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2018 Debt Forecast: The Lending Climate Remains Clear for Self-Storage Borrowers

By Shawn Hill Comments
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CMBS lenders can creatively structure and price “around” risks other lenders will avoid. They size their loans using debt-yield targets (net cash flow divided by loan proceeds). Debt-yield minimums as low as 8 percent aren’t uncommon today, with lenders stretching lower for deals with positive cash-flow trends.

It’s noteworthy that CMBS loans are assumable. This is a nice feature that can be very valuable during a climate of rising interest rates. In terms of prepayment, they’re limited to yield maintenance or treasury defeasance. The implications of these rigorous options are less significant in a rising-rate environment, but borrowers should be aware nonetheless.

The closing costs on a typical CMBS deal average around $50,000, which includes all required third-party reports, lender and borrower legal documents, American Land Title Association survey, title, and other miscellaneous reports. There are several lenders in the market that offer streamlined yet competitive “fixed-cost” programs between $25,000 and $32,000 “all in” for loans up to $10 million. This has helped these loan products gain popularity with smaller-balance borrowers.

Life-Insurance Companies

Life-insurance companies are active real estate lenders that, like CMBS lenders, allow borrowers to lock in longer-term rates than those typically available from more conventional lenders. Unlike CMBS lenders, however, these companies tend to be extremely conservative, preferring to lend on high-quality, stabilized assets in primary markets, and at lower leverage points. Further, life-insurance companies tend to gravitate toward institutional and experienced sponsors or those with strong personal balance sheets.

Given their conservative stance, life-insurance companies are notorious for stressing cash-flow underwriting and capitalization rates that are applied to determine value, resulting in loan advances of typically not more than 65 percent of actual value. Historically, many of these lenders have preferred larger deals, but given the competitive landscape, some are stretching for smaller ones.

The cornerstone of life-insurance companies is their flexibility. For example, while five-to 10-year fixed-rate terms are most common, these lenders can offer fully amortizing loan structures between 10 and 25 years. They have the capability to lock the interest rate at application and can offer more flexible prepayment options. Overall transaction costs are similar to those of CMBS. As of the fourth-quarter 2017, interest rates for life-insurance company loans were extremely attractive, typically ranging from mid-3 percent to 5 percent, depending on the term and overall structure of the loan.

Construction and Land Loans

The self-storage industry is in the midst of a hearty development cycle, and the availability of financing for new projects has been robust over the last several years. While banks are the most likely lending partners for a developer with a feasible project, SBA lenders and debt funds are also viable sources of capital.

Full recourse coupled with a completion guarantee is the most typical structure for construction financing; however, recourse burndowns may be available as a project nears completion. Non-recourse financing may be available for very low-leverage projects with institutional sponsorship, but that’s not the norm. Conventional lenders will typically advance up to 75 percent loan-to-cost (LTC) at fixed or floating rates, with interest-carry and operational reserves often built in.

The demand for self-storage construction has encouraged some non-bank lending institutions to launch competitive construction-lending platforms. For example, Jernigan Capital Inc. recognized the need for new product in select markets, offering up to 90 percent LTC on a non-recourse basis, under a participating debt structure for qualified projects. The company is selective about the projects it funds. Alternatively, borrowers may secure higher leverage financing through the SBA, as well as private debt funds that aren’t bound by the same regulatory constraints as FDIC-insured banks.

The Road Ahead

After many years of historically low and stable interest rates, borrowers should realistically expect that rates will begin to tick up as the economy continues to improve. Nonetheless, self-storage borrowers have an abundance of options. Barring unforeseen events that would dramatically alter the financing landscape, the window of opportunity should remain open to lock in on low rates with aggressive lenders looking to put money to work.

Shawn R. Hill is a principal at Chicago-based The BSC Group, where he provides mortgage brokerage, financial consulting and loan-workout solutions to self-storage real estate owners nationwide. To reach him, call 312.207.8237; e-mail shill@thebscgroup.com; visit www.thebscgroup.com.

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