Small Business Administration (SBA)
SBA loans provided significant liquidity in 2012 to the self-storage finance market, especially for smaller transactions in secondary markets. Storage became an eligible property type for SBA lending in August 2009, and the products have evolved. It was difficult to find a lender willing to exceed 75 percent leverage at the onset of the program for a self-storage asset, even though the stated limits were 85 percent and 90 percent for the 7a and 504 programs. Today, we see leverage between 80 percent and 90 percent.
An SBA loan is a great fit for a storage owner who needs higher leverage, has a smaller loan balance and may not be in a top market. The 7a program is available for acquisition and refinance. As of September 2012, the 504 program is not available for refinance. In early 2013, Congress may consider allowing refinancing through the 504 program.
SBA programs offer the highest advance rates available among major loan programs, but these loans are not meant for all owners. As the name indicates, they focus on active business owners and operators, not passive investors. The liquidity the SBA programs have brought to the self-storage market has filled a clear need and has increased the industry’s stability, especially in secondary markets.
Banks and Credit Unions
Borrowers have more options today than they have the last four years, so banks and credit unions wanting to replace maturing balance sheet loans have had to open their doors to new borrowers. But not all banks are healthy; some are still in distress. It’s important to know the financial condition of a prospective lender because the bank’s health may be a determining factor in its lending decision, even more so than the merits of the proposed project.
Banks continue to primarily focus on repeat customers in their geographic footprints, preferring short to mid-term loans, and either floating or fixed rates for three, five or seven years. Most banks offer 20- to 25-year amortizations, shorter than CMBS or insurance companies. Interest rates range between 175 base points to 400 base points over London Interbank Offered Rate (LIBOR) for floating-rate loans and 3 percent to 5.5 percent for fixed-rate loans.
Local and regional banks are the prominent construction lenders. Construction lending came to a halt four years ago, but we expect the re-emergence of the construction loan in 2013. A signal is a handful of construction loans made in 2012 as lenders looked to get money out the door and the improving economy justified some new development. As competition increases for mature loans, we anticipate lenders to consider making more construction loans. The selection process will be stringent, as only the most seasoned, well-capitalized developers will obtain financing.
It’s a Great Time to Borrow!
Interest rates are at an all-time low. The 10-year treasury is hovering around 1.7 percent. Capitalization rates are low and continue to compress as new equity enters the self-storage market. With credit, there are higher LTVs, lower interest rates, more competition, healthier banks and looser credit standards. At the property level, you have improved operations, higher values and lower debt levels. The result is more deals than we’ve seen for years.
Devin Huber is a principal at The BSC Group, which offers financial and loan advisory, mortgage-brokerage and loan-workout solutions to commercial real estate property owners and investors, with a special emphasis on the self-storage market. Prior to helping found The BSC Group, Huber was a senior vice president at Beacon Realty Capital and a key member of the firm’s Self Storage Group. To reach him, call 800.605.7880; e-mail firstname.lastname@example.org; visit www.thebscgroup.com .