For storage properties expanding in phases, your best refinancing option is your existing lender which has completed the initial homework on you and understands the project’s strengths within the local market. The key is to present documented successful performance of the existing phases.
The best structure for expansion-phase financing is to create a new interest-only loan similar to the original construction loan and have the existing phase demonstrate sufficient cash flow to cover the new debt-service requirements. Keep in mind:
- Construction costs have risen and should be factored into your cost and profitability calculations.
- Overall market supply and demand conditions may have changed since your earlier building phases.
Your lender may not be in a position to meet your financing request or provide any financing at all. (If this happens, seek other local lenders and present your refinancing similar to a construction loan request.)
Increase Leverage/Cash Out
Typically, self-storage investors make an initial equity investment of 20 percent or more when building or purchasing a facility. Many will then want to increase their bottom line and increase their leverage to recapture some, if not all, of their initial cash equity. With conduits currently out of the market, it is now tougher to leverage equity; however, it can still be accomplished.
Your current lender is less likely than others to increase the loan, as they usually want property owners to still have “skin in the game,” but may increase your loan to 90 percent of original cost if the property’s operational performance meets their guidelines. Otherwise, competing banks will likely look at historic operating results and apply a 1.25-1.35 debt-service coverage test to determine a new loan amount.
Lower Interest Rate
Today’s market offers good opportunities to obtain highly favorable interest rates. It is not uncommon to obtain a three- to five-year fixed-rate loan in the low to mid-6 percent range. If your loan currently has a high interest rate, try renegotiating a lower rate and term extension with the current lender. It will get tougher though if your lender does not renegotiate. If you find another lender with lower rates, weigh the cost, time and current lender relationship to determine if running this play is worth it.
This is a cash-flow tactic that is part of the mix in a financing decision. With higher amortization, you lower your monthly principle pay down and improve monthly cash flow. Pre-credit crunch, self-storage deals typically had a 25- to 30-year amortization, and the first several years could be negotiated with interest-only provisions. Now, expect 25-year terms or less.