As published in Scotsman Guide's Commercial Edition, June 2012.
Self-storage projects are an underserved, yet lucrative, niche in today’s commercial real estate mortgage market. In the past few years, this segment has been well-poised to take advantage of the shift in housing from homes to apartments that triggered an increasing demand for storage facilities. When it comes to financing, however, a savvy mortgage broker must be fully aware of the industry-specific requirements in terms of cash flow and operation to be able to guide clients in the right direction.
Self-storage property types typically carry loan amounts that range from $3 million to $10 million on average and serve an increasing market: multifamily clients. The demand comes from tenants and multifamily owners who rent self-storage units to make use of additional space and increase cash flow in their existing facilities.
In addition, owners also are exploring opportunities for cash-out funds to be used for expansions necessary to accommodate the rising demand from apartment dwellers who were once homeowners and have been left without viable storage options for many of their belongings.
Unlike many commercial property types, the self-storage segment’s income is dependent on tenants making small payments — in hundreds of dollars at most rather than thousands of dollars.
Because it is a priority for the self-storage owner to maintain a consistent cash flow, commercial mortgage brokers should be aware of the availability of 30-year amortization possibilities, particularly with many of these properties coming up for refinance in the next year.
The advantage of working out a 30-year amortization for your client is that you effectively increase the cash flow by as much as 40 percent more than the borrower’s neighborhood bank. Even national lenders often don’t exceed 15 years on their amortization offers. One point to keep in mind, though, is that the debt-service-coverage ratio (DSCR) requirements vary from 1.0 to 1.5, based on the borrower’s cash flow and overall personal financial statement. In addition, there are lock periods of up to 10 years in order to provide security in today’s turbulent market conditions.
For example, consider a client who takes a $5 million loan at an interest rate of 5.5 percent. If the loan is arranged at a 15-year amortization, the monthly payment will be $40,854.17. If it is taken on 30-year amortization, however, the monthly payment will be significantly lower — just $28,389.45. The difference between the two monthly payments adds up to nearly $150,000 per year, a substantial boost to cash flow for any business.
In addition, because the interest rate is fixed, your client doesn’t have to worry about the market direction each and every month.
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