By Gerard D. DiMarco Jr.
There are a few basic reasons why a self-storage owner would seek a commercial loan: the acquisition of a new facility, the refinance of a current loan or the expansion of an existing property.
On acquisitions, most lenders will provide financing up to 75 percent of the cost. By limiting the amount of equity a buyer needs to bring to the closing table, a maximum-leverage loan can help increase an investor’s immediate cash-on-cash return. With historically low interest rates, fixing the rate for the long term may be a wise financial decision for a stabilized facility.
Many owners may find themselves in a position where they need or want to refinance their existing note. Assuming the property has sufficient ownership seasoning, lenders can provide up to 75 percent of a facility’s appraised value in proceeds. There are many reasons to consider a refinance including a balloon payment coming due, pulling out equity for improvements or other investments, locking in a long-term fixed rate, or securing non-recourse debt to limit your personal liability. All of this can be accomplished in today’s market.
Who Qualifies?
There are two major components lenders analyze when determining if a property qualifies for a commercial mortgage: the borrower and the property itself. On the borrower or guarantor side, even for non-recourse loans, borrowers obtain the best terms when they have strong experience in the industry and a good financial track record. Sufficient net worth, liquidity and high credit scores are also a plus.
Regarding the property, lenders look at numerous criteria including age, quality, infrastructure, location, occupancy, net operating income, market comps, etc. Typically, there isn’t a mandatory property checklist lenders use in evaluating and approving a loan. The sum of all the various borrower and property components are analyzed equally and, therefore, every request is somewhat unique. For example, a property that’s only 70 percent occupied in a secondary market may qualify for a loan based on the upward trending income and strength of the guarantor. Each loan is truly reviewed on a case-by-case basis.
Basic Loan Types and Terms
There are a few major types of loans available in today’s market for acquisitions and refinancing. There are non-recourse, long-term, fixed-rate loans and shorter-term options.
For loan amounts above $1 million, borrowers may qualify for a 10-year, fixed-rate loan with a 30-year amortization. For non-recourse terms, by pledging the storage facility as collateral, the borrower isn’t personally liable for the note. These loans have very competitive rates and may feature options such as interest-only terms and 1 percent assumption clauses. The 10-year term allows the borrower to eliminate interest-rate risk for a full decade. From his perspective, eliminating the personal guarantee is an extremely attractive feature.
For loans under $1 million or properties in need of added value, short-term, recourse-based loans may be the optimal fit. Terms are approximately three to five years and feature variable or fixed rates with very limited prepayment penalties. These loans are great options for borrowers who may be looking to sell in the short term or need to add value to a property before it’s ready for a long-term, fixed-rate deal. Rates and amortizations are competitively priced in the market. Also, for loan requests of several million dollars and up, certain non-recourse floating-rate programs are available.
Process and Timing
The typical time frame to finance a facility, from start to finish, is approximately 45 to 60 days. Although every lender is slightly different and some loans can fund much quicker, here’s an overview of the basic process:
- Days 0-10: Once the lender receives basic information on the guarantor and facility, it works its network of other lenders to find the best fit based on the loan request and deal specifics. Quotes, term sheets and letters of intent are gathered from various sources.
- Days 11-40: Once a borrower chooses his lender, the lender may request a good-faith deposit to begin initiating third-party reports, underwriting and legal. Reports and underwriting typically take three to four weeks to complete. At that point, the loan enters the approval process.
- Days 41-60: Once the loan is approved, the closing process will begin. It can take a couple of days up to a few weeks to wrap up legal, title, zoning, survey and insurance.
Costs
For non-recourse loans, the borrower pays for the lender’s legal and third-party reports (including appraisal, environmental, the property-condition report, title and survey). Short-term recourse loans are usually slightly less expensive than long-term, non-recourse loans and may not involve as much paperwork. Fixed costs of recourse-based loans are typically $10,000 to $15,000, whereas non-recourse loans are typically $15,000 and up.
Benefits
There are several ways self-storage owners can benefit from obtaining a commercial mortgage. First, it increases your buying power for acquisitions and helps you diversify your portfolio. By obtaining a 75 percent loan-to-value mortgage, you can maximize your cash-on-cash return and place your equity in other investments. In addition, by locking in a 10-year, fixed-rate loan, you can eliminate interest-rate risk and focus on the operation of your facility. Finally, non-recourse loans limit your personal liability.
Current interest rates for self-storage loans are at historic lows. Well-qualified properties and borrowers are seeing 10-year, non-recourse fixed rates at less than 5 percent. Based on these rates, reviewing your portfolio’s financial position maybe worth considering. In addition to long-term fixed rates, lenders can offer flexible rates and terms to fit a borrower’s specific strategy.
Gerard D. DiMarco Jr. is a managing director of Rochester, N.Y.-based Security Mortgage Group LLC, which has provided commercial mortgage financing for income properties including self-storage since 1989. Gerard and his brother, Anthony, have successfully navigated the ups, downs and complexities of the financial markets over the past 25 years. For more information, call 585.423.0230; visit www.securitymortgagegroup.net.
