Fixed-rate debt on your facility now costs more than floating, and the gap is wide. Inside Self-Storage put the 10-year Treasury at 4.96% and SOFR at 3.62% on October 21. On an assumed $4,000,000 loan, that spread is $53,600 a year of extra interest for locking the rate.
The capital stack is how that loan fits with the rest of your money. Sponsors usually work with four layers, stacked by who gets repaid first and who takes the loss first.
The four layers, bottom to top
Senior debt is the first-position loan. It's repaid first, so it's the cheapest money and the most restrictive.
Mezzanine debt sits behind the senior loan. It covers part of the gap between what the lender will fund and what you want to put in, at a higher rate.
Preferred equity is investor money that gets its return before the common owners do, but doesn't hold a lien on the property.
Common equity is the owners' cash. It's paid last and takes the first loss.
Scott Meyers, who wrote the Inside Self-Storage piece, says the mechanics of those layers still work the way he described them in 2021. In his words, almost nothing else from that article does (Inside Self-Storage).
What the rates look like now
Meyers gives the federal funds target at 3.50% to 3.75%, SOFR at 3.62%, the 10-year Treasury at 4.96% and the 2-year at 4.63% (Inside Self-Storage). He dates them only as of his writing, so pull live numbers before you act on them.
The 10-year sits 0.33 points above the 2-year. The curve slopes upward again after years of inversion, the article says, and Meyers says that overturns an instinct many sponsors built in 2021 (Inside Self-Storage).
What the gap costs on a 50,000 NRSF facility
Here's a worked example. Swap in your own loan and your lender's quote.
The assumptions are ours, not quotes. A 50,000 NRSF facility is 90% occupied and averages $1.20 a foot a month, so it collects $648,000 a year. It carries a $4,000,000 interest-only senior loan. The lender charges 2.00 points over its benchmark, whether that's the 10-year Treasury or SOFR. The 2.00 is arbitrary. With equal spreads, the difference between the two loans is just the gap between the benchmarks, whatever the spread.
| Loan type | Benchmark | Rate | Interest a year |
|---|---|---|---|
| Fixed, priced off the 10-year | 4.96% | 6.96% | $278,400 |
| Floating, priced off SOFR | 3.62% | 5.62% | $224,800 |
Fixed costs $53,600 a year more at today's benchmarks. That's 8.3% of the facility's gross rent, or about $1.07 per NRSF.
Each point of rate on this loan is worth $40,000 a year. Divide $53,600 by $40,000 and you get 1.34 points, which is exactly the distance between the 10-year and SOFR. So a floating loan stays cheaper only while SOFR averages less than 1.34 points above where it is now.
Put that question to your own deal. Can the facility's rent roll absorb a 1.34 point rise in SOFR? If it can, floating saves money. If it can't, the $53,600 buys you a payment that won't move.
Real quotes won't match this. Fixed and floating loans carry different spreads, and floating debt usually comes with a rate cap you pay for. Use the example for the shape of the decision and your lender's numbers for the answer.
What this means for how you stack a deal
Rates are far above the zero-rate market of 2021, so the gap between the senior loan and your equity costs more to fill. Every layer above the senior loan is priced higher than the one beneath it. Meyers says in his intro that the layer most owners ignore is the cheapest one on the board. The text we could read stops before he names it, so read his piece for that part.
Lenders size a loan off income, and income starts at the rent roll. Your lender package should show physical versus economic occupancy side by side. How fast you can move in-place rents matters too, and notice rules set the pace.
What to check this week
- List every loan across your facilities with its balance, fixed or floating, benchmark, spread and maturity date.
- Mark any maturity inside the next two years. Those are the loans exposed to today's pricing.
- Pull today's 10-year Treasury and SOFR from their publishers, not from this article or ours.
- Ask your lender or broker for a fixed and a floating quote on the same balance and term, and the cost of a rate cap.
- Rerun the table above with those quotes. Write down the SOFR rise your facility can survive before debt service coverage gets uncomfortable.
Lenders price on occupancy and rent, and self-storage marketing is how you move both.