Are there net worth and liquidity requirements or constraints? Is it possible a borrower is too strong to qualify for a SBA loan?
SBA loans are designed for small businesses. The rules were recently changed. A corporation becomes ineligible when its tangible net worth exceeds $15 million or its net profit exceeds $5 million. An individual borrower is deemed ineligible when his personal liquidity (non-retirement assets) exceeds one times the loan amount when loans are over $750,000.
What does the SBA lending landscape look like? Can different lenders really offer different terms, and what does it mean to be a Preferred SBA Lender?
The SBA grants preferred status to banks that have exhibited expertise in SBA lending. This is generally determined by the number of SBA loans underwritten and the corresponding default rate. A preferred lender (PLP) has an advantage over a standard-processing lender, primarily as it relates to underwriting/approval and servicing. A preferred lender has the same approval authority as the SBA—“rubber stamp” approval—whereas a non-PLP lender has to submit directly to the SBA for credit approval. This can add weeks to the approval timeline.
As for rate and terms, the SBA sets certain overall parameters lenders must work within, and while the lenders have the flexibility to set their own rate and terms (within the established parameters), most fall within a fairly narrow range. Nearly all offer variable-rate loans and only a select few offer fixed-rate loans.
Aside from the SBA parameters, lenders are also required to work within guidelines set by their own credit policies, which may impact geographic availability, industry concentrations, loan product, rate, term and overall risk tolerance. The net effect to the borrower is that while many loan features will be similar, each lender’s program will likely be unique.
What’s the process and time frame for SBA loans?
The SBA has taken tremendous strides to streamline its process and really empower PLPs to act on the SBA's behalf. Because this is a government program, we find the biggest challenge is setting appropriate expectations on the front end and helping the borrower prioritize what documentation needs to be provided.
There are some additional forms required to be signed at application, but the way SBA loans are underwritten is very similar to a conventional loan, minus the focus on leverage. When dealing with an experienced SBA lender, you can expect an approval within 10 business days of submitting a complete application, and closing to occur within 45 to 60 days of a signed commitment.
Are construction or expansion loans available?
SBA has no prohibition against expansion or new construction. In fact, it supports startups and expansions because they drive economic development. The bigger challenge is in the banking environment overall. The state and federal regulators are requiring banks to limit their exposure to real estate loans, especially construction loans. Projection-based expansion or true ground-up construction loans are difficult to obtain in this banking environment.
What is the difference between SBA loans and United States Department of Agriculture (USDA) Business and Industry Guaranteed Loans? Is self-storage eligible for USDA?
Yes, self-storage is eligible for USDA financing. There are substantial differences between the programs. USDA requires the property be in an eligible location, typically in markets where the population is less than 50,000. USDA requires loans to be no more than 80 percent LTV, and there must be a 10 percent to 20 percent tangible net worth on the balance sheet.
USDA loans can be amortized over 30 years, and it’s possible to obtain a 30-year fixed rate. USDA financing will be applicable to those borrowers in much smaller markets who have a strong balance sheet and may desire a longer-term fixed rate or have a loan request in excess of $5 million, which is the maximum loan for an SBA 7a loan.
What should a prospective borrower look for in an SBA lender, and what is the role of the mortgage broker? Is he paid by the lender or the borrower?
The mortgage broker, if well-versed in the self-storage industry, can play a critical role in helping to gather and identify critical documents every SBA lender will require. Each lender has its own policy regarding payment of mortgage-brokerage fees.
Two things are important here: First, SBA prohibits the bank from charging the borrower an origination fee. Second, most SBA lenders will compensate the broker directly to minimize borrower costs. If the mortgage broker uses a lender that will pay him directly, the borrower is essentially getting the broker services for free.
The SBA landscape is tough terrain for a borrower to navigate solo. Despite SBA having the same rules for every bank, each SBA lender may approach the self-storage industry differently. I strongly recommend working with a PLP.
It’s also imperative to understand how a particular bank uses the SBA program. Self-storage borrowers should inquire about the SBA lender’s expertise in real estate lending, and should choose a lender who has a large average SBA loan size and is consistently in the top 50 SBA lenders in the country. There are many national lenders who offer a ton of SBA loans. However, their average loan amount is $200,000 or less. Clearly their specialization is not in real estate lending. As a comparison, there are a number of top 50 SBA lenders who maintain an average loan amount north of $1 million. These lenders will tend to have more experience in working with larger real estate deals such as those found in the self-storage industry.
It is my hope Mr. Vredeveld’s responses have helped operators better understand SBA financing and how it relates to self-storage. Clearly, SBA loans are a viable financing source for storage facilities. It would appear the liquidity provided will help our industry stabilize and flourish. With new opportunities for refinance, acquisition and disposition, it’s obvious SBA lending is here, is available, and just may be right for your next financing requirement.
Devin Huber is a principal at The BSC Group, a Chicago-based commercial real estate financing firm, where he supports self-storage owners nationwide with their lending needs. To reach him, call 312.207.8232; e-mail firstname.lastname@example.org; visit www.thebscgroup.com.
George Vredeveld is president and co-founder of Quadrant Financial Inc. (a subsidiary of First Chatham Bank), which lends nationally and is actively offering SBA 7a, SBA 504, USDA and conventional small-business loans through a series of loan origination offices in many major U.S. markets. To reach him, call 513.281.5625; e-mail email@example.com.