By Noel Cain
When the government’s Small Business Administration (SBA) announced self-storage as an approved property type for loans in the fourth quarter of 2010, it raised tremendous interest within the industry. Questions abounded regarding the details of the programs, and many potential borrowers wanted to know specifics.
There are two types of SBA loans available to the self-storage industry: SBA 7a and SBA 504. SBA 7a is a variable-rate program with a three-year prepayment penalty. It’s designed for borrowers who:
- Have multiple uses of proceeds (real estate, equipment, working capital, etc.)
- Typically have a loan-to-value (LTV) in excess of 90 percent
- Want to refinance
- Have a shorter holding period
SBA 504 is a fixed-rate program that carries a rather steep 10-year prepayment penalty. Its borrowers typically have a long-term holding period and a single use of proceeds (real estate or equipment purchase).
In short, 7a borrowers are willing to take on interest-rate risk in exchange for proceed-use flexibility and additional leverage. SBA 504 borrowers sacrifice flexibility and have limited use of proceeds, but are able to secure long-term fixed-rate debt.