Since the meltdown of the subprime market and its domino effect on the commercial lending markets (conduits in particular), the availability of loan dollars and variety of lending options has been significantly reduced. While financing is still available, the desire to maximize loan dollars for both construction and permanent loans is being met with much resistance from the lending community. The availability of better rate loan programs is harder to find, especially in non-metro areas, for unstabilized properties and higher loan-to-value (LTV) requests.

The Wall Street conduit market has all but gone away. Those remaining are requiring spreads approaching or above 400 basis points (4 percent) over the Treasury. With the conduit departure, there is no reason for banks and insurance companies to reduce spreads to the extremely low level previously offered by Wall Street in order to compete. As such, they have gone back to traditional loan margins to provide the yields required to be profitable or to better a yield found in safer investments such as corporate bonds.

Still Available

Since departing, the multibillion-dollar conduit financing vehicle has left a huge void in the ability to finance self-storage properties, not only at high LTVs and long amortizations with interest-only components, but also as important on a “non-recourse” basis. The non-recourse financing has fallen on the shoulders of the insurance companies (IC) and pension funds (PF), both of which are known for cherry-picking properties and underwriting conservatively.

One of the biggest drawbacks to this remaining non-recourse financing source is the higher minimum loan amounts many IC and PFs require. In addition, not every IC and PF will work with self-storage—especially if it is not a class-A facility or constructed of metal. Many lenders have already filled up their “lending buckets” for the year with more preferred property types such as apartments, anchored retail centers and multi-tenant industrial.

In some cases, insurance companies also prefer to buy existing unsecuritized conduit product off the conduit’s books at a discount rather than fund new originations, further diluting the available funding pool. By buying stabilized conduit product with impounds typically held by the servicer for tenant improvements, leasing commissions, replacement reserves, taxes and insurance, and by cherry-picking the better properties from the portfolio, the insurance companies more or less guarantee themselves a good product on book with stiff prepayment penalties should the borrower pay the loan off early.

However, if you and the property qualify, long-term IC and PF rates in the mid- to high 6 percent range can still be obtained with some of these lenders. There are also a few portfolio and balance sheet lenders offering non-recourse financing, but typically at much lower LTVs and on stabilized properties with good histories and strong sponsors.

Fixed rates are typically not cheap for the balance-sheet lenders with 10-year fixed rates approaching the 7 to 7.5 percent range. You will still find rates in the low 6 percent range or better if you can live with a floating (adjustable) rate or short-term fixed-rate product.

If you are willing to accept a loan with recourse, some banks and credit unions still offer 10-year fixed rates under 7 percent. However, many credit unions are also filling up their lending allotments for the year and selling off loans to other institutions in order to originate more.

As many searching for financing have already discovered, the underwriting requirements have tightened and loan parameters have become more difficult. What was once the norm has become the exception with 75 to 80 percent LTVs now down typically 60 to 70 percent, with 75 percent being the exception for the strongest borrowers and projects.

Previously, debt-coverage ratios underwritten as low as 1.15 are now a 1.25 or higher. While still available, 30-year amortizations are less prevalent and usually reserved for quality locations and projects, stronger borrowers and better cash-flow properties.

Non-Sufficient Funds

Other obstacles in today’s market include the lack of available funding capacity due to lenders’ loan allocations being tapped out. Some are withdrawing from the lending market in total or pulling back from specific property types such as self-storage and other commercial property to focus more on the less volatile and risky multi-family and mobile-home park loans.

Lending giants like Citibank, once a formidable player in commercial and self-storage financing, left the market in March. Washington Mutual, another lending giant, finds self-storage to be an unacceptable property type. With the conduit departure, banks, savings and loans, credit unions and insurance companies were left to pick up the void left by lenders no longer in the self-storage financing arena. These remaining lenders’ pipelines filled up quickly with loans from all property types.

Many were actively financing commercial properties, then began restricting volume mid year by leaving the market, raising rates, lowering maximum loan amounts, raising debt-coverage ratios (DCR) or lowering LTVs.

Construction Loans

The construction loan piece of the pie has also been negatively affected by the credit crisis. Self-storage, which had a hard time being accepted by many lenders in the first place as a viable property type, now finds itself with even fewer lenders willing to finance construction at the desired higher (80 to 85 percent) loan-to-cost levels.

In addition to the overbuilding that has occurred in many parts of the country, many lenders are shying away from self-storage due to its perceived special-use tag. Lenders may also require a lower loan to cost or higher cap rate than market for underwriting purposes. Strong borrower financial statements need to include excellent liquidity in addition to net worth, and the borrower may also need a secondary source of income from a primary occupation or other to qualify.

Lenders may also prefer the borrower has experience in owning and managing self-storage properties even if an outside property management firm will operate the property. Don’t be shocked to see rates in the prime plus-2 percent range (7 percent) or more to obtain construction financing today.

One large national self-storage construction lender, while still offering rates at prime plus-0 percent, requires borrowers to have enough cash in the bank to pay the interest cost out-of-pocket through lease-up as they don’t build in interest reserves into the loan. They also require a strong borrower financial statement, and underwrite the property to a minimum 8 percent cap rate and 1.30 DCR, which may reduce the LTV and, thus, the loan-to-cost loan amount calculation due to LTV restrictions.

Other lending nightmare issues include the amount of time it takes to close a loan. IC and PFs are notoriously slow, with 75- to 90-day closing timeframes common. Many portfolio lenders have cut staff or are running lean, extending out closing timeframes due to workload. This is not the case with every lender, but it is happening enough to be a concern on purchase transactions with short closing timeframes or escrows without extension possibilities.

Properties which contain a majority of RV/boat parking versus brick and mortar enclosed storage, or mixed-use facilities such as a carwash or retail may find a harder time obtaining a best rate and high LTV financing due to either the large amount of business income being generated from carwashes or the lack of enclosed storage spaces. RV/boat-heavy facilities will need to distinguish themselves from a land loan.

Looking Ahead

Lending activity in 2008 has been reported by many to be down 50 percent from last year’s already lower figures due, in part, to a lack of sales activity and a general slowdown in the economy. Refinances are also not as plentiful because many refinanced when the 10-year rates were at 6 percent or below with no need to pull cash out or be subjected to a large prepayment penalty.

Those looking to refinance for reasons other than a maturing loan are in a wait-and-see attitude, hoping to obtain longer-term fixed rates less than the current 6.5-7 percent market. If they already had a fixed rate, it may have rolled into an adjustable, and the floating rate may be advantageous for now, given the low-loan indexes (prime, Treasury, LIBOR), so there is no rush to convert to a fixed rate.

All this being said, the industry is still seeing financing completed in all areas of the country, including some large portfolio refinance transactions and expansion purchases by growing companies. Rates remain relatively stable and competitive on a historical level and deals can still make sense.

There is more short-term (five years or less) money available than longer term, and the rates can vary widely depending on location, lack of lender competition and deal parameters. One can expect to find rates between 6 and 7 percent for the most part. Depending on loan term and amortizations, the loans should be in the 20- to 30-year range in most areas. Non-recourse loans are harder to come by. The biggest issue compared to previous years is the lack of lender choices and loan options available on a national basis.

Allow yourself plenty of time to research financing options and be prepared to possibly extend the closing time on purchases to allow for the financing search and lender funding timelines.

Next year will likely mirror 2008 with respect to rates and financing issues as the single-family residences debacle has still not fully played out, the upcoming bailout of Fannie Mae and Freddie Mac is yet to come, and the presidential election may certainly affect interest rates, the economy and world events. If you’re expecting rates to drop significantly, I wouldn’t hold your breath. It is probably as good as it is going to get for a while.

David Smyle is president of Benchmark Financial. The La Mesa, Calif., company is a commercial mortgage banker providing financing options for self-storage and other commercial property types nationwide. To reach him, call 877.862.7916; visit www.benchmarkfin.com.

SA Self Storage Investments (SASSI) is rolling out a number of new self-storage facilities throughout South Africa. The first new facility opened in July on the N14 on the West Rand of Johannesburg.

The N14 self-storage facility forms part of an estimated R125 million being spent on development projects during the next nine to 15 months. The current development pipeline consists of an additional four new facilities, which are all at an advanced stage of planning. In addition, SASSI intends securing a further three to five new opportunities before the end of 2008, which will see its pipeline growing to between eight and 10 new self-storage developments next year. For more information, visit http://www.engineeringnews.co.za/article.php?a_id=145308.

If you’ve been a boat/RV owner or operator for several years, you’ve probably learned how difficult it is to keep your property clean and fresh. As managers of a large multi-service storage facility, we know firsthand how hard it is to keep maintenance costs under control. Read on for some helpful hints.

The To-Do List

We start and end every day using a facility checklist that helps keep everyone on track, especially when they have to sign off on each task. Our office procedures manual provides details on what must be done and what to do if there is a problem. Here’s a breakdown of how we’ve organized our checklist:

Restrooms/showers. Restrooms and showers are inspected every morning and evening to make sure they are well-stocked and clean. Access to the restrooms and showers are controlled with a keypad similar to an entrance keypad. On weekends, which are typically busier than week days, we check bathrooms every hour. Our tenants appreciate the effort to keep the restrooms and showers clean and generally do their part, too.

Driveways. We use golf carts to get around our 11-acre property. Using a trash picker—a 3-foot claw device bought at a local retail warehouse—we pick up debris while driving around. The entire facility is a no-smoking area because of the potential fumes from thousands of gallons of gasoline in stored vehicles. “No Smoking” signs are posted on gates, in facility rules and leases.

On busy weekends, we drive around on our golf carts and collect trash from tenants so it doesn’t wind up on the property. We keep our dumpster locked to ensure tenants aren’t discarding oil or other hazardous waste.

Doors. We have more than 800 doors on the property, ranging in size from 4-by-7 to 13-by-14. Plus, there are more than 200 electric-operated doors. Because we find most door malfunctions are due to operator error, we ask all tenants to sign a form stating they have been trained in door operation. No one gets by without training on how to raise, lower and lock doors.

In addition, we inspect the door exteriors daily for damage. Whenever possible, we adjust the doors and clean the guide rail. We also encourage tenants to let us know when doors aren’t working smoothly so we can do on-the-spot preventive maintenance. Since we have implemented a preventive maintenance plan, door malfunction issues have been reduced by 50 percent.

Wash bay. The facility has a full-service wash bay, complete with a moveable stairway so RVers can access the top of their rigs. Tenants sign a special waiver that covers the use of the moveable ladder. We’ve also posted a “Use at Your Own Risk” sign on the ladder.

Boaters and RVers love the wash bay and, so far, maintenance has been minimal. Since the equipment required a large air compressor, we also added a free air station so tenants can inflate tires and water toys.

Hose bibs. The hose bibs located around the property are designated for facility maintenance-use only, requiring a special key and faucet for use. Other facility owners have told us they wished they didn’t have hose bibs because of the dirt they produce on the driveways from vehicles and boats being washed.

Branded bottles of water. You’re probably asking, “What does bottled water have to do with maintenance?” We keep a cooler of water bottles with our logo—a marketing/advertising write-off—on the golf cart. Whenever we see an open door, we deliver an ice-cold bottle of water. Talking with tenants gives us an opportunity to see what’s stored and look for maintenance issues, especially with doors. We also remind tenants that we can blow out their space and clean the door guide rails if they leave the unit empty for a day.

While cleaning units, we check the floor for oil spills and spray for bugs. Our facility is located in the Mohave Desert, home to scorpions, black widows, sun spiders and rattlesnakes. It’s also a place where temperatures can reach 120 degrees, making cold water an absolute necessity.

Oil spills. Lake Havasu City is a gathering place for street rods and vintage automobiles, many of which have minor oil leaks. To control spills, the concrete floors are sealed, and tenants can also purchase spill pads in the facility’s store. We watch for every opportunity to control maintenance issues so they don’t become bad habits.

RV dump station. The facility has a free RV dump station. The area around the drain pipe is surrounded by a 4-inch curb, and the entire area has epoxy paint to contain spills. We also provide a 4-foot hose on a butterfly valve so tenants can wash the area when finished.

Having a checklist will not only keep everyone on track, but can also eliminate problems down the road. The goal should be to be as accommodating as possible without compromising your high standards.

Ed Heil is the manager of operations and security, and Terri Heil is the business development manager for Lake Havasu RV & Boat Storage of Lake Havasu City, Ariz. For more information, call 877.764.1961; visit www.lakehavasustorage.com. 

This month, our roundtable of experts gathered to discuss self-storage in the South-Central States. The panel includes Allen Barnhill, Bill Barnhill, Shannon Barnhill Barnes and Stuart LaGroue, of Omega Properties Inc., representing Alabama, Mississippi and eastern Tennessee; Jon Cerruti, of Jack Stumpf & Associates, representing Louisiana; Richard Minker and Tyler Trahant, with Richard D. Minker Co., representing northern Texas; and John Owens, Westar Commercial Realty, representing western Texas. My comments are in italics.

Are sellers seeking reasonable market pricing and are there difficulties in locating qualified buyers at market prices?

A. Barnhill: Owners still expect higher market prices, most likely because of the past market conditions. We have to provide owners the best information available about the current market conditions and demand for self-storage facilities. From the buyer’s side, there are fewer qualified buyers seeking properties. We are seeing few first-time buyers; almost all of our potential buyers are experienced owner/operators who are being selective.

Cerruti: In Louisiana, sellers are looking for high prices. It is not difficult to find buyers if the properties are listed at market rates, but many sellers are not willing to adjust prices to meet the market.

Minker and Trahant: Many sellers have determined it may be a good time to sell for multiple reasons. In numerous cases, sellers are not putting their properties on the market with reasonable marketing prices or expectations. They want to base pricing on future performance or, if they are using existing versus projected income, they don’t take into consideration adjustments for tax increases or future operating expenses. They probably don’t even consider including a manager’s salary, because they may not pay themselves if they are self-employed. We are still finding qualified buyers in the market, but they are more sophisticated and won’t pay for non-existing income. They will make adjustments for more realistic operating expenses and are using cap rates to reflect current market conditions.

Owens: Market pricing is determined through a number of variables, particularly cap rates. There’s been a shift in cap rates over the past 12 months due to changes in the credit markets. An owner seriously considering selling a facility should have it analyzed by a storage broker and lender. The broker can tell what the facility is worth in today’s market and, more important, the lender will reveal to the owner if a sales goal is achievable.

Lower cap rates over the past couple of years have been attractive to buyers because they had the advantage of positive leverage, which allowed a higher cash-on-cash return than their cap rates. Recent changes in the credit markets have seen Treasury spreads rise up 75 to 100 basis points from a year ago, and amortization periods shrink from 30 years to 25 years, which has had an impact on positive leverage for investors. Despite the credit market changes, it is still an excellent time to sell, and there are buyers. Pricing is still around historical highs with many investors willing to expand their market presence.

Well-capitalized buyers are generally looking for bargains or distressed properties. However, they may be overlooking some great deals, because cap rates are currently at levels that will generate 12 percent cash-on-cash returns at current loan interest rates. But be careful: Interest rates may rise quickly and ruin this unique relationship that generates the returns. Sometimes greed gets false returns!

Is the bulk of financing from local banks or conduit lenders?

B. Barnhill: Local banks have been the primary sources for financing new construction as well as acquisitions for self-storage in our area, followed by some life company loans for acquisitions of existing, well-performing properties. I haven’t seen any conduit lending recently in this area, although I have seen a number of conduit assumptions.

Cerruti: Local banks and lenders are making up the majority of the financing in our area. Some life insurance companies are making low-leverage loans, say 65 percent, with excellent rates and terms, on good quality properties, if you are willing to take the low leverage. It is worth talking to a broker to learn more.

Minker and Trahant: Most financing is through local lenders, self-storage mortgage brokers and, in some instances, cash buyers.

Owens: I have seen more financing from local banks than conduit or life lenders. The recent drops in the discount rates have enabled local lenders to be more competitive than in years past.

Do facilities in your area have to use rent concessions or incentives to attract and keep customers? If so, what trends are you seeing?

Minker and Trahant: The Dallas-Fort Worth market is very competitive with a need for some discounting, especially in select submarkets. However, we have recently seen occupancy continue to increase with facilities being able to raise rates, so the need for significant discounting may be on the decline.

S. Barnes: Facilities in the Florida panhandle, Mobile and Baldwin counties in Alabama are using some incentives to attract customers. Although we usually see a substantial increase in rentals in the spring and summer, many facilities have been relying more on concessions and other creative marketing tools to get people in the door this year.

Overbuilding in some areas has caused many facility owners to offer discounted incentives. In most cases, nicer, well-located facilities have been able to use fewer discounts than those poorly located. Typical rental concessions in our market consist of one-half off the first month’s rent or the third month free. Most facilities offer a 10 percent discount for seniors and active military.

Owens: Storage facilities in our area have historically used rent concessions to attract the tenant but also to create tenant longevity.

Rental rates and occupancies are holding up well so far in this “non-recession,” but we are beginning to see softness in unsuspected places. The jury is still out.

What types of buyers are dominating purchases—large, multi-facility owners or smaller operators/new self-storage owners? Is this a change from years past?

Cerruti: The dominant Louisiana buyers are larger local operators. We have not seen as many national operators entering the market, but the local companies that understand the current conditions are looking to grow.

LaGroue: Presently, large multi-facility owners are purchasing more facilities than smaller operators, partly because of the availability of funds. In the absence of conduit loans, buyers requiring non-recourse loans are typically getting a lower loan-to-value of about 55 percent, thus making it necessary to raise more capital for equity. Most larger buyers have access to more readily available cash for a down payment or all-cash transactions. Small operators aren’t purchasing many properties because of stiffer underwriting requirements by lenders.

Minker and Trahant: We have few large national or regional players looking at the true A facilities in the market. Local buyers are looking at the B- and C-type properties. This isn’t different from the past, except that there are less A-type investors in the market. We have also seen a decline in inquiries from West Coast investors.

Michael L. McCune is president of the Argus Self Storage Sales Network, a self-storage real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com, a marketing medium for owners in the self-storage industry. For more information, call 800.55.STORE.

The 2008 annual meeting and tradeshow of the Missouri Self Storage Owners Association (MSSOA), held in Lake Ozark, Mo., in August, drew more than 110 people from across the state to participate in seminars and roundtable discussions. This was the ninth annual event for MSSOA.

The conference featured a keynote presentation by industry expert Jim Chiswell, a legislative update titled, "What Happened With Our Property-Tax Amendment and Where Do We Go from Here?", and seminars on industry-specific topics such as security, construction trends, insurance and others. Participants also enjoyed an old-fashioned barn dance and barbecue featuring music by member Cliff Lane.

In addition, attendee Linda Creason, owner of The Storage Spot in Odessa, won two free passes to the Inside Self-Storage World Expo, which will take place Jan. 26-29, 2009, in Las Vegas. Ashley Brown, a professional marketing and education consultant, was named executive director, responsible for leading the organization into the new year. For more information, visit www.mssoa.org.

Cliff Lane entertains the attendees of the MSSOA conference in Lake Ozark, Mo.

Memphis-based Liberty Building Systems will pursue a new national business model as part of parent BlueScope Steel’s expansion of its North American infrastructure. Currently, Liberty’s metal buildings are produced in one manufacturing location, and distribution occurs at a regional level. The new model enables the company to manufacture products in multiple facilities across the United States. The company's line will now be available to builders nationally and the product line will be expanded. For more information, visit www.libertybuildings.com.

Cushman & Wakefield of California Inc. recently released the 2008 Self-Storage Expense GuideBook, compiled annually by the company’s Self Storage Industry Group (SSIG) and published by MiniCo Publishing. The publication provides operating-expense data for self-storage properties, offering ranges by region on the major expense categories. Written by R. Christian Sonne, managing director of valuation services for SSIG, the GuideBook provides up-to-date information for current and prospective self-storage owners, operators and investors. The cover price is $24.95. For more information or to make a purchase, visit www.ministoragemessenger.com.
 
SSIG is an international, full-service real estate consulting team specializing in the self-storage asset class. For more information, visit www.selfstorageeconomics.com.