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Refinancing Your Facility

November 1, 2000

6 Min Read
Refinancing Your Facility

Refinancing Your Facility

Let the borrower beware

By Scott Lee Shabel

Inthis booming economy, you may be interested in refinancing the debt on yourself-storage facility. If you are fortunate, you have contacted one of thehandful of mortgage brokers who specialize in refinancing loans to self-storageoperators.

Your first concern, of course, is: What interest rate is being offered? Andwhat are the repayment terms? Can you get cash out of the loan? How can youqualify for the loan? These basic loan considerations should only be thebeginning of your inquiry. Once you have approved the basic financial terms ofyour loan, you (and, hopefully, your attorney) will receive a rather voluminousloan package, containing numerous documents drafted by the lender'ssophisticated attorneys. These documents contain many traps for the unwaryborrower. Buried deep in this documentation are hidden features and charges, aswell as restrictions on the manner in which you may conduct your business duringthe term of the loan.

Even if you consulted with a loan broker to obtain your refinancing loan,remember that he is usually working for the lender and receives his commissiononly if the transaction is consummated. The broker may not be motivated tonegotiate on your behalf with respect to these hidden fees and charges, or thelegal pitfalls in the loan documentation. The following is intended toconstitute an overview of a typical refinancing loan. It is not--and should notbe construed as--legal advice for your particular situation. You can consultwith an attorney to assist you in understanding and negotiating the terms ofyour particular loan.

Your Loan Application

The first step in obtaining your refinancing loan, whether through a brokeror directly with a lender, is a submission of your loan application. Warning:This is the most important document in your loan transaction. It is also themost often overlooked. The loan application may be presented to you as a mereformality, but its language--more importantly, what is missing from theapplication--may serve to undo much of what the borrower seeks to accomplishwith the loan.

The borrower is generally required to invest significant sums of money at thetime the loan application is submitted, including the expense of appraisals,engineering reports and environmental studies. These expenses can often run tensof thousands of dollars. Before committing this money and submitting your loanapplication, you and your counsel must be sure that all of the follwing issuesare addressed:

  • Loan Terms: The financial loan terms, including principal amount, interest rate, payment date(s), grace period, late charges and the default interest rate.

  • Rate Lock: The borrower should negotiate a "rate lock," the lender's promise that the interest rate shall be fixed, provided the loan funds by a specified date.

  • Costs and Expenses: All of the costs and expenses the borrower is expected to pay in connection with the loan-approval process should be set forth in the loan application. Depending upon the situation, the borrower may be able to negotiate a cap on the amount of some or all fees and expenses.

  • Security/Recourse: In most cases, the facility itself will secure the loan, either by way of mortgage or deed trust. Additionally, the lender may require the owner to assume personal liability for the loan. It is a crucial aspect of the loan negotiations. In many cases, it may be possible to negotiate the personal liability of the business owner for the loan, limiting such recourse to specific situations.

  • Loan Assumability/Transfer of Interests: Whether the loan is assumable, or whether the owner is permitted to make certain transfers (i.e., to family members or other investors) should be specifically addressed in the loan application.

  • Prepayment Issues: If the lender intends to securitize the loan--and in certain other cases--he may require a prepayment penalty in the event that the loan is paid prior to maturity. In such cases, careful attention must be paid in the loan application as to the terms of the prepayment penalty clause. Consideration must be given to prepayment, not only in the event of a sale or transfer of the facility, but in the event of a casualty that results in the payment of the insurance proceeds.

  • Loan-to-Value and Cash-Flow Verification: Inevitably, your loan will be subject to the lender's verification of the loan-to-value ratio of your property and the prospective loan, as well as verification that your facility satisfies the lender's debt-service coverage ratio. The better these members are, the better able you will be to negotiate more favorable loan terms. It is essential that you and your counsel review and understand the formulas used by the lender to determine your facility's loan-to-value ratio and cash flow.

  • Insurance and Impound: The lender's requirements for coverage and impounds for taxes and insurance should be spelled out in the loan application. Often times, this aspect of the loan is overlooked, and the borrower receives several nasty surprises in the loan documentation submitted by the lender.

  • Supporting Documentation: In order to hold the lender to its obligations under the loan application, particularly in the event that the negotiated and locked interest rate does not change, the borrower should insist that the lender include, as part of the loan application, a detailed list of the documents and conditions that must be satisfied before the lender will issue its loan commitment. This will prevent the lender from later making necessary and unjustified demands for additional documents and/or conditions, as well as from attempting to change the loan terms or simply refusing to fund the loan.

Appraisals & Reports

To the extent possible, the borrower should attempt to negotiate fixedamounts, or at least "cap" the fees to be paid to the variousappraisers, engineers and consultants to be employed by the lender. In manycases, it may be possible to participate in the selection of appraisers,engineers and consultants.

Review of Loan Documentation

Congratulations! Your carefully negotiated loan application has been acceptedby the lender. The lender and its appraisers, engineers and consultants haveverified that your facility meets the lender's qualification requirements; andyou and your counsel have received the lender's rather hefty loan package andits voluminous legal documentation.

The package will include your promissory note and the deed, trust or mortgagedocuments securing the loan. Depending on the nature of the transaction, thepackage may also include a hazardous substance indemnification agreement, aproposed attorney opinion letter, financing statements and escrow instructions.These documents must be carefully reviewed by an attorney to ensure they comportwith the terms of the loan application. Your loan documents will invariablycontain a clause that states they are the final agreement of the parties. Ifthere is any variance between the terms of the loan and the terms of your finaldocumentation, the latter will prevail. It is not uncommon for the loan packageto vary, by inadvertence or design, from the terms of the loan.

Scott Shable can be reached at [email protected].Visit www.labusinesslawyer.com.

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