SBA loan guidelines were changed recently to allow self storage/mini storage or mini warehouse businesses as an eligible business type.
Previously self storage facilities were only eligible if more than 50% of the business revenue came from sources other than monthly rents or from what the SBA considered “sufficient services.” For instance, a U-Haul Self Storage business with a mini storage and a solid rental business had a decent chance at being eligible under the old guidelines.
100% Financing (creatively): See Update #2 at bottom of this post re: how we recently structured the refinance and acquisition of 3 facilities with (effectively) 100% financing.
Businesses with “Passive Income” Now Eligible
The new SBA guidelines now say that some businesses with “passive income” (i.e. rental income) are eligible and this now makes most mini storage facilities eligible for SBA financing.
Please note: SBA loans are technically for “owner occupied/owner user” properties and there are some lenders who are unaware that ministorage properties are SBA eligible and there are others who still consider them as investment properties regardless of what SBA says.
Furthermore, of the lenders that are active some are still requiring larger down payments than others and some will not allow a facility that is run by a management company or a local on-site manager, but there are lenders who will offer financing with as little as 10% down and/or to businesses where the owner is NOT the manager.
The old “passive income” guidelines singled out executive suites, shopping centers, flea markets and mobile home parks as well as self storage facilities as ineligible unless they provided “sufficient services.” Some of these business types are now eligible under the new rules so we will see if the SBA or lenders will embrace them or not. (See update and comment below)
SBA loans are considered “recourse” because they require a personal guarantee from the borrower, but there are other non-recourse self storage loan options with fixed rates of up to 10 years with a 30 year amortization (if you are borrowing $3 million or more).
The loans require a “bad boy carve out” for the owner of the borrower and can typically be done up to 75% loan to value and with cash out and with very attractive rates.
Refinance or Purchase of Multiple Properties Now Possible
In addition to mini storage businesses now being eligible there has also been a change in maximum SBA eligibilty which means that owners of multiple mini warehouse facilities can now refinance or purchase additional facilities.
Specifically, the maximum SBA eligibility is now $5 million for “regular” loans and $5.5 million for green or energy efficient loans.
This is an opportunity for the owners of mini warehouse facilities…
Let’s say you currently have an SBA loan of $1.5 million on a mini storage facility and you have a balloon coming due. Under the new guidelines you could refinance the current loan into a long term (possibly 20 to 25 year) 7a or 504 loan and still have $3.5 million of SBA eligibility available for the refinance or purchase of other businesses. This is significant news for any business owner either trying to improve cash flow or acquire other businesses and there is probably no better time than now for a successful (”approvable”) business owner to be out looking for bargains on commercial real estate.
Yesterday I spoke to the owner of a self storage business who is doing just that. He wants to refinance his current business which is suddenly SBA eligible and he wants to acquire a competitor who is struggling and wants out. And he will still have eligibility “left over” for another property.
I don’t think that people fully appreciate yet what a significant opportunity the new loan sizes and increased eligibility really are…and it is obviously not just big news for the self storage industry but ALL SBA eligible businesses.
The SBA updated their guidelines re: certain passive income properties:
Recreational vehicle parks (RV Parks), Campgrounds, Marinas and similar types of businesses are eligible for SBA financing if 50% or more of the business’s revenue for the previous year was from visitors who stay for 30 days or less at a time. If the business is a start-up, the applicant’s projections must show more than 50% of the business’s revenue will be derived from visitors/customers who stay for 30 days or less at a time.
Many lenders will still pass on these types of properties due to inexperience with (or lack of comfort with) the property type, but some loans will get done.
Update #2: I thought it might be helpful to copy an e-mail I recently sent to a commercial real estate agent inquiring about SBA financing:
Benefits of SBA Financing:
1. High leverage – acquisitions typically require at least 10% down/equity for experienced owners under the 7a program and 15% with the 504, but we recently assisted a client purchasing a facility with what ended up being 100% financing. He was purchasing 2 bank owned properties and refinancing another and we used the equity in the property he owned in lieu of a large down payment on the bank owned properties, so he came in with 10% down on the purchase of the 2 facilities, but our lender gave him back that same amount in working capital at closing…effectively creating 100% financing. If your client has never owned a facility before then he or she will likely need an extra 5% down to satisfy a lender.
2. Long term amortizations – the 7a is one loan of 25 years. The 504 is 2 loans – a first (typically) 25 years and a second of 20 years.
3. Both the 7a and the 504 are fully amortizing loans – no balloons.
4. Lenders are more willing to lend because of the SBA guarantee and the profitability of these loans.
5. 7a loans are really “cash flow” loans, so if the property for sale has solid established cash flow then the odds for approval are very good assuming the borrower is qualified.
The Negatives of SBA Financing:
1. Personal Guarantees are required for both loans and in the case of the 7a, IF the lender does not feel like they have enough collateral they will look to latch onto other assets of the borrower (possibly their home).
2. Fees – there are “guaranty fees” and other fees due with SBA financing that you do not have with conventional loans. (Silver lining is they are financeable).
3. The 7a is frequently an adjustable rate pegged to Prime - especially if the loan request is not “vanilla,” because anything creative or at a high loan to value is typically going to get done by a variable rate lender. (Silver lining: Prime is low and should remain low for at least a few years and the 7a only has a 3 year prepayment penalty that declines year over year – 5/3/1).
4. The 504 has a 10 year declining prepayment penalty on the second mortgage. The first mortgage will also typically have some type of penalty – typically a 5 year declining. (Silver lining: the rate on the second is very low at the moment – approx 4.5% - so it is unlikely that a borrower would need to refinance it, but the penalty would kick in if they sold it…however, the loan is assumable and the prepayment calculation is not as bad as it appears on the surface).
Hope this helps.
Click here for more info about SBA financing.