Softening street rates, increased expenses, capital markets challenges, and an uncertain economy has led to a slow down in self storage sales and acquisitions in 2023 among all buyer types. With the exception of the ongoing Extra Space and Life Storage merger, most of the deals that did happen received little fanfare. However, things may be looking up. Gantry, the largest independent commercial mortgage banking firm in the U.S., just announced that the firm has secured a total of $40 million of financing for the acquisition of four self storage facilities (in separate transactions) as the upleg for a strategic 1031 exchange.
Making a 1031 Exchange
1031 exchanges, which get their name for Section 1031 of the Internal Revenue Code, are being used by savvy investors to swap one real estate investment property for another. When making the swap, capital gains taxes can be deferred since the proceeds of the sale will be reinvested into the new asset. Qualifying for the tax deferral doesn’t rely on the sale and purchase to happen at the same time, however the properties being exchanged must be considered “like-kind” in the eyes of the IRS.
“Gantry has cultivated an expertise in financing self storage assets over the past decade while continuing to educate our correspondent life insurance companies on modern, state-of-the-art deal structures for this specialized asset class,” said Gantry Principal Andy Bratt. “These assets were financed over a period of months during what has truly been one of the most volatile rate climates in a decade, highlighting our platform’s stability and certainty of close provided by our life insurance company lenders. Our creative approach to the acquisitions was critical in completing all four of these transactions in a timely manner.”
Securing Unique Loans
According to the Gantry website, the assets were assembled in a series of individual acquisitions, each necessitating a unique loan. Two were for permanent loans of 7- and 12-years, each with significant interest only periods, and two more were bridge loans featuring extension options and an interest only period. Each loan was secured from Gantry’s correspondent life company lenders – which continue to favor the self-storage asset class – by Bratt and Senior Director–Irvine and Los Angeles Amit Tyagi. The transactions were made on behalf of the borrower, a multi-generational private family.
Tyagi says that each loan requirement was reviewed closely, and that the team compared them against more than 100 other lender programs in order to secure the best financing. “All the assets had some level of lease-up to be achieved, but the yield curve inversion made short-term traditional bridge financing very expensive,” says Tyagi. “Further, the Fed was rapidly raising interest rates making floating rate bridge loans unattractive. We were able to structure each loan with a fixed rate execution. Two of the loans were permanent loans, structured to accommodate lease-up, that provided rates in the high 5% to low 6% range and staggered maturities to help offset future refinance risk. We were proud of finding stable executions that were very well suited to the Sponsor’s business plans during an extremely unstable market.”
Read more about the current state of uncertainty in the self-storage industry.