Financial Facts • Section 12
existing competitive landscape, including market rents and other proposed facilities. This way, borrowers will have an easier time identifying an appropriate loan structure.
Bridge Loans For Short-Term Financing Bridge lenders are short-term providers of capital that have played an increasingly important role in the industry. Across the life cycle of an asset, bridge loans fall between construc- tion and permanent debt and act as a bridge (hence the nomenclature). Historically, bridge lenders were utilized when a sale or refinance was imminent. More recently, bridge lenders have provided loans to completed but non-stabilized properties or assets showing signs of distress related to the development boom.
Beginning in 2019 and through the first months of 2020, more bridge lenders were competing for deals than perhaps ever before. Interest rates were low and negotiating flexible structure was increasingly commonplace. However, by April 2020, the field of bridge lenders had been drastically reduced as they either shuttered their doors entirely or took a defen- sive asset management stance. At the time of this writing (Oct. 2020), the market has started to return, albeit with more modest terms.
Bridge lenders focus on a clear exit strategy to ensure that
the loan will be retired through either a refinance to perma- nent debt or a sale. These loans ordinarily feature terms up to three years with no more than two one-year extension op- tions; extension options can be exercised for a preset fee if they are performing subject to the loan agreement.
Bridge loans feature either a fixed or floating interest rate
and often include flexible prepayment language. Rates can vary significantly depending on the deal, but at the time of this writing spreads are between 350 and 800 bps over LIBOR. Non-recourse bridge loans are available in the market at the lender’s discretion. Bridge loans have a fee structure that is often referred to as “one in, one out,” including an origination fee at closing as well as an exit fee.
Bridge loans are most often required for assets that have not reached a stabilized cash flow. Therefore, bridge lend- ers adopt a more forward-looking approach. Bridge lenders typically consider the proforma projections of an asset, which must be supported with a market rental rate analysis. Bridge lenders also strive to understand the business plan and feasi- bility of the projections. Cash flow is a vital consideration, but loan-to-cost (LTC) and terminal valuations dictate proceeds as well.
Bridge loans are usually structured with reserves to in-
crease the likelihood that the borrower’s plan is successful. Other times, these loans feature earnouts or future fund- ing components depending on the situation. Some lenders
require additional collateral, such as a cross-collateralization with another asset, to get comfortable with a project. This requirement provides additional credit enhancement and comfort for the lender. A bridge loan is not an appropriate long-term debt solution; however, it can serve as a flexible in- terim financing option.
CMBS Commercial Mortgage Backed Securities (CMBS) are bonds backed by commercial mortgages, called CMBS or “conduit” loans. A CMBS transaction involves lenders originating and pooling together commercial loans and selling the securitized bonds to investors. Once the bonds are sold off to investors, capital is returned to the lender who can redeploy that capital to make more loans. According to Trepp, self-storage prop- erties only accounted for three percent of outstanding CMBS loans. Still, 2019 was a record year as $3 billion of loans were originated on self-storage, the highest amount ever.
As COVID cases began to surge in the United States, many
CMBS lenders stopped quoting deals entirely and instead fo- cused on bringing existing transactions to the finish line. By mid-April, the CMBS market came to a grinding halt, some- thing which had not happened since the last recession. The good news is that the hiatus ended by the middle of June, once the capital markets were able to risk adjust pricing on the CMBS bonds. In a peculiar turn of events, CMBS rates are in line with and, in some cases, below pre-COVID levels.
CMBS loans are non-recourse debt products featuring
10-year fixed-rate terms on a 30-year amortization schedule. Some variation exists in CMBS terms and amortization, but the majority are the areas described above. Borrowers can achieve leverage up to 75 percent LTV, and it is common for CMBS to feature upfront interest-only terms. CMBS lenders prefer primary-market deals, because of the liquidity in those markets, but will compete for loans in secondary markets.
Interest rates for CMBS loans are computed by adding a
risk spread premium to a benchmark index such as a swap or treasury rate. For sake of example, if spreads were in the 2.65 percent range (hypothetically), and the 10-year swap is at 0.85 percent, the applicable rate on 10-year CMBS money would be 3.5 percent. Practically speaking, as we move into 2021, CMBS interest rates will generally be between three per- cent and four percent.
The CMBS product is often criticized for its restrictive pre-
payment options, limited to yield maintenance or defeasance. The majority of CMBS loans require a borrower to defease a loan if they want to prepay. Defeasance is the act of replacing the collateral that generates the anticipated stream of debt service payments. This is frequently achieved with a portfolio of various government securities. Defeasance can be difficult to execute given the time and complexity required to secure
2021 Self-Storage Almanac 117
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
