Three loan limits on one store with no leases, and why the lender's question is what the rent roll earns at the price on the website.
A lender sizes a self-storage loan at the lowest of three limits: a share of value, a multiple of interest cover and a minimum debt yield. On an illustrative store worth £18,511,776, a 60 per cent LTV would allow £11,107,066, but a 2.00x interest cover test at 6.5 per cent caps the loan at £8,899,892, 48.1 per cent of value. Mark the in-place rents down to the street rate, as a careful lender will, and the loan falls to £7,857,360, 42.4 per cent.
Worked in full in Self-Storage Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A stabilised store with 60,000 sq ft of net rentable area. Its customers pay an average in-place rate of £28.50 per sq ft a year, 10.5 per cent above the £25.80 the website charges new arrivals, because existing customers have absorbed rate increases since they moved in. Every figure is illustrative.
| Input | Value |
|---|---|
| Net rentable area, sq ft | 60,000 |
| Occupancy | 89% |
| In-place rate, £ per sq ft a year | 28.50 |
| Street rate, £ per sq ft a year | 25.80 |
| Other income (insurance, retail, fees) | 60,000 |
| Fixed operating costs | 330,000 |
| Management fee, share of revenue | 6% |
| Cap rate for value | 6.25% |
| Maximum LTV | 60% |
| Minimum interest cover (ICR), interest-only | 2.00x |
| All-in interest rate | 6.5% |
| Minimum debt yield | 10% |
1. NOI and value on the rent roll.
Rent = 60,000 × 89% × £28.50 = £1,521,900. Revenue with other income = £1,581,900.
NOI = £1,581,900 × (1 − 6%) − £330,000 = £1,156,986
Value = £1,156,986 ÷ 6.25% = £18,511,776, about £309 per sq ft
2. The three limits. Each one solved for the loan.
LTV loan = 60% × £18,511,776 = £11,107,066
ICR loan = NOI ÷ ICR ÷ rate = £1,156,986 ÷ 2.00 ÷ 6.5% = £8,899,892
Debt yield loan = NOI ÷ debt yield = £1,156,986 ÷ 10% = £11,569,860
Excel: =MIN(LTV*Value, NOI/ICR/Rate, NOI/DY)
The interest cover binds. At 6.5 per cent, 2.00x cover on a 6.25 per cent cap rate allows only 48.1 per cent of value, whatever the term sheet says about LTV. The general method is in maximum loan amount from LTV, DSCR and debt yield; what is particular to self-storage is the NOI that goes into it.
3. The rent roll has no leases. An office tenant paying above market is bound by a lease. A storage customer paying £28.50 is bound by nothing: each one who leaves is replaced at £25.80, and the in-place premium decays as the customer base turns over. A lender that wants the loan to survive a change of operator, or a price war with a new store down the road, re-underwrites at street.
Street NOI = (60,000 × 89% × £25.80 + £60,000) × 94% − £330,000 = £1,021,457
ICR loan = £1,021,457 ÷ 2.00 ÷ 6.5% = £7,857,360
| NOI basis | NOI | ICR loan | Debt yield loan | Maximum loan | LTV |
|---|---|---|---|---|---|
| In-place rent, 89% | 1,156,986 | 8,899,892 | 11,569,860 | 8,899,892 | 48.1% |
| Street rent, 89% | 1,021,457 | 7,857,360 | 10,214,568 | 7,857,360 | 42.4% |
| Street rent, 82% | 919,598 | 7,073,834 | 9,195,984 | 7,073,834 | 38.2% |
Moving from in-place to street takes £135,529 off NOI and £1,042,532 off the loan, both 11.7 per cent, more than the 9.5 per cent cut in the rate (£2.70 on £28.50) because fixed costs do not fall with the rent. Add a stress of seven points of occupancy and the loan is £7,073,834.
| Interest rate | ICR loan |
|---|---|
| 5.5% | 9,285,971 |
| 6.5% | 7,857,360 |
| 7.5% | 6,809,712 |
Now take the loan of £8,899,892 sized on the rent roll, with £578,493 of interest. If the in-place premium washes out, cover falls from 2.00x to 1.77x and the debt yield from 13.0 to 11.5 per cent; with occupancy at 82 per cent, cover is 1.59x. Read as occupancy, at street rent the store needs 98.3 per cent to show 2.00x and 58.6 per cent to pay its interest at all. A borrower who takes the larger loan has spent the covenant headroom on day one, and the break-even occupancy is the figure to watch.
Debt yield did not bind on any reading here: at 6.5 per cent, 2.00x cover is the same as a 13.0 per cent debt yield. It binds when rates fall, which is why a term sheet carries both.
Asking for 60 per cent of the valuation. The valuation capitalises in-place NOI, the cover test divides it by an interest rate higher than the cap rate, and the two meet well below the headline LTV. The second mistake is to treat the gap between in-place and street rate as a lease premium that will be collected for years. It is an operating record, collected only while the operator keeps raising rents and customers keep staying, and a lender is right to ask what the loan looks like without it.
The book builds the rent roll from cohorts of customers rather than leases, and the free workbooks for this case show the in-place to street gap on its own store, line by line.
Term sheets lead with an LTV, but read the cover test first. On the illustrative store, a 60 per cent LTV would allow £11,107,066, while a 2.00x interest cover at 6.5 per cent allows only £8,899,892, 48.1 per cent of value. When the interest rate is above the cap rate, the cover test, not the LTV, usually sets the loan.
Because there are no leases. A customer paying an in-place rate above the website price can leave this month and be replaced at the street rate. On the illustrative store the in-place rate is 10.5 per cent above street; marking it down cuts NOI by £135,529 and the maximum loan by £1,042,532, both 11.7 per cent.
Solve the NOI the covenant needs back into occupancy. On a loan of £8,899,892 at 6.5 per cent, the illustrative store at street rent needs 98.3 per cent occupancy to show 2.00x cover and 58.6 per cent to cover its interest once. A loan sized on in-place rent starts life with its covenant headroom already spent.
This article is one calculation from Self-Storage Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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