Finance • Section 16
construction and lease-up period. Similarly, lenders prefer guarantors with strong balance sheets and significant de- velopment experience. Accordingly, banks are still offering construction loans across the country, but are proceeding with caution, especially in a few “overheated” markets.
Conventional lenders are advancing up to 70 to 75 per-
cent LTC, depending on the project. Interest rates are often quoted on a floating rate basis, although fixed-rate quotes are also available. If floating, the rate is commonly priced at a spread over an index such as one-month LIBOR or Prime. Full recourse with a completion guarantee is typical of con- struction financing, at least until the Certificate of Occupancy is obtained, after which a burn down to limited or partial recourse may be available. There are still a few lenders pro- viding non-recourse financing for very low leverage projects with institutional sponsorship, but this is not the norm.
Apart from the usual suspects, there are a few institutions
that have launched more targeted construction lending platforms. For example, Jernigan Capital Inc. is a special- ized self-storage lender that recognized the need for a new product in select markets. This lender can offer up to 90 per- cent LTC on a non-recourse basis under a participating debt structure for qualified projects. The executive team at Jerni- gan Capital boasts extensive self-storage experience and a wealth of industry knowledge, which allows them to be es- pecially selective about the projects they fund. Finally, some SBA lenders and debt funds are also viable sources of capital for would-be developers.
For construction financing, it is important to structure an
interest-only period that reflects the timeline necessary to bring the property to break-even occupancy. Also be sure to factor the necessary carried interest into the budget. Lenders will build debt service coverage tests that vary by lender and project into the loan agreement. Typically, lenders will stress test a project to see if it can cover interest-only payments by a predetermined number of months after completion; even- tually, the lender will also test the project to determine if it covers principal and interest payments some months after the first test occurs. This prudent structuring protects the lender, and underscores the importance of accurate cost and time budgeting for a new project. This highlights the value of a feasibility study and the necessity of understanding the existing competitive landscape, including market rents and other proposed facilities. By appropriately budgeting devel- opment costs and time frames, borrowers will have an easier time identifying an appropriate loan structure.
Small Business Administration (SBA) Loans SBA loans are made to small business owners by a bank and are partially guaranteed by the SBA. The Small Business Jobs Act was passed in 2010, which mandated that all self-storage properties were eligible for SBA financing. SBA financing has
Interest rates vary depending on factors such as leverage,
project strength, and borrower profile. Borrowers should be aware that, given the document-intensive nature of these programs, the SBA closing process can be lengthy. When applying for SBA financing, seek out a Preferred Lender Pro- gram (PLP) certified lender. PLP certified lenders can approve loans on behalf of the association, which can speed up the process. In addition, borrowers should expect to pay up to three percent on the guaranteed amount, which is usually 75 percent of the loan amount in addition to other traditional closing costs. Overall, access to SBA financing has been a positive for the self-storage industry by offering an alterna- tive financing vehicle for owners.
Bridge Loans For Short-term Financing A bridge loan allows an owner to borrow loan proceeds for a shorter period, typically capped at a loan term of three years. If a borrower anticipates selling a property or needing to re- finance in the near term, a bridge loan might be appropriate for the situation. Bridge loans are also beneficial when a self- storage facility is still in a period of lease-up and, therefore, is not fully stabilized. Bridge loans are sometimes originated when there is no cash flow at all, if a lender can gain comfort
2018 Self-Storage Almanac 165
proven beneficial to self-storage owners: (1) in non-primary markets, where traditional financing may be more difficult to obtain; (2) those looking to surpass the typical 75 percent LTV threshold; and (3) those looking to construct properties in the current development cycle. There are currently two flagship SBA loan programs available for self-storage bor- rowers: 7a and 504.
SBA 7a proceeds can be used for acquisition, refinance,
and construction. The 7a product is typically a variable-rate loan, commonly structured with a prime-based rate that re- sets quarterly. However, some lenders do offer fixed rate 7a pricing. In either case, 7a loans are fully amortizing on a 25- year schedule; they open for prepayment in year four.
SBA 504 loans can also be used for acquisition, refinance,
and construction. Historically, SBA 504 loans were limited to acquisitions, but, as of 2016, the SBA now offers a refinance option. These loans are slightly more complicated and are compartmentalized between a first and second lien, in addi- tion to the owner’s equity piece. Specifically, a bank provides a traditional first lien loan for 50 percent of the project cost at conventional terms. The second lien comes from an SBA 504 loan covering up to an additional 40 percent of project funding. This piece is funded through a Certified Develop- ment Corporation (CDC), and is 100 percent backed by an SBA-guaranteed debenture. This component offers borrow- ers a low 20-year fixed-rate (debenture rate) that carries a prepayment penalty for the first 10 years. The remaining 10 percent or more is comprised of the owner’s equity. All in, the blended rate for SBA 504 borrowers is attractive.
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