A Proactive Approach to Self-Storage Financing. Presented by Neal Gussis, Principal CCM Commercial Mortgage

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2 A Proactive Approach to Self-Storage Financing Presented by Neal Gussis, Principal CCM Commercial Mortgage

3 Today s Discussion 1. Capital markets: Brief overview of capital markets, the lending landscape and aggressive market conditions 2. Self-storage as an asset class 3. Lending sources: Refinancing, acquisition and development 4. Financing request: Key components, perm and development 5. Negotiating points: How to maximize your loan terms 6. Do s and don ts 7. Concluding thoughts and Q&A

4 The Lending Landscape Self-storage is a desired asset class across funding sources. Two primary sources of financing for self-storageare banks and CMBS lenders. Credit requirements are loosening among all types of lenders. Banks are actively originating new loans for existing and new customers and looking to differentiate themselves. Banks are also selective providing construction loans either on their balance sheet or through the SBA. Conduits lenders are aggressively providing long-term, fixed-rate, non-recourse options. Life insurance, credit unions and private lenders provide additional lending options.

5 Self-Storage as an Asset Class Based on the most recent results of the REITs, industry fundamentals are near peak occupancy with strong year-over-year results. Interest from institutional and non-institutional investors is increasing in the self-storage sector. Cap rates have compressed; we re not sure how much compression is possible. Cap-rate compression is leading to higher values. We re at the historically aggressive cap rates. Higher valuations are leading to increased loan amounts and an increase in return of equity. Development of new supply is in the pipeline and will continue to grow at least over the next three years.

6 Why Do Lenders Love Self-Storage?

7 Interest Rates Are Low 10-Year Fixed Rate CMBS 10-Year Treasury Swap 10-Year Fixed Rate Life Company Price based on various matrices 5-Year Fixed Rate Banks Usually based on bank s cost of funds Can also enter a SWAP agreement Fixed-Rate Pricing (As of March 30, 2015) Index + Spread Rate 2.05% % to 2.50% 3.80% to 4.45% 3.75% to 4.50% 3.50% to 4.50%

8 Interest Rates Are Low Variable-Rate Pricing (As of March 31, 2015) Index + Spread Rate 30-Day LIBOR 0.17% % to 3.50% 2.17% to 3.67% 90-Day LIBOR 0.27% % to 3.50% 2.27% to 3.77% Bank Prime 3.25% + 0% to 2.00% 3.25% to 5.25% 11 Dist. Cost of Funds.70% % to 3.25% 3.20% to 3.95% ** Variable-rate loans usually have more flexibility on prepayment.

9 Banks Local and regional banks are majority of capital providers to the selfstorage industry Three-, five-, seven- and 10-year terms Fixed or variable rate Quoted over UST or bank rate (fixed rate), or LIBOR and Prime (variable rate) Most frequently 20- to 25-year amortization Typically 70% to 75% LTV >1.25x DSCR Recourse or partial recourse is typical Prepayment penalty structures vary Relationship-based, deposit-driven Many times constraint on cash-out transactions

10 CMBS Five-, seven-, 10-year fixed-rate terms for stabilized properties 30-year amortization and interest-only periods are common Fixed rates quoted over five-, seven-, 10-year Treasury swap Maximum 75% LTV Alllows cash out or return of equity Targeted 8% debt yield (NOI / loan amount) 1.30 DSC Non-recourse (with standard carve-outs) Prepayment is defeasance or yield maintenance Minimum loan size approximately $2M Strong sponsorship

11 CMBS Volume

12 CMBS Financing Advantages Higher loan proceeds 75% LTV, many banks will only go to 70% Longer fixed-rate terms at low interest rates Most borrowers choose to lock a rate for 10 years Longer amortization 30 years vs. banks, which will offer years Longer amortization lowers monthly payments Non-recourse Conduit loans are non-recourse with carve-out exceptions Cash out Conduit lenders will allow you to increase leverage and pull equity out of the property based on historic operating performance Disadvantages Prepayment penalty Yield maintenance or defeasance, could be costly Costs Upfront costs can total 2% to 3% of the loan amount

13 Life Companies Historically low interest rates on conservative terms; even playing field now, but they are still more flexible than CMBS loans Generally $5-10 million minimum loan size 50-70% LTV (life-company value not necessarily market value) Typically 15- to 25-year amortization Typically non-recourse Class allocations and properties Strong sponsorship Flexible terms

14 Other Lender Options Credit unions SBA 7A and 504 Credit companies, Public and private funds, mortgage REITs

15 Permanent Financing: The Request 1. Loan-request summary 2. Property description and attributes 3. Neighborhood attributes, demographics, maps 4. Property historic operating results 5. Summary rental information 6. Historic occupancy detail 7. Ownership highlights and financials 8. Management highlights 9. Competition analysis

16 Construction Financing: The Request 1. Loan-request executive summary 2. Sources and uses 3. Site and property description 4. Site plans, floor plans, elevations, and renderings 5. Neighborhood, demographics, maps 6. Sponsorship resume and financials, construction-team experience 7. Construction budget and schedule 8. Detailed unit mix 9. Five-year pro forma 10. Competition analysis and feasibility study

17 It s More Than Just Interest Rate Negotiating Terms Is Key 1. How is the lender s underwriting cash flow?

18 How Is the Lender Underwriting Cash Flow? Revenue Upwardly trending rental income Downwardly trending rental income Seasonal income High demographic usage of certain type, i.e., college or military Commercial leases longer than one year Cell tower income Tenant insurance Truck rental Apartment rent

19 How Is the Lender Underwriting Cash Flow? Expenses Real estate taxes Management fees Capital expenses in repairs and maintenance Non-recurring expenses Owner benefits including health and life insurance Car allocation Meals and entertainment Education expenses Excess management fees Excess payroll (relatives) Legal and accounting

20 It s More Than Just Interest Rate Negotiating Terms Is Key 2. Return of equity or cash out, is the lender constraint? 3. Recourse provisions 4. Continuing covenants 5. Prepayment provisions 6. Reserves and impounds 7. Other requirements deposit a/c s, etc. 8. Managing cost of transaction

21 It s More Than Just Interest Rate Negotiating Terms Is Key Construction loan 1. Loan to cost 2. Loan to value 3. Interest only and amortization 4. Loan term 5. Interest rates fixed and variable 6. Recourse burn off 7. Interest carry reserve 8. Operating shortfall reserve 9. Mini-perm structures

22 Do s When presenting a package for attractive financing: Get to know your lender and its loan-program requirements prior to sending in a package. Be in agreement with financial partners on the financing objective. Be realistic. Prepare a complete electronic loan request to present to lenders. Be patient with lender s credit questions, and be responsive. Provide pictures. Utilize accountants, lawyers and mortgage brokers as needed. Shop the market and negotiate important terms.

23 Don ts Don t withhold Information the lender will find during underwriting. Don t just send the lenders operating results without adjusting and commenting on income and expenses as deemed appropriate. Don t present a piecemeal loan request. Don t allow site visits without trusted personnel at the facility. Don t get too comfortable with you current lender/relationship because it could change quickly. Don t get comfortable that interest rates. Don t use multiple mortgage brokers.

24 Concluding Thoughts This may be the best time yet to be in the self-storageindustry. The result of obtaining a great loan is directly related to the time and effort put forth in completing a professionally prepared loan package. You need to create competition, either by your own sources or by use of a mortgage broker. Lenders vary greatly on how aggressively they are interested in quoting proposed loans; you need to find the lender(s) that wants your business. Interest rates are at historic lows. Increased value will provide more opportunity to increase your loan proceeds. Construction financing is available for good borrowers and the right storage locations.

25 Contact the Presenter Neal Gussis Principal CCM Commercial Mortgage Office: Cell:

26 Thank You!

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