Small-Balance Lending for Self-Storage: Tips and Tricks for a Successful Transaction

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By Noel Cain

Small-balance lending is the heart and soul of self-storage finance. Generally speaking, the majority of industry loan transactions fit into the category of small-balance deals. While there's no definitive description, we consider any loan of less than $2 million to be a small transaction, and many lenders have created special programs for this group.

Loans of less than $2 million have traditionally been the focus of the local lending community and banks that have a specialized Small Business Administration (SBA) department. However, some private lenders and credit-union consolidators have come into the market in recent years to add options for borrowers.

While all small-balance lenders generally have a similar set of document requirements, each will have hot buttons that drive much of the underwriting focus. In this article, we’ll look at the program types, including the newer entrants in this space, and discuss the advantages and disadvantages of each. We’ll also look at tips for preparing your self-storage business for each program.

Local and Regional Bank Loans

Local and regional banks are a great fit for small-balance self-storage loans. They’re in the same community as the facility and understand the local market dynamics. Banks also offer the widest variety of terms and rates for small-balance loans. In fact, many offer SBA loans in addition to commercial real estate loan platforms.

Generally speaking, banks are considered short- to medium-term lenders, offering loans from one to seven years that can be fixed- or floating-rate or, in some cases, a combination. Loans generally amortize over 25 years or less and, for self-storage borrowers, are often restricted to 20 years. 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, a line of credit or additional lending opportunities.

Pros

  • Typically, local banks are in or near the trade market and understand the local dynamics.
  • Bank lenders offer short- to medium-term loans from one to seven years.
  • Generally, advance rates range from 70 percent to 75 percent loan-to-value (LTV).
  • Fixed- and floating-rate options are available.
  • Banks may offer construction financing to clients with strong relationships.

Cons

  • There are no long-term solutions for stabilized properties.
  • Banks are generally more relationship-focused, requiring a broader depository relationship.

Credit Unions

Similar to bank lenders, credit unions offer a wide variety of terms and rates. Typical transactions range from one to five years with fixed- or floating-rate terms. A select few credit unions offer 10-year, fixed-rate loans. In some cases, the loan may adjust at the end of the initial five-year term before locking again for the second five-year term.

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