By Adam Karnes
There’s no better time than football season to cook up delicious home-made chili. But that requires a recipe, and a good recipe includes prep time, quantity yield, a list of ingredients and cooking instructions.
Packaging a self-storage loan request is like following a recipe. The goal is to secure financing. You want to create a package that helps the lending community:
- Clearly understand the “ask”
- Analyze the financial and operating history to structure an appropriate loan
- Comprehend the time frame
- Prepare to execute with certainty
A quality loan request is thorough and accurate, concise and understandable. Everything presented can and will be fact-checked, and errors can be costly regarding proceeds and execution. A well-prepared request can mean the difference between achieving a value-add business plan and not.
Understanding Your Needs and Options
A good loan package clearly states the borrower’s ask, meaning it requests the ideal loan for his situation. Obviously a construction-financing request would ask for different structure than a refinance, given different sets of long-term goals. Before deciding on structure, think critically about your investment strategy over the near and long term. This helps ensure your loan meets your needs and increases your probability of success.
Every loan structure contains certain criteria, which should be stated in the request. Examples include loan dollars, interest rate, term and amortization. Additionally, you may specify the structure of the personal guaranty (recourse or non-recourse), whether the interest rate is fixed or floating, and prepayment penalties. Finally, when underwriting the economics of your loan, it should conform to generally accepted loan-to-value (LTV) and debt-service coverage ratios (DSCR). Typically, anything lower than 75 percent LTV and above a 1.25x DSCR aligns with conforming expectations.
Once you’ve pinpointed an appropriate loan structure, the next step is to identify potential lenders. Ideally, you have several options, but it’s most critical to find a lender that understands the nuanced self-storage asset class.
If you’ve borrowed commercially before, your current bank may top your list. Banks with which 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 contemplates that there are many lenders in the universe, and having options generally results in favorable executions.
Finally, remember that you ask for certain terms, but the lender will likely respond with a different offer, or “bid,” that reflects its perception of the deal strength and credit quality. If one lender declines to bid on the deal, don’t be deterred. This could be for any number of reasons, which may or may not be linked specifically to your request. If multiple lenders neglect to bid, however, this can signal an unreasonable request or other factors. It may be appropriate to revisit your request and adjust the ask.
Packaging Your Request: A Tried and True Recipe
What follows is a proven recipe for packaging a superior loan request. When cooking, it’s the chef’s prerogative to alter the recipe, as experience dictates results. That said, the recipe’s author is confident the instructions yield a consistent end product.
This holds true for your loan package. There are other formulas to create a successful request, but the following steps have worked time and time again.
Section 1: Proposed Loan Summary
This abridged summary of the proposed deal introduces the property and creates appeal, without overloading information. This should engage the lender’s curiosity while providing the following:
- Property name and address
- Description of sources and uses
- Brief overview of units and amenities
- Occupancy stats
- Borrower introduction
- Reason for request
- Loan term and amortization
- Rate type
- Existing debt
Section 2: Property Summary
This section tells the property’s story and aims to fill in the blanks about its physical qualities, including:
- Full property address
- Year built or renovated
- Zoning
- Amenities list
- Security specifications
- Construction type
- Total gross and net square footage
- Unit count and type (climate-controlled, non-climate-controlled, parking)
- Photos
Section 3: Operating History
Property financials will be highly scrutinized. If numbers are incorrectly presented or omitted, it can jeopardize the opportunity and, more important, the execution. Present the following in a concise fashion:
- Occupancy reports for the past 24 months
- Property financials for the 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 (e.g., depreciation or amortization), which can be excluded from the lender’s analysis. Depending on a lender’s risk appetite, it may incorporate a minimum debt-service coverage 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 your bottom line to yield a stabilized cash flow.
Section 4: Location and Demographic Breakdown
It’s time to present the property location and demographics. Describe the neighborhood as you would to someone unfamiliar with the area, perhaps using maps and photos to support your narrative. Address the following questions:
- Who’s your customer?
- What types of residences are most common?
- 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?
Section 5: Market and Competitive Analysis
The competitive analysis includes identifying proximate facilities, but lenders expect more detail. How competitive are your rates with other local operators or larger operators like the self-storage real estate investment trusts? How does occupancy stack up against the competition in the overall market?
This is a more time-consuming section, requiring you to scan demographic websites or self-storage publications. It’s more hands on, often requiring you to price-shop the competition.
Section 6: Borrower Biography
This section allows you to sell yourself as a borrower. Be truthful and tactful, but list those 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 the final bullet. No one enjoys reliving financial struggles, but it’s better to reveal this upfront than to allow the lender to discover a secret. Remember, credit checks are a sure thing! While not irrelevant, credit issues can be deemed immaterial when properly disclosed and mitigated. Moreover, lack of disclosure can be perceived as withholding information, and dishonesty will turn off the lender.
Section 7: Property Management
To wrap up, lay out your management experience and the qualifications of your onsite management team. You may also discuss how you use software and technology to compete—this is a growing industry trend lenders understand. Success stories hit home, so compile stats on customer satisfaction and repeat customer tenure. The management section includes:
- Name and address of the management company
- Management company website and résumé
- Fee breakdown
- Contact information of onsite manager
- Property website
For first-time owners and borrowers, you may consider contracting a third-party manager, which boosts reputability and exhibits operational prudence. If you’re already working with a third-party manager, summarize its market and property-level experience.
Hiring a Professional Chef
If all of this seems too complicated, or if you perceive more valuable uses of your time, consider hiring a professional to help identify borrowing options and package your loan request. A professional chef can execute on more advanced recipes than he typically cooks at home. The same applies to shopping for financing options.
Brokers charge for their services, but the end result should more than offset their cost. They maintain relationships with lenders, allowing them to pin-point those whose risk appetite matches the transaction profile. Brokers also know how to package the loan request and position the deal with the lending community to develop options a borrower might not consider or even know to exist. Ultimately, broker expertise not only equates to better execution, it frees up your time to pursue value-add strategies such as marketing or maintaining a competitive operational edge.
The Finished Product
An owner with a plan and a comprehensive request package benefits more than one who “wings it.” The package should highlight the property’s strengths but also identify and mitigate the risks. This demonstrates diligence and strengthens the lender’s confidence in you. Furnishing all information upfront minimizes further due diligence, which delays the delivery of proceeds.
Assuming full responsibility for a project—whether it’s cooking chili or preparing a loan package—is rewarding when you achieve results. There’s obviously a difference between having friends compliment your cooking and securing millions of dollars in loan proceeds. Still, the parallels are unquestionable: Do the research, be precise, follow through, and remember the finished product is the summation of the individual ingredients.
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.
