By David Smyle

While the economy is by no means out of the woods yet, the lending industry has seen significant improvement, with the easing of credit and capital flowing back into the market. This is good news for self-storage owners and investors, who can take advantage of the advantageous lending environment.

As the FDIC winds down its closure of failing banks, were starting to see new community banks spring up, and the continued merger of banks into stronger institutions is allowing lending to flow again. Thanks to the Small Business Administrations (SBA) recent inclusion of self-storage as an acceptable property type and USDA lending programs for rural properties, those self-storage owners with high loan-to-values (LTV) see some light at the end of the tunnel. They can possibly refinance a maturing loan or improve their interest rate.

At the time of this writing (mid-January), the one-, five- and 10-year Treasuries are at .1 percent, .86 percent and 1.99 percent respectively. Compare this to January 2007 when the rates were 5 percent, 4.68 percent and 4.68 percent (inverted yield curve). This has led to unbelievably low interest rates for some lenders; others have chosen to keep rates near 6 percent for five-year deals. In metro areas where banks are forced to compete, a five-year fixed rate can be less than 4 percent.

Life-Insurance Companies

While most lenders, including life-insurance companies, sat on the sidelines in 2008 being very selective on funding decisions, everyone is back in the game now. A limited number of life-insurance companies will lend on self-storage, but typically on larger deals of $5 million or more. Some smaller life-insurance companies will go down to $500,000 and, preferably, $1 million minimums.

The life-insurance companies prefer lower-leveraged transactions (60 percent or less). If you can live with a self-amortizing or shorter-amortized loan program, youll find rates as low as 3.5 percent on 10-year fixed and 4 percent to 4.5 percent on 15-year fixed rates. The whole range of programs exist with amortization up to 30 years, fully amortized fixed rates up to 25 years, and everything in between. Interest-only is possible, and non-recourse is standard on most programs.

The downside on life-insurance company lending is the high cost of entry, with borrowers needing to put up a deposit of 2 percent of the loan amount during the application processrefunded shortly after closingin addition to approximately $8,000 to $10,000 of third-party reports and another $5,000 to $20,000 in lender legal fees. Despite the higher costs, the overall financial gains on interest savings far outweigh the initial outlay.

Closing time is also longer at 60 to 90 days, but rates are locked for 90 days up front. In some cases, forward rate locks are available for six to 18 months in advance of funding.

Life-insurance companies also prefer buildings built of wood frame, steel or concrete block vs. all-metal. In addition, they favor larger metro areas and well-located properties with good access and visibility.
Most life-insurance companies lend through a network of mortgage-banker correspondents who not only originate but service the loans. If desiring this type of loan, youll need a commercial mortgage banker who is able to fund loans nationwide.

Conduits

After a dismal couple of years with no saleable product or market, the conduit programs, while still tenuous, are making a comeback. Because the life-insurance companies are cherry-picking most of the better, low-leveraged properties, the conduitstypically with minimum loan amounts of $5 million to $10 millionhave begun looking at secondary and tertiary markets for product on which to lend. Theyre also funding higher LTV properties the life-insurance companies wont touch, satisfying the non-recourse appetite for storage owners. Rates can be in the low to high 5 percent range for a 10-year fixed-rate loan with 25- to 30-year amortization.

Expect legal fees to approach $15,000 to $20,000, with early rate locks not as prevalent. Defeasance prepayment is still the penalty of choice on these programs, but for those long-term holders, it may not be an issue. Most conduit loans are funded and some serviced through the mortgage banker/broker network.

Banks

Banks continue to be the loan option for most borrowers due to the size, costs, market or flexibility required. Most are recourse lenders. Relationships also play a key role for ease of a transaction and certainty of execution. However, it seems most banks (except those in the West) prefer shorter amortizations of 15 to 20 years vs. 25 years, and sometimes 30 years for many lenders in the western United States.

Bank lending rates can be all over the board, but most institutions prefer to limit fixed-rate terms at five years and will lend that money out between 4.75 percent and 6 percent. This is not to say you cant find a seven-, 10- or even 15-year fixed rate at banks, but it's just not the norm.

Banks are also still one of the few construction lenders out there. But unless your self-storage project is the diamond in the rough, dont expect it to be easy to find funding. There are loans getting done, especially for project expansion, but only for deals with strong sponsorship, good operating histories and market demand.

Again, this is a good opportunity for an SBA loan option. Many borrowers choose the bank option for the prepayment flexibility and lower costs of origination, even with the shorter fixed-rate term and shorter amortization.

Credit Unions

Just like banks, credit unions had their share of commercial real estate problems and curtailed lending while they assessed their portfolios and licked their wounds. Theyre also back in the game, offering borrowers the flexibility of little or no prepayment penalty, a competitive rate and amortization, and varied products.

Not every credit union lends on commercial property. Also, theres usually a membership eligibility requirement that must be met to obtain a loan. This is typically where you live, work or worship in the credit unions lending or branch geography. Theyre also a recourse lender in nearly all scenarios, but a definite option to consider when weighing your financing choices.

Three- to 10-year fixed rates are usually the programs offered, with amortization from 20 years to 25 years and sometimes even 30 years. Rates will be competitive, ranging from high 4 percent to high 5 percent. Credit unions can be state or federally chartered, with federally chartered institutions typically being able to offer a larger geographic lending area, possibly even national.

Mortgage Bankers and Brokers

While most mortgage bankers and brokers do not originate from their own funds, they still play an active role in the lending arena, helping borrowers find loan programs not available through local banks and credit unions. With at least a dozen conduit options and a similar number of life-insurance company lenders actively providing self-storage capital, mortgage bankers and brokers offer access to these funds in an efficient and cost-effective manner. They can also locate bank and credit-union programs from institutions not in your area.

Rates will be going up because they cant get any lower. I said the same thing in 2004 when the 10-year treasury was at 3.33 percent. Oh, well. I dont think I was the only one wrong on that, but I think Im pretty safe on that comment now. Heres to a profitable 2012!

David Smyle is the vice president and managing director for Churchill Mortgage Capital, which originates or services loans in 14 states. He specializes in financing options for self-storage and other commercial property types nationwide. To reach him, call 619.956.986; e-mail [email protected] .