August 2008

Issue 3

“It’s a Lenders Market”

As we pass the one-year mark of the credit market turmoil, who would have predicted last August that the market would look like this a year later? With the evaporation of the CMBS market and traditional lenders filling only a small percentage of the void, we went from a plethora of capital to a limited amount of capital in a matter of 3 months; or at least a limited amount of available capital as significant amounts remain sidelined waiting for a clear “bottom” to the market.

In addition to life companies, we have seen local and regional banks, mezzanine sources of capital and various capital funds stepping up to also fill some of the void; but with limited allocations many of these knights in shining armor have already reached annual limits. Deals are still getting done; some with traditional lenders and some with the various new lenders that are entering the market everyday. However, the understatement of the year is that the market looks and feels very different than it did in August of 2007 and thus the typical deal looks and feels very different as well. Lenders underwriting standards have swung to the opposite side of the pendulum.

Examples of the structural changes are: 1) recourse is more commonly a necessity; 2) overall debt coverage ratios have widened; and 3) loan-to-value percentages have narrowed. Lenders also appear to be more focused than ever on the four main food groups (i.e. retail, office, multi-family and industrial) and the more specialized lenders are looking to lend on self storage deals. This seems to be happening because lenders tend to better comprehend these assets classes and therefore limit their perceived downside risk.

With the state of the capital markets being what it is today having access to real-time knowledge is crucial to the decision making process. Whether that decision is to buy a property, sell a property or refinance it is important to recognize that it currently is a lenders market. It is a necessity to understand what lenders current requirements are, which lenders are still in the market and how their requirements affect the transaction.

Regardless of whether you are looking for a short-term or long-term loan, most of the initial questions are going to be the same. Lenders are trying to identify the risk, gauge the scope of the risk, engineer ways to hedge the risk and then determine whether the full package is within their range.

This brings us to the topic of recourse. Knowing the financial strength of the borrower, the legitimacy of the story [of the property or properties they are looking to buy or refinance] and the long-term plan with the real estate is the lender’s focus. The better this information is communicated the more focused will a lender be. More than ever the financial capacity and property-type experience of the borrower greatly influences a lender’s terms and desire to “do the deal”. Obviously, the more solid the financial status of a borrower the more interested a bank will be in doing the deal. However, property-type experience and to the story is equally important so only best of class of borrowers and buyers will find market debt-terms today.

Where creative terms and real-time knowledge comes into play is with things like letters of credit, deposit minimums to offset reserve effects and other alternative credit enhancements. These creative terms balance the minimization of risk for the lender while capping the personal exposure of a borrower.

When evaluating a possible transaction; whether it’s buying a property or refinancing an existing property, being able to guarantee the loan with a healthy, liquid balance sheet is of utmost importance. The more solid the borrower, the more predictable the outcome will be; and predictability is always a key component to a successful deal. Obviously a strong guarantor and solid deal-merits coupled together will guarantee that maximum loan dollars are achieved.

Being educated to market realities is a prerequisite and finding an advisor that can guide your expectations is a way to achieve this. Gone are the days of broker’s taking on an assignment hoping it will transact/consummate and not drilling down to the real merits of the deal to gauge the likelihood up front. Credibility is a commodity in this market and the communication of honest assessments and expectations are the obligation of the brokers to protect not only their credibility but, more importantly, the credibility of their client’s.

Created and distributed by HFF Self Storage, formerly Storage Investment Advisors (SIA), Market Watch is a monthly electronic newsletter that provides storage owners and investors with brief highlights and analyses of the latest market developments, investment real estate activity and financing news. Our hope is that this information, interpretation and analysis will help you better understand current self storage real estate and financial conditions, and support your investment decisions.

If you have a story idea for a future issue of Market Watch, or want to learn about a particular aspect of the self storage real estate or finance industry, let us know! Please forward your ideas and suggestions to Market Watch Editor Jessica Mandel at jmandel@hfflp.com or 713.376.2216.

Contact us to learn how we can assist with your disposition, acquisition, or financing needs.

©2008 Holliday Fenoglio Fowler, L.P. HFF (NYSE: HF) operates out of 18 offices nationwide and is a leading provider of commercial real estate and capital markets services to the U.S. commercial real estate industry. HFF offers clients a fully integrated national capital markets platform including debt placement, investment sales, structured finance, private equity, note sales and note sale advisory services and commercial loan servicing.