The implosion of the subprime residential-lending market and tightening of the overall credit markets has had a significant impact on self-storage lending. As losses on residential loans have mounted, banks’ willingness to lend on commercial properties has dropped significantly. In an effort to firm up balance sheets for bank stability and regulatory purposes, lenders have largely scaled back lending in all commercial sectors, including self-storage.
Another significant effect of the credit crisis is the temporary elimination of commercial mortgage-backed securities (CMBS), or conduit lending. Given the tremendous volume of conduit loans placed on self-storage properties over the last five to seven years, this is a noteworthy change for this sector’s investors and borrowers.
Today’s Lending Climate
The CMBS blowup was due in part to overly aggressive lending in a few specific sectors, such as large metropolitan office and apartment loans. For instance, 10-year interest-only loans to office developers based on underwriting that assumed tremendous rent increases post-acquisition were some of the worst-performing loans placed by conduit lenders in the last three to four years.
Many large transactions with little cash equity were financed aggressively based on unrealistically optimistic financial projections. Lenders were making loans on pro forma income that never materialized.
Today, the landscape for self-storage asset debt has changed quite a bit, depending on the amount of leverage the developer is seeking. For low-leverage loans—60 percent loan-to-value (LTV) or less—on good quality assets, non-recourse financing is available. Recourse-only loans are available as a borrower approaches 70 percent to 75 percent LTV.
Interest rates range from 6 percent to 8.5 percent depending on the leverage, asset quality, and borrower net worth and experience in the industry. For those deals, the borrower’s personal net worth and credit history will come in to play and have a significant impact on lending parameters. The industry is typically seeing a maximum of 75 percent LTV, 25-year amortizations, three- to 10-year fixed rates, and closings taking roughly 60 days from start to finish.
The Return of the Lending Market
Conduit lending will resume in the future, likely in late 2010 or early 2011. However, the conduit-lending platform will be modified considerably. It is possible that future conduit lenders will need to hold a piece of the loan on their books as opposed to selling the entire loan in the secondary markets.