Financing Memorandum

A request for mortgage financing given to lenders by commercial real estate borrowers (or their representatives) for the lenders’ investment consideration. The memorandum will typically highlight various terms and property specifics such as the borrower’s requested loan terms, a detailed description of the property, the location and relevant demographic trends, a financial summary, pictures, comparable sales and/or rentals, and any other information pertinent to the investment. The Financing Memorandum is similar to the Operating Memorandum in format and content, but the offering is for a real estate debt rather than equity investment.

Putting ‘Financing Memorandum’ in Context

SummitCRE Capital Markets Group has been engaged by Sunshine Storage, LLC to prepare a Financing Memorandum for the refinancing of the Sunshine Storage Portfolio, a collection of eight self-storage properties located across major Southeastern U.S. markets, including Atlanta, GA; Nashville, TN; Charlotte, NC; and Raleigh, NC. The portfolio, which totals 1.2 million rentable square feet across 9,500 units, has experienced consistent occupancy rates hovering around 92% over the past three years. With a mix of climate-controlled and non-climate-controlled units, the properties cater to a diverse demographic, including residential movers, local businesses, and college students.

Background and Objective

Sunshine Storage, LLC originally acquired the portfolio in 2016 and has since implemented modest improvements that have increased operational efficiency and reduced costs, making this a core-plus asset. The company now seeks to refinance the existing $45 million loan on the portfolio to take advantage of current lower interest rates, and potentially increase the loan amount to fund further value-add initiatives, such as installing solar panels and upgrading security systems across the facilities. The Capital Markets team at SummitCRE is tasked with preparing the Financing Memorandum, which will serve as a comprehensive loan request package to prospective lenders.

Key Information Highlighted in the Memorandum

The Financing Memorandum, drafted by SummitCRE, includes detailed property-level and portfolio-level information to attract senior lenders and provide a complete picture of the opportunity. Key sections of the memorandum include:

• Requested Loan Terms: The borrower is seeking a $50 million loan with a 10-year term, fixed-rate, and interest-only payments for the first two years. The loan would replace the existing $45 million balance, with the additional $5 million intended for the solar and security upgrades.
• Property Description and Location: Each property in the portfolio is profiled in detail, with information on year built (ranging from 2004 to 2012), recent renovations, and market-specific highlights. For example, the Atlanta facility, located in a fast-growing suburban area, benefits from a surge of new housing developments and boasts an average occupancy of 95%. Meanwhile, the Raleigh location caters to nearby university students, offering smaller unit sizes with shorter lease terms.
• Demographic and Market Trends: The memorandum includes a deep dive into each market’s demographics, highlighting population growth in these Sunbelt cities, the migration of residents from higher-cost states, and the rising demand for self-storage facilities. For example, Charlotte has experienced a 9% population increase in the last five years, driving demand for storage space, especially among transient renters and homeowners downsizing.
• Financial Summary: A detailed financial section outlines the current net operating income (NOI) of the portfolio at $6.25 million, reflecting a 6.25% cap rate. With the proposed refinancing and upgrades, Sunshine Storage expects to increase NOI to $6.75 million over the next three years, creating value and allowing for potential future refinancing or sale at a higher valuation.
• Comparable Sales and Rentals: To support the requested loan amount, the memorandum includes an analysis of comparable self-storage property sales in similar markets, demonstrating recent cap rates between 6% and 6.5%, and rental rate trends showing steady increases in unit prices across all facilities. For instance, a recent sale of a similar facility in Charlotte achieved a cap rate of 6.1%, supporting the lender’s valuation of the asset.

Why the Financing Memorandum is Critical

The Financing Memorandum serves as the cornerstone of Sunshine Storage’s refinancing effort. By packaging all relevant financial, market, and property-specific information into one comprehensive document, SummitCRE ensures that lenders can efficiently evaluate the opportunity. The document allows lenders to quickly assess the risk profile, understand the borrower’s plans for the portfolio, and evaluate the strength of the underlying real estate. Lenders will use this memorandum to underwrite the loan, comparing the portfolio’s performance and market positioning to other similar opportunities in the region.

Additionally, by highlighting the planned upgrades and market dynamics, the memorandum makes a compelling case for the increased loan amount, showing how the improvements will add value to the portfolio and ensure long-term financial stability.

Conclusion

In this hypothetical scenario, the Financing Memorandum acts as both a marketing tool and a financial justification for Sunshine Storage’s refinancing strategy. With solid fundamentals, a strong Southeast U.S. market, and a clear plan for further improvements, the memorandum enables SummitCRE to effectively present the portfolio to lenders and secure competitive financing terms.