25 Jan 2022
During the Great Recession of 2008, financing was hard to secure, even for those with a high net worth and experience. In 2010, the U.S Small Business Administration (SBA) made its programs available to the self-storage industry, which was received with great enthusiasm. The adoption of the program by several lending institutions, some specializing in the programs, has allowed many current and prospective self-storage owners to grow and thrive in the industry.
Like other loan types, SBA loans aren't for everyone. But they have been a way for many people to get into the industry who couldn't otherwise. Self-storage deals are often funded conventionally. Conventional loans can be financed by your community bank or the local branch of one of the big banks. However, some of the requirements of these loans prevent people from getting into the business. This is where the SBA can help.
The SBA has two different loan programs: 7(a) and 504. We will cover each below.
SBA 7(a)
The 7(a) loan program, frequently called the SBA's flagship loan program, is a cash flow-based loan. Therefore, the program's primary emphasis isn't based solely on net worth or the project's loan to value (LTV), like some other loan types. Instead, it is based mainly on the project's ability to pay for itself.
The SBA does not make this loan, nor is the SBA's money used to fund the loan. Instead, the individual bank lends their money, and the SBA guarantees part of the loan against any losses the bank might suffer if the loan defaults. This guarantee is like an insurance policy for the bank and allows for better than standard terms and conditions compared to other loans.
The minimum equity requirement of the program is only 10%. However, since each loan and situation are different, a higher equity requirement might be needed for the loan to work. Compared to the equity requirements that many conventional loans require, the 7(a) program is much more flexible. It has helped many people get into the business who didn't have enough equity to obtain a conventional loan.
There are no financial covenants for a 7(a) loan such as maximum/minimum Debt Service Coverage Ratio (DSCR) or LTV requirements to put added pressure on your business. The only way you can have your loan called is if you don't make your payments.
7(a) loans for self-storage are 25-year fully amortizing loans, meaning that you may never have to refinance and incur the associated extra expenses for closing costs, etc. Some businesses may want to refinance when they are at a point where they are stabilized and have a good solid cash flow because there is usually a local bank that may be able to grant a low-rate conventional loan. This also allows the borrower to possibly take cash out at closing for another SBA loan to grow their business.
Working capital and interest reserves can be added to 7(a) loan requests making them excellent sources of capital for construction projects to help get you to break even as you lease-up. The 7(a) is also a viable option for acquisitions and repairs to an acquired facility.
There is a $5 million cap per guarantor on the 7(a) program. However, some lenders, like Live Oak Bank, can potentially add several million in conventional funds if the project is larger than $5 million. This is called a combo or pari-passu loan, and it is a companion loan with virtually the same terms and conditions as the 7(a) loan. Some banks may not be willing to do this type of loan because it increases their risk and exposure.
Prepayment penalties are required if the loan is paid off in the first three years, but you can prepay up to 25% per year without a penalty. The penalty amounts are 5% for year one 3% for year two and 1% for year three, starting when the loan closes.
There are no origination fees, but there is an SBA fee that is rolled into the loan. There is a formula for calculating this fee, but using a rule of thumb, it is roughly 2.75% of the total loan amount.
This is a recourse loan that requires personal guarantees. Anyone who is at least 20% owner of the project must meet the qualifications required by the SBA. These are:
Some banks may have further requirements such as no bankruptcies, etc.
