The election is over. The fiscal cliff is over. Are the low interest rates over? Probably not, but theyre not going to get any lower. If youre thinking about refinancing your self-storage loan, theres no better time than the present. Even if you have a prepayment penalty, it may make sense to pay it to take advantage of the lowest rates anyone can remember and ensure you benefit from todays low rates.
So what should you consider when refinancing? First and foremost, give yourself enough time to search for the right program without jeopardizing a maturity date. This means you should start your process at least 120 days prior to your current payoffif thats the reason for the refi. Most refinances take a minimum of 45 to 60 days, with some life-company programs running 75 to 90 days. Appraisals alone can easily run four to six weeks.
Next, you need to decide if non-recourse is an important feature in your loan. If so, youll most likely need to concentrate your options on conduit or life companies.
Once youve narrowed down your preferences on recourse, other important decisions such as length of term, prepayment penalties and amortization will help determine your choice of lender and lending program. There are three main groups of lenders: banks and credit unions, life insurance companies, and Wall Street conduits. Well explore each in this article, understanding there will always be exceptions from the norm and areas of the country will vary; even regions within a state might vary due to factors such as demographics and lender competition.
Banks
With banks borrowing at next to zero, it has allowed them to compete with life companies on some fixed-rate terms up to 15 years. Non-recourse is also an option with some bank programs with a low enough loan-to-value (LTV), although this would be the exception versus the rule.
Banks will provide the most flexible structure and prepayment options but typically dont want to fix a rate longer than five to seven years or amortize a loan longer than 20 to 25 years. In addition to bank-portfolio programs, higher-leveraged Small Business Administration (SBA) and United States Department of Agriculture (USDA) purchase or refinance programs are usually obtained through banks with LTVs up to 85 percent. However, SBA will not refinance an existing SBA loan.
Expect LTVs to be all over the board, from 60 percent up to 80 percent on non-SBA deals, and rates ranging from the high 3 percent on shorter three-year fixed rates to the low 4 percent to mid 5 percent range on five- to seven-year fixed rates. Ten-year or longer fixed rates are available with some banks, and rates will depend on leverage and other factors.
These rates, at least in California, have been done in the high 3 percent and low 4 percent on the bottom end of the range, but expect a normal rate for these terms to be closer to the mid 4 percent to 5 percent or more. Most banks will charge .5 percent to 1 percent in loan fees but require fewer costs related to legal, third-party reports and processing compared to life companies and conduit lenders.
Credit Unions
Credit Unions offer very similar terms to the banks with a couple of exceptions. Prepayment penalties are either minimal or non-existent. Also, with most credit unions, youll need to qualify for membership, which genearlly means living, working or worshipping in the general geographic area where the credit union operates. Recourse is almost always a requirement. Not every credit union offers commercial loans, either.
Life-Insurance Companies
Of all the lender types, life companies will typically offer the lowest long-term fixed-rate options, which, in this environment, means never having to refinance again if youre a long-term holder. This is also a great loan if youre looking to sell in the future and get a premium price, as your buyer can assume a fantastic rate in a possibly higher interest-rate environment.
Life companies can fix a rate for 25 to 30 years or offer 10- to 15-year fixed rates with up to 30-year amortizations. However, theyre typically more conservative in their LTVs or use an artificially higher cap rate than what might show on the appraisal to arrive at their value. They also like better located and well-occupied properties in major population centers.
What often draws people to life money is the long-term fixed rates, which can start under 4 percent for a 10-year fixed with 30-year amortization, and can be structured to be any term of self-amortizing program. For example, a recent closing on a 15-year fully amortized loan in Virginia closed at 4.25 percent, and 10-year full-pay loan in North Carolina closed at 3.5 percent. Also unique is the non-recourse aspect of this type of financing, meaning in the event of a default, the lender can only go after the property and not the borrowers personal assets. Combined with usually the lowest rates and longest terms and the ability to lock your rate up front for a refundable deposit, this financing vehicle is the preferred method for most institutional and multiple property owners. Many individual owners also take advantage of life financing, but its not for the faint of heart.
To obtain life money, theres typically a 2 percent refundable deposit required up front or early on in the application process. An additional lender fee is usually between $5,000 and $7,500 and is non-refundable. Lender legal fees can run between $7,500 to $15,000 or more. Third-party reports include an appraisal, phase one, property condition report and, if applicable, a seismic study. Altogether these can run between $8,000 and $10,000. An ALTA Survey, which is made for the title company and/or lender, is also needed. This can vary and easily run $4,000 to $8,000.
The property-insurance requirements and endorsements can also be more comprehensive than bank requirements, adding to the annual premium as well as additional title-insurance endorsements costing more at closing. All this, of course, is added to the loan fee, which can vary based on loan amount but is typically 1 percent. Prepayment penalties usually yield maintenance but can be step-downs and other structures.
Because of these costs, most life-company loans are larger ($3 million-plus) to make the fees cost-effective. For the smaller loan, there are a few smaller life companies that dont require surveys, legal fees and property-condition reports, which significantly reduces the costs. Loan amounts under these programs start at $500,000 to $1 million, and still offer longer fixed-rate terms and upfront rate locks, although theyre typically full or partial recourse. Most life companies fund exclusively through correspondent mortgage bankers.
Conduits
Conduits are similar to life companies in many respects such as long-term fixed rates typically in the low 4 percent to low 5 percent range, non-recourse, similar costs and fees, but with mainly defeasance prepayment penalties. Expect legal fees to approach $20,000.
The biggest difference is the conduits typically prefer loans starting at $5 million. In addition, commercial mortgage-backed securities (CMBS) lenders do not offer early rate locks, have no upfront refundable deposits, and will do loans in secondary and tertiary markets. Theres one conduit that will write loans starting at $1 million with lower fees, and a few that will go down to $3 million. Most conduit loans are funded through the use of mortgage brokers and mortgage bankers.
Theres still time to take advantage of the low interest-rate environment, and theres a myriad of options for properties with good cash flow and acceptable leverage. While working directly with your local bank works for many, employing a professional mortgage banker or broker can open up other excellent possibilities from lending companies that may not be local but will lend in your area.
David Smyle is a vice president of Pacific Southwest Realty Services, a San Diego-based commercial mortgage banking firm founded in 1972. The company has a servicing portfolio of more than $4.3 billion, offering life-company financing from more than 18 investors as well as conduit, commercial mortgage-backed securities loans, and bank and credit-union options. For more information, call 619.602.6365; visit www.psrs.com.
