Where flood damage is reported, customer satisfaction is always job one. On another front, self-storage space is an urgent prerequisite for homeowners tarting the post-storm clean-up and repair process.
The demand for storage space has pushed prices up in the cities most
severely affected by hurricanes Harvey and Irma, for example.
In Miami, the average monthly rent per square foot for a 5-by-5-foot
storage locker rose from $1.40 at the end of 2016 to $3.07 in mid-September, according to SpareFoot, an online storage-facility data
provider. Vacancy rates for storage facilities are expected to decrease
in Florida as demand heats up. In addition, Hurricane Irma forced a
number of the largest national companies to temporarily close some
Florida self-storage operations. Meanwhile, in Houston, where analysts
expect vacancy rates to drop as well in the wake of Hurricane Harvey,
per-square-foot rents for the same-sized storage locker went from 90
cents at the end of 2016 to $1.47 as of mid-September SpareFoot reports.
Clearly, the primary objective for borrowers in the self-storage industry
is to secure the lowest rate of interest on any financing. There are other
important issues to consider, however. Those other factors include
■ ■ How to structure terms to specific properties and risks;
■ ■ The trade-offs between recourse and nonrecourse loan guarantees;
■ ■ The restrictions that some lenders impose on existing self-storage
■ ■ Loan-closing and servicing costs.
As a result of these issues, obtaining loans, especially for the small,
independent operators in the self-storage sector, can be a long,
arduous and uncertain process. To understand why, we need to look
at one of the most widely-tapped pools of capital: the commercial
mortgage-backed securities (CMBS) market. The $100 billion CMBS
market supports everything from office towers in Dubai in the United
Arab Emirates to strip malls in Dubuque, Iowa.
In the self-storage sector, CMBS volume exceeded $3 billion in 2015,
up a remarkable 73 percent in just two years. The CMBS market is generally open to loans for stabilized properties that are above the range
of $3 million to $5 million.
Ten-year maturities in the CMBS loan market are the standard. The
drawbacks of CMBS loans, however, are not always apparent at first
glance, but for growing businesses they can be a major handicap.
Smaller loan amounts usually don’t command the most favorable
terms in the CMBS market. In fact, depending on size, some loans may
not qualify for securitization at all, and for those that do, the closing
costs can be quite high.
In addition, CMBS loans generally have a very complicated and
expensive prepayment provision known as defeasance, which typically
involves the borrower purchasing and posting government securities
as collateral for the loan in order to obtain a release of the lien on the
property that originally served as collateral.
Perhaps most importantly, CMBS loans normally restrict certain
material changes to sites while the loan is outstanding. These restrictions
are meant to ensure that the CMBS investors have a stable set of assets
backing their securities. Unfortunately, borrowers who want to make
improvements, including new construction and expansion, are often
unable to move forward without complex, costly and time-consuming
legal work — or maybe not at all.
There are other risks in turning to the CMBS market for financing.
Weaker properties or less creditworthy borrowers, for example, may not
be attractive to CMBS investors, especially in periods of market volatility
when investors are more cautious. To rescue the deal, CMBS underwriters
may have to increase yields, thus raising the borrowing costs.
The self-storage operator who receives assurances of low-cost,
fixed-rate financing via the CMBS market can be caught off guard
once committed to the process. At times, loan providers may have
to renegotiate loan terms later in the process, or financing collapses
altogether because CMBS underwriters are unable to place deals.
Most self-storage operators, however, need lenders who can help
them manage risks, navigate the process and serve as long-term partners.
That type of lending partnership can be difficult to foster in an industry
made up largely of smaller operators. Most are looking for loans of between $2 million and $4 million, transaction sizes that usually do not
qualify for the most favorable terms in the CMBS market. Consequently,
such financing deals attract primarily local banks, rather than national
lenders invested in the CMBS market.
Ken Schutter is an executive vice president at A10 Capital, responsible for originating commercial real estate loans in
the Chicago market. He has more than 20 years of commercial real estate experience, including loan originations,
loan under writing, asset management, special servicing, acquisitions and dispositions. Before joining A10 Capital,
Schutter was vice president and senior asset manager at C-III Asset Management and executive director at
JP Morgan Capital Corp. Schutter has a bachelor’s degree in finance from the University of Saint Francis
and holds a designation as a chartered financial analyst from the CFA Society.
Reach Schutter at email@example.com.
“Obtaining loans, especially for the small, independent
operators in the self-storage sector, can be a long,
arduous and uncertain process.”