Though the self-storage financing landscape is always changing, adjustments have been even more dramatic lately due to the far-reaching consequences of the coronavirus pandemic. Some effects were immediate, while others are only starting to emerge. Still more will surface as temporary measures of government relief expire, such as increases in unemployment income, moratoriums on home foreclosures and evictions, and the Paycheck Protection Program (PPP) for businesses.

Lender appetite was much stronger pre-pandemic, particularly for construction and bridge loans. Now, nearly every lender has been negatively impacted by COVID-19, especially those exposed to asset classes like hotels and retail centers that experienced a swift, powerful decrease in revenue. Many borrowers in these sectors began defaulting on their mortgages, creating a ripple effect across the lending landscape. Financing for self-storage was severely impacted from March through June. Thankfully, some “green shoots” began to emerge in June and slowly grew through the third and fourth quarters.

In this rapidly shifting environment, it’s critical to learn and prepare for fluctuations in the economy. What follows is a summary of what the self-storage lending environment currently looks like and my best guidance for finding the loan you need. I’ll discuss options available, the pros and cons of each, plus lender sentiment. I’ll close with advice for those of you who might need or want to refinance this year.

While not every bank has a lot of defaulted hotel and retail loans on its balance sheet, most local and regional banks have curtailed lending activity with all but their long-established clients. There’s less leverage available even for those borrowers; I would peg it at 60 percent loan-to-value (LTV). There are a small number of banks in growth mode that are still establishing new client relationships, but it’ll take a lot of calls to find them.

A primary benefit of working with local or regional balance-sheet lenders is they’re knowledgeable about the local market. Also, they’re generally well-suited for short-term loans (i.e., less than five years) due to their flexible loan-prepayment structures. But there are also drawbacks:

Many banks aren’t actively working with new clients.
Banks that are active are being conservative.
They’ve never been comfortable “cashing out” clients, and are even less so today.
They typically offer an interest rate that’s fixed for only five years vs. longer periods. If you want to lock in a low rate as along as possible, this isn’t the way to go.

The last disadvantage of working with banks is they always require a personal guarantee, meaning the borrower’s personal assets serve as collateral for the loan in addition to the self-storage property. But there are lots of reasons to desire a nonrecourse loan instead. Maybe the borrower has a large portfolio, or a lot of limited partners involved in the asset. Perhaps he’s getting older and concerned about loan acceleration if he were to die. Whatever the reason, if you’re on the market for a nonrecourse loan, look elsewhere.

SBA programs, whose loans are partially guaranteed from the U.S. government, are available for self-storage. However, these loans are generally issued by local and regional banks, and as I mentioned above, not all banks are open for business right now because of the pandemic impact on their balance sheets.

The main benefit of an SBA loan is the higher-leverage option for self-storage acquisitions. Depending on the property, loans are available at up to 80 percent loan-to-purchase (sometimes 85 percent). SBA banks are comfortable offering this because the government holds the risky portion of the loan (mezzanine), which has an “attachment point” from 50 percent to 80 percent LTV. The bank holds the senior loan, which is 0 percent to 50 percent LTV. This taxpayer-subsidized option is great for many first-time self-storage owners.

On the downside:

SBA loans carry a higher interest rate and points.
They can’t be used to cash out or refinance above your existing loan.
You must self-manage the property to qualify; you can’t hire a third-party management firm.
SBA loans are recourse, and each borrower is limited to $5 million of exposure.
There’s a lot of paperwork involved.

If you can secure a life-insurance loan, you’ll enjoy a competitive interest rate. Plus, most life lenders offer nonrecourse options. But there are disadvantages to this finance type:

Life-insurance companies are extremely cautious lenders during times of economic uncertainty, and most are limiting capital to established clientele.
Most will only make loans in primary markets; and as we know, many well-performing self-storage properties are in secondary and tertiary markets.
Life-insurance lenders don’t provide any cash-out financing or high leverage. I’d estimate their current maximum LTV is 55 percent to 60 percent.
Many of these lenders offer long-term fixed rates but only with yield maintenance, which doesn’t work for short-term hold periods.

As with banks, not every commercial mortgage-backed securities (CMBS) lender is currently active; but if you can get a loan, you can get a very low interest rate, fixed for 10 years. CMBS lenders also understand that cash-out financing is an important part of the self-storage ownership cycle and will offer it as long as the borrower or mortgage broker can demonstrate a long ownership period, or ways the owner has added facility value. Here are some other advantages:

CMBS lenders typically offer higher leverage than most—currently up to 70 percent LTV.
They offer a 30-year amortization period vs. the 25-year schedule demanded by other lenders. A longer amortization increases your after-debt-service cash-on-cash return, albeit at the expense of a larger balloon balance.
CMBS loans are nonrecourse, meaning only the self-storage property serves as collateral for the loan.

On the flip side of the coin, CMBS loans are more complicated than other types of financing. The borrower or mortgage broker will need experience and care to manage the process.

There’s also a current trend in which some CMBS lenders are pre-screening loans with their B-piece investors prior to closing. I’m talking about investors to whom the lender sells its loans. These entities can create turbulence or a reduction in loan proceeds toward the end of the loan process, which can be extremely frustrating for borrowers. An experienced mortgage broker can help you avoid lenders that pre-screen and guide you through close.

If you already own a self-storage asset and are a looking to refinance, you’ll want to keep a few important things in mind. First, as you move through the loan process, expect a close review of your arrears reports. Your lender will want to ensure tenants are paying in a timely manner. If you have commercial tenants, it may ask if those customers have requested any rent relief. Any recent decreases in revenue will give the lender significant pause, to the point that it might request daily financial statements up to the day of close.

Lenders may also want to know if you received a PPP loan last year, just for disclosure, and if your existing loan has ever been modified. If you answer yes to the latter, they’ll be concerned. If you can provide evidence, such as emails or letters, proving the modification was offered by the lender vs. requested by the borrower, it’ll be helpful to your case to disclose it.

One of the things that can kill a self-storage refinance is declining facility revenue, even if the trend only lasted a few months. Lenders have always been afraid of “catching the falling knife.” While many storage facilities have performed surprisingly well through the health crisis, it’s important to be braced for another COVID-19 lockdown. Ensure your property is financeable by keeping monthly revenue consistently trending upward.

Whether you’re looking to buy or build a self-storage facility, or refinance an existing business, do everything possible this year to keep your loan options open. Today’s economy is unpredictable, and the market will constantly change. If financing becomes necessary, you want to be in a position to interact with a lender and successfully close.