Over the past several years, the self-storage industry seen some amazingly low interest rates. To most loan experts’ surprise, they remain at historic lows today. Will rates go up in the future? Absolutely. The question is when; and if anyone can predict the timeline and by how much, that person will replace Johnny Carson as Carnac the Magnificent.
It’s hard to imagine that any self-storage owner who had the opportunity to refinance in the past several years hasn’t done so. Many even paid significant prepay penalties to refinance into longer-term, fixed rates for fear of future increases. There are circumstances, however, that may have prevented or delayed refinancing for some owners. These include significant prepay penalties, excessive debt (high loan-to-value, or LTV), property vacancies and slow leaseup, or weak borrower financial statements. Or it could be the owner was enjoying a very low adjustable rate and playing the waiting game while taking advantage of prepayment flexibility in the event of a potential sale scenario.
At this point, anyone with a long-term hold strategy who has the opportunity to refinance into long-term, fixed-rate debt should refinance as soon as possible. This isn’t to say rates are going up any time soon or that they won’t even come down a little bit, as we’ve recently seen. But if rates go up by even .25 percent to .5 percent, it could mean significant additional interest over the loan term, depending on the size of the loan.
The elections are coming in November, and who knows what effect that might have on economic policy and potential inflation based on political-party agendas. Add to that the fact that all lending institutions—including banks, credit unions, life companies, conduits, mortgage real estate investment trusts and even bridge lenders—are flush with cash and scrambling to get it into the market. Essentially, borrowers are in a very good negotiating position and are seeing lenders price and re-price to get a deal.
Let’s a take a look at some existing rate terms, who’s lending and how you can capitalize on today’s low interest-rate market.
The Lenders
Interest-rate spreads have compressed, and we’re seeing low-leveraged life-company quotes in the 135 to 150 basis-point range, equating to a 10-year fixed rate of about 3.95 percent to 4 percent. Interest-only options, typically up to five years, are also being quoted. Conduits have come down in spreads, with the range being 155 to 205 basis points over corresponding swaps for low- to high-leverage deals and interest-only up to a full 10-year term.
Banks have become extremely competitive and are winning deals from life companies in some cases due to greater flexibility and closing time, despite the usual recourse nature of their loans vs. the non-recourse life or conduit program. Credit unions are coming on strong, offering zero and short prepayment-penalty programs as well as leverage up to 75 percent on fixed rates up to 10 years.
Borrowers have a number of options for how and where to get a loan. There are obvious choices locally and regionally. Borrowers can meet directly with loan officers at banks and credit unions, while other options are typically best handled by a mortgage banker or broker. While brokers have access to the conduit (commercial mortgage-backed security, or CBMS) market, they’re limited to only a handful of life companies, which generally work exclusively through mortgage bankers.
These lenders provide financing on loans starting at about $500,000 and offer various structures, terms and prepayment scenarios, with fixed rates up to 25 to 30 years. Life companies are ideal for financing portfolios, offering releases or substitution of collateral when negotiated at application, and can lock the rate up front and up to 12 months. Most life companies require a 2 percent refundable deposit early in the process to hold the rate and prevent cancellation of the deal.
This differs from CMBS loans, which typically offer an LTV up to 80 percent and don’t require any refundable good faith or rate-lock deposits since these are not available up front. However, conduit lenders will take third-party report deposits of typically $35,000 to $50,000 to cover the appraisal, environmental and property-condition reports, and legal fees, which can run $20,000 to $30,000.
Most CMBS loans like to be at $5 million or more, but some will venture down to the $2 million range, although this doesn’t change the cost structure. Another CMBS advantage over life companies and other lenders is it’s more forgiving with borrower financial strength, credit issues (including bankruptcy and foreclosures) and tertiary property locations.
Both mortgage brokers and bankers offer potentially more choices than a borrower might find locally. In addition to having access to more than 30 CMBS and life-company lenders, they have a database of other banks and credit unions that lend on regional and national platforms, which could benefit a borrower and offer additional choices. Recent examples of closings include an Indiana bank that funded a property in North Carolina, a Missouri lender that financed a Georgia property, and a Florida bank that extended a loan to a California property.
Many borrowers will find a smorgasbord of opportunities, while some may be limited to higher-leveraged Small Business Administration or limited programs due to the size of the loan request, property location (rural), property condition, occupancy issues, or borrower credit or financial concerns.
Required Documentation
If you’re ready to seek refinancing, be prepared to present a lender, mortgage banker or broker with the following documentation:
- Property profit and loss statements (P&L) for the last three years, plus year to date (a trailing 12-month P&L may also be required for CMBS lenders)
- Rent-roll summary by unit size, sometimes called a unit-mix or occupancy report
- Property description (construction type, the number of interior/exterior units on each floor, elevators, amenities, etc.)
- Color photos of the property
- The borrower’s personal financial statement and schedule of real estate
- Two to three years of the borrower’s federal tax returns (if the borrower is an entity, similar information to the above is needed as well as the information for the guarantor)
- Occupancy history reports for the last three years
More information may be requested, but this should be enough to underwrite and size up a loan quote. If you’d like to refinance your self-storage loan, don’t delay. Interest rates are at an all-time low, making this the best time to lock in a great rate for your investment.
David Smyle is a vice president of San Diego-based Pacific Southwest Realty Services (PSRS), a commercial mortgage banking firm founded in 1972. The company services a portfolio of more than $4.3 billion, offering life-company financing from more than 18 investors as well as conduit, CMBS, bank and credit union options. Prior to PSRS, Smyle was owner and president of commercial mortgage brokerage Benchmark Financial for 16 years and spent 12 years in commercial banking. To reach him, call 858.522.1411; e-mail [email protected]; visit www.psrs.com.
