The State of Self-Storage Financing: 2008-2009

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In addition to the overbuilding that has occurred in many parts of the country, many lenders are shying away from self-storage due to its perceived special-use tag. Lenders may also require a lower loan to cost or higher cap rate than market for underwriting purposes. Strong borrower financial statements need to include excellent liquidity in addition to net worth, and the borrower may also need a secondary source of income from a primary occupation or other to qualify.

Lenders may also prefer the borrower has experience in owning and managing self-storage properties even if an outside property management firm will operate the property. Don’t be shocked to see rates in the prime plus-2 percent range (7 percent) or more to obtain construction financing today.

One large national self-storage construction lender, while still offering rates at prime plus-0 percent, requires borrowers to have enough cash in the bank to pay the interest cost out-of-pocket through lease-up as they don’t build in interest reserves into the loan. They also require a strong borrower financial statement, and underwrite the property to a minimum 8 percent cap rate and 1.30 DCR, which may reduce the LTV and, thus, the loan-to-cost loan amount calculation due to LTV restrictions.

Other lending nightmare issues include the amount of time it takes to close a loan. IC and PFs are notoriously slow, with 75- to 90-day closing timeframes common. Many portfolio lenders have cut staff or are running lean, extending out closing timeframes due to workload. This is not the case with every lender, but it is happening enough to be a concern on purchase transactions with short closing timeframes or escrows without extension possibilities.

Properties which contain a majority of RV/boat parking versus brick and mortar enclosed storage, or mixed-use facilities such as a carwash or retail may find a harder time obtaining a best rate and high LTV financing due to either the large amount of business income being generated from carwashes or the lack of enclosed storage spaces. RV/boat-heavy facilities will need to distinguish themselves from a land loan.

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