Section 12 • Financial Facts Construction loans are riskier than other debt products by na-
ture because there is no cash flow during the construction and early lease-up periods. Lenders increasingly look to make loans only to guarantors with strong balance sheets and significant de- velopment experience.
Where conventional construction lenders were advancing up
to 75 percent LTC a few years ago, they tend to prefer lower le- verage loans in the current environment. Interest rates are often floating rates, although fixed-rate quotes are available in some cases. If floating, the rate is priced at a spread over some index, such as one-month LIBOR or Prime.
Most construction products require full recourse with a com- pletion guarantee at least until Certificate of Occupancy (C of O) is obtained. After C of O, a burn down to partial recourse (or non- recourse on occasion) may be available. There are some lenders extending non-recourse financing, however this added feature comes at a higher rate and most likely higher fees.
When negotiating construction financing, it is important to structure an interest-only period that reflects the timeline
necessary to bring the property to break-even occupan- cy. In addition, be sure to factor the necessary interest carry reserve into the budget. Lenders are not buying off on 24-month lease-up periods experienced earlier in the cycle; in some cases, even 36-month lease-up peri- ods are considered unrealistic. Developments must be supportable in a slowing lease-up environment.
In attempts to structure the loan appropriately,
lenders build debt service coverage tests into loan agreements. Furthermore, they will stress-test a project to see if it can cover interest-only payments following a set number of months after completion. Eventually, lenders will test for principal and interest coverage af- ter the first test occurs. In addition to testing for project viability, this structure doubles as a safeguard for the lender.
The importance of thoughtful budgeting before be- ginning a project cannot be overstated. A professionally prepared feasibility study is essential, and it behooves a borrower to go above and beyond to understand the
116 Self-Storage Almanac 2021
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
