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Are repairs scheduled for the near future? Can they wait until after the refinance without diminishing the property’s value? Are there any one-time purchases that can wait until the refinance is complete?
There’s a great reason to wait, if possible. Lenders don’t want to take one-time expenses out of the trailing 12 months of expenses. In fact, the lender may not want to take them out of the expense side of the underwriting, thus your NOI will be less, which will equal less loan proceeds. In the current lending environment, the lack of loan proceeds is a major issue for many borrowers.
Another note of caution is how owners repot their salary. Many storage owners/operators typically pay themselves more than the average self-storage manager. The higher the salary expense is on the profit and loss (P&L) statement, the lower the NOI. A preferred accounting practice would be to exclude an owner’s salary from the manager’s salary on the P&L. Having a separate line item makes it easier for a lender to say the owners are taking a distribution of the profit, thus not counting it on the expenses. Since most lenders will include 5 percent to 6 percent management-fee expenses in the underwriting, an owner/operator could also code owner’s pay to the management fee if there’s no third-party management company.
Timeframe and Document Gathering
Commercial loans today can take anywhere from 60 to 120 days for a conventional lender or up to five months for the Small Business Administration. This time period starts after a lender has completely underwritten the loan request. Based on how many owners/partners there are with more than 20 percent of the property, the lender will require time for collecting information on all the borrowers in the case of a recourse loan. If the property qualifies for a non-recourse loan, the lender will focus more heavily on the property’s numbers and secondarily on the borrowers.
In both cases, year-to-date P&Ls along with the prior two years P&Ls, current rent roll and occupancy/management summary reports must be available. A current personal financial statement is also required by most lenders since they’re concerned about the borrower having another income or net worth to support the property in the event something happens to the income stream.
Ducks in a Row
In the months prior to submitting financials to a lender or mortgage broker, getting every penny in the door is crucial to the NOI. Past-due accounts can help boost that number. Have the property manager embark on a collection campaign to bring in every last dollar. This could mean the difference in having a $34,000 per month revenue stream vs. $30,000. That’s $4,000 additional NOI. If the NOI increased from $300,000 to $304,000, with an 8 percent cap rate on the property and 70 percent loan-to-value, that would equal $35,000 of additional loan proceeds.
By starting early and creating a seamless loan package of financial documents and the pertinent information required, the borrower will show the lender that he is serious about his business. These little efforts could be the difference between obtaining a refinance or not. Too bad they didn’t offer a merit badge for “loan preparation” when I was a Boy Scout, only for fun things like canoeing, skiing or hiking. Those were the good old days!
David Zorich is a senior vice president with The BSC Group, a Chicago-based firm that arranges debt and equity financing for self-storage and other commercial real estate investments nationwide. He can be reached at 800.605.7880; visit www.thebscgroup.com.