SBA 504 Blog

SBA Loan Requirements & Other Useful Commercial Loan Information

SBA 504 & 7a Loans, Green Commercial Loan Info & An Occasional Burst of Insight

SBA Self Storage Loans

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The following is an overview of some of the many rules and guidelines for SBA loans for self storage facilities:

  • No Down Payment is needed if you are expanding your exisiting self storage business by purchasing a competitor or opening a new location*
  • 10% down payment is the norm if purchasing your first self storage facility or if you are doing a startup, but a recent rule change in August of 2023, now makes it possible to get a self storage business loan with no down payment IF the seller of the facility is willing to hold the usual 10% down payment on “full standby” for 2 years. See below for other sources of down payment – including money that is borrowed) and see this post: full standby seller note to understand seller held standby debt.
  • “Good” credit (ideally mid 600’s or better, but there is technially no minimum credit score and credit quality is more important than score)
  • Solid “regular” job/consistent income or “enough” assets/liquidity to sustain you for awhile
  • Some type of experience to give a lender a level of comfort that you have what it takes for successful self storage ownership
  • 10% down on ground up construction/start up unless loan is for expansion of existing/cash flowing self storage business, in which case 100% may be possible

*in order to get 100 percent self-storage financing, you must have owned your existing facility/business for long enough to show you are a capable and profitable owner.

SBA Self Storage Loans

SBA Loan for Self Storage

SBA self storage loans are primarily used by borrowers to get into the self storage business with the smallest down payment possible.

In fact, SBA loans in general are all about leverage and flexibility.  It is one of the main reasons SBA loans exist and in the case of self storage, SBA loans can be an impressively good value, although like most loans they are not perfect.

SBA Self Storage Loans: Guidelines, Positives & Negatives:

  1. Ten percent down of the “Total Project Costs” (land + construction + contingency + ramp up reserves + closing costs + SBA Loan guarantee fee, etc.) is required for start-ups/ground up construction, but the down payment can be borrowed as long as you can prove you can afford the payments on the borrowed money from another source of income, including income from a spouse.
  2. If you are building from the ground up or doing a major expansion or building rehab, you can roll into the loan enough working capital to make the payments for the first few years. (Not many lenders offer this much working capital/interest carry, but it is a very significant benefit to using SBA self storage financing with some of the better lenders).
  3. For ground up construction using the SBA 7a program, the facility must start making money within 2 years of Certificate of Occupancy per SBA guidelines.  The SBA 504 program which is typically used for larger projects does not have this requirement, but a lender will need a level of comfort as to why it may take longer.  In other words, it can take longer, but lenders will need to understand why.
  4. Your personal credit needs to be good – especially recently, but some lenders will make SBA loans to borrowers with a previous bankruptcy with the right explanation.
  5. You DO NOT need self storage industry experience to get a loan.
  6. Gifts are allowed.
  7. Funds from investors (friends, family, business partners) are allowed as long as you are putting in enough of your own cash.
  8. The seller of a facility (or of the land in the case of new construction) can hold a loan of standby that can be counted towards your equity or down payment.  The key is the loan must be on “full standby” – no payments to be made to the seller for 24 months – however, especially in the case of the 7a, it is very possible that you would be refinancing just a few years from closing in which case, the seller could be paid off sooner.
  9. Down payment can also come from an IRA or 401k (tax and penalty free in many cases) as well as other types of retirement accounts.
  10. SBA self storage loans are typically “construction to perm” loans, and it is very rare, but sometimes possible that an SBA self storage lender will make you a bridge loan to close on the land first if necessary, but in any case, any money you have spent on land or projects costs will count torwards your down payment/equity injection, so if you have already purchased the land (whether you paid cash or got a loan), the lender will give you credit for what you have paid towards the down payment/equity injection.
  11. Also, the SBA 7a loan allows lenders to count equity in the land or property based on a new appraisal once you have owned the property for 1 year.  So if after 1 year, the property is worth enough so that between your cash invested and the improved equity position due to the higher value, you may not need additional down payment to close on the loan. Especially since the SBA 7a allows transactions up $5 million (or more) with just 10% down or 10% equity.
  12. Additionally, some lenders will “piggyback” an un-guaranteed loan behind a $5 million 7a loan for up to another $4 or $5 million for truly solid transactions for borrowers who are trying to take advantage of the hyper-flexibility of the SBA 7a loan in order to get larger transactions done without getting locked into the longer prepayment penalty of the SBA 504.*  The key is you typically need to have enough equity in other properties that a lender can take as additional collateral since the lender is taking a lot more risk by doing a 2nd mortgage that does not have an SBA Guaranty behind it.  The value of this structure is that the SBA 7a allows you to refinance with little or no penalty after just 2 to 3 years from the day of closing, allowing you to get incredible leverage for larger projects and then potentially refinance, refinance with cash-out, or sell the property.
  13. If you have owned the land for more than 2 years you can count all of the equity in it for either the SBA 7a or the SBA 504.
  14. *The SBA 504 is a two-loan structure where the first mortgage typically has a prepayment penalty of 3 to 5 years or more and the 2nd mortgage has a 10 year prepayment penalty.  The penalty is not as bad as it sounds, but definitely needs to be understood in the context of your short or long-term plans for the facility.
  15. A Personal Guarantee is required for all 20% or more owners.
  16. Minimum loan size with most lenders is $350,000, but smaller loans are possible and if approved, typically carry a higher rate.
  17. Maximum loan size with just ten percent down for the 7a program is approx $9 million and any 7a transactions over $5 million with just 10% down will typically need to be very strong and will require additional collateral (equity in other real estate property).
  18. Maximum loan size with 10% down under the 504 program can be much larger and with 15% down larger still at +/- $17 million.
  19. With 20% down payment the maximum SBA loan amount for a storage facility is actually over $20 million.
  20. Third-party management companies can be used to manage the facility, but the lender needs the borrower to be involved “enough.”
  21. With less than 15 percent equity in the project you may or may not have to put up other real estate collateral when using a 7a loan – assuming you have equity in other real estate.
  22. SBA Loan fees are typically between 2.25 to 2.75 percent, but they are finance-able.
  23. A market or feasibility study may be necessary for ground up construction or major expansion with some SBA self storage construction lenders.
  24. The 7a program only has a three year prepayment penalty that is only 1% after year 2 and nothing after year 3 – allowing you to refinance with minimal or no penalty 2 or 3 years into the loan.
  25. Because of the short prepayment penalty, the 7a program can effectively be used as a self storage bridge loan program allowing you to build the facility, get it leased up and then refinance it at the end of year 3 without penalty.
  26. One major benefit to the short prepayment penalty is that once you refinance or sell your facility, you replenish your $5 million of SBA 7a eligibility allowing you to go back to the well for more high leverage financing.  This “lather, rinse, repeat” strategy has been effectively used by some SBA self storage borrowers to acquire numerous facilities in a relatively short time.
  28. Portable & Mobile Storage: a 15 year term and amortization is available on some Mobile or Portable storage businesses where you will lease the property as long as there is enough “long life” equipment.  (Trucks, storage containers, etc.)
  29. RV and Boat Storage: you can finance RV and Boat Storage facilities using all of the same guidelines as SBA self storage loans.  If you are financing outdoor Boat and RV storage, some lenders – whether it is construction or not – are fine with minimal site improvements as long as there is a fenced lot, a small office, lighting, possibly gravel, etc. while others will require some “there” there.  In other words, some lenders want the property to be paved, striped and fenced with some canopies for covered storage.
  30. In almost all cases you will need a regular job/regular income, but IF you have a strong transaction AND you have significant cash/assets it may be possible to get a loan regardless.
  31. Acquisitions with minor or major expansions are possible.
  32. Conversions to re-purpose existing buildings are possible.
  33. “Turnarounds” are possible for underperforming properties as long as you can provide a solid business plan, projections, assumptions for the projections, etc.  This may or may not require a feasibility study and approval would depend on the overall merits of the transaction, your relevant experience, the size of the transaction, etc.  In other words, “case by case but do-able” with for the right transaction.
  34. Purchase of an under-performing facility is also possible if you will be adding onto it and your plan/projections (especially if provided by a reputable consultant) show that the renovated facility will be profitable within a few years.
  35. As stated above, if you have owned the property for 2 years or more you can use the current appraised value/equity in the land towards your equity injection/down payment for either the SBA 7a or the 504 – and some 7a lenders will count current value/equity in the land towards your down payment/equity injection in the facility after you haved owned the land for just 1 year.
  36. You can finance solar panels added to the rooftops (or carports) or put in a ground mount system.
  37. If going green (typically with solar), you can use the SBA Green Loan to get more a lot more SBA eligibility.
  38. Interest rates depend on market factors and most 7a loans are going to be either a “floating rate” based on the Prime Rate or possibly a 3, 5 or 7 year fixed rate or, in some cases, a 25 year fixed rate.  25 year fixed rate SBA self storage loans are not usually going to be the best value unless rates are very low at the time you close.  SBA 504 loans always have a fixed rate component.  i.e. the 504 first mortgage is usually fixed for at least 5 years and the second is fixed for 20 or 25 years.
  39. There can be other buildings or tenants (commercial or residential) on the property as long as the self storage component is at least 51% of the total square footage and the self storage income is significant enough.
  40. Owners or managers can live on the property.
  41. Larger commercial storage units are also eligible, so it is okay to have a fair number of “contractor storage units” or to have an entire facility be contractor storage units. Not many lenders will allow this, but if the contractor units are on the smaller side with a roll up door for one vehicle, small bathroom, small office then it can be acceptable as long as all tenants are on month to month leases.   
  42. You can use both the 7a and the 504 to refinance a storage facility and as of February 1st 2021 you can use the SBA 504 program to refinance an existing SBA 7a loan and as of late 2022 you can use the SBA 7a to refinance an existing SBA 7a loan.  These are actually huge developments in the world of SBA self storage lending as this has not been possible before but a new provision of the “pandemic economic stimulus” has made this possible, so if you have a floating rate or high rate 7a loan now and you plan to keep your property long term then you may want to look into refinancing into a lower rate 7a or 504.
  43. A self storage facility constructed of shipping containers can be acceptable to some SBA lenders.
  44. It can be also acceptable to cross collateralize other properties in lieu of putting cash down, but it just depends on the merits of the deal and more and more lenders want you to have enough of your own “skin in the game.”  This is admittedly easier for existing self storage owners purchasing a facility or building a new one from the ground up.  You must have enough experience AND equity in your existing properties or (self-storage business and property) to offset enough risk to make a lender comfortable.  This is not very common but definitely possible for the right operator.
  45. As stated above, the total amount financed with SBA self storage loans is based on the “total project costs.”  Below is an example from a recent ground-up self storage construction loan for one of our clients to give you an idea of how the down payment is calculated:

Land Cost: $200,000
Construction Costs: $3,300,000
Construction Contingency: (10%) $330,000
Interest Reserve: $180,000
Lease Up Reserve for Payments: $190,000
Additional Working Capital: $50,000
SBA Guaranty Fee: $110,000
3rd Party Closing Costs: $ 55,000

TOTALS $ 4,415,000

Borrower Down Payment/Required Equity: $441,500

The above is not a complete set of SBA self storage loan guidelines, but as you can see, the SBA definitely has it’s place in the storage lending marketplace – especially if you are looking for leverage.  Please get in touch if you would like more information:

1-800-414-5285 or jking (at) green commercial capital (dot) com

Or for more info, visit the self storage page of our main site: SBA loans for self storage facilities