How Will Self-Storage Owners Survive the Credit Crisis?

Neal Gussis Comments
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If you are on a construction loan and have the ability to convert into a mini perm in the next 12 to 18 months, you probably will be in a situation where going into the mini-perm portion of the loan is your best option. The only caveat is if there are certain operating hurdles to achieve.

If you have a loan coming due in the next two years, it would be prudent to start shopping for new financing now. It takes a lot longer to secure new financing today than in years past. The market is no longer homogenous and each lender will look at each loan request differently.

One of the major changes resulting from the demise of commercial mortgage-backed securities lending is the availability of non-recourse financing. You should expect to receive a recourse loan unless you are seeking a loan-to-value of around 50 percent. Even then, you’ll have limited non-recourse options.

If you have a construction loan maturing in the next 18 months, you should also start planning ahead on your loan take-out strategy. Most developers were able to get highly leveraged construction loans in the recent frothy lending environment. It was not uncommon for construction loans to be made at 80 to 85 percent of cost.

The real challenge for those developers will be to have operating performance that is strong enough at the end of two to three years to justify a take-out loan at the same level. Many of them will be at a breakpoint where they will need to infuse equity in order to obtain a new loan. If the lease-up has not been strong, they also risk facing a challenging market to obtain a new loan at all.

Regardless of where you are in the breakpoint continuum, you must also manage your operations in addition to your financing risks. Your customer base is probably acting differently by now: Looking at their shrinking pocketbooks and cash flow, residential and commercial tenants are making choices about whether they should continue renting their storage spaces.

No need to sugarcoat the truth; these are not the best of times. In fact, they’re quite humbling times.

Here’s some advice: “Staying power will help us stay in the game.” Try that for your New Year’s resolution. Even in the economic downturn, self-storage has again proven to be one of the best real estate investments available and one of the most recession-resistant. That sense of staying power should inspire you to stay in the game.

Through these tough economic times, be mindful of keeping life in perspective. Appreciate all the good around you, as well as all the good you can bring to others ... especially those who may be reaching their own breakpoint.

Neal Gussis is a principal at Chicago-based Beacon Realty Capital, where he directs the firm’s self-storage group. He can be reached at 312.207.8240; e-mail ngussis@beaconrealtycapital.com.

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