Today’s self-storage environment often requires fast-paced financing for property expansions and improvements, building renovations, or management overhauls. Traditional approaches to bank and perpetual debt financing are often not adequate. This is usually because these lenders are unable to undertake the expected rentals upon completion of the project or are unwilling to take risks in the current economic environment.
This is where bridge lending and other forms of financing can step in and solve the problem. Let’s explore some of these options and see how they can help you complete important projects designed to help you achieve higher self-storage income.
Overview of Bridge Loan
Many bridge loans can be non-recourse. This means that there is no personal liability if the loan defaults. However, as a result, along with the borrower’s experience and financial strength, property metrics become important considerations for lenders. Therefore, the high risk associated with these types of loans comes with higher interest rates and fees.
Most bridge loans require lenders to return in the high single digits to mid double digits, but the cost is often worth the price to get the project up and running. The higher the risk, the higher the interest rate, so a loan that requires an 80% loan-to-cost (LTC) demands a higher return than his LTC request of 50%. For self-storage operators with a strong track record, multiple properties, and good financial standing, mid-to-high single-digit interest rates offer a bargain on capital.
Real-world scenarios where bridge loans have been applied include acquiring self-storage facilities with low rental rates due to poor maintenance or older properties in need of updating. Bridge Financing can provide financing to acquire buildings and upgrades (security, unit doors, roofs, gates, etc.). Pro forma stability is 75% or less.
Another common example is when retail space or existing structures are purchased with the intent to reuse them for either portable container storage or traditional self-storage. In-vehicle storage using a large empty space is also popular. Whether you’re buying a property or already owning it and looking to improve it, a bridge loan can typically cover up to 80% of the total purchase and upgrade costs.
A particularly advantageous feature of bridging loans is that many programs can be completed in 30 days or less. Some overall trading metrics don’t even require an evaluation. Let’s say you are closing a self-storage purchase and have a recurring loan in place, but the seller wants all cash or quick close. A bridge loan could solve this problem, as the lender knows that an exit strategy is already in place.
Of course, nothing happens without a price. In such scenarios, the lender may prefer either higher loan fees and/or minimum guaranteed interest rates if repaid very quickly. It is rare for a lender to require a minimum of 3-6 months of guaranteed interest to match the loan fee if the loan has been off the books for a very long time. If you need to close, a bridge loan is your best option and can be a life saver.
A self-storage borrower must provide a detailed improvement or cost breakdown of the project in order for the lender to make a decision on a bridge loan request. This includes land prices and hard, soft and financing costs. Specifically, it consists of a required interest reserve and a pro forma profit and loss statement showing timelines and expected future income and expenses after completion of work.
Although valuations are generally required, it is always recommended to provide valuations and borrow comparisons up front to support pro forma. A feasibility study achieves the same goal. Lenders need to dig deeper into your credit history than just reviewing property information. You will also need financial statements that reflect the net worth and liquidity of your business and individuals. Self-storage experience is another important consideration.
Pro forma financing decisions result in an exit strategy. For example, what happens if construction is delayed or the economy falters? Once the storage project is complete, will the bridge loan be refinanced to a bank, Small Business Administration (SBA) lender, commercial mortgage-backed securities (CMBS) provider, life insurance company, or another type of lender? The plan is to sell the property for a substantial profit. You may have pre-sold the property to a real estate investment trust (REIT). How the loan is taken out is always a major factor.
Most bridge loan terms range from 12 to 36 months, with typical programs ranging from 12 to 18 months, with a 6 month extension available for an additional fee. Bridge programs are offered by banks, debt funds, life insurers, some Wall Street firms, and private lenders. They may also be available from funds provided by some of the larger self-storage operators.
Fees are typically 0.5% to 2%. A typical scenario is a 1% fee on closing the loan and another 1% fee on closing, but this can vary greatly. Minimum loan amounts also vary, with smaller programs starting at $500,000 and larger programs requiring a minimum of $10 million to over $20 million.
Program details vary with dozens of programs available. All self-storage deals are unique, so it’s difficult to estimate fees and terms without knowing the specifics of your specific deal.
Other sources of information
They are not specifically considered bridge loans, but other financing instruments (usually recourse) can achieve the same result. Here’s an overview of your options:
Line of Credit (LOC). Most lenders willing to offer this in real estate prefer to be in the first position. Adding her LOC behind the first lender is rare and expensive. However, if the lender already has the first position, they may be willing to add a second mortgage or deed of trust. The credit line rate is usually set higher than the prime rate or his SOFR (Secured Overnight Financing Rate) index, with a margin of 0% or more. Rates are usually adjusted as the index changes. The problem with LOC is that he is usually limited to 50% of his loan amount, and lenders generally don’t tend to offer large loans.
working capital loan. These loans are typically part of the SBA program and cover overhead, labor costs, equipment purchases, and similar costs, but are typically not tied to real estate. It can be provided directly by the bank, but generally must be protected by accounts receivable, Uniform Commercial Code filings, or vehicle ownership.
Very strong borrowers with existing deposit relationships get better terms and rates. This is usually set higher than the prime rate or his SOFR index. These rates also adjust as the index changes, but fixed rate options may also be available.
construction loan. Financing allocated for ground-up development, renovation, or expansion projects is primarily provided by banks and some credit unions. Some life insurers may also offer non-recourse, cheap construction loans, but they are expected to be much more modest than traditional banks. Large and experienced storage borrowers are also preferred.
Other funding sources for construction loans are debt funds, SBA, and private lenders. If you’re a strong and experienced borrower, some debt funds will lend you up to 90% of your total cost, but interest rates can easily hit the double digits. They offer leverage ranging from % to 90%, with an upper limit, but the highly leveraged loan sizes tend to have much higher interest rates than debt funds. Joint venture programs with some REITs can offer high leverage in exchange for sharing profits and equity in the project.
Construction loans are typically associated with a prime rate plus margins ranging from 0% (for clients who have a strong relationship with the lender and maintain large deposits) to 3% or more.
Although you can access these programs over the Internet, contacting your banker or commercial mortgage broker should be able to arrange the appropriate product for your self-storage financing needs.
David Smyle is a San Diego-based Pacific Southwest Realty Services (PSRS) is a commercial mortgage banking company founded in 1972. We represent life insurance companies, banks, private capital and other credit institutions seeking to invest in real estate-backed assets. Prior to PSRS, Smyle was the owner and president of Benchmark Financial, where he served for 16 years and in commercial banking for 12 years. To contact him, call 858.522.1411. e-mail [email protected].