By David Smyle
While the economy is by no means out of the woods yet, the lending industry has seen significant improvement, with the easing of credit and capital flowing back into the market. This is good news for self-storage owners and investors, who can take advantage of the advantageous lending environment.
As the FDIC winds down its closure of failing banks, we’re starting to see new community banks spring up, and the continued merger of banks into stronger institutions is allowing lending to flow again. Thanks to the Small Business Administration’s (SBA) recent inclusion of self-storage as an acceptable property type and USDA lending programs for rural properties, those self-storage owners with high loan-to-values (LTV) see some light at the end of the tunnel. They can possibly refinance a maturing loan or improve their interest rate.
At the time of this writing (mid-January), the one-, five- and 10-year Treasuries are at .1 percent, .86 percent and 1.99 percent respectively. Compare this to January 2007 when the rates were 5 percent, 4.68 percent and 4.68 percent (inverted yield curve). This has led to unbelievably low interest rates for some lenders; others have chosen to keep rates near 6 percent for five-year deals. In metro areas where banks are forced to compete, a five-year fixed rate can be less than 4 percent.
While most lenders, including life-insurance companies, sat on the sidelines in 2008 being very selective on funding decisions, everyone is back in the game now. A limited number of life-insurance companies will lend on self-storage, but typically on larger deals of $5 million or more. Some smaller life-insurance companies will go down to $500,000 and, preferably, $1 million minimums.
The life-insurance companies prefer lower-leveraged transactions (60 percent or less). If you can live with a self-amortizing or shorter-amortized loan program, you’ll find rates as low as 3.5 percent on 10-year fixed and 4 percent to 4.5 percent on 15-year fixed rates. The whole range of programs exist with amortization up to 30 years, fully amortized fixed rates up to 25 years, and everything in between. Interest-only is possible, and non-recourse is standard on most programs.
The downside on life-insurance company lending is the high cost of entry, with borrowers needing to put up a deposit of 2 percent of the loan amount during the application process—refunded shortly after closing—in addition to approximately $8,000 to $10,000 of third-party reports and another $5,000 to $20,000 in lender legal fees. Despite the higher costs, the overall financial gains on interest savings far outweigh the initial outlay.
Closing time is also longer at 60 to 90 days, but rates are locked for 90 days up front. In some cases, forward rate locks are available for six to 18 months in advance of funding.
Life-insurance companies also prefer buildings built of wood frame, steel or concrete block vs. all-metal. In addition, they favor larger metro areas and well-located properties with good access and visibility.
Most life-insurance companies lend through a network of mortgage-banker correspondents who not only originate but service the loans. If desiring this type of loan, you’ll need a commercial mortgage banker who is able to fund loans nationwide.