It’s the peak of football season. Each weekend, we see coaches analyzing down situations, pondering options, whispering into headset microphones and calling in plays.
Deciding whether to refinance your self-storage property is not much different. You must size up the financing field, especially since credit markets have tightened lending requirements in the past 18 months. You have to consider your facility’s operating history and borrowing ability given today’s lending environment. And you need to think how available credit will affect your investment returns. Only then will you know if it makes sense to make the call to refinance.
While the credit crunch has all but eliminated the go-to play from recent years (conduit financing), you don’t have to throw a desperation Hail Mary pass to obtain a loan in today’s market. You will certainly have to grind out some yardage in order to score storage refinancing, but with up-front analysis and educated play calling, you can be a winner in this arena.
The Playing Field
Let’s start by briefly examining today’s refinancing playing field. Conduit lenders have been on the sidelines for 12 months, and it is difficult to predict when they will suit up again for an appearance. For years, conduit loans were a great tool for borrowers to refinance stabilized or near-stabilized properties with long-term, non-recourse debt at attractive rates and long amortization periods.
These loans also allowed investors to pull out cash and equity based on the debt coverage and loan to values. Many experts offer two reasons for conduit lending’s return from the disabled list:
- Commercial property fundamentals remain strong with stable operating results and low default rates.
- Credit markets need a Wall Street securitization vehicle like conduit loans to provide marketplace liquidity since banks and life insurance companies alone simply do not have this capacity.
Upon their return, do not expect conduit loans to display the same dramatic pass-play style of recent years. They will be more akin to a conservative ground game that offers terms similar to those from the conduit rookie years of the mid-1990s.
For the past 18 months, banks have been—and will continue to be—the self-storage sector’s primary credit source. Unless it’s a large loan, these institutions keep loans on their balance sheets and are limited by the amount of capital they have and can raise. Banks face increasing regulatory pressures, and many have some exposure in residential or condominium construction projects, which is resulting in greater risk and fewer loan pay-offs.
Accordingly, many banks are now more selective with new loan originations by lending only to existing clients and select new customers, and quoting more conservative terms. You may find a bank’s risk-management condition will determine your financing request. While many lenders seeking to eliminate portions of their portfolio will politely ask clients to seek financing elsewhere, others are in stronger positions and wish to build clientele.