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The Financing You Need: An Overview of Self-Storage Loan Options for 2021-22

If you need money for a self-storage investment, now’s a great time to find it. But before you acquire, build or refinance, understand your loan options. Here’s an overview of debt products available for the upcoming year including their rates, terms, pros and cons, and more.

Adam Karnes

January 27, 2022

8 Min Read
An Overview of Self-Storage Loan Options for 2021-22

There’s never been stronger interest in self-storage … period! It may be crass to claim the industry “benefited” from the pandemic, but it’s true. It once again passed the recession-resistance test with flying colors.

From a debt perspective, self-storage is in vogue, especially given its recent performance. Interest rates remain extremely favorable, and there are numerous loan options available to meet borrower objectives for acquisitions, new construction and refinancing. As always, unforeseen events could shift the lending landscape; but as things stand, borrowers aiming to lock in long-term debt and insulate themselves from market choppiness and rate increases should be able to do so in the year ahead. Following is a summary of the most common debt products on the market, including rates and terms, pros and cons, and other insight.

Banks and Credit Unions

Banks are the largest originators of commercial real estate loans, providing short- and long-term debt solutions. A borrower pursuing this type of capital should expect an extensive credit review analyzing global cash flow, net worth and liquidity. But banks are relationship-driven, so your ability to obtain a loan can also be impacted by the strength and tenure of your existing relationship, if there is one. If you borrow from a bank, be prepared to place your operating accounts and other depository relationships there.

Banks require guarantees on most loans, however, recourse may be reduced or eliminated for especially low-leverage loans. They also offer more reasonable transaction costs and flexible prepayment compared to the Small Business Administration (SBA) or commercial mortgage-backed securities (CMBS).

Bank rates currently range from roughly 3% to 5% (fixed or floating) but vary based on factors like term, borrower strength, leverage, etc. While banks historically preferred shorter terms, they’re more frequently offering seven- and 10-year loans to compete with other lenders now. In today’s climate, they top out at around 70% loan-to-value, with a 25-year amortization schedule.

Credit unions are similar to banks, with a few notable differences. First, whereas banks tend to be heavily relationship-driven, credit unions are more transactional in nature. Next, while banks ordinarily prefer to lend in a designated footprint, credit unions can lend out of market. Finally, credit unions are cash-flow lenders and tend to avoid deals that require the complexities of construction or other transitional deals that may require draws, interest carry, etc.


CMBS lenders prefer larger deals in primary markets but will also compete for smaller transactions in secondary ones. Currently, these loans carry interest rates ranging 3% to 4%, though some borrowers have locked into sub-3% rates at very low leverage. As non-recourse, fixed-rate products, they’re mostly 10-year term with a 30-year amortization. Borrowers can achieve leverage up to 75% and may qualify for interest-only periods and equity cash out if the deal underwrites well.

One advantage is CMBS lenders can creatively structure and price “around” risk others will avoid. Plus, these loans are assumable for a fee, which can be a benefit in an environment of rising interest rates.

On the flip side, CMBS has rigid prepayment penalties limited to yield maintenance or defeasance. If you anticipate refinancing near term to unlock value-added equity or for any other reason, CMBS probably isn’t the right fit. In addition, closing costs for CMBS are heavier than with local banks. There are lenders that offer streamlined, “fixed-cost” programs of $25,000 and $30,000 “all in” for loans up to $10 million, which has helped this product gain popularity with smaller-balance borrowers. Overall, CMBS loans are a great, low-rate, permanent-debt product for long-term holders of stabilized assets.

Life-Insurance Companies

These are active real estate lenders that allow borrowers to lock in attractive long-term rates, similar to CMBS. They’re highly selective and prefer to lend on quality, stabilized assets in primary markets and at lower leverage. Furthermore, they gravitate toward institutional and experienced sponsors, including high-net-worth individuals.

Given their conservative nature, life companies are notorious for stressing underwriting and capitalization rates applied to determine value, typically resulting in loan advances of not more than 65% leverage. They prefer larger deal sizes but will stretch to compete with the likes of CMBS lenders.

If an asset meets the rigid requirements of life-company debt, it’s hard to beat the flexibility, terms and structure. For example, while five- and 10-year loan terms are most common, life companies can offer fully amortizing loan structures up to 25 years, a forward rate lock at application and more flexible prepayment options.

These lenders prefer recourse loans but will offer partial or non-recourse options where appropriate. Their loans include transaction costs similar to CMBS. They’re among the most competitively priced products available, ranging from mid-2% to 4% depending on the transaction.

Bridge Lenders

Bridge lenders provide short-term capital, which plays an increasingly important role in the self-storage industry. These loans are useful in many situations but have proven especially beneficial for non-stabilized properties or otherwise distressed assets.

Before the pandemic, there were more bridge lenders competing for deals than ever before. Attractive interest rates and flexible structure were increasingly common. However, by April 2020, the field of lenders had been drastically reduced as they shuttered entirely or took a defensive asset-management stance. At the time of this writing, the market has returned, albeit with fewer lenders and more stringent underwriting.

Bridge lenders are forward-looking and need to perceive a clear exit through a permanent takeout or sale. Terms vary significantly given the range of uses but are roughly summarized as:

  • Up to 80% of cost

  • Interest rates ranging 4% to 10%, often floating

  • 3 + 1 + 1 term, interest-only initial term, with up to 1% fee for extensions

  • 1% origination fee, 1% exit fee is common but may be waived

  • Non-recourse

  • Open prepayment subject to 12- to 18-month minimum interest

  • Operating shortfall or interest-carry reserves can be included

Bridge lenders rely on financial projections that must be supported in the market. They strive to understand the business plan and anything that might negatively impact future cash flow, such as new supply. A bridge loan isn’t a long-term debt solution but can serve as useful interim financing.


A unique source of capital, SBA loans have proven tremendously beneficial to self-storage borrowers. There are two programs available, 7(a) and 504, and a cornerstone is their ability to eclipse conventional leverage of 75%. But understand: the SBA doesn’t lend directly to borrowers. It relies on a bank to originate the loan and then guarantees a portion. Also, loan processing can be time-consuming, and there are guarantee fees in addition to standard closing costs.

An SBA 7(a) loan can be used for acquisitions, refinancing and new construction. It funds up to 90% of cost, but there’s a lending limit of $5 million. These are commonly variable-rate loan products with prime-based rates resetting as often as quarterly and as infrequently as every six years. Still, lenders may offer fixed pricing in certain instances. These loans are advantageous given their 25-year terms and par prepayment after year three.

SBA 504 loans can provide similar funding. They’re compartmentalized between a first and second lien and equity. A bank provides the first lien (bottom 50%) with conventional financing. The second lien, up to 40%, comes from a 504 loan made through a Certified Development Corporation (CDC).

504 loans are initially funded by the first lien and an interim note from the bank. The CDC typically funds its portion 60 to 90 days after closing to refinance that interim note.

The first lien bank piece includes conventional rates and terms. The second provides a fixed rate up to 25 years at the going debenture rate. Currently, the 25-year debenture rate is 2.86% and carries a prepayment penalty for 10 years. The resulting blended interest rate for 504 borrowers can be as low as mid-3% and is hard to beat.

A Word on Construction Loans

While local banks are the primary candidates for this type of capital, the SBA and certain debt funds may also be contenders. But take note: Lenders financing self-storage construction today are more conservative than ever. These loans are inherently riskier than other debt, as there’s no cash flow during construction and negative cash flow for a period of lease-up. Lenders increasingly favor sponsors with significant development experience and strong personal financial statements.

Interest rates are often floating, though fixed-rate options do exist on a deal-by-deal basis. Rates range from 3% up to 10% depending on the transaction, but local banks are typically 3% to 5%. It’s crucial to structure an interest-only period in the loan as well as to budget for interest and operating-shortfall reserves.

Recourse and a completion guarantee are generally required, though lenders may burn down recourse following Certificate of Occupancy or after debt hurdles are met. Non-recourse financing is available, albeit scarcer, at low leverage. While conventional lenders typically advance no more than 75% loan-to-cost, this can range from 60% to 80% depending on the strength of the project and tenure of the relationship with the bank.

In summary, construction financing is available for self-storage, but lenders are more selective than several years ago. Thoughtful budgeting increases the appeal of a project and guards against future equity calls by appropriately structuring reserves.

Going Forward

Heading into 2022, interest rates will remain low, and borrowers will have a wealth of financing options available to them. That said, economists have been forecasting and reforecasting interest rates for years. At some point, higher rates will be a reality.

A piece of advice for would-be borrowers: A bird in the hand is worth two in the bush. Lock in low rates now rather than try to time the market and squeeze out every last basis point. With the terms currently available, it’s a great time to be a self-storage borrower!

Adam Karnes is a vice president of The BSC Group, a Chicago-based boutique mortgage banking firm. As a broker, he’s active in existing and new client relationship management and oversees transaction closings. Adam has experience with all commercial property types but specializes in the self-storage asset class, having underwritten more than $4 billion in loan requests since joining the firm. To reach him, call 312.878.7561 or email [email protected].

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