Money Matters Made Easy

From construction loans to refinance, this easy-reference guide will lead you through the process and help you negotiate the twists and turns of banking.

Structure Your Deal

Understand the type of loan you are seeking. Different kinds of loans mandate unique requirements of the borrower.

A&D Loan (Vacant Land): Fairly uncommon, this loan is typically used to purchase a parcel and obtain the necessary approvals for development. This may be to simply obtain zoning or carry the property through to receiving permits. The leverage is usually around 50 percent, and interest rates are commensurate with risk. This type of financing is usually provided by banks or hard-money lenders (private individuals and small, local lending sources). The loan generally covers:

  • Land costs
  • Zoning costs
  • Interest carry
  • Due-diligence costs (survey, phase I environmental site assessments, wetland delineation, soil tests, architect and engineering-professional fees)
  • Plans
  • Permit costs
  • Closing costs

Construction Loan: The most common loan for developing a self-storage property. The loan may be used to acquire the land or develop and construct the buildings for a parcel already owned by the developer. This loan should be for 24 to 36 months, with the ability to renew six-month extensions at least twice. The most common mistake developers make is requesting too short of a construction loan, and bankers unfamiliar with self-storage will enable a potential problem by granting it. Typical leverage is around 70 percent of cost. This is a relationship loan best served by a local bank. This loan covers:

  • Land acquisition
  • Soft costs
  • A&D costs (see "A&D Loan" above)
  • Entitlements to permit costs and fees
  • Interest carry
  • Operational deficits
  • Hard costs
  • Startup costs (marketing and management)
  • Furniture, fixtures and equipment (phones, fax machines, copiers, printers, computers, golf carts, hall carts)
  • On-site signage
  • Course-of-construction insurance
  • Construction contingency
  • Construction/lease-up real estate taxes
  • Partnership legal fees
  • Developers fees
  • Loan fees

Mini-Perms: The preferred choice of self-storage developers. This is a combination of a construction and permanent loan, which starts out as an interest-only loan and, at stabilization, converts to an amortizing loan. This loan is usually 48 to 60 months in length and is best for most developers. Typically a full-recourse loan, strong borrowers may be able to negotiate partial releases as debt- service-coverage targets are achieved. The loan covers A&D, "A to Z" construction and startup costs.

Take-out or Stand-By Loan: Not a very common type of financing and usually expensive. This loan is generally required by construction lenders that do not understand the industry, so they protect themselves with a commitment from another lender to refinance your construction loan when certain occupancy (physical or economic) targets are achieved. Usually granted by mortgage lenders or credit companies, these can be expensive and are rarely actually funded.

Permanent Loan: This usually pays off the construction loan. Typically, a long-term loan of five to 10 years, this can be with or without the personal guarantees of the borrower. Amortization periods are usually 20 to 25 years with a balloon, or self-amortizing for 15 years. These can be conduit or portfolio loans (see below).

Conduit Loan: Also known as securitized loans, these loans are bundled or pooled together and sold to bond-holders. Conduit loans are typically nonrecourse, meaning they have no personal guarantees. They have significant prepayment penalties and lock-outs (periods of time when you cannot prepay). They also have inflexible documentation, higher leverage and due-diligence costs, and can be expensive to close.

Portfolio Loan: Loans not usually sold but held by the financial institution. Portfolio loans usually require guarantees, and the borrower is heavily weighed in the loan-granting process. Often relationship-driven, these loans are flexible, with lower due-diligence, closing and legal costs.

Refinance Loan: This loan can generally meet the requirements and parameters of the permanent loan. It also may be used to recapture equity or simply pay off a loan that has matured.

Bridge Loan: The bridge or acquisition loan is usually an expensive, short-term loan used to close on transactions quickly. With a duration almost always three years or less, the bridge is sometimes a temporary loan used to pay off a construction loan that was too short. It may also be used or for the purchase of an existing store that will increase in value as the result of a change in management or the addition of square footage. This is typically an expensive loan.

Mezzanine Financing: This loan is sought by individuals short on providing the equity requirement of any of the former loan types. It is often an expensive loan, and the lender generally participates in the cash flows of the property. It usually requires some type of personal guarantee by the developer or owner.

Line of Credit: The line of credit usually is for experienced developers or multistore owners and is often cross-collateralized and cross-defaulted with many properties. It is typically used for very short-term borrowings, and may require personal guarantees. Frequently used for multistore deals, it is a quick, inexpensive way to acquire properties for A&D, or to take advantage of distressed sales or short-term due-diligence periods sellers may require.

Select Your Lender

Each lender makes different kinds of loans and has unique requirements of the borrower. It is important you make a wise choice and understand what is expected of you. Here are the various lender classifications:

Banks: These are usually local, relationship-driven lenders. Most all require personal guarantees of the borrower and are typically portfolio lenders. As conservative, short-term lenders, banks are one of the most inexpensive sources of capital, and are generally not used for "mega-loans." Banks have fairly flexible pricing and terms, but have strict regulation over third-party reports and requirements.

Credit Companies: A little higher priced than other types of lenders, the credit company can be the most flexible in customizing loans to meet the borrower's specific needs. While they are bridge or A&D lenders, credit companies can also be portfolio or conduit lenders. With more complex loans or less qualified borrowers, credit companies may require recourse (for at least a portion of the loan).

Hard-Money Lenders: Flexible but very expensive, hard-money lenders are used for interim financing and borrowers who may have credit issues. These lenders are known for quick closings (sometimes less than two weeks), and their pricing is reflective of the level of risk. Loan-to-value ratios are fairly conservative, in the 50 percent to 60 percent range. Expect not only a high interest rate, but high points for the origination.

Investment Banks: Almost always conduit lenders, these can function as interim lenders for large transactions. Almost always, they are nonrecourse lenders and have very strict underwriting requirements.

Leasing Companies: A relatively new source of financing for self-storage projects, leasing companies can finance the purchase of buildings, construction and equipment. These lenders are interested in smaller transactions. High levels of leverage and long-term loans are common characteristics.

Life Companies: Usually reserved for larger, high-quality properties, life-insurance companies will offer some of the best rates at moderately conservative levels of leverage. Sometimes very particular about the strengths of the borrower, most life companies have fairly strict policies, and many do not understand self-storage projects.

Loan or Mortgage Brokers: Flexible in assisting you find the best deal or the one that most suits your needs, brokers are not usually lenders but intermediaries working on your behalf. If a broker is an exclusive correspondent, he may be the only way to access a particular lender (such as a life company). Borrowers are encouraged to work with brokers experienced in self-storage loans. The broker can assist you in packaging your loan most expedient presentation to lenders and may work with banks.

Private-Money Lenders: These are very flexible and very expensive sources of capital. Usually reserved as the last resort for capital (just behind hard-money lenders), private lenders have almost no regulations for lending and are often unlicensed. They can, however, be terrific sources for difficult transactions.

The Loan Application

You will need to put together a sound loan package. The quality of your presentation can make a huge difference in the processing of your loan. Make certain you can answer all the questions the lender asks, and be prepared to provide supporting documentation. Do your homework well ahead of time.

One of the most critical elements is the loan request or executive summary. This document should be very succinct and yet comprehensive enough to cover all of the salient facts of the loan. Know what the lender's approximate loan terms are, and make your request conform to its requirements.

If you know the lender will not lend at par (no points), do not request one. Before you submit your request, understand the underwriting requirements of the lender. If you know the advance rate, or loan-to-value, is at a maximum of 75 percent, do not try for an 80 percent loan. Save your negotiating power for the most critical of elements, such as rates and terms.

The executive summary or loan request should be a "pull-out" or stand-alone document so it may be easily copied. It should be provided in digital and hard-copy format. It should contain:

Loan-Request Essentials

  • Loan amount
  • Length of loan
  • Amortization
  • Interest rate
  • Loan-maturity date
  • Index
  • Margin
  • Name, address and type of borrowing entity
  • Where, how and date the entity was formed/documented
  • Contact name and information
  • Principals (more than 20 percent interest)--names and contact information
  • Principals--net worth and income (each and total)
  • Exit strategy or take-out
  • Names and contact information: loan broker, real estate broker, developer, contractor, engineer, architect, attorney, property manager
  • Costs (land, soft, hard, carry) as a percent of total loan
  • Loan-to-value
  • Loan-to-cost
  • Debt-to-equity
  • Loan per gross square foot
  • Loan per net-rentable square foot
  • Annual cash-flow summary: income, expense, net operating income, debt service, net cash flows
  • Annual cash flows as a percent of revenue and per-square-foot net-rentable
  • Investment analytics: cash-on-cash returns, IRRs, developer's yield
  • Cash-flow projections to stabilization
  • Complete construction costs

Organize all of the supporting information for your loan request. These documents prove everything in your executive summary. The information should be indexed and tabbed for easy reference. It should be separate from, but include a copy of, the executive summary.

Construction-Loan Support Documents

  • Résumé or corporate dossier
  • Financial statement
  • Tax returns (three years)
  • Articles of incorporation or partnership docs
  • Fictitious-name registration
  • Trade-name registration
  • Feasibility study (complete)
  • Construction contract
  • Construction costs (detailed, preferred on AIA form)
  • Construction-company resume
  • Three sets of plans (stamped)
  • Draw schedule
  • Property-tax bill (paid)
  • Purchase agreement on land
  • Survey (ALTA)
  • Environmental reports
  • Soil report
  • Statement from engineer on technical needs
  • Management plan
  • Marketing plan
  • Management-company résumé
  • Month-by-month, pro forma operating statements with cash flows (five years)

Permanent or Refinance Loan-Support Documents

  • Résumé or corporate dossier
  • Financial statement
  • Tax returns (three years)
  • Articles of incorporation or partnership docs
  • Fictitious-name registration
  • Trade-name registration
  • Survey (ALTA)
  • Environmental reports
  • Certificate of occupancy
  • Business license
  • Management plan
  • Marketing plan
  • Management-company resume
  • Description of the property
  • Description of current operations
  • Complete market survey (maps, photos and rates of competitors, demographics, traffic counts, photos of property)
  • Year-end income and expense statements (three years)
  • Year-end rent rolls (three years)
  • Year-end potential-income reports and management summary (three years)
  • 12-month pro forma income and expense statement
  • Source and use of funds
  • Accounts-payable schedule
  • Accounts-receivable schedule
  • Occupancy history (three years)
  • Rental-rate history (three years)
  • Month-by-month income and expense statements (12 months)
  • Month-by-month potential income reports and management summary (12 months)
  • Yellow Pages bill and contract
  • Insurance bill and policy-declarations page
  • Property-tax bill (paid)
  • On-site manager resume

Following these guidelines can help you to obtain financing under the best circumstances. The best loan is one that meets your needs. Be prepared and focused, and show the financier you are on his team by responding quickly to questions and requests.

RK Kliebenstein is the founder and president of Coast-To-Coast Storage, a licensed mortgage-brokerage business based in Florida. Mr. Kliebenstein has provided financing clients across the country and is working on an equity placement in Europe for a U.S. investor. He is a well-known industry author, speaker and consultant. For more information, call 877.622.5508; visit

Glossary of Financial Terms

AMORTIZATION--A method of debt reduction in which a borrower pays off a portion of the interest and principal periodically. Amortization numbers are found on balance sheets.

AMORTIZED LOAN--A loan repaid in a series of installments, each of which contains a portion applied to principal and interest. As time goes on, each successive payment allocates a larger portion to principal reduction and a smaller portion to interest payment until the outstanding balance is zero.

ANNUAL CAP--The maximum amount the interest on an adjustable-rate mortgage can be raised or lowered in the course of a 12-month period.

ANNUAL PERCENTAGE RATE (APR)--A more precise description of the cost of money, which reflects not only the actual interest rate but the cost of certain expenses charged as part of the process of obtaining the loan. The actual items calculated into the APR are determined by the federal government.

BALANCE SHEET--A financial statement that includes a company's assets and liabilities.

BALLOON PAYMENT--An installment payment that is larger (often much larger) than other scheduled payments, usually the last payment on a loan.

BLANKET MORTGAGE--A single mortgage that attaches to more than one property.

BROKER--An individual who acts as an intermediary between two or more parties for the purpose of negotiating a transaction. In lending, the broker arranges and negotiates loan amounts, interest rates and loan terms between borrowers and lenders. Depending on the type of loan, the state in which the transaction occurs and contractual arrangements, the broker may represent the borrower, the lender or not have a fiduciary responsibility to either. (See "Fiduciary Responsibility.")

BUY DOWN--A payment of discount points in exchange for a lower rate of interest. (See "Discount Points.")

CAPITAL ASSETS--Also called fixed assets. Tangible items used in the operation of a business but not consumed in the course of that operation. (Some examples include a company's buildings or the machinery with which a product is made.)

CARVE-OUTS--Potential liabilities exempt from the normal nonrecourse or personal guarantees. These often include (but are not limited to) fraud and environmental liabilities.

CASH FLOW--A measurement of the money going into and coming out of a company. If a company has negative cash flow, it must borrow money to operate its business. If it has positive cash flow, it has money to spend. The cash-flow statement frequently appears at the end of a financial statement.

CASH OUT--Cash given to the borrower from the proceeds of a loan. While relatively common as part of a refinance, it is uncommon as a benefit of nonconforming loans used for a purchase.

CLOSING--The formal meeting where loan documents are signed and funds disbursed.

CLOSING COSTS--The expenses borrowers incur to complete the loan transaction. These costs may include title searches, title insurance, closing fees, recording fees, processing fees and other charges.

COLLATERAL--Assets held to secure an obligation.

COMBINED LOAN-TO-VALUE (CLTV)--The total of all loans relative to the value of the property. If a property has a value of $100,000 and three loans totaling $125,000, the CLTV is 125 percent ($125,000 / $100,000).

COMMITMENT--The notification that a lender has approved a loan. Virtually all commitments are issued conditionally; that is, subject to some list of conditions that must be satisfied prior to funding actually taking place. Typical conditions include appraisals of a certain value, clean title, verification of representations by the borrower, etc.

CONDUIT--An entity that issues mortgage-backed securities supported by mortgages originated by other lenders.

CREDIT SCORE--A number that indicates an individual's creditworthiness. Credit bureaus determine the score with a statistical program. You are given points for such things as credit-card debt, number of cards, total debt level, and whether you rent or own a own home. Creditors use the score to decide whether to give you a mortgage, issue a credit card or offer a small-business loan.

DEBT-EQUITY RATIO--The ratio of a company's liabilities to its equity (total value of stock). Long-term debt-to-equity is the ratio of a company's long-term liabilities (debt that won't be paid off in one year) to its equity. Total debt-to-equity is the ratio of a company's long-term and current liabilities (debt that will be paid off in one year) to its equity. The higher the level of debt, the more important it is for a company to have positive earnings and steady cash flow. (See also "Debt-Assets Ratio.")

DEBT-SERVICE COVERAGE (DSC) OR DEBT-COVERAGE RATIO (DCR)--A ratio used in underwriting loans for income- producing property that is created by dividing net-operating income by total debt service. Ratios of at least 1.20 are generally required, with ratios of 1.30 and higher considered the norm.

DEPRECIATION--The allocation of costs over the depreciable life of an asset. Companies can use various forms of accepted accounting practices to amortize fixed assets over a certain time period.

DISCOUNT POINTS--One point equals one percent of the loan amount. Paying points has the effect of giving the lender a higher yield.

DUE DILIGENCE--The act of carefully reviewing, checking and verifying all facts and issues before proceeding with a loan. In lending it is, among other things, verification of employment, income and savings; review of the appraisal; credit report; and status of the title.

EQUITY--Ownership. When you own part of something, you have equity in it. For example, when you own 3,000 shares of a company's stock, that is your equity in the corporation. In the case of real estate, your home equity equals your down payment plus any principal paid on the mortgage.

EXIT STRATEGY--The process by which an owner or investor liquidates his ownership in a business or real estate investment (also known as "disposition").

FEE AGREEMENT--An agreement between a borrower and broker that normally specifies their relationship and the amount of compensation to the broker.

FIDUCIARY RESPONSIBILITY--An obligation to act in the best interest of another party. This type of obligation typically exists when one person places special trust and confidence in another and that responsibility is accepted.

FEDERAL RESERVE BOARD--The central bank of the United States. Founded by Congress in 1913, the "Fed" is responsible for maintaining the stability of the U.S. economy. Its duties include balancing the supply of money and credit, regulating the banking system, and providing financial services to banks and the U.S. government.

HARD-MONEY LOAN--A loan underwritten with the condition and value of the property as the primary criteria for approval. Secondary issues may include the credit of the borrower, the ability of the borrower to repay the loan and/or the ability of the borrower to manage or successfully sell the property.

INDEX--The published cost of money that serves as the minimum basis for determining the interest rate for an adjustable-rate mortgage. Among the commonly used indices are the prime rate, the London Interbank Offering Rate (LIBOR), the Cost of Funds (COF) and the one-year Treasury Bill.

INTEREST RATE--The percentage of the loan amount charged for borrowing money; i.e., the cost of the money expressed as a percentage. The interest rate of a loan is determined by adding a margin to the index. The size of the margin is typically a function of the index used and the credit worthiness of the borrower.

LIABILITY--Any legally enforceable obligation.

LIMITED LIABILITY COMPANY (LLC)--A business structured so its owners are not personally liable for debts or other business liabilities, such as damages from lawsuits. LLCs are taxed similarly to partnerships, thus avoiding double taxation.

LOAN-TO-VALUE (LTV)--The ratio of the size of the loan to the value of the property. If the loan is $80,000 and the value of the property is $100,000, the LTV is 80 percent ($80,000 / $100,000).

LOAN PACKAGE--The organized group of documents that contains all of the information required to obtain an underwriting decision of loan approval or denial. (See "Underwriting.")

MARGIN--A constant (fixed) amount over an index that determines a lender's yield on an adjustable-rate loan. The interest rate is determined by adding a margin to an index. The size of the margin is typically a function of the index used and the credit-worthiness of the borrower.

MATURITY--The date when a loan's principal becomes due and payable.

NET-OPERATING INCOME (NOI)--From income-producing property, the gross income minus the total of all expenses except for debt service. Cash flow is defined as NOI minus the total of all debt-service payments.

NET WORTH--Also called net assets. The difference between the total value of your assets and liabilities. For a corporation, net worth (or stockholder's equity) is the amount by which the corporation's total assets exceed its total liabilities on the balance sheet.

NONDISCLOSURE AGREEMENT-- A legal document in which the person signing agrees to refrain from disclosing proprietary and confidential information.

NONRECOURSE--Elimination of recourse or personal guarantee for an obligation. (See "Carve-Outs.")

ORIGINATION FEE--A fee paid to a broker or lender for originating a loan. It may be the only compensation for their work in arranging and/or processing the loan, or it may be only a portion. Not every loan has an origination fee.

PAR LOAN--No origination or discount fees--no points.

PORTFOLIO LOAN--A nonconforming loan held by the original lender rather than being sold on the secondary market.

PREPAYMENT PENALTY--A fee charged for paying off a loan within a relatively short period of time after the loan has closed. This provision is currently found only in nonconforming products. The time period during which it applies is usually one to three years and the amount of the penalty is usually 1 percent to 3 percent of the original loan amount.

PRIME RATE--The interest rate banks use in pricing loans to their most credit- worthy customers.

PRINCIPAL--The amount of money put into an investment.

QUICK RATIO--A measure of a company's ability to meet its short-term financial obligations with its liquid assets. To determine the quick ratio, the company's liquid current assets are divided by its current liabilities. In general, a healthy company should have a quick ratio of at least 1.0.

REAL ESTATE INVESTMENT TRUST (REIT)--A fund that holds real estate or mortgages. REITs issue shares that trade on stock exchanges like shares of common stock. There are three types of REITs: mortgage REITs that invest primarily in real estate debt such as mortgages; equity REITs that primarily own real estate; and hybrid REITs that are a combination of the two.

RECOURSE--The personal guarantee of the borrower.

RETURN--The profit earned on an investment, usually expressed as an annual percentage rate.

UNDERWRITING--The act of applying formal guidelines that provide qualitative and quantitative standards for determining whether a loan should be approved.

VENTURE CAPITAL--A mid- to long-term startup or expansion loan extended to a growing business in exchange for equity. Because the market potential of these companies is frequently disproportionate to tangible assets or other collateral, standard bank financing is often unavailable to them. This has given rise to venture-capital companies trained to evaluate long-term potential and find new or growing companies in which to invest.

YIELD MAINTENANCE--A term in prepayment clauses that ensures the lender/investor/bond holder accrues no loss in revenues (interest payments from the borrower) as a result of an early payoff. Often tied to the index.

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