Self-Storage Myths and Facts
Small Business Administration (SBA) Loans
With the 2010 changes to the Small Business Administration’s (SBA) lending guidelines, self-storage is now eligible for SBA financing and brings immediate liquidity to the asset class
It’s anticipated both smaller facilities as well as ones in secondary markets will accrue the most benefits, given that before now, these two groups have typically only been able to secure financing from smaller, local lenders. The primary reason for the change to the lending requirements was that an analysis of the self storage industry found that the majority of operators were active owners/managers of the facilities. SBA loans are not available for passive investments.
Because the SBA program is so new to the self storage industry, it’s natural to have questions about program eligibility and how the process works. Additionally, there are a number of misconceptions about SBA loans that lenders are eager to put to rest.
MYTH: The United States government is the Lender.
FACT: Lenders who fund the loans receive a partial guaranty provided by the government. This guaranty allows SBA-approved lenders to offer financing options to borrowers and industries that may otherwise have difficulty securing a conventional loan.
MYTH: SBA Lenders are in short supply.
FACT: There are hundreds of SBA lenders in the United States, but few specialize exclusively in SBA lending.
MYTH: Debt refinance is only permitted under SBA lending program 7(a) and not SBA 504, the two programs available for self storage.
FACT: The 2010 Jobs Bill (Small Business Jobs Act) made refinancing eligible under the SBA 504 program, but for a limited time frame and with certain specific qualifications. The two programs are really designed for different borrower types.
SBA 7a is designed for borrowers who have multiple uses of proceeds (real estate, equipment, working capital, etc.), who typically have a loan-to-value (LTV) in excess of 90 percent, want to refinance, or have a shorter holding time frame. SBA 7a is a variable-rate program with a three-year prepayment penalty, whereas part of the SBA 504 loan is a 20-year fixed-rate bond, which carries a rather steep 10-year prepayment penalty.
SBA 504 borrowers typically have a long-term holding period, a single use of proceeds (real estate or equipment purchase), and will sacrifice flexibility for an attractive long-term fixed rate. In short, 7a borrowers will sacrifice interest-rate volatility for flexibility and the ability to have higher leverage and multiple use of proceeds. SBA 504 borrowers sacrifice flexibility and limited uses of proceeds for a long-term fixed rate.
Below are general terms of the SBA loans in the market as of April 2011.
- 25 year fully amortizing terms
- Typically floating rate
- 80 to 85% LTV
- 1.25 DSCR
- 5MM Max loan amount 7a
- 12MM Max loan amount 504 lender takes 50% of loan
- 2.75 over Prime or fixed between 6 and 7% for 5 to 25 years
- All 20% owners and entities need to guarantee the loan
- Life Insurance required (50% of Loan amount)
- 1.25 -1.35 DSCR Global Cashflow Required
- Corporations can not have a net worth over 15MM or profit over 5MM
- Individuals can not have a liquidity in excess of loan amount
