Financial Facts • Section 12
notable differences; banks tend to be extremely relationship driven, but credit unions are more transactional in nature. Banks also prefer to lend in a designated footprint based on where they have branch presence. Credit unions will lend na- tionally and are comfortable lending without a preexisting relationship, which are two advantages for the product type. Finally, credit unions are not equipped to handle the com- plexities of construction or other transitional deals that may require draws, the carrying of interest, etc.; without much ex- ception, these institutions are cash flow lenders.
Small Business Administration (SBA) Loans Small Business Administration (SBA) loans are made to small business owners by a bank and partially guaranteed by the SBA. Currently, SBA loans are available to borrowers through two flagship programs: 7a and 504. SBA loans have proven es- pecially beneficial to owners looking to construct properties in this development cycle. Borrowers looking to surpass tra- ditional leverage of 75 percent are drawn to the SBA because it allows leverage up to 90 percent. The SBA has also shown a willingness to lend in secondary and tertiary markets (where traditional financing might prove harder to obtain).
During the CMBS hiatus at the height of the global pan- demic, the SBA persisted as a strong capital alternative to deals that would have otherwise landed in CMBS. With a highly competitive mid-two percent debenture rate at the time of writing, the blended rate on SBA 504 financing is extremely compelling, among other attractive structural features. The SBA 504 program initially includes two loans: a fixed-rate SBA component up to 35 percent, and a variable rate bank-funded portion that covers 50 percent of cost. This program includes an interim note for the 35 percent piece that is funded by the debenture as soon as 45 days after the initial loan to close includes a 25-year, fully amortizing term. This product mostly includes a step-down prepayment pen- alty structure, starting with 10 percent in year one. The 504 program is applicable for acquisition, refinance, and con- struction projects.
SBA 7a loans can take the form of fund acquisition, refi-
nance, and construction opportunities. These loans are a variable-rate product structured with a prime-based rate that resets quarterly. In some cases, SBA lenders might offer fixed rate 7a pricing, an important distinction when nego- tiating this type of deal. Either way, 7a loans include a fully amortizing 25-year schedule and have a five percent-three percent-one percent open prepayment schedule.
There has been an update to the standard operating pro-
cedures (SOP) mandating that a borrower must have direct oversight over the employees operating the business. This is problematic as it requires property management employees to be employees of the facility rather than the management company. In short, SBA financing is best suited for a store that
will be self-managed or managed by an operator that has SBA compliant management documents.
In construction lending, it is becoming more difficult for
the SBA to finance projects at desired leverage points. Even though SBA loans technically provide leverage up to 90 percent, most projects are capped at lower levels. This is be- cause SBA lenders require the property to break even on an amortizing basis (1.00X DSCR) 24 months after receiving the Certificate of Occupancy.
Borrowers are subject to guarantee fees up to three per-
cent of the loan amount, on top of standard closing costs. SBA loans are also document-intensive and can be tedious. When applying, find a lender that is Preferred Lender Program cer- tified. This distinction allows the bank to approve loans on behalf of the SBA, which can ultimately speed up the process. The 7a and 504 programs have proven beneficial and will continue to be a useful loan type for self-storage borrowers in 2021.
Distressed Real Estate As recently as the publication of the 2019 Self-Storage Alma- nac, the subset of distressed real estate was smaller. While many storage properties remain on solid footing, more and more deals are showing signs of distress. Whether because of oversupply, delayed construction, or simply downward pres- sure on rental rates, the results are the same: Borrowers are increasingly finding that their deals need “help.” Tack on the uncertainty surrounding the current global pandemic and it is clear this issue needs attention. The pandemic dragged the economy into recession territory, the severity of which re- mains to be fully realized. Outlined below is a situation which was common in the aftermath of the Great Recession and which has crept back into the purview of market participants.
The Great Recession had a profound impact on cash flow
from operations and subsequently on the ability of many borrowers to meet debt service obligations. After the market collapsed in 2008, property values plummeted. Since then, commercial real estate values have made a steady comeback. The subset of distressed deals is not at the level seen during the height of the economic crash in 2008, but they are more common than in the peak recovery years.
Operating fundamentals have been strong, and values are high, which has kept so-called stabilized assets out of dis- tressed territory. Currently, distressed deals are most likely to manifest from non-stabilized lease-up deals that are, for lack of a better term, “stuck.” Today, it is not uncommon to hear about an asset that is running out of reserves or facing a shift from interest-only to amortizing debt payments.
Even in the best of times, it is valuable to understand what financing options are available for distressed assets; in times
2021 Self-Storage Almanac 119
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