The SBA 504 Program: Why It’s an Optimal Finance Solution for Smaller Self-Storage Operators

Self-storage is attractive to investors. There’s a lot to like—low construction costs and overhead, mostly self-sufficient operation, strong consumer demand, large income potential—and it’s no longer a secret. But as the industry grows, so does market competition. When it comes to financing, the Small Business Administration (SBA) 504 program is the solution that can help keep smaller operators in the game.

Specifically designed for small to mid-sized businesses, SBA 504 is the most advantageous way to finance a self-storage acquisition, construction project, renovation or expansion. The loan features a low down payment and a fixed rate that’s currently at record lows.

Additionally, the CARES (Coronavirus Aid, Relief and Economic Security) Act offers extra benefits for owners who obtain this financing by mid-September. Under CARES, the SBA will make payments on existing and new 504 loans for six months. If an owner funds his loan by the Sept. 16 debenture sale, the first six payments will automatically be paid by the SBA. Loans that are approved by mid-July generally will fund by September.

Let’s dig further into why the SBA 504 loan program is ideal for self-storage owners, particularly in a competive market.

Low Down Payment

SBA 504 loans enable a self-storage owner to purchase, renovate, construct or refinance commercial real estate with a 10 percent down payment, which helps the business retain working capital. Renovations, equipment, closing costs and soft costs can be financed as part of the total project cost. The down payment is only 10 percent of that total, unless your business has been in operation for less than two years; then a 15 percent down payment would be required.

Long-Term, Fixed Rate

The SBA 504 loan is a second mortgage. The first mortgage is provided by a conventional lender, representing approximately 50 percent of the total project cost. The 504 generally represents 40 percent of the total project cost and offers a long-term, fixed interest rate up to 25 years, fully amortized for the full term of the loan. This means there’s no balloon payment at the end. Monthly payments are fixed for the life of the loan, providing affordable payments that enable business owners to control overhead costs for the long term.

Versatility

With an SBA 504 loan, there’s no limit to the total project cost, and no collateral required besides the subject property. Common uses of this loan for self-storage include:

Support from CDCs

SBA 504 loans are provided by Certified Development Companies (CDC), nonprofit organizations that administer the financing on behalf of the SBA. There are about 200 CDCs in the United States. All are regulated by the SBA and charge the same fees. CDCs guide business owners through the entire loan process. They help with the application and paperwork, and are your partner though the life of the loan. If needed, they can also help find a first-mortgage lender that will provide the best terms.

Eligibility

The name “Small Business Administration” often leads business owners to assume they don’t fit the size standards. Program eligibility is based on the net worth of the business and net profit after tax on average for the previous two years. Business owners are often surprised to learn that most for-profit, privately owned businesses qualify.

Case Study

Self-Storage Emporium in Larkspur, Calif., serves as an excellent example of how business owners can take full advantage of a 504 loan. When owner Michelle Larsen was at near full capacity and had a substantial waiting list, she decided it was time to expand by acquiring a neighboring property.

She used the 504 financing to purchase the land, refinance existing debt, and construct a new building to accommodate demand. For a total project cost of $2.4 million, this upscale self-storage facility was able to expand, including temperature-controlled units in a variety of sizes. Larsen was able to accommodate demand and grow her business by using a loan with a below-market interest rate, fixed for 20 years.

Getting Started

Despite what you may have heard, the SBA 504 process is simple and doesn’t take any longer than a conventional loan. The first step is to connect with a local CDC to get prequalified, even if you haven’t identified a property yet. Establishing a relationship with the right CDC is essential, as it’ll be your advocate for the life of the loan.

Prequalification can be completed at no cost or obligation, with just a few documents. The process will help you understand your borrowing capacity and provide information about the required down payment as well as monthly payments. When the right opportunity presents itself, you’ll be able to move forward with confidence and may even give you a leg up over competitors.

Barbara Morrison is president of TMC Financing, which specializes in SBA 504 lending in California and Nevada. In 40 years of service, the Oakland, Calif.-based Certified Development Company has helped nearly 6,000 businesses obtain financing. For more information, call 888.989.8855; e-mail [email protected], visit www.tmcfinancing.com.