Part 2: Financing a Self Storage Project
In Part 1, we talked about the first step you should take when considering expanding or developing a site – the Feasibility Study. In Part 2, we will go over what you need to know about financing a self storage project and finding the right lender.
This is an excellent time for financing a self storage project, including expansions and new developments, because of historically high property values combined with low interest rates. For you, the self storage investor, there are several variables to consider, and a variety of different types of lending options available when choosing a lender for your project. These include the amount of financing needed; whether the project is a new acquisition, re-finance of an existing loan, property expansion or new construction; whether the borrower is willing and able to personally guarantee a loan; and the amount of equity ownership has in the project.
Let’s go over some examples to give you a better idea of what may work for you.
Loans Up to $3 Million
For loans of $3 million or less, traditional lending institutions such as local or regional banks are a very typical means of financing.
• These lenders usually require 75% Loan to Value (LTV), some level of owner recourse (guarantee), and Debt Coverage Ratios (DCR) of at least 1.15 to 1.
• Amortization periods on these loans are frequently 20 to 25 years with loan term periods of up to 7 years and a balloon payment at the end of the term.
• Closing costs are comparatively low (typically less than $20k) for these loans, and pre-payment penalties are frequently reduced ratably over the first years of the loan, or sometimes not assessed at all.
• Lenders in this category tend to be more relationship based as well, and will frequently require that the operating and deposit accounts of the borrower be maintained with them. However, this potentially affords the borrower greater negotiating ability due to the more personal nature of the relationship between lender and borrower.
Loans for New Construction Projects
New construction projects are frequently financed with local lenders also.
• These loans will carry many of the same terms as financing for an existing property, but the borrower will need to properly plan to ensure that adequate funds are borrowed to ensure that the property can meet operating costs and debt service until it is at a break-even occupancy level.
Loans from $3 Million to $5 Million or Higher
Larger loans that are more than $3 to $5 million used to finance stabilized properties offer borrowers more options. These loans can qualify for non-recourse status, longer terms of up to 10 years and amortization periods up to 30 years.
Loans of this size are typically obtained through larger banks and financial institutions, Commercial Mortgage Backed Securities (CMBS) lenders, and Insurance/Life Companies.
• If obtained, the non-recourse terms are very attractive since the borrower doesn’t need to personally guarantee the loan.
• The longer payment terms also enable the borrower to lock in at today’s historically low rates for a longer period of time, saving money and potentially increasing property value.
• However, these loans can have significantly higher closing costs ($50k and more), stricter underwriting standards, burdensome covenants and reporting requirements, and very restrictive pre-payment penalties compared to traditional lenders.
Using Private Lenders over Financial Institutions
Private lenders are also a potential source for financing a self storage project, whether it is obtained through the seller of a property you may be purchasing or through a wealthy individual or group.
• A private lender may be looking to obtain higher returns on their money than conservative investments such as CDs or bonds, but still have the security of debt that is secured by a tangible asset, and therefore be a viable option for your project.
• These lenders may also be willing to lend to individuals or properties who don’t qualify for financing from more traditional lenders.
• The advantages in utilizing a lender of this type are the flexibility offered regarding terms and rate, as well as less stringent underwriting standards.
• However, these lenders often require shorter pay back periods and provisions to protect against rising interest rates.
Current market conditions are very favorable for borrowers in the self storage sector. When obtaining financing for your project, it is important to fully research all options available, ensuring that you make the best choice for your needs and financial success. If you have any questions about your self storage project regarding getting started with a Feasibility Study or how to approach the financing, contact us today and our team will get back to you shortly.