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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SBA self storage loans minimum requirements:

  • 10% down payment (from multiple possible sources including borrowed money and possibly 5% from seller)
  • “Good” credit (ideally mid 600’s or better but 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 self storage ownership
  • 10% down on ground up construction or acquisition unless loan is for expansion of existing/cash flowing self storage business, in which case 100% may be possible

SBA Self Storage Loans

Self Storage Financing via SBA

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 on the “Total Project Costs” (land + construction + contingency + ramp up reserves + closing costs + SBA Loan guarantee fee, etc.) whether you are buying or building and 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. 100% financing is possible for existing storage owners purchasing or building a new facility from the ground up.  You must have enough experience AND equity in your existing self-storage business and property to offset enough risk to make a lender comfortable. (Not very common but definitely possible for the right operator).
  3. If you are building from the ground up or doing a major 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).
  4. 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.
  5. 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.
  6. You DO NOT need self storage industry experience to get a loan.
  7. Gifts are allowed.
  8. Funds from investors are allowed as long as you are putting in enough of your own cash.
  9. 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) for the full term of the SBA loan (25+ years), 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.
  10. 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.
  11. SBA self storage loans are typically “construction to perm” loans, and it is 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.One caveat with this scenario is that the SBA does not allow lenders to count “excess” equity in the land until you have owned the property for at least 2 years.  i.e.  if you got a deal on the land and it is worth more than you paid they can only count what you paid towards your down payment/equity injection.  If you have owned the land for more than 2 years you can count all of the equity in it.
  12. A Personal Guarantee is required for all 20% or more owners.
  13. Minimum loan size with most lenders is $350,000, but smaller loans are possible.
  14. 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).
  15. Maximum loan size with 10% down under the 504 program can be much larger and with 15% down larger still at +/- $17 million.
  16. With 20% down payment the maximum SBA loan amount for a storage facility is actually over $20 million.
  17. 3rd party management companies can be used to manage the facility, but the agreement you have with a management company cannot give them too much control over the facility.  Most of the larger, well-known management companies have inflexible agreements but there are many whose agreements are acceptable to SBA and/or who are willing to tweak their agreements to make them acceptable.
  18. With less than 15 percent equity in the project you may or may not have to put up other collateral when using a 7a loan IF you have addl collateral.
  19. SBA Loan fees are typically between 2.25 to 2.75 percent, but they are finance-able.
  20. A market or feasibility study may be necessary for ground up construction or major expansion with some SBA self storage construction lenders.
  21. 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.
  22. 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. 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.
  23. 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.)
  24. 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.
  25. 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.
  26. Acquisitions with minor or major expansions are possible.
  27. Conversions to re-purpose existing buildings are possible.
  28. “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.
  29. 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.
  30. 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 – and some 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.
  31. You can finance solar panels added to the rooftops (or carports) or put in a ground mount system.
  32. If going green (typically with solar), you can use the SBA Green Loan to get more a lot more SBA eligibility.
  33. Most 7a loans are going to be either a 5 year (or possibly a 7 year) fixed rate or a “floating rate” between Prime + .25 and Prime + 2, but fixed rates are available.  In fact, 25 year fixed rate SBA self storage loans are possible in some cases and 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.
  34. 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.
  35. Owners or managers can live on the property.
  36. Larger commercial storage units are also eligible, so it is okay to have a fair number of “contractor storage units.”  In other words the facility does not have to be just “mini-storage.”   
  37. 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.  This is actually a huge development 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 504.
  38. A self storage facility constructed of shipping containers can be acceptable to some SBA lenders.
  39. 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.”
  40. 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 here