Self-storage financing comes in many forms, from bank loans to debt funds to commercial mortgage-backed securities (CMBS). Life-insurance companies are among the most reliable and long-standing sources of capital in this industry, though they’re often misrepresented or misunderstood.
These institutional lenders have been providing debt for income-producing properties for decades. While more conservative in their approach, they can offer attractive terms without requiring deposit relationships or restricting your assets. But for many self-storage borrowers, confusion remains about how to access this capital, what it offers, and whether these lenders are a good fit for their needs.
This article explores the myths about this type of lending and the truths behind them, so self-storage investors can better understand this unique finance solution.
One of the most persistent myths about life-company lenders is that they only finance class-A self-storage projects in the largest metropolitan areas. While they do tend to prefer high-quality, stabilized assets, some life companies can lend on property starting at $1 million, even class-B or older sites.
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In general, a self-storage asset’s history and condition, as well as the borrower’s experience and leverage, are important factors for life-insurance companies when making lending decisions.
A facility’s performance is more important than its construction type.
In addition, strong sponsorship is often a key factor, with net worth of at least one to two times the loan amount required. There’s a reasonable amount of liquidity required at closing.
Because of their conservative reputation, it’s often assumed that life companies only lend in major metros. While they invest heavily in top-tier markets, they’re also well-represented in secondary and even tertiary markets. Many actively pursue regional diversification, lending in self-storage markets with growing populations, varied economies and good fundamentals. In fact, if they feel they’re too heavily weighted in a particular state, they may cut off lending there until overall ratios are more in line with their diversification needs or payoffs occur.
For some life companies, suburban markets are common. This is because their loans are typically recourse vs. nonrecourse, and they rely more on the borrower’s financial strength if there are other weaknesses in the request. Others will lend on a nonrecourse basis even in tertiary markets.
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Self-storage borrowers often assume that life-company loans are unattractive, with low leverage, tight underwriting and slow closing times. While these aren’t the most aggressive lenders, their terms are often among the most borrower-friendly in the market. Unlike banks, they frequently offer nonrecourse loans. They offer lower interest rates than debt funds and most other lenders. They have lower legal fees and more borrower-friendly documents than CMBS. Some also:
Provide longer fixed-rate terms up to 30 years or more
Offer prepayment-penalty flexibility
Lock in interests rates up front for 90 days or longer
Provide full-term interest only and additional advances to pull out trapped equity
Their nonrecourse leverage typically ranges from 55% to 75% loan-to-value, with 60% to 65% being the higher-end sweet spot. This may be lower than bank loans but is offset by the security of long-term, fixed-rate debt. For conservative self-storage borrowers seeking stability and low rate rather than maximum leverage, life companies are often the ideal match.
Another misconception is that life companies have rigid loan structures with no wiggle room. In reality, they’re flexible in ways that matter most. Many offer customized structures tailored to self-storage investor needs, or forward commitments for properties under construction or in lease-up. Some even have bridge and joint-venture programs.
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Additionally, while life-company loans often come with prepayment penalties like yield maintenance, borrowers sometimes can negotiate flexibility like step-down penalties.
This simply isn’t the case. Each life company has its own funding goals and buckets of money. While some start at $1 million with total funding needs of $300 million to $400 million annually, others may start at $20 million to $50 million to meet lofty funding goals in the billions.
As such, these lenders do work with major institutional borrowers, but they also finance deals for smaller self-storage developers, investors and regional operators. For middle-market borrowers, the mortgage-banking correspondents are invaluable, providing access to life-company capital that might otherwise seem out of reach.
While most of life-company loans are more expensive than financing from banks due to requirements for lender legal fees and property-condition and zoning reports, they’re generally cheaper than CMBS. However, several life companies only require an appraisal and environmental report, making them very cost-competitive. Often the interest-rate savings can make up for the extra fees.
Life companies are sometimes seen as slow compared to banks or CMBS lenders. While they may not match the absolute speed of a balance-sheet bank loan, they’re generally much faster and more streamlined than CMBS. Their decision-making is quick. Once a life company issues a quote, a self-storage borrower can generally count on execution under the application terms. With tight timelines, they can sometimes close in 30 days, though 60 to 75 is standard.
Perhaps the most important truth about life-company lenders is they emphasize long-term relationships.
Also, their loans aren’t the right fit for every deal. If you’re pursuing a value-add acquisition, construction project or transitional property, a bank, debt fund or bridge lender may be the better choice. But for experienced borrowers with stabilized, income-producing self-storage facilities, for whom long-term financing and predictability are paramount, life companies are unmatched. They maintain networks of correspondent mortgage bankers across the country who originate and service loans on their behalf, creating an efficient and borrower-friendly process. Working with the right life-company intermediary can be just as straightforward as with a bank.
By dispelling the myths about life-insurance companies and understanding the truths, you can better evaluate when and how to leverage this type of financing for your next self-storage venture. Unlock a powerful source of capital that has stood the test of time!
David Smyle is a vice president of San Diego-based Pacific Southwest Realty Services, a commercial mortgage-banking firm founded in 1972. It represents banks, life-insurance companies, private capital and other credit facilities seeking investment in real estate-secured assets. Before joining Pacific, Smyle was owner and president of Benchmark Financial for 16 years and spent 12 years in commercial banking. To reach him, call 858.522.1411; email [email protected].
David Smyle
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