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Refinancing Your Self-Storage Loan: Considerations to Help You Find the Right Fit

Refinancing Your Self-Storage Loan: Considerations to Help You Find the Right Fit
The lending climate is ripe with money and low rates. If you’re on the market to refinance a self-storage loan, there are numerous options. Here are some important considerations to help you find the right fit for your needs.

There are many reasons to refinance a self-storage facility, whether your current loan is maturing or you’re looking to improve your rate and lower your payment. Perhaps you want a fixed rate for a longer term, or you’re ready to pull cash out to expand the property or invest in other improvements.

Whatever the case, lenders are currently flush with money and aggressively looking to make loans. With the market in your favor, don’t be afraid to shop around and negotiate with several candidates to get the best deal. Just keep in mind this could result in you having to change your banking relationship.

Finding a Match

There are plenty of self-storage refinance options from which to choose, though minimum size can vary. For example, life-insurance companies start around $500,000, though $1 million to $2 million is the usual. Commercial mortgage-backed securities (CMBS) typically start at $2 million, while banks and credit unions can start below $500,000. Depending on the fixed-term length, current rates start below 3%.

The trick is to find the right program to meet your specific needs and situation. For example, if you want to refinance a Small Business Administration (SBA) loan with 90% loan-to-value (LTV), your choices may be limited to a higher LTV since most lenders max out at 75% to 80%. Though you can refinance an existing SBA loan, you typically need to prove you’re achieving a savings of at least 10% in cash flow from the current financing. If you can’t, you might be required to look outside the SBA.

On the flip side, the SBA will refinance a non-SBA loan with attractive rates for its 7(a) and 504 programs. In this case, the bank-first mortgage can go up to 50% LTV, with the SBA second mortgage (20- to 25-year fixed-rate debenture at around 2.8% today) covering up to 40% LTV.

Prepayment Considerations

Prepayment penalties can also be a factor in deciding when to refinance your self-storage loan. This is a calculation that often comes down to the time it takes to recover the penalty paid. For example, going from a 5% rate to 4% but paying a 3% penalty takes about three years to break even. Though the penalty is tax-deductible, if you’re moving from a loan that’s coming due in three to five years without knowing what the rates will be, that can be a devastating decision if you get caught in the wrong rate environment.

Of course, if you can fix your rate for 15 to 25 years at today’s historically low rates, it could be worth paying the penalty. Lenders can typically lock in your rate up to 90 days in advance of funding. In fact, some life companies offer up to a 12-month advance (forward) rate-lock option, which allows you to take advantage of today’s rates without having to pay a penalty to refinance early.

Rate Fluctuation

The big questions are how long rates will remain this low and if there’s a risk in waiting to refinance to avoid the penalty. To begin to answer those, it’s helpful to understand rate activity.

Long-term rates are often measured by the 10-year Treasury bond. In 2003, the 10-year hit what was then a near-historic low of 3.13% from a high of 15.84% in 1982 and a more recent high of 8.05% is 1994. To find rates close to what we’re seeing today, you have to go back to 1963 when the low was 3.8%. After its most recent high of 5.26% in 2007, the rate has been on a downward trend. There’s been as much as a 2% swing in a single year, such as 2008 and 2011, with a high of 4.27% and 3.75%, respectively. More recently, the 10-year hit a low in 2020 of .52% after starting the year at 1.88%. This year, it hit a high of 1.74% and a low of .93%. As of Sept. 4, it was sitting at 1.32%. The last 10-year average is 2.17%.

I don’t think anyone would have predicted rates would stay this low for this long, so to predict a “significant” rise would be a fool’s errand. Of course, “significant” is relative. Even if rates went up only 1%, depending on your loan size, there could be a large loss of interest savings by waiting to fix your rate via refinance. Factors that can affect rates include inflationary pressures, political stresses, COVID-19, world events and monetary policy. It’s all a bit of a game of Nostradamus vs. Carnac, and I don’t know of any “expert” who’s been able to predict correctly.

Exploring Options

If you aren’t under a prepay-penalty restriction, your self-storage refinance options are plentiful. These include permanent loans from standard banks, credit unions, life companies and CMBS as well as refinancing for an expansion with construction components via a bridge lender. The program for which you qualify depends on a myriad of factors including:

  • Loan size
  • Property condition and construction type
  • Demographics and market size
  • LTV
  • Personal credit and financial strength
  • Desired loan parameters

Interest only. For those seeking the lowest payment and maximum cash flow, interest-only (IO) options include some banks and credit unions, though typically only up to five years. IO options up to 10 years (sometimes longer) with a fixed rate are mainly offered by life companies and CMBS lenders, so it’s important to compare and contrast the two.

A full-term IO plan with CMBS usually starts around 65% LTV, while life companies are usually closer to 50% or less. CMBS loans max out at a 10-year maturity, while life companies can go up to 25 or 30 years on a fixed-rate term. The caveat there is CMBS is more forgiving on borrower finance strength, experience, property location, construction type and upfront out-of-pocket deposits.

Further, life companies lock your rate at the time of application, while CMBS locks the rate at close. Life-company rates are generally lower, and while CMBS is very competitive, it carries a defeasance or yield-maintenance prepay penalty. Life companies also can be more flexible. In most cases, both are nonrecourse. CMBS LTVs max out at 75%, while life companies prefer to be in the 65% range or less (though it’ll go up to 75% for the right deals).

Also, be aware that CMBS and life-company loans are more expensive to close, with legal fees and third-party reports, alone, starting around $20,000 and $30,000, respectively, in most cases. There are also higher costs for title and property-insurance requirements.

Combination. If a combination of long-term (10 years) fixed, with flexible prepay are preferred, then banks and credit unions may be the best fit. Federal credit unions don’t have prepay penalties. Though state credit unions are able to charge them, they generally aren’t onerous. Most fixed-rate bank loans (non-SBA, 10 to 15 years) will have a prepay penalty, but these can vary from restrictive to potentially beneficial (swap spread penalty). Twenty-year, fully amortized (20/20) bank loans with fixed rates can also be found in some cases.

Plan Ahead

Finding the right fit can take some time, so begin to look for self-storage refinancing at least 90 to 120 days before your target funding date. Have good books and records at the ready, including management summaries, occupancy reports, property profit-and-loss statements, a description of your property and personal information.

When shopping for the best self-storage loan deals, consulting with a mortgage banker or broker can help take some of the lift off your back. These professionals can offer expertise in lender sourcing locally, regionally and nationally, though it might cost up to a 1% fee at closing in addition to any lender fees. In many cases, using a third party to shop for you can result in a much better deal than you could find on your own. It often pays for itself in the short or long run.

David Smyle is a vice president of San Diego-based Pacific Southwest Realty Services (PSRS), a commercial-mortgage banking firm founded in 1972. It represents life-insurance companies, banks, private capital and other credit facilities seeking investment in real estate secured assets. Prior to PSRS, Smyle was owner and president of Benchmark Financial for 16 years and spent 12 years in commercial banking. To reach him, call 858.522.1411; email [email protected].

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