By Noel Cain
We’ve just passed the one-year mark for self-storage as an approved property type for Small Business Administration (SBA) loans with the passage of the Small Business Jobs Act of 2010. During the past year, the industry has started to learn the capabilities and limitations of the two loan programs (7A and 504), along with which borrowers qualify.
The SBA recently released its annual update to the qualifications, which bring additional turns and twists to the programs. Let’s review each of the program's capabilities and how the changes will affect self-storage financing in 2012.
There are two types of SBA loans available to the self-storage industry: SBA 7a and SBA 504. SBA 7a is typically 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
In general, 7a borrowers are willing to take on interest-rate risk in exchange for proceed-use flexibility and additional leverage. The 7a program will allow for additional funds with uses in self-storage such as, but not limited to:
- Facility expansion
- Installation of a kiosk
- Establishment of a marketing program
- Installation of security features
- Capital for repairs
The SBA 7a program is commonly structured with a prime-based rate that resets quarterly, and a fully amortizing 25-year loan with a prepayment penalty during the first three years. This loan is typically pooled and sold to investors. There are instances in which banks will offer a fixed-rate period in cases where loans are held by the lender for the entirety of the term. These fixed-rate deals typically face tougher underwriting standards and lower leverage points.
Generally speaking, loan amounts up to 90 percent of value are achievable. However, loans must provide a minimum debt-service requirement of 1.25:1. In cases of higher leveraged transactions, collateral for the loan is not limited to the subject financed property. Often the lender will take a pledge of equity in other assets that may include other rental real estate, deposit accounts or equity in a primary residence.
The SBA has not established any significant new changes to the policy and procedures for 2012 as it relates to the 7a program. Borrowers will continue to have the program available for both acquisition and refinance. We expect more lenders to offer their SBA programs to self-storage borrowers in 2012 as they become more comfortable with self-storage as property type.