Financial Facts • Section 12
mortgage that covers the first and mezzanine pieces. Mezza- nine financing represents a smaller portion of the total asset value, and thus mezzanine lenders hold out for larger deals, generally greater than $10 million in value, to ensure profitabil- ity and account for fixed administrative costs. Other financing vehicles, such as hard money loans, exist for smaller deals. These loans are costly and require higher interest rates than first mortgage debt.
The brief case study on the previous page is based on a set
of hypothetical assumptions for the sake of example but could be very real for a property owner in the event of significant cash flow or value erosion. Perhaps the more likely situation in today’s climate would be a cash flow erosion situation where revenue has been chipped away because of new competition or rental rate softness of any kind. Either way, shortfalls in qualified loan proceeds can pose a big problem for storage borrowers.
Hiring A Broker, Consultant, Or Intermediary The decision to hire a mortgage broker may feel unnatural if doing so for the first time. However, self-storage borrow- ers can reap huge benefits from doing so. Especially during times of uncertainty, brokers lean on strong relationships to flush out qualified capital sources, some of which may even be new to a borrower. Mortgage brokers have knowledge of lenders and loan programs in the market, as well as the asso- ciated underwriting practices. These professionals often have access to lenders whose programs may not be accessible at the retail level.
An experienced broker understands how to
properly package a loan request and appropriately position the asset with the lending community. Lenders faced with a stack of potential deals are more likely to engage a succinct, easily digestible presentation than a collection of scattered docu- ments. A broker’s expertise is the result of being out in the market every day and constantly evalu- ating available debt products offered by lenders.
Brokers charge for their services, but many
borrowers will attest to the fact that the fee paid to a competent broker is worth the peace of mind that comes with smooth execution and the knowl- edge that they are getting a great deal. Finally, in addition to producing a better execution, hiring a broker also frees up the owner to pursue value-add strategies such as ac- quiring new facilities or expanding existing ones.
Hope On The Horizon Frankly, 2020 tested the resiliency of mankind with a myri- ad of trials and tribulations. Before the pandemic hit, the stage was set for a strong year from a commercial real es- tate financing perspective. Then, through the end of the first quarter and into the second, it seemed a real possibility that there would not be much of anything positive to reflect on. However, at the time of this writing, most of the capital sources reviewed in this piece are making loans, and what is more, some of these lenders are hyper focused on self- storage given its performance under pressure. Self-storage waded through economic choppiness with the best of them, underscoring its recession-resistant nature.
As 2020 wraps and we set sights on 2021, it is a year we
hope to breach with cautious optimism. Several industry- specific challenges are still in focus, including the risk of overbuilding and the ensuing possibility of rental rate soft- ness. The country will deal with some enduring pandemic impact, given that presently there is still no known vaccine. However, self-storage adapted swiftly to a new normal by rolling out contactless rental strategies that kept the indus- try on solid footing. Global socioeconomic factors larger than any storage-specific concern are always capable of im- pacting the industry, but those events are outside the scope of this section. Borrowers should be armed with an under- standing of loan products available to fit their specific need. The debt markets are generally in good standing to close 2020, and interest rates remain historically low.
Origination $2,000,000 6.00% $33,333,333 75% $25,000,000 Current
$22,960,000
$2,200,000 7.50% $29,333,333 75% $22,000,000
2021 Self-Storage Almanac 121
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