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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.
- 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.
- 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:
- Women, Minority, or Veteran Owned: The SBA likes to promote business ownership for these groups. Many of the project that I work on are able to qualify under this policy goal.
- Revitalizing Economic Development Areas: Your project may qualify under this policy goal if you are doing a substantial repositioning of the property and the business. Of course that assumes that your property is within an economic development area.
- Reducing Energy Consumption: This is one that some crafty investors have been taking advantage of the SBA 504 program. I was just speaking with an individual who got a project qualified by adding solar panels to the top of an existing facility.
- Rural Development: This goal is one of the most obvious if your area is considered rural.
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.