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Refinancing a Self-Storage Loan: The Pros and Cons of Your Lending Options

With interest rates holding steady, it’s a great time to consider refinancing your self-storage loan. Here’s an overview of the many lending options available to facility owners and the pros and cons of each.

2018 was a good year for self-storage. Rents have continued to increase, demand seems to be endless, and a flood of capital has entered the sector. This new money has pushed prices to all-time highs, and lenders have been busy with new acquisitions and refinancing existing properties for owners who wish to recapitalize or expand.

With interest rates holding steady, it’s a great time to consider refinancing your loan, whatever your needs may be. Following are the many lending options available to facility owners including the pros and cons of each.

Commercial Mortgage-Backed Securities (CMBS)

CMBS lenders are back with revised loan programs that still feature long-term fixed rates up to 10 years. Loans are also non-recourse, except for environmental hazards and fraud. Generally, these loans are best suited for stabilized, class-B and better properties in major metropolitan areas.

Most lenders prefer loans greater than $3 million, which will limit eligible properties. There are few options for loans of less than that amount, with only one or two lenders offering programs. Borrowers need to have significant liquidity in the neighborhood of 10 percent of the loan amount, with net worth equal to the loan amount.

Pros:

  • Long-term fixed rates are available, with terms from five to 10 years.
  • Higher-leverage loans are available, with advance rates up to 75 percent loan-to-value (LTV).
  • Cash out is available for qualifying properties.
  • Lenders are transactional in nature, with no further banking obligations.
  • Loans are non-recourse to the borrower.

Cons:

  • Few options exist for transactions of less than $3 million, which make up the bulk of self-storage loans.
  • There are significant upfront good-faith deposits and high transaction costs.
  • After closing, there's limited flexibility for expansion or significant changes to the property.
  • CMBS loans include high prepayment costs (defeasance or yield maintenance).

Insurance Companies

Insurance-company lenders are, in many ways, similar to CMBS in that they specialize in long-term, fixed-rate loans to high-quality facilities in major metropolitan areas. Most won’t lend less than $5 million, with many having minimum loan sizes of $10 million. This makes it difficult to qualify for all but larger self-storage properties in major markets. Owners with portfolios or bigger properties will find these rates and terms to be some of the most attractive.

Similar to CMBS, insurance-company loans are generally made on properties that are stabilized or near stabilization with strong cash flow. Borrowers need to have significant net worth and liquidity. Insurance companies often offer non-recourse and recourse loan options.

Pros:

  • Fixed-rate, long-term loans are available, including fully amortizing loans up to 25 years.
  • Interest rates are generally the lowest available.
  • There’s greater flexibility after closing for expansion or other significant changes.
  • Cash out is available, although limited to lower LTV.
  • Non-recourse options are available.

Cons:

  • Borrowers need to have significant net worth and liquidity.
  • Loan advance rates are generally limited to 65 percent LTV, with many insurance companies limiting advance rates to 50 percent or less.
  • Few properties will qualify, with most on the East or West Coast or in large metros.
  • There can high prepayment costs (typically yield maintenance).

Small Business Administration (SBA)

SBA loans can offer self-storage owners an array of options including short-term funding through the 7a program and long-term options through the 504a program. Lenders can also offer fixed and floating rates through both.

SBA offers the highest advance rates available of the major loans programs—in some cases, up to 90 percent. However, these loans aren’t meant for all owners. As the name would indicate, they’re focused on active business owners and operators, not passive investors.

Pros:

  • Short-term (7a) and long-term (504a) money is available with floating and fixed rates.
  • Higher leverage loans are achievable, up to 90 percent LTV, with realistic LTV at 80 percent.
  • You can build additional project costs into financing such as capital improvements and working capital.
  • These loans can be used for property expansion and new construction in some cases.

Cons:

  • There are stringent document requirements.
  • These loans carry high transaction costs, typically between 3 percent and 4 percent of the loan amount.
  • Cash-out financing isn’t available.
  • Processing and closing times can be long, which poses problems for acquisitions.
  • Borrowers with significant net worth and liquidity won’t qualify.
  • Third-party managed properties will have difficulty in qualifying.
  • Prepayment restrictions are fixed but can be high.

Banks and Credit Unions

Bank and credit-union loans offer the widest variety of terms and rates. In fact, banks may have more than one of the above-mentioned loan programs in addition to their commercial real estate loan platform.

Generally, bank and credit loans are considered short- to medium-term loans from one to seven years that can have a fixed or floating rate or, in some cases, a combination. Interest rates are typically some of the most competitive available. However, in exchange for access to this money, these institutions want a deeper relationship that may include deposits, lines of credit or additional lending opportunities.

Pros:

  • Short- to medium-term loans are available, from one to five years.
  • Advance rates range from 70 percent to 75 percent LTV.
  • Fixed and floating rate options are available.
  • Construction and expansion loans are available for qualifying borrower and properties.
  • Nationally chartered credit unions have no prepayment restrictions.

Cons:

  • Longer-term solutions for stabilized properties are typically limited.
  • Non-recourse lending options are limited but might be available at lower LTV ratios.
  • These loans are more relationship-focused and may require a broader depository relationship.

Private Lending

Finally, there are private lenders, which include long-term private lenders, hard-money lenders and bridge lenders. These offer the most flexibility as they’re willing to lend on non-cash-flowing properties, properties in lease-up, refinance of discounted payoffs, and mortgage-note purchases. In exchange, interest rates are typically between 10 percent and 15 percent. Due to the high cost, these loans are typically measured in months rather than years. Loans are also typically full-recourse obligations and may require additional collateral to be posted.

Pros:

  • Loans often close in a matter of days rather than weeks or months.
  • Deals can be underperforming or non-performing; however, there needs to be a clear roadmap to a permanent finance solution.
  • There are long-term financing options for clients looking for alternatives to CMBS.

Cons:

  • These loans are short term in nature, lasting months rather than years.
  • Additional collateral is often required to be posted for the loan.
  • These loans are the highest in interest-rate and transaction costs as well as upfront points.

How to Choose?

The current interest-rate environment makes this one of the most desirable times shop for a self-storage loan. While there are many options, the difficulty arises in selecting the right type of financing and then pushing through to receive the actual capital. Hiring a mortgage professional to help navigate these choices and determine the best solution can ease the process. Whichever loan you choose, this primer offers a starting point for successful banking.

Noel Cain is senior vice president of The BSC Group, where he works with clients to provide debt and equity financing that fit each self-storage owner’s goals. He also has significant experience in underwriting, development and cash-flow modeling as well as due diligence and site analysis. For more information, call 800.605.7880; visit www.thebscgroup.com.

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