Section 16 • Finance
with the outlook for the asset. Finally, a bridge loan can be used to finance an asset facing a period of transition, such as a distressed recapitalization scenario, something that was common during the height of the recession. Because a bridge loan is typically required in situations that are inher- ently riskier, it makes sense that bridge lenders generally require higher interest rates to lend.
Before funding a loan, bridge lenders want to discern a
clear “exit strategy,” which ensures that the loan will be re- tired through either a refinance to the permanent debt market or a sale of the asset. Bridge loans commonly feature a loan term of 12 to 36 months and may include an embed- ded one-year extension option. If the asset is performing according to the terms of the loan agreement, the extension option can generally be exercised for a predetermined fee.
Bridge loans can include either a fixed or floating inter-
est rate, and will often feature flexible prepayment language. Non-recourse bridge loans are available in the market at the lender’s discretion. Rates can vary significantly, depending on factors such as loan structure and risk profile. In addition, lenders often collect an origination fee at closing and may also charge a fee at repayment (aka an exit fee), although these fees are typically negotiable and yield driven.
Bridge loans are typically needed for “storied” assets,
which, by nature, will require lenders to adopt a more for- ward-looking approach. Bridge lenders typically consider the proforma projections of an asset, assuming they gain comfort with the feasibility of the projections and support- ing circumstances. While cash flow is a vital consideration,
loan-to-cost (LTC) and terminal valuation will ultimately dic- tate the proceeds.
Bridge loans are frequently structured with earn-outs,
future funding, and heavy reserves to guarantee successful execution of the borrower’s plan. Some lenders may require additional collateral, such as a cross-collateralization struc- ture with another asset or a posted letter of credit from the borrower. This requirement provides additional credit en- hancement and comfort for the lender. A bridge loan is not an appropriate long-term debt solution; however, it can serve as a flexible interim financing option.
Distressed Real Estate Historically speaking, real estate cycles typically run for 10 years. Although we currently remain in a stage of recovery from the last economic downturn, it is important to remem- ber that a market correction could be just around the corner. If the economy makes a turn in the next few years, the follow- ing situations will become more relevant.
The Great Recession had a serious impact on cash flow
from operations and, subsequently, on the ability of many borrowers to meet their debt service obligations. After the market collapsed in 2007, property values plummeted and eventually bottomed out in 2009 to 2010. Since then, commercial real estate values have made a comeback. The accompanying graph highlights the growth in values ob- served over the course of the current economic recovery, which are presented as indexed values with January 2007 as a baseline.
The subset of distressed deals that manifested during the economic crisis has decreased signifi- cantly in recent years. Operating fundamentals and values have grown stronger, resulting in few- er conversations about distressed assets. Today, traditional first mortgage refinance vehicles are often the path of least resistance for previously distressed assets.
It is valuable to understand what financing
options are available for distressed assets. Fur- thermore, the self-storage development boom in which we currently find ourselves could lead to value corrections in certain markets; if that happens, some assets may fall into distressed territory. Thankfully, there are several options available in the market to bridge the gap in the case of a distressed asset.
Subordinate Debt And Equity Options For Distressed Assets The most viable solution available to a borrower is generally dictated by the severity of the decline
166 Self-Storage Almanac 2018
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 |
Page 133 |
Page 134 |
Page 135 |
Page 136 |
Page 137 |
Page 138 |
Page 139 |
Page 140 |
Page 141 |
Page 142 |
Page 143 |
Page 144 |
Page 145 |
Page 146 |
Page 147 |
Page 148 |
Page 149 |
Page 150 |
Page 151 |
Page 152 |
Page 153 |
Page 154 |
Page 155 |
Page 156 |
Page 157 |
Page 158 |
Page 159 |
Page 160 |
Page 161 |
Page 162 |
Page 163 |
Page 164 |
Page 165 |
Page 166 |
Page 167 |
Page 168 |
Page 169 |
Page 170 |
Page 171 |
Page 172 |
Page 173 |
Page 174 |
Page 175 |
Page 176 |
Page 177 |
Page 178 |
Page 179 |
Page 180
