Section 12 • Financial Facts


a need for capable bridge lenders who can bridge from com- pletion or shortly thereafter through closer to stabilization. Cap rates remain historically low, and property values are


elevated. Commercial real estate loans are sized based on three key loan metrics: Loan to Value (LTV), Debt Yield, and Debt Service Coverage Ratio (DSCR). The basic calculation for each metric is as follows:


• LTV = Loan Amount divided by Appraised Value


• Debt Yield = Net Operating Income (NOI) divided by Loan Amount


• DSCR = NOI divided by Annual Debt Service


Given elevated values in the market today, it is common for loan proceeds to be constrained by DSCR or debt yield hurdles before LTV becomes a problem. For example, an asset with a $10 million valuation may not be eligible for a $7.5 mil- lion loan (75 percent LTV) if the in-place cash flow only covers at below a 1.20x DSCR, and/or the debt yield is below the pre- vailing market standard.


There is no denying that 2020 was a defensive year in


many ways. As a country, we had to adapt to new safety pre- cautions, work-from-home measures, and an understanding that uncertainty was the new normal. Furthermore, real es- tate owners were faced with a novel challenge in the form of government mandates restricting occupancy of many spaces. But the news was not all bad. In fact, 2021 could be a year of low interest rate financing for storage borrowers around the country.


A Quick Look At The Capital Stack The capital stack is the summation of all capital contributed to the financing of a real estate transaction. There are two broad financing categories that comprise the capital stack: debt and


equity. This includes those categories as well as any hybrid or tweener products.


Chart 12.2 can clarify the capital stack; the pyramid shape


is not purely coincidental. The level of risk and required rate of return diminishes from top to bottom. The top of the pyra- mid is the riskiest position as equity partners are last in line to receive proceeds. Meanwhile, the first mortgage (senior debt) lender has priority to the cash flow from an asset and is inher- ently the least risky position. Lenders and equity stakeholders work hard to understand the risk profile of a deal going in and price their product offerings accordingly. Typically, the capital stack includes the following arrangement from most risk to least risk:


1. Sponsor equity 2. Preferred equity 3. Mezzanine investors (hybrid debt and equity) 4. First mortgage (senior debt)


114 Self-Storage Almanac 2021


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