By Sascha Zuger

By Sascha Zuger

inancial tools such as bridge loans can help storage businesses reach the next level by providing cash flow to bridge the gap between acquiring a new property and achieving lease-up, reimagining management of an existing facility with a plan to improve rents and occupancy or take advantage of moving into upcoming development phases without waiting for initial phases to show profits.

“In self-storage, the lease-up phase can be a challenging financing hurdle,” says Alex Burnam, senior vice president of real estate acquisitions at StorageMart. “Once a facility has its certificate of occupancy, it often takes 18 to 36 months to reach stabilized occupancy levels that permanent lenders require.”

Bridge financing is designed for that interim period, giving owners the runway to execute their marketing and operational plan before locking into long-term debt.

“Our focus is specifically on properties that are already built and owned but still in lease-up,” says Burnam. “By targeting that window, we can underwrite based on market fundamentals and a credible path to stabilization, rather than construction, expansion, or acquisition risk.”

A trade-off is that bridge loans are shorter term and typically carry higher rates than permanent financing.

“The main benefit is access to capital during a stage when many conventional lenders step back,” says Burnam. “Bridge lenders can be more flexible on occupancy requirements and repayment structures, which helps align financing with the realities of a storage lease-up. In our case, we provide non-recourse terms and build the lease-up plan ourselves, as the management company, which can give owners additional confidence.”

Bridge loans work best as part of a clearly defined stabilization strategy with a thoughtfully planned exit to permanent financing down the road.

“Earlier this year, we closed a deal in the New York City MSA for a facility in the early stages of lease-up, sitting at roughly 25 percent occupancy,” says Burnam. “At the time, it was under third-party REIT management and permanent lenders weren’t willing to underwrite the stabilization risk. We executed a non-recourse bridge loan at 73 percent of stabilized value, which allowed the sponsor to pay off their construction debt, fully fund an interest reserve through lease-up, and even return some capital to themselves.”

This type of scenario is the textbook case for this product line in self-storage.

While loan approval might depend on a variety of factors, including many not within a borrower’s control, there are some things you can do to improve your chances.

“Clearly demonstrating that there exists sufficient demand in the market to merit the expansion from a rent and occupancy perspective is a first step,” says Shawn Hill, principal at The BSC Group, LLC. “The borrower should be able to provide the lending community with ample evidence that market occupancy is robust with limited new competition, market rents that justify the economics, and reasonable assumptions on leasing up the expansion.”

Another area to highlight would be the prospective borrower’s qualifications to run a business sufficiently successful to repay the loan.

“The borrower should also be able to convince the lender that they have the financial wherewithal and experience to execute on the proposed business plan,” says Hill. “Demonstrate to the lending community that the sponsor has the management experience necessary to implement the business plan, or supplement with a viable third-party partner that will provide comfort to the lender.”

This could come in the form of bringing on an established outside management company with a positive track record in revamping storage-specific businesses.

“One of the biggest obstacles is the size of a bridge loan, because there’s a lot of work to do for a lender to underwrite projections,” says Steve Libert, founding principal at CCM Commercial Mortgage. “If you’re looking for a small bridge loan, one of the harder things is that your world of potential bridge lenders becomes much, much smaller.”

Generally, lenders will want to see:

• Proforma projections through stabilization,
• Market rent comps and demand analysis,
• A timeline for reaching target occupancy,
• An exit strategy into permanent debt, and
• A detailed outline of the existing capital stack and current cost basis.

“Across the sector, the strongest bridge loan candidates have a clear story to tell on realistic occupancy projections, market data that supports demand, and an operational plan to get there,” says Burnam. “In our case, because we manage the property as part of the process, we generate the proforma, market comps, and lease-up strategy ourselves for clients. That removes guesswork and helps streamline underwriting.

Those who live and breathe in the bridge lending world know there are certain warning signs that might affect approval rates.

“Red flags would be leasing assumptions that are too aggressive, as well as other unrealistic assumptions surrounding construction costs, market rents, and occupancies,” says Hill. “Finally, if the borrower is not aware of other proposed projects in the market, the lender will likely discover that in due diligence and that will likely impact the final outcome.”

Making a good first impression with a presentation package might be the only impression seekers get. Inadvertently peppering the field of potential lenders with a poor representation can sink your chances.

“You need to put together a very professional loan request package,” says Libert. “As a borrower, if you put together your own loan request package, send it out to 10 lenders, and there is something in it a lender is not going to look at favorably or see as a red flag, you just eliminated 10 options from your potential lender pool. You want to put together a package that’s going to increase your chances of getting the loan dollars and the terms that you’re looking for. If you have your head down doing a great job managing your self-storage facility or facilities—that’s your specialty. To suddenly become a financing expert, put together a loan request package that’s going to answer 90 percent of the questions lenders will ask, and present your loan opportunity as a good one—it’s just not realistic when you don’t live and breathe this world every day.”

To be clear, using a broker is not a requirement or absolute necessity, but there are benefits.

“Many borrowers find value in using a broker because they add a lot of value in making sure the potential pitfalls discussed above are avoided,” says Hill. “A good broker will help provide support to highlight the strengths of the deal and premeditate and mitigate perceived weaknesses. Finally, a competent broker will surely expand the list of eligible capital providers who would be likely suspects for the deal.”

John Williamson, director at JLL Capital Markets, who specializes in construction loans, bridge loans, and permanent loans, shares five benefits of opting for a broker to help secure your self-storage bridge loan.

“The environment and the capital markets change quickly, so you want to make sure that you have a ‘market’ deal and that you are not overpaying,” says Williamson. “It’s far more advantageous to go through a broker who is living and breathing the market every day to know whether there is fair market value and make sure that your rate’s current. Credit spreads can adjust very quickly to market fluctuations, and that all goes to your bottom line.”

“From the beginning of the process, we’re underwriting loans very advantageously. We’re always talking to capital, so we know what they want,” he says. “We use specific underwriting standards that we know capital is looking for to enhance the profile of the loan. Our unique underwriting expertise allows us to tailor underwritings and property performance to specific capital partners which can help push dollars, proceeds, terms, structure, etc.”

“We take everything in house, and we run the execution,” says Williamson. “For someone who doesn’t have a lot of human capital and wants to focus on acquisitions and management and not get bogged down with financing, we can take all of that off your plate. We underwrite the property, build investment decks, market it, send reports, find a capital provider, and work with them to get the deal closed and funded. It frees up your capacity to focus on acquisitions and management, so you can delegate your capital markets work to us.”

“A lot of private clients have one great lending relationship, which is great,” he says, “but it’s important to have a diversified bucket of capital to tap into. Lenders can go red light/green light all of the time; you don’t want to get into a situation where your single relationship says ‘Sorry, there’s too much volatility.’ They are on pause, and you have no one else to go to, because you’ve put too many eggs in one basket. We love creating and introducing new relationships, because liquidity is important. You want a diversified deep bench of good capital providers for current projects and for future deals down the road.”

“As issues arise, we help clients work through them,” adds Williamson. “Whether that’s some sort of third-party report, whether that’s some sort of underwriting nuance, whether that’s some sort of property nuance—we help solve problems with capital to make sure your deal gets closed and funded.”

If you feel using the services of a professional works for your situation, it’s important to qualify your broker.

“Possessing a specialized skill set per product type is important,” says Williamson. “All we do is self-storage, and we do it east coast to west coast. Everyone we’re talking to is storage-minded and storage-focused. We know all the capital; we know all the players. You wouldn’t hire an office building broker to go find your bridge loan for your self-storage property. Finding someone who is knowledgeable in the asset type is a huge qualifier.”

Opting for a bridge loan offers benefits such as non-recourse loan proceeds, the ability to self-administer the funds and control the process while avoiding the hassle and expense associated with a conventional construction/draw process and extended interest-only amortization.

“Bridge lending in self-storage plays a very specific role,” says Burnam “It is not a replacement for long-term debt but a tool to get from project completion to permanent financing. The key is matching capital with operational capability. When those two align, the bridge period becomes a strategic step rather than a hurdle.”