Small Business Administration (SBA)
SBA loans can offer self-storage owners a wide array of options including short-term loans through the 7a program and long-term options through the 504a program. SBA lenders can also offer fixed and floating rates through both programs.
The SBA programs offer the highest advance rates available of the major loans programs—in some cases, up to 90 percent. However, these loans are not meant for all owners. As the name would indicate, these loans are focused on active business owners and operators, not passive investors.
- SBA loans offer short-term (7a) and long-term (504a) money with floating and fixed rates.
- Higher leverage loans are achievable, up to 90 percent LTV, with realistic LTV at 80 percent.
- Offers the ability to build in additional project costs into financing such as capital improvements and working capital.
- They can be used for property expansion and new construction in some cases.
- There are stringent document requirements.
- These loans also have high transaction costs, typically between 3 percent and 4 percent of the loan amount.
- Processing and closing times can be long, which poses problems for acquisitions.
- Borrowers with significant net worth and liquidity will not qualify.
- Third-party managed properties will have difficulty qualifying.
- Prepayment restrictions are fixed but can be high.
Banks and Credit Unions
Bank and credit-union loans offer the widest variety of terms and rates. In fact, banks may have more than one of the above-mentioned loan programs in addition to their commercial real estate loan platform. Generally speaking, bank and credit loans are considered short- to medium-term loans from one to seven years that can have a fixed or floating rate or, in some cases, a combination.
Interest rates are typically some of the most competitive available. However, in exchange for access to this money, these institutions want a deeper relationship that may include deposits, lines of credit or additional lending opportunities.
- Bank loans offer short- to medium-term loans from one to five years.
- Generally, advance rates range from 70 percent to 75 percent LTV.
- Fixed and floating rate options are available.
- Banks may offer construction financing to clients with strong relationships.
- Credit unions typically have no prepayment restrictions.
- There are no long-term solutions for stabilized properties.
- Banks are generally more relationship-focused and may require a broader depository relationship.
Finally, there are private lenders, which include hard money and bridge lenders. This type of lender offers the most flexibility, as they are willing to lend on non-cash-flowing properties, properties in leaseup, refinance of discounted payoffs, and mortgage-note purchases.
In exchange for this flexibility, interest rates are typically between 10 percent and 15 percent. Due to the high cost, these loans are typically measured in months rather than years. Loans are also typically full-recourse obligations and may require additional collateral to be posted.
- Loans often close in a matter of days rather than weeks or months.
- Deals can be underperforming/non-performing; however, there needs to be a clear road map to a permanent finance solution.
- These loans are very short term in nature—months rather than years.
- Additional collateral is often required to be posted for the loan.
- They have the highest costs in interest rate and transaction costs and upfront points.
How to Choose?
The current interest-rate environment makes this one of the most desirable times to be looking for a loan. While there are many options available, the difficulty arises in selecting the right type and then pushing through to receive the actual capital. Hiring a mortgage professional to help navigate these choices and determine the preferred solution can help ease the process. Whichever option you choose, this primer offers a starting point to successful banking in 2012.
Noel Cain is a vice president at Chicago-based The BSC Group, where he provides mortgage brokerage, financial consulting, and loan-workout solutions to self-storage real estate owners nationwide. To reach him, call 847.778.4661; e-mail email@example.com ; visit www.thebscgroup.com .