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, its 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.

Heres 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 theyve 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 todays market, a borrowers 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, theyll 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 whats likely a rising rate environment.

During the credit crisis, from late 2008 thru mid 2010, conduit origination was largely non-existent. Today the CMBS market is back on solid footing and aggressively seeking qualified lending opportunities. Loan spreads have generally remained steady on a slow decline over the past 12 months, while U.S. Treasuries has remained historically low; and this combination presents very attractive all-in rates for borrowers. In fact, at the time of this writing in the fourth quarter of 2013, rates for 10-year CMBS loans were hovering right around the 5 percent range.

CMBS lenders offer non-recourse loans with five-, seven- or 10-year fixed rates and amortizations up to 30 years. Leverage up to 75 percent LTV is available, and lenders have increasingly become more aggressive with their debt-yield targets, which is the net cash flow divided by loan proceeds. Throughout 2012, there was a firm 10 percent debt-yield minimum. In the market today, a 9 percent debt-yield minimum is increasingly common.

On CMBS loans, the available prepayment options are limited to yield maintenance or treasury defeasance, which is a factor borrowers should understand before proceeding with this debt structure. Theyre also assumable, which is a nice feature that can be very valuable in a climate of rising interest rates.

CMBS lenders are increasingly competing for deals at lower loan sizes and in secondary markets. Although lenders prefer deals over $3 million in primary markets, transactions as low as $1.5 million in secondary markets were processed via CMBS lenders in 2013.

CMBS loan origination volume was strong in 2013, and most market prognosticators foresee continued growth in 2014. By all accounts, theres reason to be optimistic about the future of the CMBS markets.

Insurance Companies, aka Life Companies

Insurance companies are by nature among the most conservative lenders in the market, representing roughly 13 percent of all outstanding mortgage debt. Insurance companies prefer stabilized assets and tend to be very picky in terms of location, size, age and physical attributes. In addition, these lenders prefer owners with high levels of experience and strong personal balance sheets. Most life companies have a minimum loan size of $5 million, but a handful will lend as low as $1 million.

Insurance companies prefer lower leverage transactions and typically do not advance more than 65 percent of their stressed underwritten value. The cornerstone attribute of life companies is their flexibility. For example, while five-, seven- and 10-year fixed-rate loan terms are most common, insurance companies can also offer fully amortizing loan structures between 10 and 25 years. As of the fourth quarter in 2013, interest rates for life company loans were extremely attractive, typically ranging from 3 percent to 6 percent, depending on the structure of the loan. Prepayment penalties can also vary greatly, and while yield maintenance is common, other structures can be negotiated.

Small Business Administration Loans

Since self-storage was approved as a property type for Small Business Administration (SBA) loans in 2010, the SBA programs have been especially beneficial to owners in secondary or tertiary markets where traditional financing options may be more difficult to find. There are two types of SBA loans available to the self-storage industry: SBA 7a and SBA 504.

The SBA 7a program is typically a variable-rate program thats most commonly structured with a prime-based rate that resets quarterly, and a fully amortizing 25-year loan, open to prepay after three years. 7a proceeds can be used for acquisition or refinance.

SBA 504 is a fixed-rate program with up to a 20-year term that carries a prepayment penalty for the first 10-year period. In mid-2012, the 504 program no longer accepted applications for refinance, only for acquisitions; however, this can be reinstated with Congressional approval, which some speculate may happen in 2014.

Rates for both programs vary depending on a multitude of factors. Borrowers must be aware that the course of underwriting, processing and closing an SBA loan can be time consuming due to the document-heavy nature that comes with any Federal program. Overall, access to SBA financing is a positive for the self-storage industry because it injects an additional source of capital and liquidity into the market.

Construction and Land Loans

Construction financing has been essentially non-existent over the past five years, but the tide appears to be turning. Generally speaking, construction financing is limited to those with very strong balance sheets and significant development experience. Expect full recourse and leverage no greater than 65 percent of cost, for even the very best projects. For a developer whos determined to build and has a viable project in a high-demand trade area, the most likely lending partner is a local or regional bank willing to build a relationship and partner with the sponsor.

Given the low interest-rate environment, limited new development, aggressive capitalization (cap) rates for stabilized facilities and upward pressure on rental rates, new construction is becoming a more attractive proposition. This factor, combined with the increased health of local and regional banks, is making construction loans once again become a viable lending option.

Going Forward

It appears the positive momentum created in 2013 paved the way for a very strong 2014, as self-storage fundamentals improve and the economy continues to grow. For self-storage owners, theres reason to be optimistic. The fear in the market that has been present for the past several years seems to be diminishing. Increased competition from lenders has created excellent borrowing opportunities, all while interest rates remain low by historical standards. This borrower-friendly environment presents unprecedented opportunities for self-storage owners looking to refinance or acquire additional properties.

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 protected]; visit www.thebscgroup.com .