Section 10 • Finance


for a 10-year loan would add the lender’s perceived risk spread premium to the 10-year swap rate; therefore, if current risk spread premiums are 200 basis points or 2 percent, and the 10- year swap is at 2.5 percent, the applicable interest rate on 10- year CMBS money would equal 4.5 percent (2.5 percent + 2.0 percent = 4.5 percent). The swap rate will generally mimic the treasury rate in terms of directional movement, but is also his- torically wider as it contains a spread premium over “risk free” treasury bonds.


Regardless of total origination volume,


it is clear that CMBS lenders are more actively and aggressively competing for deals at lower loan sizes and in secondary markets.


Loan spreads for CMBS generally remained on a steady slow


decline over 12 months, while U.S. Treasuries (and the linked swap rate) also remained historically low. The end result was a winning combination that presented very attractive all-in rates for borrowers. A common criticism of CMBS loans is that prepayment op-


tions are limited to yield maintenance or treasury defeasance. In a rising interest rate environment, the implications of these rigorous prepayment options are less significant; however, it remains a factor that borrowers should understand before pro- ceeding with this debt structure. It is also noteworthy that CMBS loans are assumable, which is a nice feature that can be very valuable in a climate of rising interest rates. The closing costs on a typical CMBS deal typically average


around $50,000, which includes all required third-party reports, lender legal, ALTA survey, title, and other miscellaneous reports. Although CMBS lenders prefer larger deals in primary markets, they are also extremely competitive for smaller transactions as low as $1 million located in secondary or even tertiary markets, and there are several lenders in the market today that offer com- petitive “fixed cost” programs between $20,000 and $25,000 all-in for loans under $5 million.


Regardless of total origination volume, it is clear that CMBS


lenders are more actively and aggressively competing for deals at lower loan sizes and in secondary markets. While the mini- mum loan size was generally $5 million in 2011, transactions as low as $1 million were processed via CMBS lenders in 2014. This is especially important for self-storage owners, as many transactions are in the sub $5 million range. Furthermore, CMBS lenders are completing deals in what are traditionally consid- ered secondary or tertiary markets such as Danville, Va., and Jacksonville, N.C.


Insurance Companies Insurance companies (aka Life Companies) are very active real estate lenders and, like CMBS lenders, offer borrowers the abil- ity to lock into low rates for longer terms than what are typi- cally available from more conventional bank lenders. Insurance companies are also among the most conservative lenders in the market, preferring to lend on very high quality, stabilized assets in primary markets with premium physical attributes. In addition, these lenders prefer owners with high levels of


experience and strong personal balance sheets. Many life com- panies enforce a minimum loan size of $5 million, however as competition for deals has increased, a number are now willing to consider loans below these minimums. Because insurance companies are matching assets for its


shareholders/members, most prefer lower leverage transac- tions that will provide them with low volatility throughout the loan term; for this reason, they typically do not compete with CMBS lenders on loan proceeds. Given their lending mandate, insurance companies tend to be more conservative in nature and will stress the cash flow for its underwriting and use higher capitalization rates to determine its value, resulting in loan ad- vances of not more than 65 percent of actual market value. The cornerstone attribute of life companies is their flexibil-


Chart 10.6 – Commercial Real Estate Debt Outstanding Others 13.9%


Life Insurance Companies 13.4% Agency & GSE Portfolios and MBS 15.3% CMBS, CDO and Other Issues 21.7% Banks and Thrifts 35.8%


Source: Investor Group 102 Self-Storage Almanac 2015


ity. For example, while five-, seven-, and 10-year fixed-rate loan terms are most common, insurance companies can offer fully amortizing loan structures between 10 and 25 years. Insurance companies can also offer borrowers the ability to lock the inter- est rate at application, more flexible prepayment options, and lower overall transaction costs. Because they tend to be more conservative, the spread premium on insurance company loans can be more attractive than that of other lend- ers. As of Q4 2014, interest rates for Life Company loans typically ranged from 3 percent to 6 per- cent, depending on the term and overall structure of the loan.


Local And Regional Banks As the largest originator of commercial real es- tate loans representing 36 percent of outstanding debt, banks are the primary source of capital for the majority of self-storage owners. It should come as no surprise that commercial banks have traditionally been the primary source


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