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Refinancing a Self-Storage Property: Getting From A to Z in the Midst of Capital-Market Flux


Capital markets are in flux again: the European crisis, America’s budget debates, slower gross domestic product growth, stubborn unemployment, fears of a double-dip recession, stock-market swings, natural disasters, Middle East uprisings, and the list goes on. Unfortunately, it all has a direct impact on the self-storage owner looking for financing today.

The last few years have been the most volatile I’ve seen in my entire career of providing debt and equity to self-storage owners. Just last summer, if you were looking for a 75 percent loan-to-value (LTV), fixed-rate, non-recourse loan under $3 million, you had very few options, if any. In the beginning of 2011, extremely aggressive financing was available through the consumer mortgage-backed securities (CMBS) market, similar to what self-storage owners could have expected in 2007.

Today, the markets are in upheaval again, and lenders are reassessing their underwriting standards. We’ll have to wait and see how it all shakes out, but it’s likely that if you financed in the second quarter of 2011, you may have achieved the best rates and terms of the year, if not the foreseeable future. The chart below illustrates the non-recourse, fixed-rate loan proceeds available over the course of the past year if you had a self-storage property generating $300,000 in net operating income (NOI).



Loan Type

Cap Rate


June 2010


Life Insurance Company

10% arbitrary


January 2011



8.5% arbitrary


June 2011




75%-80%, 9.5% debt yield

September 2011


Lenders reassessing underwriting standards

The good news is at the time of this writing (late August), it’s anticipated the markets will start to settle down and permanent loans will be funded again, but with normalized underwriting. Most likely, this equates to a 10 percent debt yield (NOI divided by loan amount), 70 percent LTV and 1.30 debt-service coverage ratio.

Evaluating Lenders

The first thing a borrower should do when seeking a refinance is determine which lenders to contact. Many have downsized personnel, modified lending programs or simply stopped lending altogether. It’s important to work with a professional who’s up to speed on current market conditions. The first question to ask is whether the lender has closed a loan in the past 90 days. This will help you determine if its truly in business and lending. Many lenders may say they’re quoting loans but are being conservative and issuing terms that aren’t competitive with the market.

There are a variety of lenders in the market depending on whether you’re looking for a construction, bridge or permanent loan. Additionally, you must decide if you want a recourse or non-recourse loan quote. Some of the lenders who provided specific loan options before the capital market collapse of 2008 may have completely different programs today. To make sure you’ve identified the right lender for your particular situation, you should at least consider quotes from life-insurance companies, CMBS lenders and commercial banks.

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