Moreover, for self-storage borrowers looking to lower their defeasance costs by waiting for U.S. Treasury yields to rise, it should be noted that this strategy will most often have only a minimal impact on costs. For example, should the borrower on our sample loan choose to delay his defeasance until the relevant Treasury rates have risen 10 basis points, his defeasance savings will be only approximately $18,000. Obviously, while these savings are certainly helpful, they pale in comparison to the potentially hundreds of thousands of dollars in increased interest costs that borrowers risk incurring by delaying a refinance.
Indeed, most borrowers view defeasance as a Treasury-rate game, believing they should delay their defeasance as long as possible to lower their costs. However, as the table demonstrates, the rewards associated with defeasing today can often outweigh the rewards of delay.
Self-Storage Defeasance Activity
In 2010 and 2011, defeasance rarely made sense for self-storage owners, as storage properties comprised a mere 6 percent of defeasance activity. However, 2012 saw a significant uptick in self-storage defeasance, as industry properties comprised 16 percent of all defeasances. Current 2013 forecasts project an even greater increase in the number of self-storage properties being defeased, as both market factors and loan terms have pushed borrowers to refinance or sell.
With new fixed-rate loans offered at historic lows, borrowers are incredibly incentivized to refinance as soon as possible. Moreover, with many self-storage loans originated from 2003 to 2005, defeasance costs are reaching manageable levels, allowing borrowers the opportunity to refinance without exorbitant penalties.
It’s also likely that the jump in self-storage defeasances over the past year is due to the increasing attractiveness of acquiring self-storage properties and the subsequent increase in property sales. As self-storage capitalization rates have dropped to historic lows, buyers have increasingly turned to defeasance to replace existing debt with new 10-year financing at today’s historically low rates.
Eitan Weinstock is the senior defeasance analyst at defeasance firm AST Defeasance Services. For more information, call 866.333.3273; e-mail firstname.lastname@example.org .
Based in Chicago, Shawn Hill is a principal at The BSC Group, where he advises clients on debt and equity financing and loan-workout services for all commercial property types nationwide, with an emphasis on the self-storage asset class. He can be reached at 312.207.8237; e-mail email@example.com ; visit www.thebscgroup.com .