From the desk:Self-Storage (Passive Hold)

Underwriting a bridge loan on a lease-up storage facility, the stabilization assumption is doing all the work

Looking at participating in a bridge position on a facility that opened in late 2023. 62,000 rentable square feet, currently 61 percent physical occupancy, targeting stabilization at 88.

The request is $5.9 million against a stabilized value the sponsor puts at $9.4 million, so about 63 percent of stabilized value and roughly 78 percent of current as-is. 24 months with two six-month extensions at 25 basis points each. Interest reserve funded for 18 months.

The sponsor's lease-up assumption is 42 net units per month against a current trailing six of 27. That's the entire deal. At 27 they don't hit 88 before the extensions run out, and the interest reserve empties around month 19 with occupancy somewhere in the mid-70s.

I've stress tested it three ways. At 30 net per month they stabilize at month 26, inside the first extension, and the reserve gap is about $310,000 which the sponsor would have to cover out of pocket. At 27 flat the gap is $520,000 and they're at 83 percent at month 30. At 35 the deal works comfortably.

The sponsor's argument for the jump from 27 to 42 is that they cut street rates 11 percent in Q3, added a second competitor's worth of paid search spend, and that the trailing three is 33 not 27. That's true. The trailing three is 33.

What I keep circling is that they bought the velocity with rate. Lower street rates on a lease-up facility means the in-place rate curve at stabilization is below what the stabilized value assumes. I asked for the exit valuation rebuilt at actual achieved rates and got a spreadsheet that still used pro forma rates.

Options on my desk: pass, participate with a lease-up milestone covenant and a sponsor guaranty on the reserve gap, or take a smaller piece and stop worrying about it. Leaning toward the second but the covenant only helps if the remedy is worth exercising.

Answer

1luis_carrera Get yours

The covenant is worth less than you think and I'd size the deal on the reserve gap instead.

A lease-up milestone covenant on a facility at 61 percent has one realistic remedy, which is that you take it over at 70-something percent occupancy in a market you didn't pick with a lease-up you now have to finish. Nobody wants that outcome and the sponsor knows nobody wants it, so the covenant doesn't change their behavior. It gives you a negotiating position in month 20, which is worth something, just not what a covenant usually costs to get.

What actually protects you is the reserve. Your three cases give a gap between $310k and $520k. Make the sponsor fund the top of that range into a controlled account at closing, not a guaranty. A guaranty is a lawsuit in 2028. Cash in an account is cash in an account. If they won't fund $520k, that tells you what they think of their own 42.

On the rate curve, @fathom is right that you have to rebuild it, and I'd go further. Run the exit at the achieved blended rate with no growth at all and see whether $9.4 million survives. Storage rent growth slowed materially heading into 2026 and the recovery everyone expects is tied to home sales thawing, which is not a thing you or the sponsor controls. If the deal only works with rent growth in the exit, you're lending against a housing-market forecast.

Smaller piece plus full reserve funding is where I'd land. If you can only get one, take the reserve.

9 replies

1wendy_park48CapitalPRO7

Pull the actual signed leases from the last 90 days and build the rate curve yourself. If they cut street 11 percent and the trailing three jumped to 33, the new cohort is priced below the old cohort, and the stabilized rent roll is a blend that's lower than either the pro forma or the current in-place. Then there's the second problem. Discounted lease-up tenants get an ECRI six or twelve months in, and move-out risk on a rate-motivated cohort is higher than on a life-event cohort. So the stabilized 88 has churn baked in that the model probably shows as a static number.

3jordan_ellis2ActivePRO6

Naive question from someone who's never underwritten a bridge. If the trailing three really is 33 and rising, why is 42 the number instead of 36? Where does 42 come from other than what the deal needs?

2samantha_ruizAU4APRO6

@pike that's usually exactly where it comes from. Back-solved.

1dmitri_v6CapitalPRO6

On the extension options, check what the conditions precedent to extension actually are. A lot of these documents let the borrower extend on payment of the fee and no event of default, which means at month 24 with occupancy at 74 percent and no default, they extend and you carry. If the extension is conditioned on hitting a debt yield or an occupancy test, the whole picture changes. I've seen both drafted and the difference isn't obvious unless you read the conditions list line by line.

1mikeoconnell7SP2APRO6

The paid search spend point deserves more attention. If velocity is being bought with marketing dollars as well as rate, that spend is an ongoing operating cost at stabilization, not a lease-up cost. Is it in the stabilized expense assumption or is it sitting in a lease-up budget that disappears at month 24?

3monica_tran3SF4CPRO6

@lantern that's the one I'd check first. Everyone models marketing as temporary and it never is.

4nataliehsuSO1BPRO7

Reading this to learn. The idea that you can buy occupancy with price and end up worse off is not something I'd have understood a month ago.

1aaron_fitz10 Get yoursPRO6

@windlass's point about lending against a housing-market forecast is the sentence I'd put at the top of the memo. If the exit needs a thaw in home sales to work, say so out loud in the file so nobody pretends later that it was a rate risk.