The lending climate remains favorable for self-storage borrowers. Here’s an overview of the current state of financing in 2017, including common debt products available.

January 10, 2017

7 Min Read
2017 Financial Planning: Loan Types and Options for Self-Storage Owners

By Adam Karnes

Historically low interest rates coupled with strong operating fundamentals equate to readily available mortgage capital for self-storage owners who seek financing. Those aiming to lock in longer-term debt and insulate themselves from prospective rate increases will find a number of attractive options in the market. Following is a summary of some common debt products available for borrowers.

Local and Regional Banks

According to data compiled by the Mortgage Bankers Association (MBA), the dollar volume of commercial bank originations through the second quarter of 2016 was up approximately 33 percent year over year. As a result, banks and thrifts maintain their position as the largest holders of commercial and multi-family debt at nearly 40 percent of the $2.9 trillion outstanding. While this indicates strong commercial bank lending, there’s evidence that local and regional banks are experiencing a “lending chill” because of the regulatory scrutiny of real estate loans.

Local and regional banks are relationship-driven lenders that can offer very competitive interest rates. Borrowers should be prepared to place their operating or depository accounts with that bank and should also anticipate the bank conducting an extensive credit review.

Banks will lend up to 80 percent loan to value (LTV), offering terms ranging from one to 10 years, which amortize over 20 to 25 years. They commonly require personal-recourse guarantees, which can be scaled back or even eliminated at lower leverage. They typically aim to maintain transaction costs at a reasonable level, and owners can often negotiate prepayment provisions. Finally, the interest rate will vary based on the factors above, and the rate package is often executed through a swap agreement.

The CMBS Market

The commercial mortgage-backed securities (CMBS) market appeared to be finding its post-recession footing in 2015, which at approximately $101 billion of total U.S. issuances was the strongest year since the recession. The sentiment going into 2016 was it would be similar to and possibly surpass 2015. However, through October, issuance was down nearly 37 percent year over year.

Jamie Woodwell, vice president of commercial real estate research for MBA, has said the CMBS market is seeing far more loans paying off and paying down than new loans being originated. This is despite $232 billion in CMBS loans scheduled to mature in 2016 and 2017—affectionately labeled “the wall of refinances” by Trepp.

Furthermore, a new round of risk-retention measures took effect in December as part of the Dodd-Frank Act, which has already caused some choppiness in CMBS activity and may continue to do so. While commercial banks and life-insurance companies have stepped up to the plate and taken on some of the maturing volume, it stands to reason the balance sheets of these institutions will inevitably fill up. As such, a case could be made that the market needs a CMBS recovery.

While they’ll vary based on individual deals, here are some common CMBS debt terms:

  • Non-recourse loans

  • Leverage up to 75 percent (can increase with mezzanine)

  • Five- to 10-year terms

  • Fixed interest rate

  • Amortization schedules up to 30 years

  • Interest-only periods available

  • 8 percent debt yield minimum

  • Large primary-market deals preferred; may compete for smaller loans in secondary markets

  • Closing costs of approximately $50,000 all in; some lenders offer a fixed-cost option for $25,000 (excluding survey, title and borrower legal fees)

  • Prepayment typically yield maintenance or defeasance

The interest rate in CMBS transactions is calculated by adding a risk-spread premium to the “swap side” offering index. For example, a 10-year rate is found by adding the lender’s risk-spread premium to the 10-year swap. Therefore, with spreads in the 2.75 percent range (275 basis points) and the 10-year swap at 1.5 percent, the applicable rate on 10-year CMBS money would be 4.25 percent.

CMBS lenders are aggressive in nature and have historically produced extremely compelling quotes for self-storage owners, regardless of what the CMBS market might suggest. CMBS debt allows borrowers to lock in low rates for up to 10 years, and the loans are also assumable—both valuable hedges against rate increases. Assuming the industry can wade the regulatory waters and capital-market volatility, CMBS loans can present a very attractive piece of financing going forward.

Life-Insurance Loans

Life-insurance companies are another source of commercial debt for self-storage owners. According to the MBA’s “Quarterly Databook,” the second quarter of 2016 marked the second largest origination quarter ever for life companies. As such, these lenders account for 14 percent of all outstanding commercial/multi-family mortgage debt.

Insurance lenders allow borrowers to lock in longer-term rates on a non-recourse basis, similar to CMBS. However, unlike CMBS, life companies are extremely conservative and prefer to lend on high-quality stabilized assets in primary markets.

While insurance lenders historically enforced $5 million loan minimums, increased competition has encouraged some to lower this threshold. Life companies are notorious for stressing cash-flow underwriting and capitalization rates applied to determine value, which typically yields loan advances of not more than 65 percent LTV. For many of the reasons listed above, they don’t compete as directly with CMBS lenders for proceeds.

A cornerstone attribute of life companies is their flexibility. They can offer among the lowest interest rates available depending on structure, often allowing rate lock at application. Furthermore, while five- to 10-year fixed-rate terms are most common, fully amortizing terms up to 20 years may also be available. Finally, life companies offer flexible prepayment structures and generally reasonable transaction costs.

Construction and Land Loans

New construction was the name of the game in 2016. According to a second-quarter 2016 report from real estate firm Colliers International, the industry witnessed the construction of more than 600 new facilities last year, with some estimates tripling that number. Some merchant builders are capitalizing on the chance to sell their newly developed facilities to publicly traded real estate investment trusts with certificate-of-occupancy (CO) deals. While a CO sale is definitely not the norm, there are facilities being built to meet certain criteria that make them a primary acquisition target for large operators.

The most likely lending partner for a developer with a feasible project in a high-demand trade area is a local or regional bank willing to partner with the sponsor. Full recourse with a completion guarantee is typical of construction financing, at least until CO (recourse may burn down afterward). For the right project, conventional lenders are advancing up to 75 percent loan to cost (LTC) at fixed or floating rates, with interest carry and operational reserves often built in.

With consideration to the terms laid out above, the proliferation of new storage construction has encouraged some institutions to launch competitive lending platforms. For example, one specialized lender can offer up to 90 percent LTC on a non-recourse basis, under a participating debt structure for qualified projects. Alternatively, borrowers may secure higher leverage financing through the Small Business Administration (SBA).

When negotiating a construction loan, it’s important to structure an interest-only period that mirrors the timeline required to bring the property to breakeven occupancy. Furthermore, careful budgeting of the construction costs and development timeframe can help identify an appropriate loan structure.

SBA Loans

SBA loans are a capital source that have helped secondary-market owners secure fixed- or floating-rate loans at elevated leverage. The two SBA loan programs available for real estate borrowers are summarized below.

7a loans

  • Variable rate, adjusted quarterly

  • Maximum proceeds of $5 million

  • 25-year loan term, fully amortizing

  • Five-three-one percent penalty in first three years, followed by open prepayment

  • Available for acquisition or refinance

504 loans

  • Fixed rate on SBA lien, variable rate on first lien

  • Max proceeds of $14 million

  • 20-year loan term, fully amortizing

  • Step-down prepayment, starting with 10 percent in year one

  • Available for refinance or acquisition

It’s worth noting the 504 program historically was limited to acquisition loans, but as of June 2016, the SBA now offers a refinance option. When applying, seek a lender that’s certified for the SBA Preferred Lender Program (PLP), which allows it to approve loans on behalf of the administration. As a government-sponsored program, the process is document intensive and can be tedious, which is why it’s important to work with a PLP entity.

No Time Like the Present

Whether you plan to refinance an existing self-storage facility, or acquire or construct a new one, there continues to be debt products available. The quality, location, cash flow and existing debt of an asset will largely dictate the loan required, but it’s important to consider your long-term goals. This prolonged low-interest-rate environment coupled with strong operating fundamentals marks a desirable time to seek financing. Lenders are working hard to win business, which means borrowers are often presented with one or more very competitive bids.

Adam Karnes is a senior credit analyst for The BSC Group, where he specializes in the packaging of debt and equity financing requests for all commercial property types nationwide, with an emphasis on self-storage assets. Adam is based in Chicago. To reach him, call 312.878.7561; e-mail [email protected]; visit

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