The finance market is shaping up to have its most active quarter since the beginning of the coronavirus pandemic. It has continued to show weekly improvement, with significantly increased activity. Lenders across the spectrum are issuing competitive terms and closing loans. With interest rates at historic lows, you should be thinking about your next self-storage project or refinancing your existing properties.
Commercial debt is readily available with terms as unprecedented as the times in which we’re living. The health crisis slowed loan originations for many lenders earlier in the year. Now, they see themselves as being behind on their annual targets and feeling pressure to deploy debt capital before year-end. In other words, it’s a good time to borrow!
Many self-storage owners are taking advantage of low rates for acquisition and development financing. Refinancing activity has also been fairly robust. Borrowers with stable assets are locking in great rates, while those building new projects or operating facilities in lease-up are seeking to provide a partial cash-out to their investors and remove personal guaranty risk.
Whatever your goals, this is an optimal time to secure financing. Here’s an overview of the lending options on the market and tips for landing your loan.
Cast of Lenders
Life-insurance companies. These lenders are targeting best-in-class, low loan-to-value (LTV) deals. Behind on their annual origination targets and facing increased competition, many are willing to lend to borrowers and projects with superior credit, lowering rates to below pre-pandemic levels to win deals. If they like your project, they’re offering rates from high 2 percent to very low 3 percent, as well as 60 percent to 65 percent LTV.
Commercial mortgage-backed securities (CMBS). These lenders were in a state of suspended animation when COVID-19 hit. The lockdown created a limited supply of bonds. Since then, they’ve been getting more and more active, as the appetite from bond investors for CMBS loans has grown. They’re offering interest rates in a wide 3 percent range, depending on LTV.
Traditional banks and credit unions. These remain the inferior lender of the commercial real estate debt market, but they continue to improve slowly and steadily. There are several reasons for this, including an increase in loan-loss reserves, as banks seek to preserve capital against anticipated future loan defaults. Banks have also taken a very cautious, conservative outlook on commercial real estate and underwriting fundamentals in light of the forbearances they have in place and a lack of payoffs. Finally, they’re still recovering from processing Paycheck Protection Program loans as well as borrowers completely drawing down their credit lines when the lockdown began.
Banks and credit unions have focused on low-leverage, cash-flowing deals, mostly in the range of 50 percent to 60 percent LTV and usually for pre-existing borrower relationships. The all-in rates have been in the mid-2 percent to mid-3 percent range. Much of this can vary depending on the lender, the borrower, the project and even the week.
Debt funds. Right now, these are the most competitive lenders in the market by far. Historically relegated to development and heavy value-add transitional projects, they’re now able to access more stabilized projects, as traditional lenders are either somewhat sidelined or offering much tighter terms and proceeds.
Debt funds aren’t constrained by bank or insurance regulations or the public markets. They have hundreds of billions of raised capital ready to be lent on real estate, coupled with a sense of urgency to put that debt to work. For the right deal, lenders have been aggressive with their terms, offering 65 percent to 70 percent LTV and high-3 percent to high-4 percent rates for cash-flowing assets. For heavier-lift/riskier profiles or projects in weaker markets, they’ve been offering 65 percent to 75 percent LTV, with rates from mid-4 percent to mid-5 percent.
Mezzanine, preferred-equity and joint-venture capital providers. These have shown a strong, growing willingness to fill in the gaps of lower loan proceeds offered by senior lenders. They’ve been taking a deal’s financing from 65 percent to 80 percent LTV and targeting interest rates of 10 percent to 13 percent.
Joint-venture financing can vary widely by investor profile and appetite, but a good rule of thumb is that as a sponsor, you should expect to bring 10 percent of the equity to the deal and deliver an internal rate of return in the mid to high teens. These groups have dedicated funds with defined investment parameters for self-storage and other assets. This makes it pretty easy for borrowers to know if a particular project fits within their financing programs.
5 Steps to Land a Loan
This pandemic is a pivotal moment in the career of all real estate entrepreneurs. If you keep approaching the same debt sources, you risk depleting your options, which could bring your portfolio growth to a slow crawl or complete standstill. To succeed, you must understand how to access different sources of financing. Get acquainted with various lenders and their debt programs, and position your project accordingly. Here are five steps to help you land a loan:
1. Highlight the points that make your deal a safe lending opportunity. Emphasize how your asset can withstand any disruption that could jeopardize loan performance or repayment. Lenders will more readily approve a loan when you can demonstrate value preservation and cash-flow continuity.
2. Explain how you are a credit-worthy borrower. Lenders are particularly focused on what makes you a good borrower. Be the hero who’ll navigate this loan to a successful conclusion, i.e., timely interest payments until repayment. Demonstrate how you may have done this before, and how you have the resources to do it now.
3. Prepare your package in advance, before you seek financing. It should include property, financial and borrower information. This way, documentation is ready to go to any lender that wants to move to the underwriting phase. It demonstrates your organization and preparedness, and helps build momentum to getting your loan approved and closed.
4. Form your borrowing entities, and have your equity capital ready. Lenders want to see you can close once they approve your loan. Demonstrate that you have the equity capital committed and all borrowing-entity documents ready for review and approval.
5. Be flexible with debt sources and exit terms. Get smart about loan programs you may not have previously considered, whether conventional sources like the Small Business Administration or nontraditional channels like bridge and mezzanine financing. Negotiate flexible, no- or low-cost repayment terms. This way, you can sell or refinance without heavy exit costs.
David Blatt is CEO of CapStack Partners, an investment bank and adviser specializing in real estate. He leads all principal-investing and capital-raising efforts for the firm, and has negotiated and structured countless transactions since 2001. He’s a frequent public speaker and writer on innovation and capital-market trends in real estate.