Finance • Section 16


five-year term loans. To remain competitive and win deals, banks are increasingly offering seven- and 10-year fixed- rate term loans at attractive interest rates. Bank amortization schedules typically fall on the conservative side at 20 or 25 years, with leverage available up to 75 percent LTV today.


Banks will generally 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. Non-recourse debt may be available for institu- tional sponsors on low-leverage deals. Transaction costs for bank deals are generally very reasonable, and prepayments can be negotiated on a deal-by-deal basis.


A borrower’s ability to obtain a bank loan, and the terms offered, may be


driven by the strength and tenure of the existing relationship with that bank.


That said, borrowers will often find that local and regional banks can produce extremely compelling quotes.


Credit unions have become an increasingly relevant fi- nancing source following the financial crisis. Credit unions are like banks with several notable differences: First, whereas banks tend to be extremely relationship driven, credit unions are more transactional in nature. Next, most banks prefer to lend in a designated footprint that largely follows the bank’s presence or follows their existing clients based on that rela- tionship. Credit unions will lend nationally and will often lend to a borrower with no preexisting relationship. Finally, credit unions are cash flow lenders and are not equipped to handle the complexities of construction or other transitional deals that may require draws, the carrying of interest, etc.


CMBS Commercial Mortgage Backed Securities (CMBS) are bonds backed by commercial mortgages. A CMBS transaction in- volves lenders originating loans with the explicit purpose of pooling them with other loans to sell bonds backed by the cash flow stream from mortgage payments. When the bonds are sold to the investment community, capital is returned to the lender who, in turn, can redeploy that capital and make more loans. In this way, funds flow efficiently between bor- rowers, lenders, and investors, hence the name “conduit” is used to describe the lenders financing these loans.


For the CMBS product, 2017 has been a transition year to be sure. On one hand, the CMBS wall of refinances brought a


heap of debt that is coming due that needed to be refinanced. On the other hand, issuers were faced with implementing the risk retention rule, which drove several CMBS lenders out of the market. However, according to data from the Com- mercial Mortgage Alert, U.S. CMBS issuance was reported at $73.8 billion at the end of October, above the $51.8 billion reported for the same period last year. Furthermore, year-to- date issuance was up in 2017 despite a quieter first quarter start than last year; May and June were very active months, as was September. Total U.S. CMBS issuance is on track to fin- ish somewhere between the total issuance levels reported in 2015 and 2016 of approximately $101 billion and $76 billion, respectively.


CMBS loans are non-recourse debt products that typi-


cally feature five-, seven-, or 10-year fixed-rate terms. These loans include amortization schedules up to 30 years, and commonly feature upfront interest-only periods. Borrowers can achieve leverage up to 75 percent, or higher (85 percent) for large loans (greater than $10 million), when combined with mezzanine debt. Like most lenders and investors, CMBS lenders prefer large primary-market deals because of the li- quidity in those markets, but they also compete for loans as low as $1 million in secondary or even tertiary markets. This is especially important for self-storage owners, as many trans- actions are in the sub $5 million range.


Closing costs for CMBS loans are usually around $50,000, including all third-party reports, lender legal, survey, title, etc. Several lenders have created competitive “fixed-cost” programs priced at $20,000 to $32,000 all-in for loans under $10 million. While these programs do not cover such costs as survey, title, and borrower counsel, expenses covered by the capped cost program include all third-party reports and the lender’s legal responsibilities, which are some of the costlier items.


CMBS lenders are seldom praised for offering flexible pre-


payment options, a pitfall of the product type. CMBS lenders tend to limit the available prepayment structures to yield maintenance or defeasance. Costs to borrowers with these prepayment options are often higher in a declining interest rate environment and lower in a rising interest rate environ- ment. It is unlikely that we will find ourselves in a declining interest rate environment; however, borrowers should un- derstand the implications of each prepayment option.


Interest rates for CMBS loans are calculated by adding a


risk spread premium to a benchmark index, called the Swap Side offering. For example, a 10-year rate is found by add- ing the lender’s risk spread premium to the 10-year swap. Therefore, if spreads are currently in the 2.4 percent range (hypothetically), and the 10-year Treasury is at 2.35 percent, the applicable rate on 10-year CMBS money would be 4.75 percent (2.4 percent + 2.35 percent = 4.7 percent).


2018 Self-Storage Almanac 163


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