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Time to Refinance Your Self-Storage Property? Discussing Eligibility and Options

Time to Refinance Your Self-Storage Property? Discussing Eligibility and Options

Investor interest in self-storage is booming, which means current owners likely have equity in their properties. Learn why current market dynamics favor refinancing.

Self-storage assets have become a hot commodity in today’s market. The increased interest in buying storage facilities means owners can sell for top dollar.

It’s a situation that goes both ways. On one hand, if you’re an owner looking to expand through acquisition, you’re going to face the same seller-favored dynamics as everyone else. On the other, your property probably has a lot of equity, which means it’s a good time to start thinking about refinancing and pulling out cash. This strategy supplies extra capital and helps ease the pressure of feeling you have to buy another facility at above fair market value.

Self-storage owners are the crème de la crème to lenders in this perfect storm of low interest rates, good economic rates and high demand, so there are many benefits to refinancing and taking advantage of the equity your property has accrued. Following are some tips to figure out if you’re eligible to refinance, along with the types of options that may best suit your needs.

Are you Eligible?

Despite a strong market, not every self-storage owner is eligible to refinance. Those who are have:

  • Good cash flow: When refinancing a property, you must be able to service the debt. For whatever amount you pull out, you must have 1.25 times more in net cash flow to the annual debt. This lets your lender know you have enough cushion based on the loan amount.
  • Good credit: Ideally, the perfect borrower also has good credit, meaning zero bankruptcies, foreclosures or short sales. A few black marks on your credit won’t necessarily kill a deal, but it’ll ensure it’s more challenging.
  • Collateral: If you hope to refinance, you’ll also need enough collateral, which means your loan-to-value (LTV) ratio can’t exceed 75 percent.
  • Credibility: Lenders want to refinance with owners who have lots of this. It means they’re looking for someone who’s been in the industry for a while or had established business success. You don’t have to be an established self-storage owner if you’ve dealt with the development and management of other types of real estate, but having industry experience makes you more suitable for obtaining a loan.

The self-storage market is booming, so if you meet all of these requirements, you should be in a good position to refinance.

Loan Options

There are a several refinance options available. Each loan type is beneficial to different owners, depending on their business standing and the amount of capital they’re willing to advance.

Small Business Administration (SBA). An SBA loan is a great way to refinance for owners who are looking for a little more leverage during negotiations. They’re typically looking to borrow up to 85 percent of the value of the property.

Life-insurance company. These are long-term, fixed loans, with a 25-year amortization and 10-year fixed rates. Someone might use this type is if he has complicated financial statements due to owning multiple companies that require tax returns. A life-insurance loan can help owners avoid copious amounts of bank underwriting.

Mid-market banks. Another strategy is to leverage the banking community. There are some very unique groups who don’t advertise but have great permanent-loan programs. Typically, you can expect up to 70 percent, especially on cash out, with fixed terms for five, seven or 10 years. Rates can vary but are currently in the 4 percent range. Lenders will first look to ensure the property cash flows at a 1.25 to 1.3 debt-service ratio coverage. Then they’ll examine if you cash flow on a personal level. They want to make sure you can cover payments if the property doesn’t perform.

Credit unions. Over the years, credit unions have become quite a force in commercial lending and could be a very viable option for self-storage owners. One reason is they typically don’t have prepayment penalties. This can be very attractive for investors who want a lot of flexibility. Second, credit unions can sometimes be more flexible on leverage. Most groups will do only 65 to 70 percent LTV, but there are some that’ll move as high as 75 percent. This can be a very attractive option for someone looking to pull as much cash out as possible.

Action Steps

To figure out where to go from here, do the following:

  • Ask yourself, “What’s my purpose for pulling out this money?”
  • Prepare for success by gathering your profit-and-loss statements from the last few years, along with your rent roll and a management-summary report.
  • Contact a loan broker, as many will offer a free assessment of your eligibility.

The self-storage market boom means owners have multiple ways to refinance their property. This is the perfect time to make the most out of your investment!

Dave Kotter is the principal of Integrity Capital LLC, a Scottsdale, Ariz.-based commercial-mortgage brokerage that’s closed more than $554 million in loans. He’s helped self-storage owners find financing nationwide. For more information, call 480.422.4525; visit

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