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How to Choose a Self-Storage Lender in a Lender’s Market

Jessica Mandel Comments

Choosing a lender is a vital part of any successful self-storage financing transaction, but in today’s environment, it may seem like lenders are choosing you rather than the other way around. How can you be prepared?

Even in an uncertain lending market like the one we are experiencing now, property owners still have a need for financing—whether it is new financing, a revolving line of credit, structured financing to recapitalize property investment, or a refinancing of an existing loan to more favorable terms. With vast changes in the financing environment during the past 16 months, particularly with the near-extinction of commercial mortgage-backed securities (CMBS) financing alternatives, the challenge for storage owners is to find the best lender to help them accomplish their financing goals.

Undoubtedly, we are in a lender’s market and the ability to achieve your financing goals is controlled by lending sources. While a borrower may have an idea of what he needs regarding financing, he must be flexible with his expectations relative to terms and loan proceeds in order for the transaction to actually work.

Do Your Homework

Before choosing a lender, determine in which real estate asset classes the potential lending institution specializes, how many self-storage financing transactions it has completed, and if it currently has money allocated for storage property. Because self-storage is not considered one of the four major food groups (office, multi-family, retail and industrial), some lenders are not familiar with underwriting a storage loan, may think storage lending is riskier than other property types and avoids self-storage transactions altogether.

Plenty of lenders, however, have been financing self-storage properties for years. In addition, you will likely find other lending sources interested in entering the self-storage market because of the positive press the industry has received during the current economic downturn. The low default rate on storage loans is an enticing statistic for lenders seeking commercial real estate transactions in today’s volatile environment.

Finding a lending source is just the first step. Next, you need to find one with available capital. Due to the credit crunch, finding a financing source with money to lend has become a serious issue for property owners. It is a classic supply-and-demand conundrum. While the need for financing is still strong, there has been a reduction in the supply of loans (due in large part to the sidelining of most conduit funding sources), along with a corresponding increase in the cost of obtaining bank financing. When this equation will return to a better sense of equilibrium is anyone’s guess.

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