With the winter hunting season upon us, it’s a great time to make a trip. Before embarking, however, you’ll need to plan several arrangements, including your hunting location and where to stay, days of travel, transportation, supplies and an estimate for the gear. All these preparations will ultimately determine your success.
As in the hunt for wildlife, careful planning is an essential step in the pursuit of self-storage financing. A successful, efficient loan-request package requires groundwork, but it allows a lender to execute better, faster and with a higher degree of confidence. Organization and attention to detail are key. You must be focused throughout the entire process, and everything must be fact-checked, as one error could spoil the entire product. While time is valuable, the No. 1 priority is achieving the desired outcome.
You’ll have the most success by taking advantage of the knowledge and superior tools others can provide. Imagine how challenging—and distressing—it would be to hunt for the first time if you were out in the remote woods, miles from civilization, without any guidance or experience. It would be intimidating, right? It helps to first comprehend proper techniques, like how to shoot and stalk prey.
Sure, you can get away with using minimal resources. Your loan request may still attract a lender even if it includes only the minimum information, such as property description, financials and a rent roll. However, that might not be the best possible analysis, and there are ways to better your chances. As a “hunter,” take the opportunity to learn from more those who are more practiced.
The following is a quick overview of a strong loan-request package. There are several ways to “shoot,” and people will use different techniques; but the following steps will yield a consistent, effective result.
Identify Your Target
An effective loan package clearly states the borrower’s “ask,” requesting the ideal loan for your situation. Obviously, a construction-financing request requires a different structure than a refinance, given different objectives. Before deciding on structure, think about your present and future investment strategy. This helps ensure the loan meets your needs and betters your probability of success.
Every loan has specifics that should be addressed in the request. These include the amount, interest rate, term and amortization. In addition, you may stipulate principles such as the structure of the personal guaranty (recourse or nonrecourse), whether the interest rate is fixed or floating, and prepayment penalties. Finally, the loan should comply with generally accepted loan-to-value (LTV) and debt-service coverage (DSCR) ratios. Typically, loans with an 8.25 percent debt yield and at least a 1.30 DSCR align with conforming expectations.
You must understand that though you ask for certain terms, the lender will likely respond with a slightly different offer or “bid,” which reflects its perception of the deal strength and credit quality. If one lender dismisses the deal, don’t be discouraged. There are several reasons why this might be, and they may or may not be linked to your loan. If multiple lenders neglect to bid, this can indicate the request is unreasonable or other factors. In that case, it may be appropriate to revisit and adjust.
Track Down a Lender
After deciding on an effective loan structure, the next step is to find lenders. In a perfect world, you’ll identify many options, but it’s important to choose those who understand the self-storage asset class.
If you’ve borrowed commercially before, your current bank might top your list. Banks with whom you have a relationship often substantiate more aggressive quotes with positive past lending experiences. Reverting back to the familiar is often the path of least resistance. However, a truly informed decision that considers all your options generally results in more favorable result.
Now, on to the nitty gritty. The following breaks down a detailed loan-request package that’ll impress lenders and help you obtain financing.
Section 1: Executive Summary
This abbreviated summary of the deal introduces the property and creates intrigue for the lender, without offering too much information. This should pique interest while providing the following:
- Borrower introduction
- Loan term and amortization
- Rate type
- Existing debt
- Property name and address
- Brief unit and amenities overview
- Occupancy statistics
- Sources/uses description
Section 2: Operating History
Property financials will be highly inspected, and if numbers are omitted or presented inaccurately, it can severely jeopardize the deal. Present the following in a concise fashion:
- Trailing 12-month revenue and expenses, broken out monthly
- Budget income and expense projections for the coming 12 months
- Current real estate tax bills
- Occupancy reports for the past 24 months
- Property financials for past 24 to 36 months
Identify one-time expenses and other non-cash items (depreciation/amortization), which can be excluded from the lender’s analysis. Depending on a lender’s risk stance, it’ll incorporate a minimum DSC and maximum LTV ratio when sizing loans, both of which are impacted by history and operating results. Lenders will likely apply a conservative “haircut” to yield a stabilized cash flow.
Section 3: Location and Demographics
Describe the neighborhood as you would to someone who doesn’t know the area, perhaps using maps and photos to support your narrative. Answer the following questions:
- What’s the average household income?
- Where are the local businesses?
- Where are the military bases, colleges, etc.?
- What’s the area population? Is it growing or shrinking?
- Who’s the customer?
- What types of residences are most common?
Section 4: Property Summary
This section tells the property’s narrative and aims to fill in the blanks about the asset’s physical qualities including:
- Full property address
- Year built/renovated
- Zoning
- Construction type
- Total gross and net square footage
- Unit count/type (climate controlled/non-climate-controlled, parking)
- Amenities
- Photos
Section 5: Market and Competitive Analysis
This analysis includes nearby self-storage facilities. Lenders will expect details, such as:
- How does occupancy of the subject property stack up against the competition in the overall market?
- Is there any new supply coming to the market?
- How competitive are the property’s rates with local operators, larger regional operators or real estate investment trusts?
This is a more tedious section, requiring you to scan demographic websites or self-storage publications.
Section 6: Borrower Biography
This section allows you to sell yourself. Be honest and courteous, and list the qualifications that legitimize your experience. If you have partners, be warned: Lenders will examine anyone with at least a 20 percent ownership interest. Include the following:
- Principal real estate holdings
- Principal résumés
- Principal financial statements
- Past or pending credit issues
Credit checks are a sure thing! No one enjoys reliving financial struggles, but honesty is much better than an unearthed secret. While not irrelevant, credit issues can be deemed extraneous when properly disclosed and mitigated and, moreover, absence of acknowledgement can be perceived as withholding information.
Section 7: Property Management
Finally, lay out your own management experience and the qualifications of any onsite staff. You may also talk about how the property uses software and technology to compete. This is an increasingly important industry trend that lenders understand. This section includes:
- Manager contact information
- Property website
- Name/website of management company (if applicable)
- Fee breakdown
New owners may ponder contracting a third-party management company, which boosts reputability and exhibits operational prudence. If you’re already working with a firm, summarize its market- and property-level experience.
Hire a Guide
If you want to improve your odds, consider hiring a professional to help identify your borrowing options and package your loan request. Brokers charge for their services, but the efficiencies gained should offset the cost. They not only maintain relationships with lenders, allowing them to pinpoint those whose risk appetite matches the transaction profile, they know how to package the request and position the deal with the lending community to develop options a borrower might not consider. Ultimately, broker expertise equates to better execution and increases your free time to pursue value-add strategies.
Ready to Take Aim
Putting everything together into a well-thought-out, detailed loan package is the best way to tell the asset’s story and ensure a successful borrowing experience. The package needs to highlight the property’s strengths but also identify and mitigate transaction risks. It should clearly present the financial picture, excluding one-time expenses and other non-operating items. In addition, quality pictures and data from industry providers go a long way. In today’s lending environment, it’s better to provide more information so there are no surprises.
Remember, there are millions of dollars in loan proceeds at stake here, so you want to be prepared before you aim and shoot. Do the research, be precise and follow through.
Shawn Hill is a principal at Chicago-based The BSC Group LLC, where he advises clients nationwide on debt and equity financing as well as loan-workout services for all commercial property types, with an emphasis on the self-storage asset class. To reach him, call 312.207.8237; e-mail shill@thebscgroup.com; visit www.thebscgroup.com.
