Section 12 • Financial Facts
the replacement collateral as well as the ancillary costs. Both Defeasance and Yield maintenance penalties are reduced in a rising interest rate environment, and vice versa. Rates are extremely low from a historical standpoint and locking into long-term debt before interest rates begin to rise is a great way to counteract one of the most common grievances as- sociated with the CMBS product type.
CMBS loans normally feature higher closing costs and more rigid loan documents than other loan types. Typical closing costs are in the $50,000 range for a single asset. This includes all required third-party reports, the ALTA survey, title, lender legal, and other miscellaneous reports. A few CMBS lenders offer competitive fixed closing cost programs between $25,000 and $32,000 “all in” for loans up to $10 mil- lion as part of a small balance loan program.
Because CMBS loans are pooled together and sold as a
securitized bond in the secondary market, the loan docu- ments have many non-negotiable standard clauses and requirements. Additionally, the loans are most often ser- viced not by the originating bank but rather by a third-party servicer that is not relationship based.
CMBS loans have played an increasingly large role in
self-storage as more institutional equity enters the space. The aggressive nature of these lenders, combined with low rates, extended interest-only periods, and non-recourse op- tions, make these loan products appealing for borrowers. Add to this the CMBS lenders’ willingness to provide cash out above a borrower’s basis, and it is clear why the product is in such high demand.
Life Insurance Companies Life Insurance Company lenders offer one of the most competitive loan products in all commercial lending, but that comes at the price of very conservative underwriting. Life Co lenders favor high-quality, stabilized assets in core markets as collateral. These lenders also tend to gravitate towards experienced, well-capitalized borrowers. Life Co lenders prefer lower leverage transactions that will mini- mize volatility during the loan term.
Given their conservative nature, stressing cash flow and
cap rates is in Life Co lender DNA; it follows that these loans are frequently constrained below full (75 percent) leverage. Life Cos have historically preferred larger loans ($5 million and up), but they will stretch for smaller deals to compete with other lenders.
Five-, seven-, and 10-year fixed-rate loan terms are most
common, but fully amortizing structures up to 25 years are available. Life Co products feature reasonable transaction costs, and these lenders can offer flexible prepayment op- tions. Life Cos may allow a borrower to lock the interest rate
118 Self-Storage Almanac 2021
at application, but this is not standard. With all the talk about their conservative underwriting, it should not come as a sur- prise that Life Co interest rates can be quite compelling.
The Life Co loan product has been a great source of capital
for the self-storage industry, assuming the property meets their criteria. Per the MBA’s Quarterly Databook, originations (across all CRE, not just storage) totaled $19.84 billion for the first half of 2020 by Life Co lenders, down significantly from the same period in 2019. Life Co debt currently holds 15.3 percent of all outstanding commercial/multifamily mortgage debt, having passed the CMBS, CDO, and other ABS investor groups in 2017.
Life Co lenders continue to have an appetite for self-storage
moving into 2021. As highlighted above, Life Co lenders can of- fer some of the most competitive deal terms if the property meets the lender’s standards. Look for this product to continue to make a splash in the storage industry.
Commercial Banks And Credit Unions The Bank and Thrift category maintains its position as the largest holder of commercial and multifamily debt, at ap- proximately 38.8 percent of the $3.76 trillion outstanding. Accordingly, banks have traditionally been the primary source of capital for most self-storage owners. Banks are relation- ship-driven lenders who meet a variety of different needs for borrowers, ranging from short-term capital for construction, acquisition, or refinancing to longer-term, permanent debt solutions. In addition to expecting borrowers to maintain op- erating and other depository accounts, banks will also conduct an extensive credit review analyzing global cash flow, net worth, and liquidity.
As is the case for all debt products, interest rates vary sig-
nificantly based on leverage, loan size, and the strength of the borrower relationship with that bank, among other things. Borrowers will find that local and regional banks can produce extremely compelling quotes for the right deal profile. Bank loans normally feature one- to five-year terms; however, these lenders are offering seven- and 10-year fixed-rate term loans to remain competitive. Bank loan amortization schedules are on the conservative side at 20 or 25 years, with leverage available up to 75 percent LTV today; however, many banks have scaled back amid the current economic environment.
Banks will generally require personal recourse guarantees
on almost all loans; however, the amount of recourse may be reduced or eliminated for lower leverage loans under 65 per- cent LTV. Non-recourse debt may be available for institutional sponsors on very low leverage deals. Transaction costs for bank deals are generally quite reasonable, and prepayments can be negotiated on a deal-by-deal basis.
Credit unions continue to be a relevant financing source following the financial crisis. Credit unions are like banks with
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