A Recipe for Success: Preparing a Winning Loan Request Package

October, 2015

The seasons of change are upon us and football season is in full swing. There is no better time than the present for delicious homemade chili to supplement the chips, dips and salsas that make up the game-day spread. Homemaking anything requires a recipe, and a good recipe includes basic information such as prep time, quantity yield, a list of ingredients and cooking instructions.

A "recipe," for packaging a self-storage loan request has many similarities. The goal is securing the financing, which means preparing a package that helps the lending community: 1) clearly understand the ask; 2) analyze the financial and operating history to structure an appropriate loan; 3) comprehend the timeframe; and 4) prepare to execute with certainty.

A quality loan request package is thor ough and accurate, yet also concise and understandable. Everything presented can and will be fact checked, and errors 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.

Understanding Your Needs & Options

A good loan package clearly states the borrowers "ask"; put differently, it requests the ideal loan for your 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 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 anything lower than 75% LTV and above a 1.25x DSCR aligns 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 may top your list. Banks you have a relationship with 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"- which reflects that lender's perception of the deal strength and credit quality. If one lender declines to bid on the deal, do not be deterred. This could be for any number of reasons, which may or may not be linked specifically to your loan 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 step-by-step recipe for packaging a superior loan request. When cooking, it is the chef's prerogative to alter the recipe, as experience dictates results. That said, the recipe's author is confident that following the instructions yields a consistent end product. This holds true for your loan request; there are other formulas to package successful loan requests, 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 information:

  • Property Name/Address
  • Sources/Uses Description
  • Brief Unit/Amenities Overview
  • 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 the asset's physical qualities, including:

  • Full property address
  • Year built/renovated
  • Zoning
  • Amenities list
  • Security specifications
  • Construction type
  • Total gross and net square footage
  • Unit count/type (climate controlled/non-climate controlled, parking)
  • Photos

Section 3: Operating History

Property financials will be highly scrutinized, and if numbers are presented incorrectly, or omitted, it can jeopardize the opportunity and more importantly the execution. Present the following in a concise fashion:

  • Occupancy reports for past 24 months
  • Property financials for past 24 months
  • Trailing 12-month revenues 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, 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 your bottom line to yield a stabilized cash flow.

Section 4: Location and Demographic Breakdown

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:

  • Who is your customer?
  • What types of residences are most common?
  • What is the average household income?
  • Where are the local businesses? Where are the military bases, colleges, etc.?
  • What is 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 with larger operators like REITs? 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 is 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 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:

  • Principal resumes
  • Principal financial statements
  • Principal real estate holdings
  • List past or pending credit issues

Never underestimate the importance of the final bullet. No one enjoys reliving financial struggles, but honestly looks better than a lender discovering a concealed secret; remember, 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 and dishonesty will turn the lender off.

Section 7: Property Management

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. Success stories hit home so compile stats on customer satisfaction and repeat customer tenure. The management section includes:

  • Name/address of management company
  • Management company website and resume
  • Fee breakdown
  • Contact information of on-site 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 already working with a third-party manager, summarize their 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 they typically home-cook; the same applies to shopping for financing options!

Brokers charge for their services, but the end result should more than offset their cost. Brokers maintain relationships with lenders, allowing them to pin-point those whose risk appetite matches the transaction profile. Brokers 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 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.

The Finished Product

An owner with a plan and a comprehensive request package benefits more than an owner who "wings it." The package should highlight the strengths, but also identify and mitigate the risks. This demonstrates diligence and strengthening 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 cooking chili, or preparing a loan package- is rewarding when you achieve results. There is a difference in scope 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.

Based in Chicago, Adam Karnes is an assistant vice president at 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; e-mail: akarnes@thebscgroup.com; visit: www.thebscgroup.com.

Articles: October 2015

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