Owners Guide to Survival: Assembling a Winning Loan Request Package

December, 2016

As you glance longingly outside, you decide the weather is perfect for a family camping trip, and that you want to plan the trip yourself. Before you actually go camping, you have to decide how long you will camp, where you will camp, what amenities you require, and finally what you must spend on gear and supplies. Based on these answers, your trip will vary in terms of cost, the range of activities available, whether you will plan a trip to this destination again, and furthermore whether you will plan another trip yourself at all! Thus, the preparation that goes into planning a trip greatly impacts the result.

Packaging a self-storage loan request has its similarities to planning a camping trip. You might be thinking, "Hold on, how are camping trips and self-storage financing requests alike?" However, like camping- only the goal is securing financing- if there is not adequate preparation, the result is much easier said than done. You have to prepare a package that allows the lending community to: 1) understand the ask; 2) comprehend the timeframe; 3) analyze the operating history to structure an appropriate loan; and 4) be confident in the execution.

Understanding "the Ask" & Targeting Lenders

Logically, a refinance loan request on a small secondary-market property would "ask" for different structure than a top-10 market construction financing request, given different long-term goals. Prior to determining appropriate structure, think critically about your investment strategy over the short and long term; this positions you for a loan that meets your needs.

Every loan structure incorporates certain conditions that should be spelled out in the request. For example, interest rate (fixed or floating), term, amortization, and of course loan dollars requested are rudimentary. Additionally, you may specify such criteria as the structure of 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% LTV and above 1.25x DSCR aligns with conforming expectations.

After determining appropriate structure, the next step is targeting appropriate lenders. Ideally you identify several options, however it is just as important to pin-point lenders who understand the nuanced self-storage asset. If you've borrowed commercially before, your existing bank may top the list. Banks you have borrowed from in the past may be comfortable offering a strong set of terms against the backdrop of successful past experiences. However, a savvy borrower acknowledges that there exists a vast network of lenders available, as having options is generally conducive to 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 that lender's perception of the deal strength and credit quality. Do not be deterred if one lender on your list declines to bid as this could be for any number of reasons- whether specifically linked to your loan request or not. However, if multiple lenders neglect to bid, it may warrant revisiting the "ask," and making some adjustments to your request.

Packaging Your Request: Don't Enter the Woods Unarmed!

If you're a camping buff, you might not find it necessary to research the area in which you are camping or heed the advice of other experienced campers. Similarly, if you are an experienced self-storage owner, you may find that the following guidelines are of minimal benefit to you. However, if the goal is to "enter the woods," with a plan and an idea of what you are likely to face, this is a good place to start. The logic behind putting in the time to plan out a camping trip is not only to ensure a good time, but to protect what is important (your family). 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 tent can seriously derail your trip, so can excluding- or worse, withholding- information considered crucial by the lending community when presenting a loan request package. Every error can be costly regarding proceeds and execution. Results of a well-prepared request can mean the difference between executing a value-add business plan, and not. What follows is an overview broken into sections for a well-prepared loan package request.

The Property

The lending community needs certain information just to understand the asset, and this makes for a great place to start. While it is important to present the asset in the best light possible, this should not come at the cost of being truthful. In this section, be sure to include the property's name and address, year of construction/renovations, total net rentable square feet of the property, lot size, unit count, unit sizes and unit types (how much climate controlled versus non-climate controlled). Furthermore, it is crucial to list amenities at the property, including such relevant information as tenant access and security specifications.

Typically, this section is supplemented with interior and exterior photos of the asset. It is important to get quality photos of your asset, as in some cases you may be dealing with a lender who is unable to visit the property, at least initially. To put this in perspective, imagine trying to choose a destination for a camping trip relying solely on pictures taken on an old disposable camera; it would be hard to distinguish a beautiful destination from an unappealing one. This section details the physical qualities of the asset, and should engage the lender's curiosity, without overloading information.

The Market

After detailing the physical facility description, the next step is defining the market, and the asset's position within that market. The borrower should map out the area's neighborhood and demographics for the lender, keeping in mind once again that lenders may not be acquainted with the area. Thus, describe the neighborhood as you would to someone who is unfamiliar with the area, which you may supplement with maps and aerials photos. At the very least, answer the following questions: Who is the customer? What types of residences are most common in the market? What is the average household income? What is the population within a certain radius (1, 3 or 5-miles)? Is the population growing or shrinking? Where are the local businesses? Where are the military bases, colleges, etc.?

A demonstration of the competitive landscape is another important component of the market analysis. It is one thing to have a high quality asset (physically) in a strong market, it is another thing to understand and outperform the competition. The borrower should provide the following information: how many competing facilities are in the market, where the competition is located, whether the subject's rental rates are in line with its competitors- both large and small-, how well occupied the subject is compared to other market facilities, and finally if there is any new supply coming online in the market.

In contrast to the property level information which may be readily available, the above information will require the borrower to do some homework. This section is more hands on, requiring you to scan demographic websites or self-storage publications; it may also require you to price shop the competition.

The Financials

No loan request package is complete without a detailed historical financial presentation. Although this section includes less writing, it is one of the most important facets of the request package. The final product in this section encompasses a document which presents the past two years of operations, 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 occupancy level at the property. The support files for this section include year-end profit and loss reports for the past two years of operations, monthly profit and loss statements from the trailing 12 months of operations and a detailed occupancy statistics report.

Take time to scan the property financials and highlight one-time expenses and other non-cash items (depreciation/amortization), which can be excluded from the lender's analysis. Lenders will often incorporate a minimum debt service coverage and maximum loan-to-value ratio based on their specific risk appetite when sizing loans, both of which are impacted by operating history. Lenders will generally apply a conservative "haircut" to your bottom line to achieve a stabilized cash flow. It cannot be stressed enough how important it is that the numbers be accurate, as inaccurate financials can jeopardize the opportunity and the execution.

The Borrower

This last section tells the borrower's story. It is important to be truthful, but also to detail those qualifications which validate your experience. This includes preparing a personal financial statement, résumé, list of real estate holdings and list of past or pending credit issues. The last point is crucial! No one enjoys recalling financial woes, but honesty looks better than when a lender discovers a concealed 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 dishonesty will turn the lender off.

If you self-manage the facility, your resume should also lay out your management experience and qualifications. However, if you have hired a 3rd party manager- which new owners should certainly consider, as it demonstrates operational prudence - then this will require a separate sub-section which details the above points for the management company, and on-site manager. Finally, briefly discuss how your facility utilizes software and technology to stay competitive, as technology is a growing industry trend that lenders understand.

The End Result

Securing millions of dollars in loan proceeds certainly has its differences compared to planning an awesome weekend in the woods. Still, parallels exist: do the research, understand your options, and understand that while not everything can be controlled, an informed borrower with a well-prepared loan package is likely to have a better experience than one who "wings it." The package should highlight strengths, but also identify and mitigate risks. Furnishing all information upfront minimizes further due diligence, which delays the delivery of proceeds. Taking on a "do it yourself," project - whether planning a camping trip, or preparing a loan package- is rewarding when the execution is smooth.

Calling in the Park Ranger: Enlist the Aid of a Pro

If the above seems overly complicated, or if you perceive more valuable uses of your time, contemplate hiring a professional. Just as a trail guide is constantly navigating the landscape and can observe changes overtime; the same applies to shopping for financing! A competent broker not only knows the keys to success, but also knows about pit falls and challenges you may not even have thought existed, and how to deal with them appropriately. Brokers charge for their services, but ultimately a broker's expertise not only equate to better execution, but also free up the owner's time to pursue value-add strategies such as marketing or maintaining a competitive operational edge.

Adam Karnes is a Senior Credit Analyst for 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. Adam is based in Chicago, and can be reached at 312.878.7561; e-mail akarnes@thebscgroup.com; visit www.thebscgroup.com.

Articles: December 2016

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