CMBS lenders are aggressively seeking quality self-storage deals with spreads at 200 to 250 over the 10-year swap rate for lower leverage deals (less than 65 percent), and 230 to 280 over full leveraged deals (70 percent to 75 percent). Current 10-year swap rates are at 1.8 percent (as of Dec. 31, 2012), so borrowers are securing 10-year, fixed-rate, non-recourse loans at interest rates in the 3.8 percent to 4.75 percent range.
Here are some things you can expect when securing a CMBS loan:
- Up to 75 percent LTV
- Up to 30-year amortization
- Debt yields as low as 9.5 percent
- Insurance and tax reserves
- Defeasance or yield maintenance prepayment
CMBS lenders continue to include more self-storage facilities. In 2011, most active CMBS programs had restrictions that did not favor self-storage economics. Many lenders enforced loan minimums ($5 million and up), which limited storage potential to portfolios of assets or single assets in larger markets controlled by institutional quality sponsors. Today, many lenders are considering smaller loans (less than $5 million) in secondary markets, and at least three lenders have a stated loan program that will go below $2 million.
Liquidity in the CMBS market has provided an outlet for transactions on insurance company and regional/local bank balance sheets, so these lenders have the need to make new loans. Insurance companies, which are balance-sheet lenders, focus on large transactions with institutional sponsorship. They cherry-pick deals. The old adage is if you qualify for an insurance-company execution, no other lender can compete.
Insurance companies originated an estimated $60 billion in 2012, with a similar volume expected in 2013. Insurance companies have consistently provided capital for commercial real estate owners for over half a century. Through the last recession the insurance companies were one of the few active lenders. They’ll continue to be active in 2013 for the few self-storage transactions that fit their criteria.
Characteristics of insurance-company loans in today's market include:
- Lower leverage (60 percent or less)
- Institutional quality assets and markets
- Larger loans ($5 million and up), with a few lenders willing to look at loans less than $5 million
- Loans over $10 million considered "the sweet spot"
- 25- to 30-year amortizations
- Fixed-rate loans up to 25 years (fully amortizing options available)
- Rates similar to CMBS (10-year money around 4 percent)
- Non-recourse (loans less than $5 million might have some recourse)
- Flexible prepayment options (yield maintenance or step-down)
- Greater flexibility than CMBS after closing for expansion or other significant changes
- Significant net worth, liquidity and sponsorship required