Loan Products Available for Self-Storage Owners: An Overview

December, 2016

The Federal Open Market Committee (FOMC) once again opted to maintain the federal funds rate at the existing 0.25%-0.5% range during the September meeting. Despite unemployment holding steady at 5% or below since October 2015 and an uptick in US economic growth from the first half of 2016, inflation still falls short of the FOMC's 2% target as a benchmark in its rate raising criteria. While rates held steady at the most recent meeting, a number of Fed officials have been outspoken about the need to increase rates to avoid more difficult consequences. The FOMC has indicated that a rate hike is still a possibility by YE2016, but only time will tell.

Thus, self-storage owners still find themselves in a prolonged low interest rate environment. Historically low rates, coupled with strong industry operating fundamentals, equate to readily available mortgage capital for those seeking financing. Owners aiming to lock in longer-term debt and insulate from prospective rate increases will find a number of attractive options in the market. To follow is a summary of some common debt products available for borrowers.

Local and Regional Banks

According to data compiled by the Mortgage Bankers Association, the dollar volume of commercial bank originations through Q2 2016 is up approximately 33% year-over-year. As a result, "Banks and Thrifts," maintain their position as the largest holder of commercial and multifamily debt, at nearly 40% of the $2.90 trillion outstanding. While the above indicates strong commercial bank lending, there is evidence that local and regional banks are experiencing a "lending chill," because of the regulatory scrutiny of real estate loans.

Local and regional banks are relationship-driven lenders that can offer very competitive interest rates. Borrowers should be prepared to place their operating or depository accounts with that bank and should also anticipate the bank conducting an extensive credit review. Banks will lend up to 80% loan to value (LTV), offering terms ranging from 1-10 years which amortize over 20-25 years. Banks commonly require personal recourse guarantees, which can be scaled back or even eliminated at lower leverage. Banks typically aim to maintain transaction costs at a reasonable level, and owners can often negotiate prepayment provisions. Finally, the interest rate will vary based on the factors above, and the rate package is often executed through use a swap agreement.

Commercial Mortgage Backed Securities (CMBS)

The CMBS market appeared to be finding its post-recession footing in 2015, which at ~$101BB total US issuance was the strongest year since the recession. The sentiment going into 2016 was that it would be similar and possibly surpass 2015. However, 2016 had other plans, as issuance is down nearly 37% year-over-year through October. According to Jamie Woodwell of the MBA, "The CMBS market is seeing far more loans paying-off and paying down than new loans being originated." This is despite CMBS loans to the tune of $232BB scheduled to mature in 2016 and 2017, affectionately labelled, "the wall of refinances," by Trepp. Furthermore, a new round of risk retention measures will take effect in December as part of the Dodd-Frank act, which has already caused some choppiness in CMBS and may continue to do so once implemented. While commercial banks and life insurance companies have stepped up to the plate and taken on some of the maturing volume, it stands to reason the balance sheets of these institutions will inevitably fill up. As such, a case could be made that the market needs a CMBS recovery.

While terms will vary based on the deal, listed below are common CMBS debt terms:

  • Non-recourse loans
  • Leverage up to 75% (can increase with mezzanine)
  • 5-10 year term
  • Fixed-rate
  • Amortization schedules up to 30 years
  • Interest-only periods available
  • 8.0% debt yield minimum
  • Large primary-market deals preferred; may compete for smaller loans in secondary markets.
  • Closing costs of approximately $50k all in; some lenders offer fixed-cost, option for $25k (excluding survey, title and borrower legal).
  • Prepayment typically yield maintenance or defeasance

The interest rate in CMBS transactions is calculated by adding a risk spread premium to the Swap Side offering index. For example, a 10-year rate is found by adding the lender's risk spread premium to the 10-year swap; therefore, with spreads currently in the 2.75% range (275 basis points), and the 10-year swap at 1.5%, the applicable rate on 10-year CMBS money is 4.25%. After an early jump in 10-year AAA CMBS spreads, spreads have since fallen below the level reported a year earlier as of the beginning of Q4.

CMBS lenders are aggressive in nature and have produced extremely compelling quotes for self-storage owners historically- regardless of what the CMBS market in 2016 might suggest. CMBS debt allows borrowers to lock in to low rates for up to 10 years and the loans are also assumable, both valuable hedges against rate increases. Assuming the industry can wade the regulatory waters and capital market volatility, CMBS loans can present self-storage owners with a very attractive piece of financing going forward.

Life Insurance Company Loans

Life Insurance companies are another source of commercial debt for self-storage owners. Per the MBA's Quarterly Databook, Q2 2016 marked the second largest origination quarter ever for life companies. As such, life companies currently account for 14.0% of all outstanding commercial/multifamily mortgage debt. Insurance lenders allow borrowers to lock in longer-term rates on a non-recourse basis, similar to CMBS. Unlike CMBS, however, life companies are extremely conservative and prefer to lend on high-quality stabilized assets in primary markets.

While insurance lenders historically enforced $5MM loan minimums, increased competition has encouraged some to lower this minimum. Life companies are notorious for stressing cash flow underwriting and capitalization rates applied to determine value, which typically yields loan advances of not more than 65% LTV. For many of the reasons listed above, life companies do not compete as directly with CMBS lenders for proceeds.

A cornerstone attribute of life companies is their flexibility. They can offer among the lowest interest rates available depending on structure, often allowing rate lock at application. Furthermore, while 5-10-year fixed-rate terms are most common, fully-amortizing terms up to 20 years may also be available. Finally, life companies offer flexible prepayment structures and generally reasonable transaction costs.

Construction and Land Loans

New construction has been the name of the game in 2016 for self-storage. Per a Q2 2016 Colliers report, there is no publication that explicitly tracks new storage construction, but it has been reported that, "the industry is witnessing the construction of over 600 new [facilities] in 2016 with some estimates tripling that number." Some merchant builders are capitalizing on the chance to sell their newly developed facility to a Public REIT at Certificate of Occupancy. While a CofO sale is definitely not "the norm," there are facilities being built which meet certain criteria that make them a primary acquisition target for large operators.

The most likely lending partner for a developer with a feasible project in a high-demand trade area is a local or regional bank willing to partner with the sponsor. Full recourse with a completion guarantee is typical of construction financing, at least until CofO; recourse may burn down after CofO. For the right project, conventional lenders are advancing up to 75% LTC at fixed or floating rates, with interest carry and operational reserves often built in.

With consideration to the terms laid out above, the proliferation of new storage construction has encouraged some institutions to launch competitive construction lending platforms. For example, Jernigan Capital is a specialized self-storage lender that recognized the need for new product in select markets and can offer up to 90% LTC on a non-recourse basis, under a participating debt structure for qualified projects. The Jernigan team has a depth of self-storage expertise and is therefore selective about the projects it funds. Alternatively, borrowers may secure higher leverage financing through the SBA.

When negotiating a construction loan, it is important to structure an interest only period that mirrors the timeline required to bring the property to break-even occupancy. Furthermore, careful budgeting of the construction costs and development time-frame can help identify an appropriate loan structure.

Small Business Administration (SBA) Loans

SBA loans are a capital source that have helped secondary-market owners secure fixed or floating rate loans at elevated leverage. The two SBA loan programs available for real estate borrowers are summarized below:


  • Variable rate, adjusted quarterly
  • Max proceeds of $5MM
  • 25-year loan term, fully amortizing
  • 5-3-1% penalty in first three years, followed by open prepayment
  • Available for acquisition or refinance


  • Fixed-rate on SBA lien, variable rate on first lien
  • Max proceeds of $14MM
  • 20-year loan term, fully amortizing
  • Step down prepayment, starting with 10% in year one
  • Available for refinance or acquisition

It is worth noting that the 504 program historically was limited to acquisition loans, but as of June, 2016 the SBA now offers a refinance option. When applying, seek a lender that is Preferred Lender Program (PLP) certified, allowing them to approve loans on behalf of the association. As a government sponsored program, the process is document intensive and can be tedious, which is why it is important to work with a PLP entity.


Whether you plan to refinance, acquire or construct a new facility, there continues to be debt products available to self-storage owners. Attributes such as the quality, location, cash flow and existing debt of an asset will largely dictate the debt product that is required, but it is also important to consider your long-term goals as a borrower/owner when selecting a lender. This prolonged low interest rate environment in which we find ourselves, coupled with strong operating fundamentals, marks a desirable time to be seeking financing. Lenders are working hard to win borrower's business, and the result is that borrowers are often presented with one or more very competitive bids.

Adam Karnes is a Senior Credit Analyst for The BSC Group, where he specializes in the packaging of debt and equity financing requests for all commercial property types nationwide, with an emphasis on self-storage assets. Adam is based in Chicago, and can be reached at 312.878.7561; e-mail Additional questions can be directed toward Devin Huber, BSC Group principal, who can be reached at 312.207.8232; e-mail:; visit

Articles: December 2016

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