Borrowers are often fearful of defeasance, but why? With the recent low interest-rate environment fresh in everyones minds, defeasance has built up a negative connotation among owners and brokersparticularly those associated with self-storage propertieswith many loans being assumed rather than defeased over the last few years. However, as loans that were originated from 2004 to 2007 approach maturity, defeasance can actually be cost beneficial for many self-storage property owners.

Most often used in commercial real estate as the prepayment requirement on conduit/commercial mortgage-backed security (CMBS) loans, defeasance is the process of releasing a commercial property from the lien of the mortgage and replacing it with a portfolio of U.S. government securities. Once a loan is defeased, the securities portfolio effectively replaces the borrowers payment stream and makes the remaining mortgage payments on the loan, allowing the borrower to simultaneously either refinance or sell his property free and clear.

However, with the cost to defease tied directly to the cost of U.S. Treasuries (i.e., the higher the cost of Treasuries, the higher the cost to defease), many owners have dismissed defeasance as impractical, especially those with several years remaining until loan maturity. Moodys reported that 58 percent of loans defeased in 2012 had one year or less remaining on their terms. Since 2008, the cost to defease has ranged from four to six points per year remaining on the loan, leading many borrowers to sit on their loans rather than sell or refinance.

Yet while penalties still range from tens of thousands to tens of millions of dollars, many borrowers on self-storage properties can actually save considerable amounts by defeasing today (see the sample analysis below). For borrowers looking to take advantage of todays lending market, defeasance presents the opportunity to move from 5.5 percent to 7.5 percent rates into 3.5 percent to 4.5 percent rates while protecting themselves against probable interest-rate increases over the next few years. In many cases, defeasing today means negating interest-rate risk at a minimal cost.

For a self-storage borrower with a loan whose original principal balance of $10 million was originated in June 2005 at a 6 percent interest rate, the potential cost savings from defeasing now will be approximately $582,724, based on current interest-rate forecasts. As illustrated, the total cost to defease will be approximately $1 million, while total savings recognized by locking in a new 10-year loan at 4 percent interest rather than 5.5 percent interest will be approximately $1.6 million, resulting in a net profit. Should interest rates move above 5.5 percent, these costs will be even more substantial.

 

Moreover, for self-storage borrowers looking to lower their defeasance costs by waiting for U.S. Treasury yields to rise, it should be noted that this strategy will most often have only a minimal impact on costs. For example, should the borrower on our sample loan choose to delay his defeasance until the relevant Treasury rates have risen 10 basis points, his defeasance savings will be only approximately $18,000. Obviously, while these savings are certainly helpful, they pale in comparison to the potentially hundreds of thousands of dollars in increased interest costs that borrowers risk incurring by delaying a refinance.

Indeed, most borrowers view defeasance as a Treasury-rate game, believing they should delay their defeasance as long as possible to lower their costs. However, as the table demonstrates, the rewards associated with defeasing today can often outweigh the rewards of delay.

Self-Storage Defeasance Activity

In 2010 and 2011, defeasance rarely made sense for self-storage owners, as storage properties comprised a mere 6 percent of defeasance activity. However, 2012 saw a significant uptick in self-storage defeasance, as industry properties comprised 16 percent of all defeasances. Current 2013 forecasts project an even greater increase in the number of self-storage properties being defeased, as both market factors and loan terms have pushed borrowers to refinance or sell.

With new fixed-rate loans offered at historic lows, borrowers are incredibly incentivized to refinance as soon as possible. Moreover, with many self-storage loans originated from 2003 to 2005, defeasance costs are reaching manageable levels, allowing borrowers the opportunity to refinance without exorbitant penalties.

Its also likely that the jump in self-storage defeasances over the past year is due to the increasing attractiveness of acquiring self-storage properties and the subsequent increase in property sales. As self-storage capitalization rates have dropped to historic lows, buyers have increasingly turned to defeasance to replace existing debt with new 10-year financing at todays historically low rates.

Eitan Weinstock is the senior defeasance analyst at defeasance firm AST Defeasance Services. For more information, call 866.333.3273; e-mail [email protected] .

Based in Chicago, Shawn Hill is a principal at The BSC Group, where he advises clients on debt and equity financing and loan-workout services for all commercial property types nationwide, with an emphasis on the self-storage asset class.  He can be reached at 312.207.8237; e-mail [email protected] ; visit www.thebscgroup.com .

Go Minis Moving and Portable Storage has hired David Silver as a franchise-development salesperson to help the company grow its franchise footprint across the United States, Canada and Latin America.

Silver has more than 20 years of experience as a marketing executive and sales manager. Davids track record, extensive experience and knowledge in the franchise industry makes him a valuable asset to our company, said Michael Lohman, chairman of Go Minis LLC. His sales approach and leadership are a great fit for Go Minis as well as his ability to attract a new generation of franchise owners. We are excited to have him join our team.

The company estimates annual revenue in the mobile self-storage industry is in excess of $40 billion and growing.

Go Minis currently has more than 220 franchise locations in North America, with imminent openings in Florida, Idaho, New Jersey and Texas, company officials said. The company provides protected operating territories to franchisees and helps drive leads to locations through the quote system on its corporate website, GoMinis.com.

Business Property Trust, a Portland, Ore.-based investment company specializing in small-business industrial properties and self-storage facilities, recently purchased Camelback & Grand Self Storage in Glendale, Ariz., for $212,000. The seller was Kristin Rousseve.

The facility at 4616 N.W. Grand Ave. is comprised of 48,066 square feet and 357 storage units. It was built in 1986 and was 50 percent occupied at the time of closing.

This is the second purchase in the Phoenix market made recently by Business Property Trust. The company acquired Allstate Self Storage in June for an undisclosed amount. The 76,345-square-foot property has been rebranded Black Canyon Bargain Storage.

Bill Alter and Denise Nunez of Rein & Grossoehme Commercial Real Estate negotiated both sales. Rein & Grossoehme specializes in the sale of investment properties and commercial leasing.

The Illinois Self Storage Association (ISSA) will host its 2013 Great Lakes Self Storage Owners Summit & Expo on Aug. 5 at the Hilton DoubleTree Hotel in downtown Chicago. The event will feature presentations on self-storage industry topics including a macro-economic outlook on commercial real estate, management and operational innovations, investment trends and self-storage property values, capital markets, and more.

The event is targeted at self-storage executives, owners, operators, investors, lenders and developers. The program kicks off with a lunch and tradeshow at 11 a.m., followed by seven education sessions. A cocktail reception concludes the event beginning at 5 p.m.

Featured speakers include:

• Eugenio Aleman, chief economist, Wells Fargo Bank
• Marc Boorstein, co-founder, MJ Partners Real Estate Services
• Bob Copper, owner, Self Storage 101
• Jeffrey Greenberger, partner, Katz, Greenberger & Norton LLP
• Shawn Hill, principal, The BSC Group
• Michael Scanlon, president, national Self Storage Association
• Jim Stevens, senior vice president, acquisitions and business development, Extra Space Storage Inc.

For more information, contact ISSA at 703.575.8000 or via e-mail at [email protected]. A registration form and full agenda are available on the MJ Partners website.

Real estate developer Quattlebaum Development Co. is building a four-story self-storage facility in West Ashley, S.C., that will be managed by Extra Space Storage Inc. The facility will comprise 140,000 square feet and 1,200 units, and feature three elevators. The project is expected to be completed in nine months.

The property at 810 St. Andrews Blvd. is not within city limits, forcing the development company to work with the Charleston County Planning Department for more than seven months to find an agreeable design, according to principal Scott Quattlebaum.

Extra Space also manages Quattlebaum Developments three-story, 100,000-square-foot self-storage facility on Charlestons upper peninsula. Richard Morse of Palmetto Commercial Properties Inc., a local brokerage and consulting firm, is a partner in the project, according to the source.

Headquartered in Salt Lake City, Extra Space is a self-storage real estate investment trust that owns or operates 974 self-storage properties in 35 states; Washington, D.C.; and Puerto Rico. The companys properties comprise approximately 644,000 units and 71 million square feet of rentable space.

Operating under the assumption that mobile-storage solutions tend to cost more than traditional self-storage, EasyStorageSearch.com, an online directory of self-storage and portable-storage facilities, recently conducted an online poll to answer the question, "Is the convenience of portable self-storage worth the added expense?" The company reported that 68 percent of respondents replied affirmatively. At the time of posting, the poll had 128 participants.

"Our interest is in helping individuals locate the best, most cost-effective ways to store their possessions, boats, trailers, RVs, or whatever else. And in doing so, we try to keep our finger on the pulse of what people actually want in a self-storage unit," said Jason Kay, president. "Portable-storage pods differ from traditional [storage] units only insofar as they prevent you from having to transport and unload all of your stuff on your own. The portable-storage-unit company does it all for you, which makes moving much easier and more convenient. Clearly, consumers are happy to pay a little extra for that additional convenience."

EasyStorageSearch.com allows consumers to search for self-storage facilities by geographic area, price, storage needs and size, and allows them to compare prices and reserve units online. The website also includes information about portable self-storage companies and services.

The Lock Up Self Storage has opened its fifth facility in Chicago after a complete renovation of the property. The project included rebuilding the roof, remodeling windows and upgrading the buildings interior, including carpeting the hallways. The facility also has an indoor loading bay and an enclosed, drive-through tunnel with access to units as large as 500 square feet. More than 700 storage units were created during the renovation, company officials said.

Tenants can drive their moving trucks into the indoor loading bay to stay protected from inclement weather while moving into a unit. Similarly, customers who rent a drive-up unit can pull their moving trucks into the drive-through tunnel, which houses more than 20 climate-controlled units. The facility also features electronic, coded access and security cameras.

Located at 1900 N. Narragansett Ave., the Chicago-Galewood Lock Up Self Storage is situated within the Galewood/Elmwood Park neighborhoods near the border of Chicago and Oak Park, making it accessible to residents and businesses on Chicagos West side.

Amenities include free WiFi for tenants and motion-sensor lighting. To celebrate the opening, the company is offering 20 percent off rental fees to customers who book online.

Based in Chicago, The Lock Up currently operates 13 self-storage facilities in Illinois and has several locations in eight states comprising more than 1.6 million square feet.