While you don’t need top-of-the-line gear or the best swing to play golf, you do need some essential equipment and preparation to make your way around the course. In that way, there are parallels between golf and preparing a self-storage loan-request package.
Imagine how difficult it would be to play a good round of golf if the first time you swung a club was when you stepped onto the tee box. To be proficient, it helps to understand the proper mechanics and learn the rules. The same holds true for a well-organized loan package. Proper preparation will enable lenders to execute more quickly, which is vital in self-storage, when time is often of the essence.
Organization and attention to detail are also key to good execution. Whether golfers are trying to shave strokes off their game or simply keep score, they must be organized and focused on the end goal. When packaging a loan request, the same standard of care applies. Everything presented will be fact-checked, and errors are costly.
In addition, while golfers can get away with the bare-minimum equipment (clubs and balls), there are numerous resources to help players improve their game, from gadgets to television to videos to publications. Improving weaknesses and developing a well-rounded game improves a player’s score. The same holds true for assembling a loan request. While lenders may look at a package if it includes only the basics—property description, financials and a rent roll—it may only be a passing glance.
With that in mind, here’s a crash course in how to successfully package a self-storage loan request. While there are many ways to shoot par and people will swear by different methods, following these guidelines will yield consistent results.
Understanding Your Needs and Options
A good loan package clearly states the borrowers “ask.” Put differently, it requests the ideal loan for your situation. For example, a construction-financing request asks for a different structure than a refinance because the objectives are different. Before deciding on structure, consider your investment strategy over the near and long term. This helps ensure your loan meets your needs and increases the probability of success in execution.
Every loan structure contains certain criteria, which should be stated in the request. Examples include loan dollars requested, interest rate, term and amortization. Additionally, you may specify the structure of the personal guaranty (recourse or nonrecourse), whether the interest rate is fixed or floating, and prepayment penalties. When underwriting the economics of your loan, it should conform to generally accepted loan-to-value (LTV) and debt-service coverage ratios (DSCR). Typically loans with an 8.25 percent debt yield and at least a 1.30x DSCR align with conforming expectations.
Once you’ve pinpointed an appropriate structure, the next step is to identify lenders. Ideally, you should choose several options, but it’s critical to find lenders that understand the nuanced 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. Falling back on the familiar is often the path of least resistance. However, a truly informed decision that contemplates all your options generally produces the most favorable results.
While you’ll ask for certain loan terms, the lender will likely respond with a different offer or “bid” that reflects its perception of deal strength and credit quality. If one lender declines to bid the deal, don’t be deterred. This could be for any number of reasons, which may or may not be linked specifically to your loan. If multiple lenders neglect to bid, however, this can signal an unreasonable request or other factors. If this occurs, it may be appropriate to revisit and adjust your request.
Request Components
Below is a rundown of the seven sections every well-prepared self-storage loan package should include.
Proposed loan summary. This abridged synopsis of the deal should introduce the property and create appeal without overloading information. It should engage the lender’s curiosity while providing:
- Property name and address
- Sources/uses description
- Brief unit and amenities overview
- Occupancy stats
- Borrower introduction
- Loan term and amortization
- Rate type
- Existing debt
Property summary. This section should tell the asset’s story. Aim to fill in the blanks about the property’s physical qualities, including:
- Full address
- Year built/renovated
- Zoning
- Amenities list
- Construction type
- Total gross and net square footage
- Unit count/type (climate-controlled/non-climate controlled, parking)
- Photos
Operating history. Property financials will be highly scrutinized. If numbers are incorrect or omitted, it can jeopardize the opportunity and loan execution. Present the following in a concise fashion:
- Occupancy reports for past 24 months
- Property financials for past 24 months
- Trailing 12-month revenue and expenses, broken out monthly
- Budget income and expense projections for the coming 12 months
- Current real estate tax bills
Highlight 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 appetite, it will incorporate a minimum DSCR and maximum LTV ratio when sizing loans, both of which are impacted by operating results and history. Lenders will likely apply a conservative “haircut” to yield a stabilized cash flow.
Location and demographic breakdown. Here’s where you’ll present details about the locale and area demographics. Describe the neighborhood as you would to someone unfamiliar with the region, perhaps using maps and photos to support your narrative. Address the following:
- Who is the customer?
- What types of residences are most common?
- What is the average household income?
- Where are the local businesses, military bases, colleges, etc.?
- What is the area population? Is it growing or shrinking?
Market and competitive analysis. This section should identify proximate facilities, keeping in mind that lenders expect some detail. This is a more time-consuming task, requiring you to scan demographic websites or self-storage publications. Address the following:
- How competitive are your rates with other small, local operators, or against larger operators like the real estate investment trusts?
- How does occupancy stack up against the competition in the overall market?
- What new supply, if any, is coming to the market?
Borrower biography. This section allows you to sell yourself as a borrower. Be truthful and tactful, and list the qualifications that validate your experience. If you have partners, be advised: Lenders will examine anyone with at least a 20 percent ownership interest. Include the following:
- Principal resumes
- Principal financial statements
- Principal real estate holdings
- Past or pending credit issues
Never underestimate the importance of disclosing credit issues. No one enjoys reliving financial struggles, but honesty looks better to a lender than discovering a secret. Credit checks are a sure thing! While not irrelevant, these issues can be deemed immaterial when properly disclosed and mitigated. Moreover, a lack of disclosure can be perceived as withholding information.
Property management. To conclude your package, lay out your management experience and qualifications. You may also choose to discuss how you use software and technology to compete, as this is a growing industry trend that lenders understand. This section should include:
- Name/website of management company
- Fee breakdown
- Contact information of onsite manager
- Property website
First-time self-storage owners may want to consider contracting with a third-party management company, which boosts reputability and exhibits operational prudence. If you’re already outsourcing facility management, summarize the firm’s market and property-level experience.
Call a Professional
Sometimes going it alone seems too daunting. Just like new golfers using the expertise of a pro or caddie to help select gear or improve elements of their game, consider hiring a professional to help you identify self-storage borrowing options and package your loan request.
Brokers charge for their services, but the efficiencies gained should offset the cost. One advantage is brokers maintain relationships with lenders, allowing them to pinpoint those whose risk appetite matches the transaction profile. A reputable broker who understands the self-storage market will also know how to package the request and position the deal with the lending community to develop options a borrower might not consider or even know exist. Ultimately, broker expertise equates to better execution and frees up a borrower’s time to pursue value-added strategies.
The Finished Product
Bringing all these elements 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 strengths of the property but also identify and mitigate transaction risks. A strong package clearly presents the financial picture of the asset, free of one-time expenses and other non-operating items.
In addition, incorporating quality pictures as well as real-time market data from an online provider can go a long way toward convincing a lender your project is worth the risk. In today’s lending climate, it’s best to err on the side of more information to eliminate surprises, particularly when you have loan proceeds at stake.
Adam Karnes is senior credit analyst at Chicago-based The BSC Group, which provides mortgage brokerage, financial consulting and loan-workout solutions to self-storage real estate owners nationwide. To reach him, call 312.278.7561; e-mail [email protected]; visit www.thebscgroup.com.
