We all want some control in our lives. Whether we’re concerned about our health, lifestyle or working environment, it’s good to be in control. At the same time, it’s good to recognize that some things are beyond our control, like the weather, football kickoff times and our Thanksgiving dinner appetite.
By a similar token, self-storage owners have many things beyond and within their control when it comes to refinancing their properties. With today’s low interest-rate environment and compressing capitalization (cap) rates, it’s easy to think you’re in control—and you are to a certain degree. More important, it’s critical to understand factors that affect a lender’s decision so you can be in the driver’s seat throughout the refinancing process. Following are factors you can and can’t control along the way.
Beyond Your Control: Interest Rates
Global economics and bond markets, combined with the Federal Reserve’s hesitancy to rapidly increase rates, have created a sustained low-interest environment. There are indications the Fed will continue to monitor economic conditions and gradually increase short-term rates into 2017.
If these projections hold true, then variable-rate loans tied to LIBOR (London Interbank Offered Rate) or prime rates will be immediately affected. The Fed historically increases or decreases short-term rates to influence the pace of national growth. Long-term rates are tied to additional factors, such as global economics, inflation and supply and demand, and don’t directly move with short-term rates. Expect increases on both types of rates over time.
Beyond Your Control: Credit Standards
Be prepared for lenders to diligently underwrite and document your loan request. Bank credit committees and compliance departments have remained in check due to conservative regulatory oversight and guidance. Among many regulations affecting commercial real estate financing are those correlating the level of construction loans relative to the lender’s size, as well as guidance regarding a borrower’s ongoing equity.
At the end of 2016, risk retention regulations come into effect requiring commercial mortgage-backed securities (CMBS) lenders and related bond investors to retain a portion of every bond deal. Time will tell how these new risk-retention rules potentially affect CMBS lenders’ interest rates and refinancing programs.
Beyond Your Control: Property Management and Economics
Despite currently high occupancy and rent levels, every self-storage facility and submarket is affected by new storage construction. Among other influencing factors are a facility’s relative location, marketing, Internet presence and local market demand. Even the best-positioned properties are likely to experience rent and occupancy pressure with the arrival of new competitors. Rest assured, lenders will consider the new developments’ potential economic impact on your property performance when underwriting loans and determining financing amounts.
While historically high occupancies with upward trending rents bode well when presenting a loan request, lenders can be more cautious with terms and leverage if new competition enters or starts building within your immediate locale. Worse, if your revenue declines due to new competitors, lenders will likely make downward adjustments to your income when deriving a loan amount.
Within Your Control: Your Priorities
It’s hard to have the best of all worlds, so you must prioritize your priorities. Your answers to the following questions will help determine the type of lender best suited for your refinancing needs:
- What loan size are you are seeking?
- How much would you like to leverage your facility?
- If leveraging up from a current loan, how much cash investment will still be in the deal?
- Do you want a variable- or fixed-rate loan?
- How important is it to have prepayment flexibility with limited penalty?
- Is reducing recourse exposure important to you?
- Do you want to reduce your monthly payments with a longer amortization or interest-only period?
- What is this asset’s credit history, along with the rest of your real estate portfolio?
Within Your Control: Lender Selection
Local, regional and national lenders—primarily banks and CMBS institutions—have embraced self-storage as an attractive market. Today, more banks than ever will finance self-storage, while CMBS sources have remained steady. As we all know, though, talk is cheap and comes down to a lender who understands the industry and wants to lend by providing aggressive loan terms vs. those who will lend with conservative rates and terms relative to other property types.
Any lender’s policies and portfolio mix changes over time based on performance results. A lender who offered aggressive terms on one deal may not necessarily offer the best options for the next. By creating relationships with lenders, monitoring markets and researching alternative financing quotes, you’re more likely to receive competitive terms.
Within Your Control: Early Financing
While fixed-rate loans are attractive for locking in an interest rate for a defined period, they often come with prepayment-penalty provisions. Consider a cost-benefit analysis of prepayment penalties as you reach the latter stages of your current loan.
Incurring a prepayment fee to refinance your property could offer access to significant equity trapped in the current loan. It also may make sense to pay an existing loan’s prepayment fee to secure new financing with a much larger balance; the resulting cash-out can then be used to redeploy your capital for new acquisitions, development or investments. You can also consider capitalizing on today’s low interest-rate environment to refinance into a new fixed-rate loan.
Within Your Control: Borrowing Track Record and Reputation
Successful real estate owners strive to maintain strong reputations among their financing sources. Remember, lenders will examine your entire portfolio’s performance—along with historic financing/operating track records—from positive and negative perspectives.
For CMBS loans, reporting and historic information are highly transparent. By using reporting vehicles, such as Trepp or Bloomberg, CMBS lenders can access your entire loan history, including occupancy levels, operating performance, payment history and any relevant servicer conversations. Accordingly, if your servicer records a “blip,” then you’ll likely have to explain its circumstances when seeking CMBS financing related to that asset or another one in your portfolio.
Within Your Control: Refinance Planning Horizon
Undoubtedly, you know when your current loans mature and the timetable for examining your refinance options. Here are a few simple tips when planning your options:
- Watch economic and banking markets since they may have as large an impact on your property investment as your daily operations.
- Run your facility in accordance to how your daily operation could affect refinancing or potential sale.
- Maintain strong banking relationships, yet look for alternative lending options that may be available when you choose to refinance. Consult with a mortgage broker who specializes in self-storage and can advise you on current and historical lending environments.
It’s nice to be in control; but when you can’t be, it’s beneficial to understand the factors affecting present circumstances. When it comes to refinancing your self-storage property, accept the influences within and outside your grasp, and the process will go more smoothly.
Neal Gussis is a principal at CCM Commercial Mortgage, a mortgage-banking firm that secures financing for self-storage owners nationwide. With 25 years of experience as a national self-storage mortgage broker and adviser, Neal has secured more than $3 billion of self-storage transactions for operators. For more information, call 847.922.3750; e-mail [email protected]; visit www.ccmcommercialmortgage.com.