Banking deposits. To close a deal today, property owners must be able and willing to provide lenders with operational deposits as well as some depository facility. Be forthcoming in what you and your partners can offer in the form of deposits. Banks will continue to look for sources of capital, and good old-fashioned deposits are the most basic.
Recourse. With some very low leverage exceptions, most loans will require a recourse element going forward. This presents you and your partners with a new decision: Who is willing and has the wherewithal to sign personally for a self-storage loan? Often, the lender answers the question by requiring all the property’s owners to sign recourse.
Before you put your name on the dotted line, though, keep in mind that with many loans being modified and extended, recourse will come into play. As an owner, you’ll need to believe in the property and the ultimate ability to refinance it, even if you’re able to extend for a one- to three-year period today.
Elastic street rents. If an appraisal is required, it’s difficult to peg market rates today. Many owners are pricing concessions into street rents. Actual rent rolls for you and your competitors would reflect an expected rent from occupied units that is higher than if you were to extrapolate street rents currently being quoted.
It’s important to stress to lenders and appraisers that rents are elastic and can change daily. They need to take into account a period of time and devise reasonable market data points in determining “market.” An appraiser strictly using current discounted market rents will drastically hurt the final appraised value. This may be the difference in whether a deal is financeable or not.
Extend/modify maturities. A phrase frequently heard in the banking sector these days is “extend and pretend,” which refers to lenders extending loans while hoping for better times. The real question is whether they are simply kicking the can down the road and putting off the problem to a later date.
Property-loan extensions could very well be the best answer when alternative financing is not available, or if a forced sale in a weak market would result in substantial losses to the borrower and even the lender.
In today’s environment, be willing to negotiate. Lenders generally want give and take and expect some additional commitment from the borrower. Often, that arrives in the form of additional collateral, principal paydown, recourse, or additional structure to existing loan terms.
CMBS loans. If you currently hold a maturing commercial mortgage-backed security loan, try to obtain new financing. If you need to work with a servicer, a new rule established in late 2009 allows a master servicer to address a potential extension or modification with the owner prior to the property going into actual default.
Keep in mind that servicers will not write down the loan’s principal balance. The typical extension period is for one year at a time, with at least a one-point fee and some principal paydown. Non-performing loans are handled on an individual basis.
Seek Professional Advice
Today’s market is moving quickly. Given this highly dynamic financing environment, you should consult with storage-lending experts who are in the market on a daily basis and can help you through these trying times.
Ask questions, get advice, and then decide how to best maintain your serve. The players with the stamina and strategy to survive this cycle will still win, even if they are once again facing a break point.
Neal Gussis is a principal at Chicago-based The BSC Group, a full-service financial services firm, where he provides mortgage brokerage and financial consulting solutions to commercial real estate owners nationwide. During his career, Mr. Gussis has secured more than $1 billion in self-storage financing for client transactions. To reach him, call 847.922.3750; e-mail