Finance • Section 10
of capital for the majority of self-storage owners. Banks, espe- cially local banks, are relationship driven lenders that can pro- vide shorter-term capital used to purchase, refinance, and con- struct properties.
Typically, banks require personal recourse guarantees on almost all loans; however, the amount of recourse may be reduced or eliminated for lower leverage loans under 65 percent LTV.
Given the relationship aspect that banks prefer, a borrower’s
ability to obtain a bank loan may require developing a relation- ship with the prospective lender. As a result, borrowers should be prepared to place the operating accounts and/or other de- pository relationships with that bank. Borrowers should also ex- pect an extensive credit review analyzing global cash flow, net worth, and liquidity. Like all debt products, interest rates for bank loans are ex-
tremely attractive presently but can vary greatly depending on the term of the loan, borrower strength, leverage, and loan size, among other factors. Current fixed rate lending parameters for banks are primarily one- to five-year term loans; however, with mounting competition to win business and increase product, some banks are even offering seven- and 10-year fixed-rate term loans, often through the use of a swap agreement. Bank amortization schedules are typically on the more conservative side at 20 or 25 years, with available leverage today of up to 75 percent LTV available. Typically, banks require personal recourse guarantees on al-
most all loans; however, the amount of recourse may be reduced or eliminated for lower leverage loans under 65 percent LTV. Transaction costs for bank deals are generally very reasonable, and prepayments can be negotiated on a deal by deal basis. As lending competition grows, banks have be-
come a leader in lending on higher-risk storage assets, including turnaround properties that may be underperforming, or those with a construction component.
Small Business Administration (SBA) Loans SBA loan products have only been available to self-storage owners since 2010, but have proven especially beneficial to those owners in second- ary or tertiary markets where traditional financing options may be more difficult to find, or where higher than conventional leverage is required. There are two SBA loan programs available for self-storage properties: 7a and 504. The SBA 7a loan program is typically a variable-
rate loan that is most commonly structured with a prime-based rate that resets quarterly. It is a fully
100 90 80 70 60 50 40 30 20 10 0
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amortizing 25-year loan, open to prepay after three years. SBA 7a loan proceeds can be used for either acquisition or refinance. The SBA 504 is a fixed-rate loan program with up to a 20-year
term that carries a prepayment penalty for the first 10-year pe- riod. Currently, the 504 program is only available for property ac- quisitions; however, some speculate that refinance may become eligible with Congressional approval, the appetite for which is often dependent on the political climate and party agendas. Rates for both 7a and 504 programs vary depending on a multitude of factors. Borrowers must also be aware that the processing, underwriting, approval, and closing of an SBA loan can be time consuming due to the document-heavy nature that comes with any Federal program. Overall, access to SBA financ- ing is a positive for the self-storage industry because it injects an additional source of capital and liquidity into the market.
Banks are the logical suspects from which to obtain construction financing. While banks and thrifts do seem to be offering construction loans, they are doing so with caution.
Construction And Land Loans Given the low interest-rate environment, limited new develop- ment in the past six years, aggressive cap rates for stabilized fa- cilities, and upward pressure on rental rates, new construction is becoming an ever more attractive proposition. After being largely non-existent for many years following the recession, in 2014 construction financing regained popularity, a trend that should continue in 2015. Banks are the logical suspects from which to obtain con-
struction financing. While banks and thrifts do seem to be of- fering construction loans, they are doing so with caution. For
Chart 10.7 – Worldwide CMBS
Year-to-date volume ($Bil.) 2014
2013 US Non-US
77.0 67.5 3.7
TOTAL 80.7
10.3 77.7
2013 2014
F MAM J Source: Commercial Mortgage Alert 2015 Self-Storage Almanac 103
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