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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   June 2012

Pack It Up

Look for opportunities in the self-storage niche

Pack It Up

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. 

30-year amortizations

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.

Construction to perm

Many of today’s clients are looking for construction-to-permanent loans for self-storage facilities that were completed in 2008 and 2009 but faced lease-up difficulties because of the struggling economy. Thanks to the opportunities offered by the shift in tenancy from homes to apartments over the past three years, a facility that previously sat dormant now may see a sudden resurgence in demand.

Although there may not be a full two-year lease up, a savvy mortgage broker may find lenders who are willing to make exceptions based on consistent upward trends in tenancy and overall net operating income. If your client has a strong overall portfolio, a lender may accept cross collateralization, as well. 

Revenue streams 

Income for self-storage operators comes from a number of sources outside of the storage spaces themselves — sales of packing materials, locks and packing services, for example. In addition, some self-storage projects cater to specific industries.

For example, there are specialized storage units for vintners in areas where wine production from vineyards is a key agricultural fixture in the economy. Many self- storage facilities in these areas offer packing and shipping services for wineries, and the service makes up a substantial portion of their annual revenue streams.

Another possible source of income comes from properties located near large bodies of water — lakes or coastline-resort areas. These facilities cater to the need for storing boats and other high-dollar recreational vehicles. One point that owners of these self-storage facilities must keep in mind is that the raw land at the back of their facility can be costing them money. A paved parking lot is sufficient for storage of these clients’ recreational vehicles, and if there is a cover over them it’s just another increase in the asking rent.

Military bases and college campuses also can be a source of clients with little storage space and a need for this property type’s services.

• • • 

Self storage is one of the most overlooked property types in today’s marketplace, so self-storage investors looking for financing may find a receptive audience. Skilled mortgage brokers can only add to their bottom lines by investing time researching this market and providing solid solutions for interested parties.  


 


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