Section 16 • Finance


self-storage assets wants to do (increase cash flow), the mar- ket dynamics did not work in the borrower’s favor.


If value is depressed but expected to increase going


forward either because of growth in cash flow or cap rate compression, the mezzanine lender has a clear out in the form of a traditional first mortgage that covers the existing first and mezzanine piece. Mezzanine financing represents a smaller portion of the total asset value, and thus mezzanine lenders often require larger deals, generally greater than $10 million in value, to ensure profitability and account for fixed administrative costs.


Today, cap rates are low, cash flows are high, and values are strong, but no one can say what


tomorrow holds; therefore, it is crucial to understand the strategies available.


Other financing vehicles, such as hard money loans, exist for smaller deals. These loans are costlier and require higher interest rates than first mortgage debt. In some cases, the borrower may have to contribute additional equity to make up for the new debt shortfall.


While based on a set of hypothetical assumptions, the sce- nario described previously could be very real for a property owner in the event of significant cash flow or value erosion. Today, cap rates are low, cash flows are high, and values are strong, but no one can say what tomorrow holds; therefore, it is crucial to understand the strategies available.


Hiring A Professional: Brokers, Consultants, And Intermediaries The expertise of a professional intermediary, such as a mort- gage broker, can have a positive impact on the financing that is ultimately secured, especially during times of volatility in the capital markets. A broker’s knowledge of lenders and loan programs in the market, as well as the associated underwrit- ing practices, can often assist a borrower in locating qualified capital sources, such as banks and insurance companies, or even newly formed funds, of which the loan applicant may be entirely unaware. Brokers often have access to lenders whose programs may not be accessible at the retail level, or they may possess the knowledge to reach different sources of capital that exist within a given financial institution.


168 Self-Storage Almanac 2018 Most professional intermediaries can help to properly


package, present, and structure a transaction in a way that helps a financial institution efficiently digest and under- stand the asset at hand. Lenders faced with an inbox full of potential transactions are more likely to react to a succinct, understandable presentation of the financial performance of the property. Sourcing funds is a full-time job, and oftentimes a broker can help to achieve a more favorable execution for the borrower and facilitate the most challenging deals to completion.


Brokers charge for their services, but many borrowers will


attest to the fact that the fee paid to a competent broker is worth the peace of mind that comes with smooth execution and the knowledge that they are getting a great deal. Finally, in addition to producing a better execution, hiring a broker also frees up the owner to pursue value-add strategies such as acquiring new facilities or expanding existing ones.


Conclusion Predicting the future is never an easy task, and 2018 is no exception. However, self-storage owners can spend some time assessing the past to strategically prepare for what is to come. Total outstanding commercial and multifamily debt is up year-over-year as of the end of Q2 2017; Q1 2017 was a milestone because total mortgage debt outstanding sur- passed $3 trillion. Total CMBS issuance was up in the first half of 2017 over the same period in 2016. However, the total bal- ance of outstanding CMBS debt has continued to decline; Q2 2017 balance was reported at $427.5 billion, down nearly 12 percent from $484.5 billion one year ago. Outstanding Bank, Thrift, and Life insurance company debt increased in Q2 2017, indicating that originations are keeping pace with pay offs and pay-downs.


The self-storage industry has continued to impress. Spe-


cifically, we continued to observe strong operating trends in 2017 that will hopefully carry into 2018. Strong fundamen- tals have drawn many new investors into the self-storage space, on both the debt and equity sides. According to data from rating agency DBRS, self-storage reported the lowest historical delinquency, specially serviced, and loss rates of all CMBS property types tracked through the recession and into the ensuing recovery. Self-storage remains the same recession-resistant asset we all know, but the industry hasn’t seen quite so much construction activity in recent years. Construction financing will continue to be available, but it stands to reason that underwriting will remain conservative going forward. Furthermore, lenders will be hesitant to lend in markets that are overbuilt. On the conventional financing side, self-storage owners should continue to find the capital markets liquid in 2018 given this prolonged low-interest rate environment.


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