Inside Self-Storage

OCT 2018

Inside Self-Storage (ISS) is an information source for industry owners, managers, developers and investors covering news, trends, facility operation, finance, real estate, construction, development, marketing, technology, insurance and legality.

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Subscribe To Our FREE Weekly Newsletter. Stay on top of what's happening in the industry and get links to the latest news, feature stories, videos, and more straight to your inbox. SIGN UP TODAY! insideselfstorage.com/newsletter Subscribe To Our FREE Weekly Newsletter. Wading through the pros and cons of either program can be tricky. An experienced intermediary or investment banker can provide valuable guidance in navigating the decisio n-m aking and transaction processes. How the SOP Applies to Self-Storage Released earlier this year, SOP 50 10 (J) includes new regulations for borrowers that use thir d-p arty management companies, as many sel f-s torage owners do. In the past, the SBA allowed operators and thir d-p arty firms to engage in propert y-m anagement agreements with only cursory oversight. The new SOP, however, spells out specific requirements that must be outlined in any management contract. Under the new rules, SBA borrowers must: • Approve the annual operating budget • Approve any capital expenditures or operating expenses over a signifcant dollar threshold • Have control over the bank accounts • Have oversight over the employees operating the business (who must be employees of the applicant business) The last clause is italicized because it's the most subtle and important point for sel f-s torage owners using thir d-p arty managers. When the SBA says staff must be employees of the applicant business, it's referring to the borrower. In other words, facility staff cannot be employees of the management company. This has serious implications for the relationship between the sel f-s torage owner and management company, and it'll take time for the big firms and their legal teams to reconcile this requirement and make it work. Lenders will likely find creative ways to make these deals while the market digests and works through these new requirements. In the meantime, though, expect considerably tougher sledding when seeking an SBA loan if your plan includes thir d-party management. An Alternative Option Thankfully, the conduit loan market, in which lenders pool loans and sell them on the secondary market as CMBS, remains very robust and reliable for long-term fixed rates. A typical structure involves a 10-year fixed rate and 30-year amortization, with rates ranging from 2.15 percent to 3 percent over the 10-Year Swap Rate, depending on the leverage point, in-place cash flow and asset location. As an added benefit, these loans are typically non-recourse without the burden of personal guaranties. This means only the property is on the line to satisfy the loan. Not only does a no n-r ecourse loan insulate owners from unnecessary personal risk, it keeps the personal balance sheet clear, allowing owners to take on more debt for other properties. With conduit loans, leverage is typically capped at 70 percent, with higher leverage available in certain instances. Any equity freed up as cas h-o ut at closing (in the case of a refinance) is typically disbursed ta x-f ree, with no limits or strings attached (please consult your tax adviser). Using a Combination A common business model is to use the leverage afforded through the SBA programs to construct or acquire an asset, followed by refinancing with a conduit loan once the property stabilizes to take advantage of the lon g-t erm fixed rates, cas h-o ut availability and no n-r ecourse. Notably, a good portion of conduit lenders are also willing to make 1 0-y ear, fixe d-r ate loans with 3 0-y ear amortizations to sel f-s torage owners for amounts as low as $1.5 million. This is a significant advantage over the $3 million lending threshold for other asset classes and demonstrates lenders' affinity for storage projects. When buying or refinancing a valu e-a dd property, conduit lenders also offer shor t-t erm bridge loans. With these, the leverage is based on the projected value of the stabilized facility, so owners can obtain no n-r ecourse loans even if a property is still in transition. This strategy buys time to execute your business plan before selling or refinancing to permanent debt. This is just a small snapshot of the financing readily available to sel f-s torage owners and investors. Your choice should be driven by your short- and lon g-t erm goals and priorities. Working with a skilled intermediary who knows the nuances, market, asset class and, most important, the lenders, can significantly increase your options, eliminate obstacles and improve the final results. Mac Dobson is senior vice president at Aries Conlon Capital, a Chicag o-b ased commercial mortgage and real estate investment banking firm that offers debt placement, equity arrangement, ta x-c redit syndication, real estate brokerage and advisory services. To reach him, call 734.604.6962 ; e-m ail mdobson@conloncapital.com ; visit www.ariesconlon.com. 54 ISS I October 2018 www.insideselfstorage.com

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