Is Seller Financing Creating Buying Opportunities in Value-Add Self Storage?

Based on recent broker feedback, around 50% of all current value-add self storage acquisition opportunities offer the buyer some component of owner financing. This financing structure was unheard of just a couple of years ago when bank financing was readily available and inexpensive.

Self storage owners are uniquely positioned to provide seller financing because of the lower leverage most Mom-and-Pop owner-operators carry on their facilities. Some have owned their storage portfolio for decades and have been extremely conservative with financing, concentrating less on leverage and more on the cash flow generated year after year.

HOW SELLER FINANCING RESHAPES VALUE-ADD SELF STORAGE ACQUISITIONS

Providing seller financing has advantages for both parties. Sellers who know their property very well are comfortable with the cash flow and their first lien position in the asset. They don’t hesitate to provide reasonable leverage, knowing that if the buyer defaults, the asset could be recovered at 60% or 65% of the value. Sellers can also spread the income over multiple years, avoiding a one-time tax hit in the year of sale.

A seller who can provide more attractive financing than what is available on the open market increases the surety of execution from would-be buyers. With the debt markets in turmoil, many buyers will need help finding suitable debt that achieves acceptable returns. In other words, offering seller financing can take an asset from unsellable to sellable.

UNLOCKING BUYING POTENTIAL IN VALUE-ADD SELF STORAGE INVESTMENTS

There are transactional advantages for the buyer as well. Buyers can avoid a bank's sometimes arduous loan approval process. The buyer also removes the cost of negotiating a set of loan documents, removes appraisal risk, and is less likely to pay expensive loan fees. Sellers have greater flexibility with terms like interest-only periods, prepayment penalties, and loan guarantees, whereas banks are typically much more rigid.

The past two years have been the most robust and lucrative self storage sale market in the history of the asset class. Timing isn’t always perfect for sellers, and when they can be creative, it increases the value and marketability of their assets tremendously. Seller financing is one of the ways we see this occurring in today’s self storage value-add market.