After a dismal couple of years with no saleable product or market, the conduit programs, while still tenuous, are making a comeback. Because the life-insurance companies are cherry-picking most of the better, low-leveraged properties, the conduits—typically with minimum loan amounts of $5 million to $10 million—have begun looking at secondary and tertiary markets for product on which to lend. They’re also funding higher LTV properties the life-insurance companies won’t touch, satisfying the non-recourse appetite for storage owners. Rates can be in the low to high 5 percent range for a 10-year fixed-rate loan with 25- to 30-year amortization.
Expect legal fees to approach $15,000 to $20,000, with early rate locks not as prevalent. Defeasance prepayment is still the penalty of choice on these programs, but for those long-term holders, it may not be an issue. Most conduit loans are funded and some serviced through the mortgage banker/broker network.
Banks continue to be the loan option for most borrowers due to the size, costs, market or flexibility required. Most are recourse lenders. Relationships also play a key role for ease of a transaction and certainty of execution. However, it seems most banks (except those in the West) prefer shorter amortizations of 15 to 20 years vs. 25 years, and sometimes 30 years for many lenders in the western United States.
Bank lending rates can be all over the board, but most institutions prefer to limit fixed-rate terms at five years and will lend that money out between 4.75 percent and 6 percent. This is not to say you can’t find a seven-, 10- or even 15-year fixed rate at banks, but it's just not the norm.
Banks are also still one of the few construction lenders out there. But unless your self-storage project is the diamond in the rough, don’t expect it to be easy to find funding. There are loans getting done, especially for project expansion, but only for deals with strong sponsorship, good operating histories and market demand.
Again, this is a good opportunity for an SBA loan option. Many borrowers choose the bank option for the prepayment flexibility and lower costs of origination, even with the shorter fixed-rate term and shorter amortization.
Just like banks, credit unions had their share of commercial real estate problems and curtailed lending while they assessed their portfolios and licked their wounds. They’re also back in the game, offering borrowers the flexibility of little or no prepayment penalty, a competitive rate and amortization, and varied products.
Not every credit union lends on commercial property. Also, there’s usually a membership eligibility requirement that must be met to obtain a loan. This is typically where you live, work or worship in the credit union’s lending or branch geography. They’re also a recourse lender in nearly all scenarios, but a definite option to consider when weighing your financing choices.
Three- to 10-year fixed rates are usually the programs offered, with amortization from 20 years to 25 years and sometimes even 30 years. Rates will be competitive, ranging from high 4 percent to high 5 percent. Credit unions can be state or federally chartered, with federally chartered institutions typically being able to offer a larger geographic lending area, possibly even national.
Mortgage Bankers and Brokers
While most mortgage bankers and brokers do not originate from their own funds, they still play an active role in the lending arena, helping borrowers find loan programs not available through local banks and credit unions. With at least a dozen conduit options and a similar number of life-insurance company lenders actively providing self-storage capital, mortgage bankers and brokers offer access to these funds in an efficient and cost-effective manner. They can also locate bank and credit-union programs from institutions not in your area.
Rates will be going up because they can’t get any lower. I said the same thing in 2004 when the 10-year treasury was at 3.33 percent. Oh, well. I don’t think I was the only one wrong on that, but I think I’m pretty safe on that comment now. Here’s to a profitable 2012!
David Smyle is the vice president and managing director for Churchill Mortgage Capital, which originates or services loans in 14 states. He specializes in financing options for self-storage and other commercial property types nationwide. To reach him, call 619.956.986; e-mail firstname.lastname@example.org .