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Qualifying Self Storage Properties for SBA 504 Loans

Example of an older, urban self storage facility.
Image via Wikipedia

Written by: Joseph Cacciapaglia

Does Your Self Storage Project Qualify for an SBA 504 Loan?

Since writing ‘SBA Financing for Self Storage’, I’ve received lots of questions regarding the SBA 504 program.  Many borrowers would like the benefits of the higher LTV and long term fixed rates, but they don’t believe that they would qualify.  Many borrowers have been told that they don’t meet the SBA’s job creation criteria so they cannot use a SBA 504 loan.  Other borrowers believe that their business is too large, or that the SBA 504 program will only work for very small self storage facilities.  I’m not sure where all of the misconceptions about this loan program are coming from, but I’m guessing it’s from lenders who are trying to push other products.

Who Can Qualify?

There are two very simple tests that I like to use to see if the person or business will qualify as a small business.

  1. Is your net worth less than $15MM?  For many self storage operators, the answer to this question is a yes.  If you are operating only a few facilities, you probably pass this test.
  2. Were your net profits after tax less than $5MM on average for the last 2 years?  Again, this is an easy test for many self storage operators to pass.  Unless you are one of the top owners in the U.S., you are probably eligible.

If you pass these two tests, you’re in.  Now it’s time to see if your project qualifies.

Is Your Self Storage Business Eligible?

This is where things start to get tricky.  There are many different ways that a project can qualify for the SBA 504 program.  Here are some of the SBA’s public policy goals, and how they can be used to qualify your self storage business for financing:

These are just the most common ways for a self storage operator to qualify for the SBA 504 program.  None of these goals require any job creation.

How Much Can You Borrower?

This is probably the most misunderstood part of the SBA 504 program.  Many of the borrowers that I speak with believe that if they need more than $5MM, then they aren’t eligible.  That simply is not the case.  Remember that with the SBA 504 program there is a first mortgage and a second mortgage (called a debenture).  The debenture is limited to the lesser of $5MM or 40% of the project cost.  There are some instances where it can be even more, but we’ll ignore that for the moment.  

Assuming that the $5MM makes up 40% of your purchase price, you can purchase a $12.5MM facility using a SBA 504 loan.  However, there is no rule that the debenture must be 40% of the cost.  If your first mortgage lender is willing to make a larger loan, they can.  There are lenders who will make a 65% first mortgage with the $5MM debenture behind them.  I won’t bore you with the math on that scenario, because clearly there are not too many self storage facilities out there that would require such a large loan.

To find out more about self storage financing, click on ‘Financing' above, or apply online.

SBA Financing for Self Storage

self storage
Image by lonely radio via Flickr

By Joseph Cacciapaglia

 Self Storage SBA Loans

SBA financing is one of the most overlooked and misunderstood tools available to self storage owners and investors.  It’s true that there are several restrictions and limitations that come with SBA loans, but there are also advantages.  In today’s environment where leverage is limited, it’s still possible to receive up to 90% financing with an SBA mortgage.  Please note the emphasis on ‘up to‘.  Not all deals will qualify for the full 90%,  but it is very common to see 85% or more today, and deals are closing at 90%.

SBA Programs for Self Storage

There are two main SBA lending programs for commercial real estate, and both can be used for self storage.  They are the 504 and the 7a.  I’ll briefly describe each below:

SBA 504 - With this program, there are typically three parts to the financing package:

  1. First mortgage provided by your bank.  This portion is typically up to 50% LTV.
  2. Second mortgage (debenture) provided by a CDC.  This portion can make up to 40% of the total LTV.  You should not have to contact a CDC separately; your lender can do this for you.
  3. Equity provided by the business.  This needs to make up 10% of the total cost.

The advantages of the 504 program are that the fees are typically lower and the rates are usually fixed.  These loans are limited in size by the amount of the debenture (currently $5MM), but that does not limit the total amount lent.

SBA 7a - The 7a program is a single loan that is guaranteed up to 75% by the SBA.  The maximum amount guaranteed is limited to 75% of $5MM.  Because of this limitation, most 7a lenders will limit their loan amounts to $5MM.  These loans are typically floating rate, although it is possible to have them fixed.  One main advantage to the 7a is that it can be approved quicker than the 504 because there are less moving pieces. 

Qualify for SBA Financing 

Self Storage properties were recently added to the list of approved property types for SBA loans, and the SBA has recently changed their lending limits and other qualifying factors.  So if you have been turned down in the past, it might be time to take a new look.  The main limitation to these programs is that they have to be made to ‘small businesses’.  To be disqualified by this restriction a borrower must have a net worth of greater than $15MM AND must have earned more than $8.5MM in income annually.  Please note that both of these requirements must be met to be disqualified based on this criteria.  In addition to meeting SBA requirements, the actual lender will have underwriting standards of their own.  

Keep in mind that each of lender will also look at your loan differently, even if they are using the same SBA program.  It is possible that one bank or financial institution will turn down your SBA loan application, while another may be excited to make you the loan.  For this reason, it’s important to know which SBA lenders are interested in making loans on self storage, and which are not.  If you have questions regarding SBA loans or you just want to find out where are today, please click on the financing tab above or apply online.