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, well look at the program types, including the newer entrants in this space, and discuss the advantages and disadvantages of each. Well 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. Theyre 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.
- 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.
- There are no long-term solutions for stabilized properties.
- Banks are generally more relationship-focused, requiring a broader depository relationship.
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.
As with bank lenders, credit unions are typically located within the same market as the facility and want a relationship outside of the real estate loan. This may include deposits or additional lending opportunities.
- There are no or limited prepayment restrictions.
- Loans range from short to long term, with some offering 10-year options.
- Fixed- and floating-rate options available.
- The loans typically have some upfront points.
- Credit unions are generally more relationship-focused, requiring a broader depository relationship.
Similar to credit unions, credit-union consolidators offer a wide variety of terms and rates that generally range from one to five years. These firms participate loans among smaller credit unions across the country that do not have their own real estate departments.
Where consolidators differ from standard credit unions is theyre solely transactional in nature and are not interested in a long-term relationship. They can also offer flexibility, financing properties with out-of-market (or state) borrowerssomething local banks may not entertain. Transactions have the potential to take longer than average if participating credit unions take time to indentify.
- Credit-union consolidators typically have no or limited prepayment restrictions.
- They offer the ability to finance properties with out-of-market or state ownership.
- Fixed- and floating-rate options available.
- Loans typically have some upfront points.
- Final approval is often dependent on individual participants, which lends itself to changes in the deal structure should they disagree with the consolidator's loan structure.
SBA Loans: 7a and 504a
The SBA offers self-storage owners small-balance loans in a wide array of options, including short-term loans through the 7a program and long-term options through the 504a program. SBA lenders also offer fixed and floating rates through both programs. Some banks have started offering a specific small-balance 7a program for loans under $350,000. This program allows for leaner documentation requirements, including a desktop appraisal, lower transaction costs and quicker approvals.
The SBA programs will offer the highest advance rates available of the major small-balance loans programs and, in some cases, up to 90 percent. However, these loans are not meant for all owners. These loans are focused on active business owners and operators, not passive investors.
- SBA offers short-term (7a) and long-term (504a) money, with floating and fixed rates.
- In general, higher leverage loans are achievable, up to 90 percent LTV, with a realistic LTV at 85 percent.
- These programs offer the ability to build in additional project costs such as capital improvements and working capital.
- SBA loans can be used for property expansion and new construction in some scenarios.
- Properties in secondary and tertiary markets can qualify.
- There are stringent document requirements.
- There are 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 (with the small-loan program as the exception).
- 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.
A number of private lenders are active in small-loan transactions. These lenders offer the most flexibility, as they are willing to lend on non-cash-flowing properties, properties in lease-up, refinancing of discounted payoffs and mortgage-note purchases. In exchange, interest rates are typically higher, between 6 percent and 9 percent. Some newer private lenders have started to offer non-recourse financing for small-balance loans under 70 percent LTV. Loan terms can vary from months for a true bridge loan to 10 years for a stabilized property.
- There is tremendous flexibility in terms of loan structure and term.
- These loans often can close in a matter of days rather than weeks or months.
- Deals can be under performing or non-performing; however, there needs to be a clear road map to a permanent finance solution.
- These loan programs have the highest costs, both in interest rate and transaction costs, and upfront points.
Small-balance borrowers have a number of options for loans under $2 million, including some newer entrants in the lending market. Many local and regional banks have now cleared their balance sheets of their non-performing loans and now have the capacity to lend again. With more potential lenders comes increased competition, allowing borrowers to achieve more favorable rates and terms. Nows a great time to refinance or acquire an additional property to take advantage of the new, borrower-friendly lending environment.
Noel Cain is a vice president at Chicago-based The BSC Group, a commercial real estate financing advisor and provider of debt and equity capital solutions for self-storage owners nationwide. Cain provides mortgage brokerage, financial consulting and loan-workout solutions. For more information, call 847.778.4661; e-mail [email protected]; visit www.thebscgroup.com .