Money Matters Made Easy

Prepare yourself and your property for a financial transaction
RK Kliebenstein

From construction loans to refinance, this easy-reference guide will lead you through the process and help you negotiate the twists and turns of banking.

» Structure Your Deal

Understand the type of loan you are seeking. Different kinds of loans mandate unique requirements of the borrower.

A&D Loan (Vacant Land): Fairly uncommon, this loan is typically used to purchase a parcel and obtain the necessary approvals for development. This may be to simply obtain zoning or carry the property through to receiving permits. The leverage is usually around 50 percent, and interest rates are commensurate with risk. This type of financing is usually provided by banks or hard-money lenders (private individuals and small, local lending sources). The loan generally covers:

  • Land costs
  • Zoning costs
  • Interest carry
  • Due-diligence costs (survey, phase I environmental site assessments, wetland delineation, soil tests, architect and engineering-professional fees)
  • Plans
  • Permit costs
  • Closing costs

Construction Loan

The most common loan for developing a self-storage property. The loan may be used to acquire the land or develop and construct the buildings for a parcel already owned by the developer. This loan should be for 24 to 36 months, with the ability to renew six-month extensions at least twice. The most common mistake developers make is requesting too short of a construction loan, and bankers unfamiliar with self-storage will enable a potential problem by granting it. Typical leverage is around 70 percent of cost. This is a relationship loan best served by a local bank. This loan covers:

  • Land acquisition
  • Soft costs
  • A&D costs (see "A&D Loan" above)
  • Entitlements to permit costs and fees
  • Interest carry
  • Operational deficits
  • Hard costs
  • Startup costs (marketing and management)
  • Furniture, fixtures and equipment (phones, fax machines, copiers, printers, computers, golf carts, hall carts)
  • On-site signage
  • Course-of-construction insurance
  • Construction contingency
  • Construction/lease-up real estate taxes
  • Partnership legal fees
  • Developers fees
  • Loan fees

Mini-Perms

The preferred choice of self-storage developers. This is a combination of a construction and permanent loan, which starts out as an interest-only loan and, at stabilization, converts to an amortizing loan. This loan is usually 48 to 60 months in length and is best for most developers. Typically a full-recourse loan, strong borrowers may be able to negotiate partial releases as debt- service-coverage targets are achieved. The loan covers A&D, "A to Z" construction and startup costs.

Take-out Or Stand-By Loan

Not a very common type of financing and usually expensive. This loan is generally required by construction lenders that do not understand the industry, so they protect themselves with a commitment from another lender to refinance your construction loan when certain occupancy (physical or economic) targets are achieved. Usually granted by mortgage lenders or credit companies, these can be expensive and are rarely actually funded.

Permanent Loan

This usually pays off the construction loan. Typically, a long-term loan of five to 10 years, this can be with or without the personal guarantees of the borrower. Amortization periods are usually 20 to 25 years with a balloon, or self-amortizing for 15 years. These can be conduit or portfolio loans (see below).

Conduit Loan

Also known as securitized loans, these loans are bundled or pooled together and sold to bond-holders. Conduit loans are typically nonrecourse, meaning they have no personal guarantees. They have significant prepayment penalties and lock-outs (periods of time when you cannot prepay). They also have inflexible documentation, higher leverage and due-diligence costs, and can be expensive to close.

Portfolio Loan

Loans not usually sold but held by the financial institution. Portfolio loans usually require guarantees, and the borrower is heavily weighed in the loan-granting process. Often relationship-driven, these loans are flexible, with lower due-diligence, closing and legal costs.

Refinance Loan

This loan can generally meet the requirements and parameters of the permanent loan. It also may be used to recapture equity or simply pay off a loan that has matured.

Bridge Loan

The bridge or acquisition loan is usually an expensive, short-term loan used to close on transactions quickly. With a duration almost always three years or less, the bridge is sometimes a temporary loan used to pay off a construction loan that was too short. It may also be used or for the purchase of an existing store that will increase in value as the result of a change in management or the addition of square footage. This is typically an expensive loan.

Mezzanine Financing

This loan is sought by individuals short on providing the equity requirement of any of the former loan types. It is often an expensive loan, and the lender generally participates in the cash flows of the property. It usually requires some type of personal guarantee by the developer or owner.

Line of Credit

The line of credit usually is for experienced developers or multistore owners and is often cross-collateralized and cross-defaulted with many properties. It is typically used for very short-term borrowings, and may require personal guarantees. Frequently used for multistore deals, it is a quick, inexpensive way to acquire properties for A&D, or to take advantage of distressed sales or short-term due-diligence periods sellers may require.

» Select Your Lender

Each lender makes different kinds of loans and has unique requirements of the borrower. It is important you make a wise choice and understand what is expected of you. Here are the various lender classifications:

Banks

These are usually local, relationship-driven lenders. Most all require personal guarantees of the borrower and are typically portfolio lenders. As conservative, short-term lenders, banks are one of the most inexpensive sources of capital, and are generally not used for "mega-loans." Banks have fairly flexible pricing and terms, but have strict regulation over third-party reports and requirements.

Credit Companies

A little higher priced than other types of lenders, the credit company can be the most flexible in customizing loans to meet the borrower's specific needs. While they are bridge or A&D lenders, credit companies can also be portfolio or conduit lenders. With more complex loans or less qualified borrowers, credit companies may require recourse (for at least a portion of the loan).

Hard-Money Lenders

Flexible but very expensive, hard-money lenders are used for interim financing and borrowers who may have credit issues. These lenders are known for quick closings (sometimes less than two weeks), and their pricing is reflective of the level of risk. Loan-to-value ratios are fairly conservative, in the 50 percent to 60 percent range. Expect not only a high interest rate, but high points for the origination.

Investment Banks

Almost always conduit lenders, these can function as interim lenders for large transactions. Almost always, they are nonrecourse lenders and have very strict underwriting requirements.

Leasing Companies

A relatively new source of financing for self-storage projects, leasing companies can finance the purchase of buildings, construction and equipment. These lenders are interested in smaller transactions. High levels of leverage and long-term loans are common characteristics.

Life Companies

Usually reserved for larger, high-quality properties, life-insurance companies will offer some of the best rates at moderately conservative levels of leverage. Sometimes very particular about the strengths of the borrower, most life companies have fairly strict policies, and many do not understand self-storage projects.

Loan or Mortgage Brokers

Flexible in assisting you find the best deal or the one that most suits your needs, brokers are not usually lenders but intermediaries working on your behalf. If a broker is an exclusive correspondent, he may be the only way to access a particular lender (such as a life company). Borrowers are encouraged to work with brokers experienced in self-storage loans. The broker can assist you in packaging your loan most expedient presentation to lenders and may work with banks.

Private-Money Lenders

These are very flexible and very expensive sources of capital. Usually reserved as the last resort for capital (just behind hard-money lenders), private lenders have almost no regulations for lending and are often unlicensed. They can, however, be terrific sources for difficult transactions.

The Loan Application

You will need to put together a sound loan package. The quality of your presentation can make a huge difference in the processing of your loan. Make certain you can answer all the questions the lender asks, and be prepared to provide supporting documentation. Do your homework well ahead of time.

One of the most critical elements is the loan request or executive summary. This document should be very succinct and yet comprehensive enough to cover all of the salient facts of the loan. Know what the lender's approximate loan terms are, and make your request conform to its requirements.

If you know the lender will not lend at par (no points), do not request one. Before you submit your request, understand the underwriting requirements of the lender. If you know the advance rate, or loan-to-value, is at a maximum of 75 percent, do not try for an 80 percent loan. Save your negotiating power for the most critical of elements, such as rates and terms.

The executive summary or loan request should be a "pull-out" or stand-alone document so it may be easily copied. It should be provided in digital and hard-copy format. It should contain:

Loan-Request Essentials

  • Loan amount
  • Length of loan
  • Amortization
  • Interest rate
  • Loan-maturity date
  • Index
  • Margin
  • Name, address and type of borrowing entity
  • Where, how and date the entity was formed/documented
  • Contact name and information
  • Principals (more than 20 percent interest)--names and contact information
  • Principals--net worth and income (each and total)
  • Exit strategy or take-out
  • Names and contact information: loan broker, real estate broker, developer, contractor, engineer, architect, attorney, property manager
  • Costs (land, soft, hard, carry) as a percent of total loan
  • Loan-to-value
  • Loan-to-cost
  • Debt-to-equity
  • Loan per gross square foot
  • Loan per net-rentable square foot
  • Annual cash-flow summary: income, expense, net operating income, debt service, net cash flows
  • Annual cash flows as a percent of revenue and per-square-foot net-rentable
  • Investment analytics: cash-on-cash returns, IRRs, developer's yield
  • Cash-flow projections to stabilization
  • Complete construction costs

Organize all of the supporting information for your loan request. These documents prove everything in your executive summary. The information should be indexed and tabbed for easy reference. It should be separate from, but include a copy of, the executive summary.

Construction-Loan Support Documents

  • Résumé or corporate dossier
  • Financial statement
  • Tax returns (three years)
  • Articles of incorporation or partnership docs
  • Fictitious-name registration
  • Trade-name registration
  • Feasibility study (complete)
  • Construction contract
  • Construction costs (detailed, preferred on AIA form)
  • Construction-company resume
  • Three sets of plans (stamped)
  • Draw schedule
  • Property-tax bill (paid)
  • Purchase agreement on land
  • Survey (ALTA)
  • Environmental reports
  • Soil report
  • Statement from engineer on technical needs
  • Management plan
  • Marketing plan
  • Management-company résumé
  • Month-by-month, pro forma operating statements with cash flows (five years)

Permanent or Refinance Loan-Support Documents

  • Résumé or corporate dossier
  • Financial statement
  • Tax returns (three years)
  • Articles of incorporation or partnership docs
  • Fictitious-name registration
  • Trade-name registration
  • Survey (ALTA)
  • Environmental reports
  • Certificate of occupancy
  • Business license
  • Management plan
  • Marketing plan
  • Management-company resume
  • Description of the property
  • Description of current operations
  • Complete market survey (maps, photos and rates of competitors, demographics, traffic counts, photos of property)
  • Year-end income and expense statements (three years)
  • Year-end rent rolls (three years)
  • Year-end potential-income reports and management summary (three years)
  • 12-month pro forma income and expense statement
  • Source and use of funds
  • Accounts-payable schedule
  • Accounts-receivable schedule
  • Occupancy history (three years)
  • Rental-rate history (three years)
  • Month-by-month income and expense statements (12 months)
  • Month-by-month potential income reports and management summary (12 months)
  • Yellow Pages bill and contract
  • Insurance bill and policy-declarations page
  • Property-tax bill (paid)
  • On-site manager resume

Following these guidelines can help you to obtain financing under the best circumstances. The best loan is one that meets your needs. Be prepared and focused, and show the financier you are on his team by responding quickly to questions and requests.

RK Kliebenstein is the founder and president of Coast-To-Coast Storage, a licensed mortgage-brokerage business based in Florida. Mr. Kliebenstein has provided financing clients across the country and is working on an equity placement in Europe for a U.S. investor. He is a well-known industry author, speaker and consultant. For more information, call 877.622.5508; visit www.askrk.com.

Article can be found at: 
» http://www.insideselfstorage.com/articles/2b1FEAT5.html 11/01/02

 
 
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