Section 12 • Finance


self-storage REITS reported physical occupancies above 91 percent. These four Public REITS are reporting their strongest occupancy levels ever.


Increased occupancies are applying upward pressure on


public REIT rental rates, as evidenced on a quarter-by-quarter basis with street rates averaging 3.7 percent higher in Q3 2015 than in Q2 2015. Furthermore on a year-over-year basis, street rental rates in Q3 2015 for the four public REITs are 5.5 percent above corresponding rates a year earlier based on MJ Partners quarterly reports for those periods. While these metrics do not reflect the performance of the self-storage asset class as a whole, the performance of the public REITs is regarded as a benchmark indicator for the state of the industry.


Going forward, global economic volatility will continue to


impact domestic lending and interest rate fluctuations. That said, self-storage assets have generally reported strong oper- ating metrics and exhibited persistent low delinquency rates.


Chart 12.2 – Capital Stack


Sponsor Equity


Preferred Equity


Mezzanine Investors First Mortgage (Senior Debt)


The self-storage asset class has become a core property type for lenders, and there remains the opportunity for self-storage owners to lock in to compelling financing packages in 2016.


Available Financing Within The Capital Stack A real estate transaction is comprised of all capital sources invested in the project, including the debt and equity as well as any hybrid pieces such as mezzanine debt that may sit in between.


Picturing the capital stack as a multi-level pyramid can help


clarify the concepts. The top of the pyramid is the riskiest posi- tion, since those parties are last in line to receive proceeds. This section is where most equity resides. Risk diminishes approach- ing the base of the pyramid where priority to cash flow resides. This is the position of the senior debt lender. 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)


The relative size of the above classes within the capital stack


will likely change over time, similar to the value of a real estate asset. This means that as debt is reduced, equity increases, and vice versa. Sponsor equity essentially represents the owner’s cash position in the real estate asset. The sponsor equity posi- tion can be quantified by subtracting the value of all higher pri- ority positions from the asset’s current value.


The amount of sponsor equity that remains in an asset is im-


portant to the lender in most situations. A borrower that is fully cashed out, or has no “skin in the game,” might have different interests than another borrower with equity remaining in the deal—especially in the eyes of a lender. This does not discount


Chart 12.3 – Commercial/Family Mortgage Bankers Originations Index (2001 Quarterly Average = 100)


100 150 200 250 300 350 400


50 0


Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Mortgage Bankers Association 124 Self-Storage Almanac 2016


68 110 98 145 100 137 144 188 109


172 172


207 153 215 283 318 205


253 258


328 280 352 247 275


132 130


116 54 40 60 53 61 45 61 70 114 83 126 138 129 113 157 129 192 123


167 166


223 122 164 193 246 182 210 217


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