SBA Loans Now Available for Self-Storage Projects

Posted by Terry Campbell on Dec 18, 2010 12:00:00 AM

It seems to be common knowledge that the greatest contributor to the slowdown in the self-storage business during the current recession has been the lack of traditional financing. I use the word “traditional” to describe what self-storage owners came to expect from their lenders, i.e., 90 percent or better loans, long terms and low monthly payments.

But anyone in the business realized early on that these types of loans were destined to disappear when banks got in trouble with bad mortgage loans and regulators tightened the screws on financing. Owners and prospective owners were forced to the sidelines when lenders required much higher down payments (sometimes as high as 50 percent or more) and less liberal terms. This scenario has resulted in the toughest stretch the storage industry has experienced since the business started in the late sixties. And it’s not over yet.

BUT, there is some good news which may reveal some light at the end of the recession tunnel, at least for the self-storage industry.

U.S. Small Business Administration Steps Up

Recent legislation was passed that recognizes the self-storage asset class as an eligible business type for the SBA’s lending facility. Effective October 2010, the SBA reclassified self-storage properties for certain acquisition and financing scenarios. In effect, the SBA has changed the rules for “passive income” properties, such as self-storage, so they now qualify for SBA financing.

How does it work for the owner? There are two pieces to the puzzle:
1. Understanding exactly what programs the SBA is offering
2. Knowing who the owner needs to deal with as an underwriter who is authorized to handle the loan on behalf of the SBA anywhere in the United States

The SBA Programs

The SBA offers two programs for storage owners:

1. SBA 7(a) Program – These loans are designed for owners who want a construction loan to add to an existing site, purchase a facility or who are interested in refinancing an existing facility.

Long terms (up to 25 years) and lower monthly payments.

$300,000 to $5,000,000 loan amounts. (And now there are higher loan amounts available and higher eligibility limits.)

Financing up to 90 percent, which is backed by the SBA to reduce risk to the lender. (A minimum of 10 percent equity is likely required in most cases.)

Any loan must be personally guaranteed.

The SBA fee of .50 percent has been waived.

Finding an authorized SBA Preferred Lender – If you’re serious about moving ahead with your self-storage plans, you should get in touch with a reputable building manufacturer.

They will put you in contact with a commercial lender that is authorized to make loans on behalf of the SBA, which will speed up the paperwork process. Another approach is to consult your local bank. It is likely they are participating in the SBA programs, and, if they are not, they will tell you who is.

2.  SBA 504 CDC Program – This is financing for new construction and new sites, and the loan amount can include land costs. That said, new construction loans may still be difficult at this point in time since lenders are much more willing to fund refinances, acquisitions and expansions of profitable existing business in the near term. You should contact the CDC (Community Development Corporation) to get started with this type of loan. The CDC is associated with the SBA and will work with a lender to fund your project. Visit their site for more info.

The SBA fee of .50 percent has been waived.

There is now the beginning of a two-year window allowing the 504 program to be used for refinancing. Please note: The SBA has not yet released their rules for the 504 program refinancing, but the hope is that new rules will be in place by January 2011.

All of the information I have outlined suggests that now is an opportune time for owners to apply for a loan given that it typically takes 30 to 60 days to close, and the fee waivers could expire by the end of the year if not sooner.

The past few years have been difficult for our industry because finding affordable financing has been almost non-existent for the majority of owners. And financing is the critical element for any developer. Perhaps with the new SBA loan programs, we’re seeing the break we have been looking for that will help get owners back on track so they can get on with their self-storage plans.

Terry Campbell is Vice President of Sales & Marketing for BETCO, the leading single-source manufacturer of metal self-storage buildings.