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The 2014 Capital Markets: Loans and Rates Available for Self-Storage Owners and Investors

By Shawn Hill Comments
Continued from page 2

Small Business Administration Loans

Since self-storage was approved as a property type for Small Business Administration (SBA) loans in 2010, the SBA programs have been especially beneficial to owners in secondary or tertiary markets where traditional financing options may be more difficult to find. There are two types of SBA loans available to the self-storage industry: SBA 7a and SBA 504.

The SBA 7a program is typically a variable-rate program that’s most commonly structured with a prime-based rate that resets quarterly, and a fully amortizing 25-year loan, open to prepay after three years. 7a proceeds can be used for acquisition or refinance.

SBA 504 is a fixed-rate program with up to a 20-year term that carries a prepayment penalty for the first 10-year period. In mid-2012, the 504 program no longer accepted applications for refinance, only for acquisitions; however, this can be reinstated with Congressional approval, which some speculate may happen in 2014.

Rates for both programs vary depending on a multitude of factors. Borrowers must be aware that the course of underwriting, processing and closing an SBA loan can be time consuming due to the document-heavy nature that comes with any Federal program. Overall, access to SBA financing is a positive for the self-storage industry because it injects an additional source of capital and liquidity into the market.

Construction and Land Loans

Construction financing has been essentially non-existent over the past five years, but the tide appears to be turning. Generally speaking, construction financing is limited to those with very strong balance sheets and significant development experience. Expect full recourse and leverage no greater than 65 percent of cost, for even the very best projects. For a developer who’s determined to build and has a viable project in a high-demand trade area, the most likely lending partner is a local or regional bank willing to build a relationship and partner with the sponsor.

Given the low interest-rate environment, limited new development, aggressive capitalization (cap) rates for stabilized facilities and upward pressure on rental rates, new construction is becoming a more attractive proposition. This factor, combined with the increased health of local and regional banks, is making construction loans once again become a viable lending option.

Going Forward

It appears the positive momentum created in 2013 paved the way for a very strong 2014, as self-storage fundamentals improve and the economy continues to grow. For self-storage owners, there’s reason to be optimistic. The fear in the market that has been present for the past several years seems to be diminishing. Increased competition from lenders has created excellent borrowing opportunities, all while interest rates remain low by historical standards. This borrower-friendly environment presents unprecedented opportunities for self-storage owners looking to refinance or acquire additional properties.

Based in Chicago, Shawn Hill is a principal at The BSC Group, where he advises clients on debt and equity financing and loan-workout services for all commercial property types nationwide, with an emphasis on the self-storage asset class.  He can be reached at 312.207.8237; e-mail; visit .

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