Strategies for Navigating Financing in a High-Interest Rate Environment

By Bishesh Shrestha

Financing a storage project during a period of high interest rates can present challenges, but several strategies are available to navigate this situation. Remember that the availability and terms of financing depend on various factors, including your creditworthiness, the specific project details and market conditions. Here are some strategies to consider:

Seller Financing

When negotiating the purchase of a property, consider requesting the seller provide financing if the seller is motivated to close the deal. In a seller financing arrangement, the seller acts as the lender, allowing you to pay them directly over time. Sellers can benefit from providing financing because it enables them to defer capital gains tax on the whole property.

In a seller financing scenario, the seller note should provide better terms than available bank debt to aid with cash flow during the ownership transition. Standby payments or interest-only payments for 12-36 months and a longer amortization of 25-30 years would make seller financing attractive and help with cash flow. 

Loan Structuring

Consider adjustable-rate mortgages or hybrid loans that start with a fixed rate for a certain period before converting to an adjustable rate. A fixed-rate period can provide some predictability and hedge against the rising interest environment. Then, should rates fall, you can take advantage of having the adjustable rates bring your debt service requirements down. 

Government Programs

Government-backed loan programs, such as those offered by the Small Business Administration (SBA) or other local economic development agencies, may be less impacted by market interest rate fluctuations and may offer more favorable terms.

Two SBA products are widely used in the storage industry: SBA 7(a) and SBA 504 loans, which can be used for acquisitions, development, startup, expansion, and debt refinance. The SBA 504 loan program has a fixed rate that locks your rate for 25 years. Talk to an SBA-preferred lender, like Live Oak Bank, to determine which SBA loan program fits you best.

Explore Lenders

Look beyond traditional banks and explore alternative lenders, private equity firms, or real estate crowdfunding platforms. They may offer more flexible terms or have different risk appetites. Keep in mind that not all lenders have storage expertise.

Interest Rate Hedging

Investigate interest rate hedging strategies, such as interest rate swaps or caps. These financial instruments can mitigate the risk of rising interest rates by providing a degree of interest rate protection.

An interest rate cap is like an insurance policy a borrower purchases to protect against interest rate increases. If borrowers believe that rates will continue to rise during their loan term, they can purchase an interest rate cap from a third-party provider to limit the interest rate for a specific term. Sometimes, lenders will even require borrowers to purchase an interest rate cap on a floating rate loan to limit repayment risk in a rising interest rate environment. The rate cap limits the interest the borrower must pay if the index portion of the interest rate rises above a certain amount, known as the “strike rate.” The interest rate cap provider will price the cost of the interest rate cap based on a forward curve, which is a projection of an index’s future rate.

Another option for borrowers to hedge against rising rates is to purchase an interest rate swap from a third-party provider. Interest rate swaps allow eligible borrowers to swap their variable rate for a fixed rate over a specific period. The provider will make the floating rate payments, giving the borrower a fixed interest rate in exchange. 

Interest rate caps and swaps may benefit borrowers if rates continue rising. However, swaps and caps may pose a risk if the rising interest rate environment is temporary, and rates decline instead. These products can also be complex, so talk to your lender about whether these options fit you well.

Joint Ventures and Partnerships

Consider forming partnerships or joint ventures with other investors or developers. By pooling resources, you can put more equity in the deal, so you reduce the amount you need to borrow at higher rates and can potentially secure more favorable financing terms by reducing leverage. Partnerships also enable you to share the project’s risks, but remember that it also requires sharing the rewards.

Development Projects

High interest rates can be a barrier to entry for development projects, causing some to rethink building when the rates are high. Consider breaking your development project into phases, allowing you to secure financing for one phase at a time, potentially mitigating the impact of high interest rates on the overall project cost.

Acquisitions

Implement a value-added strategy demonstrating to lenders how the project will improve over time, potentially increasing its value and revenue. Showing future value could make lenders more willing to finance the project despite higher interest rates.

Please remember that the methods mentioned might only be available or a good fit for some borrowers. Storage professionals can find great opportunities to start or grow their businesses even during high-interest rate environments. It’s a matter of finding the right opportunities, working with a lender that understands the industry and proving yourself to be a strong borrower with a well-defined plan. When assessing an opportunity, conduct thorough due diligence, evaluate the risks and rewards, and consult financial professionals to determine the best financing strategy for your storage project.

Bishesh Shrestha is Senior Vice President of Self Storage Lending at Live Oak Bank. He is a dedicated lender in the self-storage space and has been working in the self-storage industry since 2016. As a senior loan officer, he is responsible for evaluating, qualifying, and structuring, self-storage deals. Bishesh works with borrowers across the country to secure self-storage financing using various loan products (SBA, USDA, and Conventional Bank debt).

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