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Self-Storage Financing: Facing the Break Point and Predictions for 2010

Neal Gussis Comments
Continued from page 1

Relative strength of self-storage. It’s important to keep everything in perspective. In most cases, even with a decline in bottom-line income, the self-storage asset class is still covering debt and performing at profitable levels. 

Compared to the retail, hotel, office and multi-family real estate sectors, with their higher exposures to vacancy and rental pressure, storage is strong. Self-storage will also be on the leading edge of an economic recovery, as our industry’s month-to-month rental format will allow upward rental adjustments in a timelier manner.

As a property type, storage also tends to be on the smaller scale of commercial real estate deals. That’s a benefit in a tight market since lenders are more likely to make credit decisions on smaller transactions. Smaller deals also tend to be less complex.

Conservative money/changing risk tolerance. While liquidity will lead the banking sector’s recovery, it alone will not initially solve the leverage issues facing many owners. With some exceptions, expect loan-to-value ratios to remain at 50 percent to 65 percent. This low leverage, combined with lower property valuations, will crimp your ability to repay existing debt unless you currently have very low leverage.

Property performance and its ability to cover current and future debt will always be a big part of any banker’s decision process.  In 2009, many lenders restructured, modified or extended loans.  Based on individual circumstances, the tend will continue this year.

Projections indicate approximately $10 billion to $12 billion of self-storage loans will mature in 2010.  This amount is similar to prior years; however, there seems to be a shrinking acceptance of the storage property type with local and national capital sources that are able and willing to finance self-storage owners. In today’s environment, each bank has a unique philosophy guiding its ability and desire to extend credit.

Most lenders are now trying to work out troubled commercial real estate loans. Many will continue to clean up and maintain current balance sheets and focus on existing clients, thus making lending approvals a highly competitive experience for property owners. 

Banking relationships. Maintaining a proactive relationship with your lenders cannot be overemphasized. Let them know how your property is performing—good or bad. Be sure to provide them with required documents in a timely manner.

Unfortunately, you cannot be certain if your relationship with a loan officer or lender will last. We are all aware of the high turnover rate among these professionals. Many have been transferred to their banks’ distressed-asset workout units given the increase in property foreclosures.

The other uncertainty is the health of the bank itself. More than 100 banks closed in 2009, with projections of another 200 or more being shuttered and assumed by either the FDIC or other banking institutions before this financial crisis is finally over.

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