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An Open Letter: Self-Storage Real Estate in This Economy

Michael L. McCune Comments
Continued from page 1

The circumstances of this debacle leave self-storage operators few options and many challenges. Being unprepared is not  good.  My experience tells me owners have three choices.

Option 1: Batten down the hatches. If you want to hold on to your property for the long pull, the questions you must consider are:

  • Are you willing to hold the property for five years? 
  • Do you have solid financing currently in place for a contractual period of at least five years?
  • Do you have liquid resources to cover the debt service in the event your revenue declines 20 percent?
  • Are you among the five most competitive properties in a 3-mile radius?

If you can’t answer yes to these questions, you will have a serious problem reaching your objective of holding the property for a long period. Opportunities to refinance a loan are scarce in today’s world, and the terms will be difficult as to rates, adequate loan amounts and recourse. Your risk of not having enough loan term or staying power in a credit crisis and a seriously decaying economic environment is high.

If your current loan was made in 2002 through 2006, it is highly probable the property could not be appraised at a value that would yield the same loan amount as your current loan amount. This is because the loan-underwriting standards have gone from extremely lax to impossibly stringent. Remember, many loans have personal recourse and there are significant tax impacts on the “forgiveness of debt” in a foreclosure. If your answers are “no” to any of these questions, try Option 2.

Option 2: Move on. If you are thinking of retiring, lowering your risk, concerned about your market or just want to take it easy, then maybe you should think about selling. The necessary questions to answer include:

  • Are you willing to sell at the market price or wait several months so you can?
  • Do you believe prices are down at least 20 percent or more from the highs in 2006? 
  • Does your loan not have a “lock-in” that prohibits a sale?
  • Do you understand cap rates have gone up dramatically and generally range from 8 to 11, depending on the location and property?
  • Are you willing to pay the taxes?
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