Submitted to Investment Real Estate by Shane Soranno at Summit Capital Partners, LP
The limitations placed on commercial banks by regulators may no longer provide for the ideal capital stack, and ultimately, this “tightening” is requiring sponsors to get creative. An option more frequently availing itself to investors is private debt. Most investors interpret private debt as a financing option for sponsors with poor credit and/or limited experience. In some cases, that may be true. But more often, and as is the case at Summit Capital Partners, LP, private lending is an alternative financing vehicle that provides short term, higher leverage debt to experienced sponsors. For self storage businesses, private lending takes two forms:
- With land at premium in most population centers, the potential of acquiring existing product becomes an increasingly attractive investment model for operators. Vintage “family holdings” offer value add potential, but require flexible lenders as the family operator may not be able to provide the buyer with the information necessary to close with conventional financing.
- Ground up opportunities could offer similarly appealing returns, thanks in part to a simpler entitlement process (as compared to other uses) and short construction timeline. Conventional lenders, though, may be hesitant to extend leverage due to the long runway on lease up, an issue not typically encountered in other asset classes.
Local and regional banks offering construction and bridge loans for the above-mentioned deal types may prohibit mezzanine financing that is either secured by a second mortgage or a pledge of the borrower’s ownership interest. The alternative for the sponsor is typically equity – a capital source that comes at a steep cost considering the low leverage likely offered by the conventional lender.
The good news is that private lenders like Summit Capital recognize that as a result of increased urbanization and population growth, the outlook for self storage remains positive. A positive outlook combined with first-priority mortgage and qualified sponsor executing on a sound business plan, makes for a compelling investment strategy. Moreover, the approval process for a private real estate loan is considerably easier and shorter than with traditional CRE financing. In many cases, an investor can have a loan approved and funded within one to two weeks all but negating the old adage – Time Kills Deals.
Now, what could a borrower expect as it relates to terms?
- Leverage up to 95% LTC.
- Interest rates starting at 9%.
- Loan terms between one to three years, allowing enough time to prepare the property for resale or arrange for traditional refinancing.
Private lending takes many forms, and as with most industries, has its fair share of dishonest participants. When considering a private lender for your self storage business, attempt to quickly understand the following:
- Who are the decision makers? The “quick close” often advertised by private lenders could be derailed by bureaucracy and committees within the firm. Smaller, but still well capitalized firms, may offer an advantage should timing be a critical element.
- Real estate is local and private lenders who limit their reach to certain geographic areas have the potential of moving more quickly and providing better terms, as they may already be familiar with a particular submarket.
- What are the lender’s in-house capabilities? Whether it be legal or field inspections, working with a lender that lessens a borrower’s dealings with third party professionals typically leads to a savings in time and money.
It’s not a one size fits all model, but a private lending relationship could prove to be a valuable tool when contemplating your next self storage investment opportunity. If you would like to learn more about how Summit Capital Partners, LP can help you with your self storage lending needs, you can visit their website or reach out directly to Shane Soranno at firstname.lastname@example.org.
About the author:
Summit is a private lender that primarily originates senior mortgages and mezzanine loans collateralized by real estate throughout NY, NJ, PA and DE. Summit focuses on short-term, secured lending to small and medium-sized real estate operators – businesses that traditional commercial banks have forgotten. Our clients typically fall into two categories: experienced developer and homebuilder in need of acquisition, remediation, site improvement and construction financing; or a qualified owner/operator in need of bridge financing. Summit prides itself on the fact that, at any given time, the majority of loan portfolio consists of repeat borrowers.
Summit attempts to differentiate itself from its private lending peers as it’s comprised of professionals actively participating in the ownership, development, construction and management of all types of real estate. This collective knowledge becomes a valuable resource to the borrower through either fast tracking the due diligence process, or providing guidance that may beneficially influence the success of the project. Further, considering the executive team’s affiliated development and property management platforms, Summit can extend leverage where most private and commercials lenders cannot.