Self-storage operators looking to finance or refinance properties are weighing the pros and cons of CMBS loans.
“Self-storage is an asset class that is easily financed by CMBS,” said Robert Russell, head of CMBS production at New York City, NY-based Greystone, a financial services and private investment group.
Self-storage is relatively straight forward and underwrites much like a multifamily property. Thanks to stable cash flow, self-storage also is viewed favorably by bond buyers who purchase CMBS (commercial mortgage-backed securities).
‘Readily available’ option
Greystone, which has typically been an apartment lender, recently expanded into self-storage financing. The company, which focuses on deals greater than $5 million, completed its first loan in April. Greystone provided a $26.25 million loan to Elite Stor Capital Partners in West Palm Beach, FL, for its purchase of 23 self-storage facilities in Ohio and Kentucky.
“CMBS is definitely a financing option that is readily available for the self-storage industry,” said Shawn Hill, principal at The BSC Group, a commercial real estate financing advisory firm based in Chicago, IL. That being said, the minimum threshold to access CMBS capital is $1 million.
The majority of CMBS lenders prefer deals over $5 million. However, many lenders will consider anything over $3 million, there’s a group of lenders that offer specialized loans between $1 million and $5 million. Once deals get above $3 million, the majority of mainstream lenders will compete for that business, Hill said.
A borrower might have several reasons to pick CMBS over other financing options.
At the top of the list is higher leverage. Now, CMBS offers a loan-to-value ratio of about 75 percent for self-storage, with some ratios going up to 80 percent when good borrower credit and strong facility financials are in place, Russell said. By comparison, life insurance companies generally offering 60 percent to 65 percent leverage, and banks might go as high as 70 percent.
In some cases, CMBS is a good option for borrowers who have poor liquidity but have a lot of trapped equity in their properties. Traditional lenders struggle with borrowers that don’t have a strong cash balance sheet, whereas CMBS lenders will readily finance a borrower’s liquidity.
“They understand that once the transaction happens, the borrower will be liquid by virtue of the cash they are getting from the loan,” Hill said. So, that’s a deal that CMBS lenders can entertain, while a local bank might struggle with it, he said.
Another advantage of CMBS is speed. For start to finish, a CMBS loan can close in 30 days. “So, from a borrower’s perspective, there is a lot of ease in doing CMBS transactions, while some of the other programs take a little bit more time,” Russell said.
Similar to life insurance loans, CMBS loans are non-recourse, whereas banks loans generally have some recourse.
Details and drawbacks
Keep in mind that CMBS is a longer-term financing vehicle. CMBS issuers do offer five- and seven-year products, but the majority of loans fall into the 10-year category.
Typically, amortization will last longer than with traditional lenders. For example, a bank might offer a 20- or 25-year amortization period, while 30-year amortization is readily available in the CMBS market. CMBS also offers a few years of interest only.
On the negative side, CMBS rates are typically higher. “CMBS is a market that lends more dollars, but charges for it,” Russell said. Loans from life insurance companies and banks are 30 to 50 basis points lower than CMBS.
In addition, the long-term nature of CMBS might not be a good fit for every borrower, given the pre-payment penalties, Hill said. Due to the CMBS process—creating bonds from the loans by securitizing and selling them in pools to investors—the loan structures are fairly rigid. CMBS pre-payment penalties are designed to protect the bond holders, whereas banks can be much more flexible regarding pre-payments.
Words of advice
Although CMBS loans are assumable, CMBS might not be the best option for an operator expecting a facility transition to occur during the loan term, such as a sale or expansion.
The best advice for operators pursuing CMBS is to work with an experienced adviser, such as a mortgage broker or legal counsel, who can help navigate the process. Also, operators interested in CMBS should be prepared with their financial information.
“The more financials that we have so that we can understand the property better, the more aggressive we can get on a loan,” Russell said.