Is self-storage a qualified collateral type under both programs?
If the business operation is eligible, which self-storage is, then the collateral is eligible. However, SBA classifies collateral differently. Self-storage will be classified as “special purpose,” which doesn’t impact a borrower on a SBA 7a loan request. On a SBA 504 loan, it reduces the maximum LTV from 90 percent to 85 percent. Furthermore, if the facility is less than two years old, the LTV drops an additional 5 percent to 80 percent LTV (only under SBA 504).
If it sounds too good to be true, it surely is. Can the SBA really lend up to 90 percent of cost/value, and what are the other general terms and underwriting hot buttons for a SBA transaction?
The SBA 7a program has no LTV requirement. SBA 504 lending is limited to 85 percent LTV on a special purposed property for which self-storage would be classified. Under the SBA 7a program, the government provides a guaranty of up to 75 percent of the loan, which can provide an incentive to the lender to do higher leverage financing.
Remember, SBA is designed for operating, cash-flowing businesses. Cash flow repays debt, so in the SBA’s view, cash flow takes precedence over collateral. The critical underwriting parameters are ability to repay—debt-service ratio, management experience, borrower’s personal credit, post-closing liquidity and collateral. Real estate can be financed on an amortization of up to 25 years. All SBA loans are fully amortizing with no balloon payments or call provisions. Rates are typically variable tied to Prime with a maximum rate of Prime + 2.75 percent.
What can a borrower expect from the 504 program, and are fixed rates available for this program?
As previously mentioned, the SBA 504 program differs from SBA 7a in a few respects. First, the LTV on a SBA 504 loan ranges from 80 percent to 85 percent. The SBA 7a loan doesn’t have a LTV requirement but typically will not exceed 90 percent on a self-storage facility.
The SBA 504 program uses two funding sources. First, a conventional first mortgage is required to be at least 50 percent of the project. Borrowers can expect to receive a three- or five-year adjustable-rate mortgage (ARM) with a 20-year amortization. The balance of the project (30 percent to 35 percent) will be funded by a 20-year fixed-rate bond. Borrower equity is required between 15 percent and 20 percent.
The prepayment penalty on the bond is one of the drawbacks of the SBA 504 program. There are substantial penalties if the bond is paid off within the first 10 years; however, the benefit is a 20-year fixed rate. Borrowers really need to understand their time horizon when deciding between SBA 7a and 504. The two programs are designed for very different borrower profiles.
Can you explain what fees are charged by the SBA and whether these fees, and the soft costs, can be financed?
As of Jan. 1, the “fee waiver” from the Recovery Bill (American Recovery and Reinvestment Act of 2009) will expire. On SBA 7a loans, the SBA charges a guaranty fee, which is assessed on the amount of the loan guaranteed (75 percent). The fees are graduated depending on loan size. A good rule of thumb is 2.5 percent of the loan amount. SBA lenders will provide the exact fee in their term sheet. These fees can be financed into the loan.
On SBA 504 loans, the SBA assesses a guaranty fee on the bond (100 percent guaranty on the bond). These fees are generally 3 percent of the bond debenture and are financed in the bond. One important exclusion relates to developer fees when the borrower is acting as the developer on his own project. SBA will not allow lenders to finance these fees.