The combination of the value increase, lower interest rates and easier underwriting would mean you could add about 50 percent to the loan amount and pay roughly the same amount of interest as before the refinance. All of this was available without any personal liability. The real estate business was very good to self-storage owners over the last handful of years. It just doesn’t get any better than free money!
So It Goes
Starting last summer, things began to change. The sub-prime market in residential real estate got very weak, the commercial loan folks said the loan-to-value ratios were out of whack and wanted the underwriting tightened up, then the big Wall Street Banks started taking big write-downs. To quote Kurt Vonnegut, "and so it goes."
Today we find ourselves in quite a different spot than a year ago. Cap rates have gone up between 1 percent and 1.5 percent, causing values to decrease, but even worse, there are fewer buyers around. Despite the Fed lowering short-term rates, the spreads (the difference between the 10-year U.S. Treasury rate and the interest rate) lenders charge for risk have almost tripled, leaving loan rates just slightly above where they were last year (which are still very reasonable in the context of a longer history). The bad news is that all of the Wall Street generated conduit loans are gone; thus, the life companies and banks can now get the exact terms they want and need from needy borrowers.The underwriting is much more restrictive (maybe saner):
- 12-months trailing income
- No proforma income
- 60 percent to 70 percent loan-to-value ratio
- Good markets only
The remaining lenders, while not impossible, can be pretty picky. I asked Steve Clifford at NorthMarq to compare the loan a hypothetical class-A quality facility could have gotten last February and again this February. His summary is below.
The bad news is that not only are loans harder for you to get, but they are also harder for your potential buyer to get. Even though the cap rates have gone up and values down, the lower loan-to-value ratios means the buyer must still put up about as much equity. This doesn’t mean there are no buyers; there are still many, but they aren’t quite as eager as before.