2013 was a bounce-back year that brought strength and stability to the capital markets, and there's reason to be optimistic about 2014. Thanks to historically low interest rates, strong industry metrics, and a host of lenders who see opportunity instead of risk, it’s arguably easier to get self-storage financing now than any other time in the past five years. Lenders are aggressively pursuing deals, which benefits borrowers in the form of lower rates, more advantageous underwriting standards and higher leverage.
Here’s a primer on the loans and rates available today for self-storage owners and investors.
Local and Regional Banks
As the largest originator of commercial real estate loans, representing roughly 35 percent of all outstanding mortgage debt, banks are the primary source of capital for the majority of self-storage owners. Generally speaking, banks are the strongest they’ve been since the outset of the recession in 2008, which bodes well for borrowers.
The current fixed-rate lending parameters for banks are primarily three- to five-year-term loans. Some banks even offer seven- and 10-year fixed-rate term loans, often through the use of a swap agreement. Bank amortization schedules are typically 20 or 25 years, with available leverage today up to 75 percent loan-to-value (LTV).
Bank underwriting is largely based on the historical operations at the property, typically on a trailing 12-month basis. The debt service coverage requirement (DSCR) is currently a minimum of 1.25 times.
Interest rates vary greatly depending on the term of the loan, borrower strength, leverage and loan size, among many other factors. Banks typically require personal recourse guarantees on almost all loans. Nevertheless, recourse may be reduced or eliminated for low-leverage loans under 65 percent LTV.
In today’s market, a borrower’s ability to obtain a bank loan may require developing a relationship with the prospective lender. As a result, borrowers should be prepared to place the operating accounts and/or other depository relationships with the lender. Expect an extensive credit review analyzing global cash flow, net worth and liquidity.
As banks grow stronger, they’ll be more likely to lend on higher-risk storage assets, including properties with a construction component, or those that may be underperforming or below stabilized occupancy. Look for increased lending from banks and credit unions in 2014.
Commercial Mortgage-Backed Securities
Many self-storage owners find commercial mortgage-backed securities (CMBS) debt to be the most attractive financing vehicle available today. CMBS lenders offer non-recourse financing with the ability to lock in historically low interest rates for 10 years, thereby postponing interest-rate risk in what’s likely a rising rate environment.