However, some owners (Prey) have discovered their plight of declining values and are worried about the constant value of the mortgage eating away at their equity, not to mention declining cash flow because of the weak economy. Hopefully they had the good sense and fortune to have a long maturity loan from the start. If not, they should immediately begin to think seriously about refinancing or possibly selling. The problem is that when the old loan has to be refinanced and the value is down, the new lender won’t lend as much, and the owner may have to make a serious cash infusion just to refinance with a lower loan.
To continue the analogy, to keep your place in the boat you must carefully analyze the situation and act surely and quickly. Lastly, for those owners (Unaware) who haven’t reviewed their real estate situation to figure out exactly what they must do to resolve a potential problem, swimming lessons might be a good idea.
Do the Math
This analogy presents the gist of the situation, but some numbers might help you understand the mechanics as well as the magnitude. The numbers are illustrative, but are scalable in either direction to suit your property. The first column above shows the peak of the market, and the second assumes the same revenues and a valuation at a 9 cap rate. Nobody knows for sure where cap rates are today, but many experts think that cap rates will return to historic norms, which is in the “nine-ish” range.
The last column shows what will happen to value if the occupancy and rents are each down 5 percent and the resulting impact on the cash required to refinance the project. The loan-to-value ratios in the last two columns are very likely less than 75 percent, but rather than add another variable, I just used 75 percent. I believe that the math suggests a very serious problem on the horizon as this market moves forward; every day is one day closer to the maturity of the loan.
Consulting a real estate expert specializing in self-storage will either set your mind at ease or help you develop a plan to mitigate your situation. There are some very capable professionals in the industry who can help you navigate through the process. The best thing you can do is prepare yourself and not be caught unaware as the market continues to evolve around us.
Michael L. McCune is president of the Argus Self-Storage Sales Network, a self-storage real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com, a marketing medium for owners in the self-storage industry. For more information, call 800.55.STORE.