Self Storage or Mini Storage Financing Options
Self Storage facilities are a hot commodity in the investment property market. The demand for financing this property type is high. Buyers and investors have been purchasing these properties under 6% cap rate in some markets. The appeal of a self storage or mini storage asset is that maintenance expenses can be low and cash-on-cash return can be extremely profitable. Many owners are refinancing at this time to lock in a lower rate or get cash out of their properties during this low rate environment.
Finding the right lender to provide financing for self storage loans can be challenging. To get the very best loan that fits your investment needs, it’s important to work with an experienced group that has done financing for self storage facilities and understands the idiosyncrasies of underwriting. Our expertise with self storage financing will help you navigate the system and get you loan terms to meet your financial goals. Here are some examples of the many lending programs available for self storage facilities:
Local Bank or Credit Unions Loans:
Banks are often limited geographically to the footprint of the bank’s retail network. Many banks prefer to lend only to local borrowers to whom they can provide additional banking services. General loan terms: 3-5 year fixed pricing at a 4-5% interest rate with a loan to value of 70% and is available with a 20-30 year amortization.
Pros: Some local lenders are willing to work with the property having a higher loan to value (LTV). Banks and credit unions offer low prepayment penalties, however you also get a shorter fixed rate in return. A personal guarantee is almost always required. Some banks can offer a partial guarantee depending on LTV. Loan fees tend to be generally lower than nonrecourse loans.
Cons: Banks usually prefer to write a 15 to 20 year amortization for self-storage loans which can really restrict projected pro forma on your cash-on-cash return on the property. Rates may only be fixed for a period of 3, 5, or at the most, a 7 year period.
Small Business Association (SBA) Loans
SBA changed the rules for "passive income" properties back in 2010 making self storage businesses eligible for SBA financing. This is good news for those looking to refinance, acquire, or build a self or mini storage facility because SBA financing offers especially high leverage. (RV and boat facilities are also eligible and in some cases). Current self-storage owners need to have good credit and a proven track record. Eighty five percent LTV financing is available for those who do not have storage investing experience but have enough relevant business experience and other personal strengths like the proven ability to successfully manage a property.
- Longer loan terms are available (up to 25 years plus the construction period).
- SBA Loans have lower equity and down payment requirements - typically 10% for self-storage, but 95% financing is technically possible - for refinances, purchases and construction - if you have other stable cash flowing facilities.
- SBA financing can be used to make improvements or to expand mini warehouse properties and there is a streamlined program available for those with good credit for loans under $350,000.
- Working capital and business debt consolidation are financeable for self-storage businesses.
- All closing costs are financeable.
- Little to no financial covenants.
Personal guarantees may be required. SBA loan applications can seem cumbersome to borrowers.
USDA Rural Loans
A USDA Rural Development Loan is offered to rural property owners by the United States Department of Agriculture.
Pros: It is possible to get self-storage loans in a smaller city where most lenders aren’t otherwise willing to lend. The loan does not have a call or balloon payment. The rate is usually fixed for smaller interim periods of 1, 3, or even 5 years, and then it will reprice over an index. A 30-year amortization is available for self-storage facilities.
Fees - There is generally a government fee of 2-3% of the loan amount attached to the loan. This fee is due up front (similar to an SBA loan for a business) which helps cover government costs.
Availability - The quantity of these loans vary state-by-state and some state USDA offices are not always willing to lend to self-storage facilities. Availability can also depend on what funds are allocated to their offices.
Time – These loans generally take 75-90 days to fully underwrite, get approved by the state offices, and close. If you are planning to get a self-storage property under contract in a smaller town, plan on making sure your seller is aware of extended closing deadlines.
CMBS or Conduit Loans
If a non-recourse loan is what you need, then this type of loan may be the best option for you. After a nonrecourse loan funds it is then sold and traded on the investor market (secondary market as a security). Non-recourse financing is available with very low rates. Properties need to be stabilized with good historical financials. General loan terms: Nonrecourse loans with a 10-year fixed rate and 30-year amortization are offered at rates around 4.5% depending on the market.
Pros: Nonrecourse loans are available with a longer fixed term and a 30 year amortization. These loans are assumable. They are made directly to the LLC entity structure, with a “warm body carve-out signer”. The loans are assumable to a qualified buyer, so if you lock in a low interest rate now and the rates go up, your loan can be assumed by a new qualified buyer in the future at today’s low rates. Loan deliverability is very high on these transactions once the offer to finance is made.
Deposits and Fees - Once your loan offer is made, the lender generally requires an $8,000-$15,000 deposit for appraisal, site visit, and environmental survey. Also, a deposit is required for lender legal fees and can range from $10,000-$15,000 depending on the size of the loan being securitized.
Defeasance – Since these loans are being sold as securities in the investor market, the lender doesn’t want their money back early. If you choose a 10-year fixed, low interest rate loan, plan on being in that loan for 9 years and 9 months.
Some self-storage facilities currently on the market have a seller financing option. General loan terms are 50-60% LTV with a 7-8% interest rate and the seller is willing to take your payment for a period of 3-10 years before they want to be paid in full.
Pros: Buyers do not have to qualify through a bank, which can help if your credit was damaged as an investor during the market downturn. Sellers may want to receive a monthly check for a stretched out period of time instead of one lump cash sum, especially in situations where the occupancy is low.
Cons: Interest rates tend to be higher: usually 6-8% for seller financing. These loans generally require a large cash injection or down payment of 30-40% of the purchase price
How to determine the best financing to meet my loan needs:
There are an abundance of lenders in the marketplace for self-storage facilities, but how do you determine who is the best fit for your unique situation? It can take extensive research and calls to find out who to contact. By working with an experienced commercial loan broker, you can have access to many institutions and their programs. Your commercial loan broker works with the best lenders and already has a relationship with those representatives on the inside. In addition, the broker can help you assemble your loan documents to make sure you present the best possible loan package. This complete package will provide the best options for the optimal loan terms. You are not only hiring a finance expert, but a whole team of associates that will work in your best interest.
The broker submits your package to obtain offers to finance your property. He will consult with you to determine which scenario works best for your financial goals. He will also help you negotiate with the lender, if needed, for prepayment penalties options, origination fees, amortizations, and an assortment of other loan terms.
The broker and his team will partner with you every step along the way until the loan is funded. They work with the third party reports, and underwriting conditions, to ensure you have a successful closing. Often, unknown conditions pop up, and the team is invaluable to eliminate these potential deal breakers.
The Madison Group has a proven approach to self storage financing:
- We give fast, straight forward answers to your lending questions.
- We have a team of dedicated professionals to handle your file from start to finish.
- We will eliminate the entanglement of paperwork.
- We place our loans with direct lenders.
If you need financing for your self storage property purchase or refinance, consider hiring an experienced commercial loan broker like The Madison Group.