Self Storage Mortgage Rates Continue Their Decline
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Update by: Joseph Cacciapaglia
Mini Storage Loan Rates Fall Further
It looks like I was wrong. After mentioning the falling loan rates last week, I told several people that I couldn’t image rates going any lower. However, since that post, rates have fallen another quarter point. This time the decline has come from a drop in the swap rates, rather than a decline in lenders’ spreads. So it’s not that lenders are getting even more aggressive, this time the lower rates are just a function of the macro economy. Either way, I’m willing to admit that I was wrong, but now I really can’t image rates going any lower. Today we can offer rates as low as 4.5% for 5 years at 70% LTV for fully stabilized self storage properties.
Rates Fall Further for Self Storage Mortgages
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Update by: Joseph Cacciapaglia
Balance Sheet Lenders Continue to Compete for Mini Storage Loans
I just wanted to provide a brief update regarding balance sheet lending and self storage. While CMBS spreads and rates increase, many portfolio lenders have continued to lower their rates on self storage loans. For premium deals, rates are now as low as 4.75% for a 5 year deal with a 25 year amortization. I also want to make a clarification, because I don’t think my previous post was clear about the types of deals that these lenders are competing for. These rates aren’t available for value-add or construction deals, and they’re not available to refinance under-performing facilities. They are available for fully stabilized properties in major markets with good borrowers. If you are purchasing or refinancing this type of self storage facility, balance sheet lenders should be on your short list of options.
Preparing Your Self Storage Property for a Refinance
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Written by: Joseph Cacciapaglia
What Self Storage Lenders Like to See
Self storage owners often ask me what, if anything, they should do to prepare their property for a refinance. I usually get this question 2-3 months before the owner is interested in refinancing, but unfortunately most of my suggestions work best when implemented 12-18 months prior to the refinance. Most lenders today are looking at a trailing 12 month financial statement when underwriting new loans, so changes made just prior to the refinance have less impact than those made earlier.
The borrower’s goal should be to maximize the property’s NOI for the 12 month period prior to the refinance. At first glance you would think that this is always the borrower’s goal, but often borrowers have reasons to minimize their NOI for tax or other reasons. Alternatively, borrowers might siphon off some of their profit from the property through artificially high wages or other profit centers related to their global business. While this may make sense in certain circumstances, it always creates problems when attempting a refinance.
Maximizing Your Self Storage Facility’s NOI
Over several years of looking at self storage financials, I’ve seen many ways where borrowers have hurt their ability to refinance because they hadn’t maximized their NOI. Here are a few common examples, and some ways to avoid them:
Inflated Wages - It is very common for borrowers with large portfolios to pay corporate level wages out of their better performing properties, rather than dispersing profits to the corporate entity and paying wages at that level. Often this practice started when the borrower had just one or two properties, but ended up continuing because nobody realized it was a problem. When a lender looks at the P&L’s for the property, it appears that there is a very large payroll burden, and the property is not operating well. Backing the inflated payroll out of the property level financials becomes a point of contention with many lenders, and can potentially reduce the proceeds that the borrower is able to receive.
Charitable Unit Rentals - Many borrowers have ‘donated’ units to local non-profits. This is admirable, but not the best way to go about doing business. When looking at the rent roll, these units are usually either listed at $0 rent or as down or vacant. This hurts the property’s occupancy and NOI. One suggestion that I received recently to deal with this problem, is to have the borrower rent the unit to the non-profit at the fair market rental rate, and then have the borrower pay the rent as a donation each month. The net effect on the borrower’s cash flow is zero, but the NOI at the property level remains intact.
Inflated Maintenance/Management Expenses - Many borrowers have a complex web of entities related to their self storage portfolio. Often these entities include both a maintenance and management company which have their own separate staff and overhead. I’ve often see borrowers carry these additional entities with their better properties, while many of the expenses should have been allocated elsewhere. This is another situation where it is difficult for a lender to back out some of the expenses to see the true NOI of the property.
Poor Collection Practices - Some borrowers find the process of collections and evictions distasteful, and therefore, will put off these activities until absolutely necessary. I’ve spoken with some borrowers who only have one auction a year, even though a large percent of their units go unpaid each month. Many borrowers believe that this isn’t hurting them unless their occupancy is very high. They rationalize that if they evicted these tenants, the unit would just be vacant anyway. However, this practice creates artificially high collection losses at certain points in time, and also creates large swings in occupancy levels as well. Many lenders will perform a trend analysis, so these swings make a facility look much weaker than it may actually be. Staying on top of collections and evictions will eliminate this issue. Not to mention that it’s just good business.
Not Capitalizing Expenses - Often borrowers will complete large capital projects that should be depreciated over time, but are included in their R&M expense line item. Lenders don’t want to guess which expenses were capital items and which were really for repairs and maintenance. It is very difficult for a lender to back out capital expenditures if the borrower has included them above the line in their P&L’s. It’s important for borrowers to properly classify these expenses in their general course of business.
Not Recognizing Prepaid Expenses - This is slightly less common than the issue of capital expenditures, but it is very similar. Occasionally borrowers will prepay their insurance, lease, or marketing expenses to receive a discount. Often these prepaid expenses are reported in a single period instead of being allocated over the periods in which they are used. This increases expenses in some years, and reduces it in others. Borrowers should report these expenses when the benefit is received, not necessarily when they made their payments.
Reporting all of your income and property tracking expenses over time is extremely important when preparing your facility for a refinance. If you are thinking about refinancing your self storage facility, and would like other suggestions regarding your P&L’s, please drop a comment.
Please keep in mind that I’m not a CPA or tax attorney. I’m not telling you how you should report and pay your taxes.
Self Storage Portfolio Financing
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Article by: Joseph Cacciapaglia
Mini Storage Lenders Look at Portfolios Differently
As your self storage portfolio grows, it may be beneficial to start financing your holdings on the portfolio level. Doing so saves time by taking care of all of your properties at once, but it will also often provide you with better terms as well. This is true because many of the larger banks, life companies, and conduits have minimum loan amounts that preclude the vast majority of single property self storage loans. These same lenders often have the lowest cost of capital, and therefore provide the best rates to their borrowers. By grouping your properties, you will be able to meet these lenders’ minimum loan amount, and therefore have access to their better programs. If you are at a point where you are considering financing your portfolio, there are a number issues that you’ll want to consider.
Characteristics of a Mini Warehouse Portfolio
Just lumping all of your properties together does not necessarily create a portfolio that an institutional lender will be interested in. There are several characteristics that they will want to examine:
- Do all of your properties fall within the lender’s ‘footprint’? Many lenders have defined markets that they are and aren’t willing to enter. Some lenders may ask you to remove some of your properties if they don’t fall into their specific markets.
- Are your properties geographically diverse? If all of your properties are clustered too closely, the lender may view your portfolio to have too much exposure to a single market. Diversification reduces this exposure, and therefore makes your property portfolio more attractive.
- Are some of your properties in growth markets while others are in more mature or declining markets? This issue can be looked at both ways. Some lenders would like to see a focused business plan where you are specifically targeting certain types of markets. Others like to see that you have a diverse mix of growth and mature markets. I think all would agree that including declining markets will make your portfolio less attractive.
- Are all of your properties stabilized? Often borrowers bring portfolios to me hoping that their stabilized properties will help them finance their assets that have not yet completed lease-up. This is possible, but should only be done after careful consideration. Adding these properties will allow you to get them refinanced, but it will also most likely increase the cost of capital on your entire portfolio. It’s important to look at the total cost of adding these properties, not just the relative cost of capital for that one property.
- Are some of your properties completely built out, while others have additional phases planned? It may be beneficial to leave out properties that you plan to expand in the near future. You may not get the same flexibility when financing your portfolio that you would get financing these properties on their own.
- Are all of your properties similar in size? Many institutional lenders like to see assets of a certain size. If you have some properties that are 20,000 square feet and others that are 200,000, they may not fit in the same portfolio. Some lenders are more worried about this than others, so this may or may not create a problem.
- Do all of the properties have similar unit sizes? If the mix at some of your properties is skewed to the large side because of a high percentage of business clients, this may be more or less attractive than your properties with smaller average unit sizes. This is not an issue for most lenders, but some will like to see that your units mix caters to a specific type of customer.
- Are all of your properties performing well? You may be supporting some of your ‘dogs’ with your better performing properties, but that doesn’t necessarily mean that you want to finance them together. This is another situation where you want to look at the total cost of capital when including poor performers.
- Have some of your properties been improving while others are flat or declining?
- Do all of your buildings have the same physical characteristics? Some lenders will prefer certain styles or configurations. If you have too much diversity in construction type, some of the properties may not be attractive to your lender.
- Are any of your properties conversions? Some lenders are fine with conversions, but they scare many others. Knowing whether or not your lender will accept these types of properties is important on the front end of the process.
- How are your properties managed? If you are managing your local properties, but have hired a 3rd party management company for your properties in other states, this may be an issue. Some lenders like to see that you are closely monitoring all of your properties, while others may prefer to have a ‘name brand’ manager run all of your properties. Having a mix is not ideal for most lenders.
- Are your properties staffed similarly? If you have some properties with resident managers, some with on-site managers, and some with a skeleton staff and kiosks, you might run into problems. Most lenders will want to see that you have a cohesive business model.
There are certainly additional factors to consider, but this list should be a good start. Understanding how your lender looks at your portfolio is crucial when trying to get the best rate and terms for your self storage portfolio financing. If you are interested in exploring portfolio level financing for your self storage properties, please feel free to contact me today.
Refinancing Unstabilized Self Storage Properties
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Article by: Joseph Cacciapaglia
You Can Refinance Mini Storage Facilities With Low Occupancy
In a recent survey I asked our readers to comment on how long it should take to lease-up a self storage facility. This topic came up because of the difficulty that borrowers face when trying to refinance self storage properties that haven’t reached stabilization as fast as planned. Today I’m going to provide a strategy that I have used to help borrowers refinance a property prior to reaching stabilization. That strategy can be broken down into 3 steps: Story, Plan, Commitment.
Tell Your Story
Properties that have under-performed their pro forma are often referred to as ‘storied’. The story of the property is basically just a description of what went wrong. The first thing that you need to to is explain exactly what happened. Why didn’t your property perform as expected. This explanation needs to be more than just referring to the national economy. In many markets self storage has done well despite, if not because of, the poor economy. Self storage lenders know that the economy is struggling, so you need to provide further details. Here are a few acceptable explanations:
- The property did not have suitable access
- New competitors entered the market
- The manager was inept
- The property was configured poorly
- The marketing campaign missed the mark
- Initial pricing was too high
Each of these reasons is specific and easily understood by your lender. If you don’t have a specific reason like those listed above, you may need to take a closer look at your operation. If there truly is nothing wrong with your property, then you need to provide hard data about self storage performance in your market, and what economic trends are driving that performance.
Provide Your Plan
Once you’ve explained to the lender what has gone wrong up to this point, you need to provide them with your plan. Your plan should outline exactly how you are going to address each problem that you brought up while telling your story. Here’s how you might address the issues above:
- The property did not have suitable access - Show the lender that the initial access problem has been addressed, and ideally, show that the increased in leasing since the change.
- New competitors entered the market - Explain why the new competitors were able to steal your market share. You will also have to outline your plan to win back customers and increase your leasing. This is one of the most difficult issues to overcome, unless you already have your plan in place, and can show that it has been working.
- The manager was inept - Explain exactly what your past manager was doing wrong, and tell them exactly what your new manager will be doing differently. It is often helpful in this situation to bring in a third party consultant or manager. You need somebody else’s track record to lean on.
- The property was configured poorly - Explain how you have reconfigured the property, and show the increase in leasing velocity since the change.
- The marketing campaign missed the mark - Explain how your new marketing program is different, and point to the increased results.
- Initial pricing was too high - Outline your initial pricing schedule, and explain any adjustments that you’ve made. Show the lender your increased results since the change.
You’ll notice that I’m assuming that your plan has already been put into place, and there is a noticeable change in leasing. If you haven’t yet identified your problem, there are very few lenders that want to provide you with a refinance to keep you afloat until you ‘figure things out’. If you already know what the problem is, but don’t have the capital to fix things, it may be possible to refinance, but it will certainly be difficult.
If your problem was truly just the economy, you need to provide data about how things have changed locally, and show that performance is improving. If that is not the case, you’re options will be very limited.
Show Your Commitment
This probably sounds a little strange. It’s your property, of course you’re committed to making it a success. Most lenders will believe this, but they still want you to show them some additional commitment to the property. They may require you to put additional cash-in (that’s right, cash-in refinancing is happening far more often then cash-out these days), they may ask for additional collateral, or additional guarantees.
The additional commitment requested by your lender will depend on how well you’ve told your story, how clearly you’ve explained your plan, and how much better your facility is doing since you’ve put your plan in place. If you’ve addressed all of your issues, and your property’s performance is headed in the right direction, there are many lenders who will entertain your refinance request.
I’m not saying that you will be able to refinance your property in every situation. If you’re only 10% occupied, but you’ve increased your leasing from 1%/year to 2%/year, there’s not much I can do for you. However, if you’re 50% occupied, and have recently double your leasing velocity after making some changes, you may be a good candidate for a refinance.
Leasing Up Self Storage Properties - Survey Results
How Long Should it Take to Lease-Up a Self Storage Facility?
That was the question that I posed in a recent survey of US Storage News readers, and today I want to provide a brief recap of the results. I had asked how long it should take to reach 25%, 50%, and 75% occupancy, as well as how long it should take to reach stabilization. The vast majority of our readers (92%) answered that it should take 7-12 months on average to reach 25% occupancy. A strong majority (75%) believed that it should take 13-24 months to achieve 50% occupancy. Half of the respondents stated that it should take 25-36 months for a property to reach 75% occupancy, with another 33% stating that it should happen sooner. A slight majority (58%) of respondents stated that a property should reach stabilization within 25-36 months, one quarter believed it should take 37-48 months, and only 8% thought it should take longer.
I’ll address refinancing a property that has not yet reached stabilization later today. If you would like the full results of the survey, please enter your email in the form below.
13 Profit Centers for Self Storage
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Article by: Joseph Cacciapaglia
Adding Income to Your Mini Storage Facility
One of the challenges with refinancing self storage properties today is that in many markets cap rates have risen, but rents have remained flat. This combination leads to lower values, and therefore higher LTVs on refinancing requests. Many successful storage operators have figured out ways to increase their NOI despite having flat or declining rents. These are always the easiest clients to finance, so I thought I’d share some of their methods below:
- Ice Machines/Vending Machines: There are several different ways to include vending income into your business model, from putting an ice machine near your boat and RV storage to adding soda machine to your office. Income from leasing space to a third party vending company is the easiest to capitalize, but many lenders will consider your vending income regardless of how it is collected.
- Car/Boar/RV Wash: Several developers have started to add washing stations to their self storage facilities.
- Retail Sales: Most facilities already sell boxes and moving supplies, but several operators have started expanding their product offerings to include anything from candy bars to survival kits.
- Wine Storage: In certain areas wine storage can be a high rent add on to self storage properties. There are definitely some properties where this service should not be included, but in the right location these can be very profitable.
- Record Storage: This can be a natural extension to your storage business. I worked with on operator that is now exclusively a record storage company due to a complete lack of competition in his area.
- Cell-Tower Leases: There are several companies looking for spaces to lease for their cell towers.
- Storage Condos: Although this is not actually a way to add to your NOI, I have seen storage operators condo and sell portions of their facilities when they need lump sums of cash. A few years ago several investors developed storage facilities as condos, but this seems to be less popular today. I would guess that it’s because of the lack of financing for the end users, but I’m not certain.
- Boat/RV/Vehicle Storage: The facility that I managed way back when, added revenue by striping an unused area of the parking lot for boat and RV storage. Other owners build carports for higher rents.
- Mobile Storage: I’m not trying to start any fights with this one, but I have seen successful operators add mobile offerings to their self storage facilities.
- Rental/Moving Trucks: Many, if not most, facilities offer rental trucks. If you happen to be one of the operators without this product, maybe you should consider it.
- Solar Panels: These are becoming more popular every day. Extra Space just announced that it will install panels on 21 facilities soon.
- Ebay Sales: This is another widely debated topic, but some facilities are making money by offering to sell customers’ items on Ebay.
- Shelving Rental: I just recently heard of one mini warehouse owner who was renting shelving units for $5/month. He was buying them for $55 each, so this investment paid for itself in 11 months.
- Balikbayan Box: I know I said 13, but this one might be more of a novelty. I heard of one facility that was acting as a drop off site for Balikbayan Boxes. I had never heard of these, but apparently it drove a lot of business to his location.
What other ways are you adding value to your self storage property?
REIT Reporters Missing the Self Storage Story
Written by: Joseph Cacciapaglia
Self Storage Outperforms Through May 31, 2011
If you’ve read any REIT or self storage related news, you already know that according to the National Association of Real Estate Investment Trusts (NAREIT), self storage REITs outperformed those of every other property sector. Their total return for the first five months of 2011 was 18.4%, besting the 17.8%, 16.9%, and 13.0% gains posted by office, apartment, and retail REITs respectively. While these figures are impressive, it’s important to note that they cover a relatively short period of time.
Although the media loves printing these short term statistics, they are not very useful if you’re a long term investor. Only ten days later, the total returns YTD for self storage Reits dropped to 11.6%. At the same time returns for apartment REITs dropped less to 12.3%. So maybe we’ll see some new articles about how apartment REITs are the new top performers
Self Storage Dominates the Long Term
The real story for anyone really looking at the numbers on NAREIT’s website is that self storage REITs have outperformed for the long term. With compound annual total returns of 18.0% over the last ten years, self storage has beaten all other categories of REITs for a full decade. The only property sector that came close was health care at an impressive 17.3%. To me, this is much more conclusive data than anything that covers only five months, but somehow it was ignored in all of the recent articles that I’ve seen. Hopefully, I just missed a few that mentioned this.
Explaining Self Storage Returns
One of the things that bothered me the most about the recent media coverage of self storage was the way that reporters attempted to explain the data. There were two main themes in the articles that I read: 1.) Self storage was helped by the rise in foreclosures 2.) Self storage was helped by the rebound in the economy. Both of these explanations seem to imply that self storage was only performing well due to the specific environment that we experienced for the first part of this year. Neither explains why self storage returns have outperformed for the long term, but I’ll save that topic for a later date.
Conduit Lenders Return to Self Storage
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Written by: Joseph Cacciapaglia
Self Storage Transactions Financed by CMBS Again
There have been several stories related to the return of conduit lenders and CMBS deals, but most, if not all, have ignored self storage transactions completely. Lately several small balance focused conduits have started targeting self storage transactions. This is definitely good news for an industry that is relying on local banks and the SBA for most of their financing, but don’t get too excited yet. This is not the same breed of conduit lenders that we saw three or four years ago. They are competitive in many markets, but they are not overly aggressive.
How are Conduit Lenders Looking at Self Storage?
Obviously not every conduit lender is going to look at your self storage deal in the same light, however I’m going to make some generalizations to provide some insight into the type of financing available today. I’ve outlined below the underwriting criteria that I’ve seen from conduits on recent deals:
- Maximum LTV of 65-70%: Remember I mentioned that conduits are competitive today, but are definitely not overly aggressive when it comes to LTV.
- Loan Size: One exciting turn of events for those of us in the small balance lending world is that there are many conduits targeting loans in the $1-5MM range. Of course there are also those that will look at the larger loans and portfolio transactions, but it’s nice to see that they are also providing capital to the average sized storage operator.
- Underwritten Expenses: There are some variations here, but most of the lenders that I deal with are underwriting a 5-7% management fee and $0.15-$0.25/SF reserves into all of their deals.
- Trailing 12 Financials: Most, if not all, conduits are looking at a full trailing 12 P&L when underwriting self storage today. While it may be possible to use a T6 or T3 in some instances, it is definitely not the norm.
- Debt Yield: Minimum debt yields range from 11% to 12% today. (I’ll write more about debt yields in general in a future post. I realize that this is not a familiar topic for many investors)
- Interest Rates: I hesitate to put rates into a post like this because they do change quicker than the other criteria. Please click on the 'Financing Self Storage' tab above to see current rates. I would say that this is where conduits are winning deals. It seems that they’ve made the decision to be the low cost provider of funds on conservative transactions.
Hopefully this has given you a better idea about what to expect from conduit lenders in the self storage lending market. If you have questions about a specific deal, contact me today or apply online.
SBA Financing for Self Storage
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By Joseph Cacciapaglia
Self Storage SBA Loans
SBA financing is one of the most overlooked and misunderstood tools available to self storage owners and investors. It’s true that there are several restrictions and limitations that come with SBA loans, but there are also advantages. In today’s environment where leverage is limited, it’s still possible to receive up to 90% financing with an SBA mortgage. Please note the emphasis on ‘up to‘. Not all deals will qualify for the full 90%, but it is very common to see 85% or more today, and deals are closing at 90%.
SBA Programs for Self Storage
There are two main SBA lending programs for commercial real estate, and both can be used for self storage. They are the 504 and the 7a. I’ll briefly describe each below:
SBA 504 - With this program, there are typically three parts to the financing package:
- First mortgage provided by your bank. This portion is typically up to 50% LTV.
- Second mortgage (debenture) provided by a CDC. This portion can make up to 40% of the total LTV. You should not have to contact a CDC separately; your lender can do this for you.
- Equity provided by the business. This needs to make up 10% of the total cost.
The advantages of the 504 program are that the fees are typically lower and the rates are usually fixed. These loans are limited in size by the amount of the debenture (currently $5MM), but that does not limit the total amount lent.
SBA 7a - The 7a program is a single loan that is guaranteed up to 75% by the SBA. The maximum amount guaranteed is limited to 75% of $5MM. Because of this limitation, most 7a lenders will limit their loan amounts to $5MM. These loans are typically floating rate, although it is possible to have them fixed. One main advantage to the 7a is that it can be approved quicker than the 504 because there are less moving pieces.
Qualify for SBA Financing
Self Storage properties were recently added to the list of approved property types for SBA loans, and the SBA has recently changed their lending limits and other qualifying factors. So if you have been turned down in the past, it might be time to take a new look. The main limitation to these programs is that they have to be made to ‘small businesses’. To be disqualified by this restriction a borrower must have a net worth of greater than $15MM AND must have earned more than $8.5MM in income annually. Please note that both of these requirements must be met to be disqualified based on this criteria. In addition to meeting SBA requirements, the actual lender will have underwriting standards of their own.
Keep in mind that each of lender will also look at your loan differently, even if they are using the same SBA program. It is possible that one bank or financial institution will turn down your SBA loan application, while another may be excited to make you the loan. For this reason, it’s important to know which SBA lenders are interested in making loans on self storage, and which are not. If you have questions regarding SBA loans or you just want to find out where are today, please click on the financing tab above or apply online.