Self-Storage State of the Industry 2011: Financing, Construction and Development

By Amy Campbell Comments
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How will the new SBA loans change lending for this industry?

Hill: As of the time of this writing in December, the SBA programs for storage are pretty new, and the players involved are mostly trying to get their arms around the nuances of these transactions. The expectation is this will happen in the first half of 2011. At that point, these programs should become a viable source of capital for smaller (less than $5 million) transactions.

By nature, the SBA favors deals where the owner is heavily involved in the business, so this should be a great source of capital for transactions where the business is the borrower’s primary source of income. This is an area that has been somewhat undeserved by banks during the recovery because often times the risk in these deals is perceived to be higher.

Finally, in deals where there’s strong cash flow, but maybe a bit of an LTV mismatch relative to many lenders stated requirements (i.e.: a maximum 70 percent LTV), the SBA programs should present a good fit as they will allow some flexibility to climb up the leverage ladder.

Ragsdale: SBA loans will have a favorable impact on the smaller borrowers who qualify for this type of funding. The program is just now getting off the ground, so in a few months everyone will know a great deal more about exactly what and what will not be approved for SBA. We can understand the guidelines, but the devil is in the details.

Bankers are also adjusting to this program. Some remain uncomfortable with the property type and don’t wish to include storage in their SBA portfolio, while others see this as an opportunity to write solid commercial property loans. This is a great help to smaller regional banks that can write a smaller loan for local storage operators with support from the SBA.

Sonne: It sounds exciting, but until some deals are actually completed, we will not know the impact.

What’s your advice for operators looking to refinance this year or next?

Hill: If you have a near-term refinance coming and don't want any surprises, start the process early and make sure you’re well-prepared. By talking to a few lenders or mortgage professionals, you can get a pretty good idea about how things are looking and what reaction you can expect from the market, and still have ample time to make adjustments or alternative arrangements if necessary.

It’s advisable to make sure your books are clean and orderly, and any deferred maintenance or other types of issues have been addressed at the property. Also, don't get greedy. If you’re presented with a deal that seems reasonable and brings a high level of certainty of execution, then execute and move on.

Ragsdale: Absolutely take a look at refinancing options while the rates are very low. That will have a big impact on cash flow.

Sonne: Make sure your balance sheet is strong. Lenders will look at the trailing 12 months of operating statements benchmarked to the trailing three years. If a sponsor doesn’t have a strong relationship with a lender, use a solid mortgage broker experienced in the self-storage asset class. Interest rates are low, but deals are not easy to complete.

What’s your advice for people seeking money for new development? Is it available, and how do they get it?

Hill: With few exceptions, this market remains challenged and the development financing climate is not favorable. There are many distressed opportunities out there that still need to be addressed, and lenders are going to be focused on solving these problems before they’re willing to talk about starting new projects.

The interesting thing about the development dilemma is the problem sort of solves itself. If a proposed transaction and the associated return make sense under an intensive equity scenario, which is essentially what you’ll need to succeed in this environment, then that deal probably makes sense and can get done. Alternatively, deals that would rely heavily on leveraged debt to make sense probably don't get done today. In that respect, you could say that the capital markets are self-policing the development situation.

Ragsdale: New development remains very challenging. Most banks have stopped making any commercial development loans unless an ironclad credit-tenant is in place to fully lease the property upon certificate of occupancy. Building storage remains especially difficult due to the longer leaseup time for the property. Many areas were overbuilt during the late 2000s and that’s still being absorbed.

The old adage holds regarding new development: Cash is king! Have plenty of it and seek a relationship with a local bank.

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