Inside Self-Storage

JAN 2019

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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Page 27 of 47

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 ˆ xed rates are available, with terms from ˆ ve 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 signiˆ cant upfront good-faith deposits and high transaction costs. • After closing, there's limited " exibility for expansion or signiˆ cant 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 " exibility after closing for expansion or other signiˆ cant changes. • Cash out is available, although limited to lower LTV. • Non-recourse options are available. Cons: • Borrowers need to have signiˆ cant 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 " oating and ˆ xed rates. • Higher leverage loans are achievable, up to 90 percent LTV, with realistic LTV at 80 percent. • You can build additional project costs into ˆ nancing 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 ˆ nancing isn't available. • Processing and closing times can be long, which poses problems for acquisitions. • Borrowers with signiˆ cant net worth and liquidity won't qualify. • Third-party managed properties will have difˆ culty in qualifying. • Prepayment restrictions are ˆ xed 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. The pros and cons of today's lending options By Noel Cain It's a Great Time to Refinance! 26 ISS I January 2019

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