Self-Storage Lending: Restrictions Today, Better Loans Tomorrow
|Copyright 2014 by Virgo Publishing.|
|By: Anthony DiMarco|
|Posted on: 09/29/2009|
The implosion of the subprime residential-lending market and tightening of the overall credit markets has had a significant impact on self-storage lending. As losses on residential loans have mounted, banks’ willingness to lend on commercial properties has dropped significantly. In an effort to firm up balance sheets for bank stability and regulatory purposes, lenders have largely scaled back lending in all commercial sectors, including self-storage.
Another significant effect of the credit crisis is the temporary elimination of commercial mortgage-backed securities (CMBS), or conduit lending. Given the tremendous volume of conduit loans placed on self-storage properties over the last five to seven years, this is a noteworthy change for this sector’s investors and borrowers.
The CMBS blowup was due in part to overly aggressive lending in a few specific sectors, such as large metropolitan office and apartment loans. For instance, 10-year interest-only loans to office developers based on underwriting that assumed tremendous rent increases post-acquisition were some of the worst-performing loans placed by conduit lenders in the last three to four years.
Many large transactions with little cash equity were financed aggressively based on unrealistically optimistic financial projections. Lenders were making loans on pro forma income that never materialized.
Today, the landscape for self-storage asset debt has changed quite a bit, depending on the amount of leverage the developer is seeking. For low-leverage loans—60 percent loan-to-value (LTV) or less—on good quality assets, non-recourse financing is available. Recourse-only loans are available as a borrower approaches 70 percent to 75 percent LTV.
Interest rates range from 6 percent to 8.5 percent depending on the leverage, asset quality, and borrower net worth and experience in the industry. For those deals, the borrower’s personal net worth and credit history will come in to play and have a significant impact on lending parameters. The industry is typically seeing a maximum of 75 percent LTV, 25-year amortizations, three- to 10-year fixed rates, and closings taking roughly 60 days from start to finish.
Conduit lending will resume in the future, likely in late 2010 or early 2011. However, the conduit-lending platform will be modified considerably. It is possible that future conduit lenders will need to hold a piece of the loan on their books as opposed to selling the entire loan in the secondary markets.
It’s also likely that lenders placing conduit loans will take a larger role in the servicing of these loans, which will allow them to build a stronger relationship with borrowers than in the past. There will be a market for good loans in the self-storage sector in cases where the borrower has a solid track record and the asset has consistent cash flow.
As the government’s Term Asset-Backed Securities Loan Facility (TALF) program takes hold and investors begin to pour more money into top-tier commercial bonds, it will have an affect on spreads and competition for regional banks and a few other lenders that seem to be the only groups right now with the desire to lend aggressively. Borrowers, however, should be concerned about loans coming due on average-quality storage facilities—ones for which occupancy hovers in the 80 percent range or lower.
Based on current market conditions, there are options for positioning assets to weather this economic storm. For owners that currently have loans coming due, there are choices. Consider transitioning to a two- to three-year bank loan that will help you get through the most turbulent part of this lending environment, after which you can expect credit requirements and lending parameters to loosen significantly.
Specifically, the conduit market should come back in the next 12 to 24 months. Loans coming due now will be able to be refinanced with moderate to aggressive terms. Bank loans with non-punitive prepayment penalties will enable borrowers to transition to a long-term, non-recourse loan with minimal cost.
There are additional steps you can take to prepare your business for a better loan in the future. Spend the extra capital to keep your asset in good shape, drive or maintain occupancy at high levels, and keep your tenants satisfied. In this way, you’ll be a market leader that will survive to see not only more aggressive lending, but also the return of higher property valuations and a more vibrant market for self-storage property owners and investors.