By Adam Karnes
As you gaze longingly outside, you decide the weather is perfect for a family camping trip—and that you want to plan it yourself. Before you go, you have to decide where you’ll camp, how long you’ll stay, which activities you’ll do, what amenities you require, and what you have to spend on gear and supplies. After all, the preparation that goes into your excursion will greatly impact the result.
Packaging a self-storage loan request is similar: Securing your financing is much easier if you adequately prepare. To properly structure a loan and be confident in its execution, you have to create a package that allows the lending community to understand the “ask,” comprehend the timeframe and analyze the operating history.
The ‘Ask’
Before determining the appropriate structure for your loan, think critically about your investment strategy over the short and long term. This positions you for a loan that meets your needs. For example, a refinance request for property in a small secondary market would “ask” for a different structure than a request for construction financing on a property in a top-10 market, given their different goals.
Every loan structure incorporates certain conditions that should be spelled out in the request. Items such as interest rate (fixed or floating), term, amortization and, of course, loan amount are rudimentary. Additionally, you may specify the personal guaranty (recourse or non-recourse) and prepayment penalties. Finally, when underwriting your loan, it should conform to generally accepted loan-to-value (LTV) and debt-service coverage ratios (DSCR). Typically, anything below 75 percent LTV and above 1.25x DSCR aligns with conforming expectations.
The Lenders
After determining the appropriate structure, the next step is to target the right lenders. Ideally, you would identify several options; however, it’s important to pinpoint lenders that understand the nuanced self-storage asset.
If you’ve borrowed commercially before, your existing bank may top the list. Banks you’ve borrowed from in the past may be comfortable offering a strong set of terms against the backdrop of successful experiences. However, a savvy borrower acknowledges that there’s a vast network of lenders available, and having options is generally conducive to a favorable execution.
Keep in mind that while you “ask” for certain terms, the lender will likely respond with a different offer or “bid,” which reflects its perception of the deal strength and credit quality. Don’t be deterred if one lender declines to bid, as this could be for any number of reasons, which may or may not be specifically linked to your request. If multiple lenders neglect to bid, it may warrant revisiting the “ask” and making some adjustments to your request.
The Package Request
If you’re a camping buff, you might not find it necessary to do a lot of research in advance of your trip or heed the advice of other experienced campers. Similarly, if you’re an experienced self-storage owner, you may find the following guidelines are of minimal benefit to you. If, however, your goal is to “enter the woods” with a plan and an idea of what you’re likely to face, this is a good place to start.
The logic behind planning a trip isn’t only to ensure a good time but to protect the people involved. This holds true for loan requests. Strive for smooth execution, but also to protect your facility. In the same way that arriving at your camp site without a key piece of equipment can seriously derail your trip, excluding—or worse, withholding—information considered crucial by the lending community can disrupt your loan request. Every error can be costly.
The results of a well-prepared request can mean the difference between executing a value-add business plan or not. What follows is an overview for a well-prepared package.
Section 1: The Property
The lending community needs certain information to understand your asset, and this section is a great place to start. It should detail the physical qualities of the asset and engage lenders’ curiosity without overloading them with information. While it’s important to present the property in the best light possible, you want to be truthful. This section should include:
- The property name and address
- Year of construction and any renovations
- Total net rentable square feet
- Lot size
- Unit count, sizes and types
- Amenities
- Other relevant information, such as tenant access and security specifications
Typically, this section is supplemented with interior and exterior photos. It’s important to get quality images, as in some cases, you may be dealing with a lender who’s unable to visit the property, at least initially.
Section 2: The Market
After detailing the physical description, the next step is to define the market and the facility’s position within it. Describe the neighborhood and demographics, keeping in mind that lenders may not be acquainted with the area. You can even supplement with maps and aerials photos. At the very least, answer the following:
- Who is the customer?
- What types of residences are most common in the market?
- What’s the average household income?
- What’s the population within a certain radius (one, three or five miles)?
- Is the population growing or shrinking?
- Where are the local businesses?
- Where are the colleges, military bases, etc.?
A demonstration of the competitive landscape is another important component of the market analysis. It’s one thing to have a high-quality asset in a strong market, it’s another to understand and outperform the competition. Answer the following:
- How many competing facilities are in the market?
- Where are they located?
- Are your rental rates in line with competitors (large and small)?
- How well occupied is your facility compared to others in the market?
- Is there any new supply coming into the market?
In contrast to the property-level information that may be readily available, the above will entail doing some homework. This section is more hands-on, requiring you to scan demographic websites or self-storage publications. You may also have to price-shop the competition.
Section 3: The Financials
No loan request is complete without a detailed, historical presentation of the asset’s financials. Although this section includes less writing, it’s one of the most important facets of the package.
The final product encompasses a document that presents the past two years of operation as well as a detailed budget for the year to come. It also includes a rent-roll prepared on a separate sheet, which exhibits the property’s occupancy level. The support files for this section include:
- Year-end profit-and-loss reports for the past two years of operation
- Monthly profit-and-loss statements from the trailing 12 months of operation
- A detailed occupancy-statistics report
Take time to scan the financials and highlight one-time expenses and other non-cash items (depreciation/amortization), which can be excluded from the lender’s analysis. When sizing loans, lenders will often incorporate a minimum DSCR and maximum LTV based on their specific risk appetite, both of which are impacted by operating history. They’ll generally apply a conservative “haircut” to your bottom line to achieve a stabilized cash flow. It can’t be stressed enough how important it is that the numbers be accurate; inaccurate financials can jeopardize the opportunity and the execution.
Section 4: The Borrower
This last section tells your story. It’s important to be straightforward and detail those qualifications that validate your experience.
This section should include a personal financial statement, a résumé, a list of real estate holdings, and past or pending credit issues. The last point is crucial! No one enjoys recalling financial woes, but honesty is better than allowing a lender to uncover a secret. Be forewarned: Credit checks are a sure thing. While not irrelevant, credit issues can be deemed immaterial when disclosed and mitigated from the start. Lack of disclosure can be perceived as withholding information, and deceitfulness will turn off the lender.
If you self-manage the facility, your résumé should also lay out your management experience and qualifications. However, if you’ve hired a third-party manager (which new owners should certainly consider, as it demonstrates operational prudence), it’ll require a separate subsection that details the above points for the management company and onsite manager. Finally, briefly discuss how your facility will use software and technology to stay competitive, as this is a growing industry trend lenders understand.
The End Result
Securing millions of dollars in loan proceeds is certainly different from planning an awesome weekend in the woods, but some parallels do exist:
- You have to do the research.
- You have to understand your options.
- While not everything can be controlled, someone who is informed and well-prepared is likely to have a better experience than someone who “wings it.”
If the above seems overly complicated or you have better uses for your time, consider hiring a professional. Just like a trail guide, a competent broker is constantly navigating the landscape and can observe changes over time. He not only knows the keys to success, he understands the pitfalls and challenges as well as how to deal with them appropriately. Brokers charge for their services, but ultimately, their expertise can equate to better execution. It also frees up your time to focus on other aspects of your business.
Ultimately, your loan package should highlight your strengths but also identify and mitigate any risks. Furnishing all information up front minimizes further due diligence, which speeds the delivery of funds. Like planning a camping trip, assembling a loan-request package is rewarding when the execution is smooth.
Adam Karnes is a senior credit analyst at Chicago-based The BSC Group, where he specializes in the packaging of debt and equity financing requests for all commercial property types nationwide, with an emphasis on self-storage assets. He can be reached at 312.878.7561 or [email protected]. For more information, visit www.thebscgroup.com.
