dotted line, keep in mind that with many loans being modified and extended in today’s credit crunch, more than likely, recourse will come into play. As an owner, you’ll need to believe in the property and the ultimate ability to refinance it.
What types of lenders look at global cash flow? The quick answer is all types. In today’s credit environment, even non-recourse lenders want to ensure the borrower has the wherewithal to pay on all of his obligations and “other liabilities” will not bring down its freshly minted loan on your property. In addition, it’s important that a borrower have some liquidity, even after the proposed transaction is completed, to ensure there are funds available in the event an unforeseen occurrence resulting in a capital call.
Preparing for an Upcoming Financing
As for all transactions, it’s best to start by getting all of the required documentation in order. To that end, you should prepare an updated and accurate personal financial statement. If you need a guide, the SBA has a personal financial form on its website that most banks will accept. Gather the past three years of tax returns, for personal income and all businesses, including but not limited to real estate investments. Finally, make sure you have a current profit-and-loss statement for the property you are financing as well as any other properties you may own.
In the interim, do not take on any additional liabilities prior to your refinance; this would include buying a new car, house, etc. It’s important to have some free cash available for the refinance, so it’s best to limit any large discretionary transactions that will require cash until after you close on the loan. Again, lenders will want to see you have some liquid funds on hand, not to mention a refinance will cost several thousand dollars, some of which will be required in the process of the transaction prior to closing.
Lastly, start the process early. A typical financing transaction takes longer to complete in this market, and borrowers should leave ample time (more than 90 days) from start to finish.
The bottom line is borrowers should put themselves in their lender’s shoes and anticipate what the concerns will be on their global cash flow. One of the keys to obtaining financing in today’s market is preparation and expectation. A borrower who understands what his lender will be looking for can analyze his situation and prepare a loan package that clearly tells the story and preemptively addresses any concerns the lender may have. When in doubt, remember the six Ps of success: proper prior preparation prevents poor performance.
Noel Cain is a vice president at The BSC Group, where he provides mortgage brokerage, financial consulting, and loan-workout solutions to self-storage real estate owners nationwide. To reach him, call 847.778.4661 or e-mail firstname.lastname@example.org .