So you have decided it's time to refinance your self-storage property. Maybe your construction loan is maturing, or perhaps you just want to take advantage of the currently favorable interest-rate environment. Most financial experts agree that 2011 looks to be much more active for commercial real estate lenders than the past few years. Not to mention a number of new sources including commercial mortgage backed securities and Small Business Administration lenders have jumped into the self-storage finance arena.
While you might know that lenders will underwrite an asset's cash flow and its ability to cover expenses and debt service, you may not be aware that lenders will spend just as much or more time focusing on your personal ability to cover liabilities?business or otherwise. Lenders call this underwriting the "global cash flow." Not only is it important to get your property financials in order, you need to pay attention to and organize your personal finances.
Let's examine in closer detail this concept of global cash flow and what you can do to be prepared when dealing with lenders.
Global cash flow is a borrower's net cash flow from all sources of income, less all expenses and interest, both personal and business. Lenders include income from employment, dividends, businesses and real estate. As part of their due diligence, they will likely require both a personal financial statement and multiple years of tax returns to document all sources of income. Expenses will include all business as well as personal operating costs, including personal debt such as home mortgages, credit cards and auto loans. To document the expense side of the global cash flow, lenders will again use tax returns to capture all business expenses, and will also run a credit report to capture any business and personal debts.
Much of the global cash flow underwriting process will be spent understanding your other real estate holdings and their financial implications. Lenders will require a schedule of real estate owned, which will summarize holdings and their net income. You should anticipate this schedule to include detailed cash flows and a summary of debt terms for of all the properties in your portfolio, including those for which you may be a limited partner. The lender will underwrite each property focusing on the ability of its cash flow to cover its respective debt service. The goal of this analysis is to determine what your total cash obligations are outside of the subject loan.
To the extent there are properties in your portfolio that do not cover their own debt service, lenders will want to know if there is a loan structure in place (i.e., interest reserves, etc.) to cover those deficits. In the absence of such structure, they will focus on how you propose to cover that shortfall and how long it can be supported. In some cases, excess cash from other properties may be a reasonable explanation; however, if the investor groups are different?which limits disbursements?then cash from other sources will need to be available.
In conducting this extensive analysis, lenders are looking to determine that a positive global cash flow exists, typically with an income to expense ratio of 1.25 to 1. They are also analyzing all of your current recourse obligations to determine the extent of your contingent liabilities.
This analysis will include an in-depth review of your net worth and liquidity to determine your ability to repay your "other" liabilities and what capacity is left to service the prospective loan. This presents you and your partners with a decision outside the simple "who is willing and has the wherewithal to sign the required personal recourse guarantee." There is also now the question of who has the borrowing capacity.
Many times in this market, the lender will simplify the process by requiring all the property's owners to sign recourse in an effort to ensure they will be repaid. But before you put your name on the dotted line, keep in mind that with many loans being modified and extended in today's credit crunch, more than likely, recourse will come into play. As an owner, you'll need to believe in the property and the ultimate ability to refinance it.
What types of lenders look at global cash flow? The quick answer is all types. In today's credit environment, even non-recourse lenders want to ensure the borrower has the wherewithal to pay on all of his obligations and "other liabilities" will not bring down its freshly minted loan on your property. In addition, it's important that a borrower have some liquidity, even after the proposed transaction is completed, to ensure there are funds available in the event an unforeseen occurrence resulting in a capital call.
As for all transactions, it's best to start by getting all of the required documentation in order. To that end, you should prepare an updated and accurate personal financial statement. If you need a guide, the SBA has a personal financial form on its website that most banks will accept. Gather the past three years of tax returns, for personal income and all businesses, including but not limited to real estate investments. Finally, make sure you have a current profit-and-loss statement for the property you are financing as well as any other properties you may own.
In the interim, do not take on any additional liabilities prior to your refinance; this would include buying a new car, house, etc. It's important to have some free cash available for the refinance, so it's best to limit any large discretionary transactions that will require cash until after you close on the loan. Again, lenders will want to see you have some liquid funds on hand, not to mention a refinance will cost several thousand dollars, some of which will be required in the process of the transaction prior to closing.
Lastly, start the process early. A typical financing transaction takes longer to complete in this market, and borrowers should leave ample time (more than 90 days) from start to finish.
The bottom line is borrowers should put themselves in their lender's shoes and anticipate what the concerns will be on their global cash flow. One of the keys to obtaining financing in today's market is preparation and expectation. A borrower who understands what his lender will be looking for can analyze his situation and prepare a loan package that clearly tells the story and preemptively addresses any concerns the lender may have. When in doubt, remember the six Ps of success: proper prior preparation prevents poor performance.
This article has been reprinted with permission from Inside Self-Storage, the premier magazine of self-storage professionals. For information, visit www.insideselfstorage.com.
The BSC Group has been voted Best of Business - Finance for six years running by the readers of Inside Self-Storage.