Finance • Section 12
Closing costs on CMBS deals are typically around $50,000, including all third-party reports, lender legal, ALTA survey, title, etc. Some lenders offer competitive “fixed-cost” programs be- tween $20,000 and $25,000 all-in for loans under $5 million. These programs cover third-party reports and the lender’s legal; however, there are still costs such as survey, title, and borrower counsel that fall outside of the capped cost structure.
CMBS lenders are aggressive in nature, and with the current
combination of low rates and non-recourse offerings, it makes for compelling loan products. Borrowers can lock in historically low rates for up to 10 years, helping hedge against interest rate risk. CMBS debt is also assumable—another valuable potential hedge against rate increases. CMBS loans are presently among the most attractive financing vehicles available to self-storage owners as seen in Chart 12.6 on the opposite page.
Insurance Companies Insurance companies also allow borrowers to lock in longer- term rates on a non-recourse basis, a similarity shared with CMBS loans. Unlike CMBS lenders, however, life companies are extremely conservative and prefer to lend on very high- quality, stabilized assets in primary markets. This is also exhibited by their preference to lend to highly-experienced, well-capitalized borrowers. Finally, it is important to consider the goal of insurance company lending, which is to match assets for its shareholders/members. Thus, most prefer lower leverage trans- actions that will suppress volatility during the loan term; this is another reason insurance companies typically do not compete with CMBS lenders on loan proceeds.
Most life companies historically enforced $5 million loan minimums as a general rule, many with much larger minimum targets. As competition has flourished in recent years, however, some abandoned this standard and are willing to lend lower amounts. Life companies are notorious for stressing cash flow underwriting and capitalization rates applied to determine val- ue. This measure typically results in loan advances of not more than 65 percent of actual value. Because life companies tend to be more conservative, the spread premium on these loans can be more attractive than other lenders. As of Q4 2015, interest rates for life company loans typically ranged from 3.75 percent to 4.75 percent.
The cornerstone attribute of life companies is their flexibility.
They offer among the lowest interest rates available depending on structure, and borrowers can generally lock the rate at ap- plication. Furthermore, while five-, seven- and 10-year fixed- rate terms are most common, fully-amortizing structures up to 20 years may also be available. Life companies often offer flex- ible prepayment options and reasonable transaction costs. In other words, they are extremely selective, but those who do se- cure a loan are in a strong position to negotiate a very attractive package.
Local And Regional Banks Commercial Banks are the largest originators of commercial real estate loans, representing 36.9 percent of outstanding com- mercial real estate debt. Accordingly, it shouldn’t come as a sur- prise that local banks have been the primary source of capital for most self-storage owners. Banks are relationship-driven, so a borrower should be prepared to place their operating and other depository accounts with that bank. Banks will also conduct an extensive credit review analyzing global cash flow, net worth, and liquidity.
Banks will lend up to 80 percent loan to value (LTV), and have
historically funded loans ranging from one- to five-year terms. More aggressive seven- and 10-year packages have become popular amid mounting competitive pressure, and these pack- ages are often made possible with the use of a swap agreement. Furthermore, banks typically offer amortization schedules of 20 to 25 years. Banks commonly require personal recourse guaran- tees, although the level of recourse fluctuates with leverage and can sometimes even be eliminated for loans below a 65 percent LTV. Depending on the variables above, rates offered by banks can vary significantly, but can be very attractive.
Transaction costs are typically very reasonable with local
and regional banks, and self-storage owners can often negoti- ate prepayment provisions. Banks have also recently taken on higher-risk storage assets such as underperforming properties, particularly when there is a turn-around story, some planned construction, or a sponsor with a track record of success.
Small Business Administration (SBA) Loans SBA loan products have only been available to self-storage own- ers since 2010 but have proven especially beneficial to those owners in secondary or tertiary markets where traditional fi- nancing options may be more difficult to find. Through 7a and 504 programs, self-storage owners have been able to secure fixed or floating rate loans when above average leverage is nec- essary. The following briefly outlines the two programs:
504 Program: • Commonly fixed-rate • Proceeds of $125,000 to $13 million available • Up to 20-year loan term available, fully amortizing • Declining prepayment penalty structure for the first 10 years, starting with 10 percent in year one
• Currently only available for acquisition financing 7a Program: • Commonly floating-rate • Rate generally resets quarterly based on a prime-based rate
• Proceeds of $50,000 to $5 million available • Up to 25-year loan term available, fully-amortizing • Prepayment allowed after three years, following a 5 per- cent, 3 percent, 1 percent penalty in the first three years • Applicable for both acquisition and refinance
2016 Self-Storage Almanac 127
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