No doubt about it, 2020 is a year of totally new territory for the self storage industry, and that goes for self storage lending as well.
We are currently working on three loans, getting ready to close on them, and it has been a journey.
CMBS
We are not doing any CMBS loans this year, so I can’t speak directly about it.
I know during the first part of the year, especially at the end of the first quarter and the start of the second, there was very little activity in this lending arena.
My understanding is it has picked up some, and rates are good. Their underwriting guidelines have always been rigorous due to the loan structures and non-recourse aspect of the financing, so I imagine they are perhaps even more so now.
This market is important to many of us who do value-add plays because this is the market we go to when we need to refinance, cash-out, and keep the projects for long term cash flow. Not every lender likes large cashouts, but we can do this with CMBS.
Banks
Our experience is that banks have been all over the board this year concerning self storage lending.
Some banks were not in a mood to lend at all, some reluctantly lend as long as their perceived risk is very low, and a few are hungry. But, mostly, they have been very slow and cautious in our experience.
One of our refinances is with a local bank using conventional underwriting terms, and they wanted enhanced security, and it took a while to get approval. We worked through what they needed and are very grateful to have received the approval.
In today’s environment, I would be prepared to go to many more banks than before. I think you will have to wade through many ofthem to see which ones want to lend and which ones want to lend in the self storage space.
Then once you get a few, know that some of them will be dropped because of their stricter underwriting requirements today. All of this equates to many more calls and presentations.
SBA Loans
For us, the shining light this year has been SBA loans.
The challenge has been that the large SBA lenders have been so busy. They were the ones who had the bulk of work distributing and doing all the work required in PPP loans from the federal government in the first half of the year.
For a long time, the lenders we use were 100% focused on this.
Then around the end of April or the beginning of May, they could start focusing on storage loans.
The big plus right now on the SBA loans is that if anyone closes on one before Sept. 29, 2020, the first six months of payments are to be made by the government. In other words, when we close on one of our refinances at the end of August, our first payment we will have to make is March 2021.
We are also waiting to see if the guarantee fee will be waived. But, Congress can’t get together on this, so we will not wait too much longer. I am not holding my breath.
As always, SBA takes longer to move through the pipeline, but the loans do offer a lot of benefits, like the ability to have access to operating cash flow deficits funds if needed, interest payments added to loan if needed, furniture, fixtures and equipment added to loan if needed on top of the acquisition, and of course much lower equity requirements. Someone could get a 90% loan-to-value loan with as little as 10% down payment.
I don’t recommend this, but you can get one in most cases.
So, all things considered, this is the year for you to seriously consider an SBA loan on a refinance or acquisition if you can close by the end of September. Even past then, these loans offer a lot, but the first six payments being made for you has benefits.
So, this is my quick survey of the lending landscape for the second half of 2020 in the self storage space.
As always, any of the vendors we use in running our self storage business are listed on the resource page of my website.
Good luck and share any of your 2020 lending experiences below.
