Understanding the Underwriting Process
Once you’ve executed the loan application and posted the good-faith deposit, the lender will start the underwriting process. It’s very important at this stage to focus on two objectives. The first is to know who the lender is hiring to complete the third-party reports, including the environmental phase I report, property-condition report, seismic report and appraisal. The companies should be well-respected among their peer groups. When it comes to the appraiser, he should also have a strong understanding of self-storage.
It’s important to meet each of these vendors at your property when they conduct their site inspection so you can answer all their questions. You never know what they’ll conclude if left to their own assumptions. It’s much easier to convince the person preparing the property-condition report that the roof is in good shape while he’s on site then to argue with him once he’s completed his report.
It’s also extremely important that during the due-diligence stage you’re in constant communication with the lender’s underwriter. This is the person who will be completing the underwriting and sizing your loan for approval with the credit committee. Always keep good records so you can provide the underwriter historical non-recurring and non-property-related expenses that will help him maximize your NOI.
Closing the Loan
Upon loan approval, you’ll enter the legal-documentation stage. The key here is to have counsel who understands the documents being prepared by the lender. Whether it’s a CMBS, bank or insurance-company loan, make sure your counsel is familiar with what’s standard and what’s open for negotiation.
Finally, the most important point to realize in the loan process is your loan is subject to change until it’s officially approved. This is nothing new, but in today’s volatile environment, there’s much more that can go wrong. In addition to issues arising such as environment findings, missed appraisals and credit concerns, you can be subject to the whims of the overall capital markets.
The markets are volatile, and some lenders have clauses in their loan applications known as MAC (material adverse change). Basically this clause provides the lender with an out in the event the capital markets change and impact its profitability. This is a serious risk in today’s capital market, so it’s always good to have an alternative lending option identified up until the day you actually close your loan.
At the end of the day, the good news is the risk and effort associated with the loan process in today’s market still results in historically low interest rates.
Eric Snyder is a principal of Talonvest Capital, which provides debt and equity to self-storage owners nationwide. He can be reached at 949.636.3365; e-mail firstname.lastname@example.org ; visit www.talonvest.com .