Section 10 • Finance
rate fluctuation. Given that interest rates remain historically low and are expected to rise only modestly in 2015 (absent some un- foreseen crisis), there remains the opportunity for self-storage owners to lock in to compelling financing packages in 2015.
The Dynamic Nature Of The Capital Stack A commercial real estate transaction has two primary financing components: debt and equity. The capital stack refers to the to- tality of capital invested in a real estate development project, including the debt and equity, as well as any hybrid “dequity” products that may sit in between. It can be helpful to think of the capital stack as a pyramid as
shown on the previous page. The top of the pyramid contains the most risk, since those lenders are last in line to collect pro- ceeds. This section is where most equity resides. Risk diminishes approaching the base of the pyramid where priority to cash flow resides. This is the position of the senior debt lender. Lenders and equity stakeholders are highly sensitive to their
position within the capital stack and price their debt and eq- uity products accordingly. Typically, the stack has the following arrangement starting from the top:
1. Sponsor equity 2. Preferred equity 3. Mezzanine investors (hybrid debt and equity) 4. First mortgage (Senior Debt)
Just as the value of a real estate asset is dynamic and chang-
es over time, so, too, does a relative position in the capital stack. More specifically, as debt is reduced, equity increases, and vice
Table 10.1 – Lender Delinquency Rates
CMBS (30+ days)
Life Companies (60+ days) Banks & Thrifts (90+ days)
Source: MBA Databook
5.71% 0.08% 1.40%
versa.
Sponsor equity at the top of the pyramid is essen- tially the owner’s cash position in
the asset; it can be quantified as the asset’s current value minus all priority positions lower in the stack. This is important because lenders pay close attention to the “skin in the game” or “cash position” as well as the value; a fully cashed out borrower may not have the same alignment of interests.
The capital stack refers to the totality of
capital invested in a real estate development project, including the debt and equity, as well as any hybrid “dequity” products that may sit in between.
Mezzanine debt and preferred equity are generally available for larger transactions but its availability has been expanding. Due to its higher risk position, this type of financing bears inter- est rates that are higher than first mortgage financing. Rates for that debt range from 10 percent to 20 percent. Strategically, this type of debt can be used to finance very large transactions or help to recapitalize maturing loans that need to be right-sized. The following sections focus primarily on first mortgage lending opportunities, although each generally may have mezzanine and/or preferred equity lending arms as well.
First Mortgage Debt The mortgage origination market has largely stabilized since the financial meltdown. The MBA’s Quarterly Origination Index shows the dramatic decrease in debt originations through- out 2009 and 2010. Over the past two years, originations have returned to healthy, sustainable levels experienced in 2003 and 2004. The momentum of positive indicators from 2013 followed
into 2014 with the continuance of a decline in delinquent loans. Delinquency rates continue to decline for all lender types, with CMBS debt and banks showing the most declines: However, when it comes to self-storage as an asset class, the figures are much more positive. According to data from DBRS,
Chart 10.3 – Commercial/Multifamily Mortgage Bankers Originations Index (2001 Quarterly Average = 100) Source: Mortgage Bankers Association
400 350 300 250 200 150 100 50 0
100 Self-Storage Almanac 2015
2002 Q1 2002 Q2 2002 Q3 2002 Q4 2003 Q1 2003 Q2 2003 Q3 2003 Q4 2004 Q1 2004 Q2 2004 Q3 2004 Q4 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2
2013 Q3 2013 Q4 2014 Q1 2014 Q2
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