09 May 2019
The preparation of a successful loan request package requires adequate preparation. With adequate preparation, a lender will be able to execute faster, more efficiently, and with a higher degree of certainty - and while time is often of the essence, the most important factor is obviously achieving the outcome you desire.
Finally, you can get away with utilizing the bare minimum supplies and effort, but there are many ways to improve your chances at being successful. Your request may catch the eye of a lender if it includes only the basics – property description, financials, and a rent roll- but it might not be a very considerate look!
To following is a crash course in successfully packaging loan requests, as refined by many years of helping clients do just that. Following these guidelines will yield a consistent result.
A good loan package clearly states the borrowers “ask”; put differently, it requests the ideal loan for your situation. Obviously, a construction-financing request asks for different structure than a refinance, given different objectives. Before deciding on structure, consider your investment strategy over both the near and longer term. This helps ensure your loan meets your needs and increases your 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 criteria such as the structure of the personal guaranty (recourse or nonrecourse), 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, loans with an 8.25% Debt Yield and at least a 1.30x DSCR align with conforming expectations.
Once you have pinpointed an appropriate loan structure, the next step is identifying lenders. Ideally you identify several options, but it is most critical to locate lenders that understand the nuanced self storage asset class. If you’ve borrowed commercially before, your current bank might top your list.
Falling back on the familiar is often the path of least resistance. However, a truly informed decision that contemplates all your options generally results in more favorable executions.
Finally, remember that you ask for certain terms, but the lender will likely respond with a different offer- or “bid”- which reflects the lender’s perception of the 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; it may be appropriate to revisit and adjust your request.
This abridged summary of the deal introduces the property and creates appeal, without overloading information. This should engage the lender’s curiosity, while providing the following:
This section tells the property’s story, and aims to fill in the blanks about the asset’s physical qualities, including:
Property financials will be highly scrutinized, and if numbers are presented incorrectly, or omitted, it can jeopardize the opportunity the execution. Present the following in a concise fashion:
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, they incorporate a minimum debt service coverage and maximum loan-to-value 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.
It’s time to present the property location and the area 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:
The competitive analysis includes identifying proximate facilities, but lenders expect more detail. How competitive are your rates with local operators, or with larger operators like REITs? How does occupancy stack up against the competition in the overall market? Is there any new supply coming to the market? This is a more time consuming section, requiring you to scan demographic websites or self storage publications.
This section allows you to sell yourself as a borrower. Be truthful and tactful but be sure to list those qualifications that validate your experience. If you have partners, be advised: lenders will examine anyone with at least a 20% ownership interest. Include the following:
Never underestimate the importance of the final bullet. No one enjoys reliving financial struggles, but honesty looks better than a lender discovering a concealed secret; credit checks are a sure thing! While not irrelevant, credit issues can be deemed immaterial when properly disclosed and mitigated, and moreover, lack of disclosure can be perceived as withholding information.
To wrap up, lay out your management experience and the qualifications of your on-site management. You may also discuss how you utilize software and technology to compete; this is a growing industry trend that lenders understand. The management section includes:
First-time owners may consider contracting a third-party manager, which boosts reputability and exhibits operational prudence. If already working with a third-party manager, summarize their market and property-level experience.
If structuring alone seems too daunting, consider hiring a professional to help identify borrowing options and package your loan request. Brokers charge for their services, but the efficiencies gained should offset their cost. Brokers maintain relationships with lenders, allowing them to pin-point those whose risk appetite matches the transaction profile.
Bringing it all 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, but also identify and mitigate transaction risks. A strong package also clearly presents the financial picture of the asset, free of one-time expenses and other non-operating items. In addition to what is laid out above, quality pictures as well as data from providers like Radius go a long way.
