By David Smyle
By all “expert” accounts, we’re now in an economic recovery, as tepid as it is. However, tepid cannot be used to describe the financing environment where banks are flush with cash, conduits can’t make loans fast enough, and life-company allocations continue to increase. More and more credit unions are in the commercial-lending arena, and with the Small Business Administration (SBA) opening self-storage as an eligible property type, high-leverage purchases and refinances are available.
The prior claim that banks weren't lending is far from the truth. Borrowers with good cash flow, liquidity and net worth have been able to get loans, albeit it at lower LTVs (speculative building and higher-risk lending due to occupancy, leverage or borrower issues were a much harder pill to swallow). Things have loosened a little further today, as banks have made it through their Federal Deposit Insurance Corp. audits and survived the tough times. Now they find themselves with too much cash and not enough loans on the books to balance assets and liabilities.
What this means for borrowers in 2014 is lenders are getting very competitive within their policy scope to try and win deals. Here’s a look at the terms lenders are offering self-storage owners and investors.
For life companies, which are typically more conservative LTV lenders, winning deals come in the form of nonrecourse loans with upfront rate locks; long-term, fixed rates up to 25 and even 30 years; interest-only; and very low rates still under 5 percent on 10-year fixed rates. Most life-company loans will top out at 70 percent LTV but can go to 75 percent in higher capitalization-rate markets.
Life-company loans start around $500,000 with no real limit on the upper end. Life companies typically have population minimums to lend in a market and prefer higher-quality projects to operators with multiple properties, but this is not a hard and fast requirement.
However, they don’t have this market locked up, as larger and even medium and smaller banks venture into nonrecourse with an LTV of typically 65 percent or less and will also rate lock and even offer interest-only loans. The advantage for life companies is their ability offer longer, fixed-rate terms at lower rates, although 15-year, fully amortized loans may be available at some institutions. Banks beat life companies on origination and legal fees.
Conduits are also competing for the nonrecourse business and may offer LTVs up to 80 percent. They’ll get aggressive on pricing on lower LTVs, including interest-only, but most conduits only lend fixed-rate terms of five to 10 years with 25- to 30-year amortizations. They also do not lock rates up front. Rather, rates are typically locked two days before close. The other disadvantage to conduit loans are the exorbitant legal fees, typically starting at $20,000, as well as restrictive cash-management, lock-box requirements and costlier property and title-insurance requirements.
So where do conduits win deals? Nonrecourse, higher-leverage transactions or deals not in favor with the more conservative life companies or banks is where they come out on top. Conduits will also overlook more borrower-credit and financial-strength issues than life companies and banks. However, the minimum loan for most conduits is $3 million. That is very costly, as the legal fees don’t change with the loan size. There are a few $1 million and up conduit programs with limited costs, but LTVs are typically in the 65 percent range.
Banks and Credit Unions
By far, banks and credit unions have been the most intriguing player in the commercial financing market over the past 18 months. With cost of funds at record lows, there’s a huge spread to be gained and profit to be made by getting the money out in the market.
A November quote from a Midwest bank on a 10-year fixed rate with 25-year amortization came in at 4.5 percent. The quote also provided a second 10-year, fixed-rate at the then 10-Year Treasury plus 2 percent (200 basis points). Although recourse, that quote would beat just about every life company and conduit lender in the market. A credit union in the Southwest recently quoted a 10-year fixed rate with 25-year amortization at 4.95 percent and no prepayment penalty—again a recourse loan but an amazing program nonetheless.