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Is Your Self-Storage Loan Overleveraged?

Shawn Hill Comments

Around this time last year, I wrote a column for Inside Self-Storage titled, “The Credit Crunch: From Wall Street to Main Street.” Its two main points were that the economic situation was far worse than expected, and the credit crisis had extended beyond Wall Street capital markets to affect most consumers. A year later, I think few would debate the article’s premise.

As the recession deepens, I recall one of my mentors—a wise and experienced credit officer—telling me, “It is not until the tide goes out that you learn who has been swimming without their trunks on.”

Mortgage bankers field daily calls and e-mails from people wanting to better understand the current lending market. Media coverage has left self-storage owners and investors with the impression that banks are not lending. Meanwhile, owners with immediate financing needs are concerned about finding a lender who is willing to support their transactions. Perception is reality in our world, and the lack of real information, coupled with a healthy dose of headline risk, has markets paralyzed with fear.

The fact is banks are lending and deals are getting done in today’s market environment. Make no mistake though: Lenders are much more selective. There are fewer of them, and there is far less availability of non-recourse capital. Today’s deals likely bear no similarity to those transacted 18 months ago, but there is certainly money available for qualified transactions if you know where to look and have realistic expectations.
Covering Your Exposure in 2009

Banks are underwriting an average of 65 percent loan-to-value (LTV) and applying much more stringent underwriting criteria. To arrive at cash flow, they analyze a property’s extended history (trailing 12 months or more), use conservative expenses, and make sure amortizations are short enough to ensure some pay down of the balance over the loan’s life. This generally means the lender’s idea of reliable underwritten cash flow is different (read: lower) than the owner’s perspective and, in some cases, even the actual operating results.

The most challenging situation we face is many loans made in the past five years are likely overleveraged by today’s lending criteria. If you have a loan maturing, this can be a significant problem that results in the deal requiring an equity infusion to rebalance the capital stack.

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