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If the Slipper Fits … Finding Your Perfect Self-Storage Loan

By Devin Huber Comments

Much like Cinderella at the ball, self-storage owners are feeling pretty confident and falling in love with the Federal Reserve, as it continues to keep interest rates at historic lows. But midnight is approaching and, at some point, it’s back to reality. Luckily, that doesn’t mean a life of indentured servitude; but it does mean a potential bump in rates.

Interest payments are often a storage owner’s largest monthly expense, so even a modest increase can have a significant effect on the bottom line. While it may feel like you’re the darling of the ball, the clock is ticking, as Federal Reserve Chair Janet Yellen signals an end to quantitative easing and an increase in the federal funds rate.

Commercial Mortgage-Backed Security

In today’s market, there are some very attractive rates and terms. Commercial mortgage-backed security (CMBS) debt is a particularly attractive option, offering 10-year, non-recourse, fixed-rate debt with a 30-year amortization and an interest-only period for loans as small as $2 million. Rates generally range from 4.25 percent to 5 percent, with proceeds up to 75 percent loan-to-value (LTV). Prepayment penalties typically take the form of defeasance with open prepay during the last two to three months of the loan.

Life Insurance Companies

Life insurance companies are also offering very competitive rates and terms, often on a non-recourse basis. While these companies are generally more conservative in proceeds and more selective for the properties in which they lend, they make up for it with very competitive rates. The most selective assets and borrowers benefit from rates in the mid 3 percent to 4 percent range. Life companies offer a standard 10-year term and 25- to 30-year amortization structure, but also feature fully amortizing loans with a 15/15 and 20/20 structure.

As mentioned, these lenders are selective and prefer quality assets in primary and secondary markets. Loans are lower leverage in nature, with typical LTVs at 65 percent. Life companies are also attractive due to the flexible prepayment options they offer.

Local and Regional Banks

Local, regional and national banks also present an attractive option for borrowers looking for more flexibility. Loans terms max at five to seven years, with a 25-year amortization and LTV capped at 75 percent. Banks offer both fixed- and floating-rate options, with floating rates from 2.5 percent for highly capitalized borrowers to the high 3 percent range for more traditional borrowers.

Fixed-rate deals are in the low 4 percent range and generally offer interest-only options. Prepayment penalties are often on a declining basis, with 5 percent in year one, 4 percent in year two, 3 percent in year three, two percent in year four and 1 percent in year five being the most common.

Keep in mind bankers are more relationship-based and borrowers should be prepared to have operating accounts and/or other significant depository relationships in place with the lender. Credit unions offer similar rates and terms, but due to federal regulations are often required to offer open prepay.

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