Finance • Section 10 By reaching higher in the capital stack, subordinate lenders
are inherently assuming more risk and therefore get paid a high- er rate of interest. Interest rates on subordinate debt can range anywhere from 8 percent to 18 percent, depending on the trans- action. Subordinate debt lenders are often flexible and willing to structure the payments to match the cash flow projections of the specific transaction; for example, the payments might be structured as an interest only payment with a balloon, or amor- tized over time via routine interest and principal payments to reduce the debt. The two most common types of subordinate debt are mez-
zanine financing and junior mortgages (B-Notes). Mezzanine lenders provide subordinate debt that is secured against an ownership position in the borrowing entity rather than the mortgaged property itself. “B-Notes” take a secondary debt po- sition that is secured by the mortgaged property as collateral for the loan. This mortgage is junior in priority to the first mortgage or senior note (A-Note), hence the nomenclature. In more extreme cases, cash flow and equity erosion may be so severe that there is no longer adequate cash flow available
Origination Current
Cash Flow $2,000,000
$1,900,000 Cap Rate
7.50 percent 8.00 percent
terms available in the market at the time of loan origination are five-year term, 5 percent rate, and 30-year amortization.
In a recessed market of declining property value, the ability to refinance the entire amount of outstanding debt may be an issue for some self-storage owners.
Assuming only a modest decline of 5 percent in NOI, com-
bined with a 50 basis point increase in cap rates and new avail- able leverage of 70 percent LTV, the borrower would realize a proceeds shortfall of roughly $2.97 million that will be needed to refinance the transaction at maturity of the existing loan. The property is not under water, as value of $23.75 million well ex- ceeds the balloon balance of $19.59 million, but additional mez- zanine debt of $2.97 million will be needed to bridge the gap and refinance the new loan.
Table 10.2 – Proceeds Shortfall Value
LTV
$26,670,000 $23,750,000
to service the debt, and in some situations the commensurate value decline may be so severe that the current sponsor’s equity has been completely eroded. In these situations the sponsor may need to infuse new equity in to the transaction, and if the sponsor does not have the equity, this can be achieved through an equity joint venture. Joint venture equity is typically avail- able to commercial property owners in transactions where there is a significant upside in the transaction, often stemming from a development or recapitaliza- tion scenario and resulting in enhanced cash flow and consequent value.
Capital Stack Example In a recessed market of declining property value, the ability to refinance the entire amount of outstanding debt may be an issue for some self-storage owners. If value declines enough that debt available in the mar- ket is not sufficient to cover outstanding debt, mez- zanine debt may be needed to fill the gap. In Table 10.3 on page 106, consider this self-stor-
age portfolio refinance example that was common- place in 2011. Five years earlier in 2006, a portfolio of self-storage assets generating $2 million in net operating income (NOI) would likely have qualified for loan proceeds of around $26.7 million, based on a cap rate of 7.50 percent and available market lever- age of 80 percent loan-to-value (LTV). The generic
130 120 110 100 90 80 70 60 50
80 percent 70 percent
Loan Amount $21,330,000
$16,625,000 $2,965,000 Shortfall Assuming that value is depressed and expected to rise in the
future either from growth in cash flow or cap rate compression, the mezzanine lender has a clear out in the form of a traditional first mortgage that covers the existing first and the mezzanine piece. Because mezzanine financing represents a smaller por- tion of the total asset value, mezzanine lenders often require a
Chart 10.8 – Price Indices (January 2007 = 100)
Balloon Ballance (Year 5) $19,590,000
Moodys/REAL CPPI
NCREIF TBI
GSA CPPI
Source: MBA Databook, Q2 2014; source data from Mortgage Bankers Association, Real Capital Analytics, Moody’s Investors Services, National Council of Real Estate Investment Fiduciaries, and Green Street Advisors
2015 Self-Storage Almanac 105
JAN 2007 MAY 2007 SEP 2007 JAN 2008 MAY 2008 SEP 2008 JAN 2009 MAY 2009 SEP 2009 JAN 2010 MAY 2010 SEP 2010 JAN 2011 MAY 2011 SEP 2011 JAN 2012 MAY 2012 SEP 2012 JAN 2013 MAY 2013 SEP 2013 JAN 2014 MAY 2014
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96 |
Page 97 |
Page 98 |
Page 99 |
Page 100 |
Page 101 |
Page 102 |
Page 103 |
Page 104 |
Page 105 |
Page 106 |
Page 107 |
Page 108 |
Page 109 |
Page 110 |
Page 111 |
Page 112 |
Page 113 |
Page 114 |
Page 115 |
Page 116 |
Page 117 |
Page 118 |
Page 119 |
Page 120 |
Page 121 |
Page 122 |
Page 123 |
Page 124 |
Page 125 |
Page 126 |
Page 127 |
Page 128 |
Page 129 |
Page 130 |
Page 131 |
Page 132
