As you are likely aware the SBA changed their “passive income” rules a few years ago making self storage eligible for Small Business Administration loans. The change had a lot of media buzz and many people, both bankers and borrowers, were excited about the possibility of using this type of financing, primarily because of the high level of leverage available (85 – 90% loan to value).
However, many traditional self storage owners were quickly “turned off” and confused by the rules and various restraints associated with this type of financing, relative to what they were used to.
Personal Guarantees – There is no way around it. Any borrower that owns 20% or more of the entity, regardless if it’s just the “money guy” and or passive investor, has to personally guarantee the loan. What this also implies is that anyone with 20% or more ownership has to be fully underwritten, including any other businesses that they own 20% or more of…
Many of the traditional self storage borrowers that we work with have their hands in several different holdings and are not use to having their other businesses underwritten. Most of the time, the additional underwriting is more of an issue then the personal guarantee. If you have over 5 or so affiliates it can get complicated and cumbersome pretty quick.
Higher Fees – Both the SBA 7a and 504 loan programs have higher fees then with traditional conventional financing. Basically the SBA charges fees that equal appr 3% of the total loan amount. Granted that these fees are rolled into the loan, they still exists and many borrowers just can’t accept them.
There are other fees involved such as SBA packaging fees and additional legal fees that can annoy borrowers as well.
Terms – On purchases you can get long term fixed rates via the SBA 504 loan. However, on refinances you have to use the SBA 7a loan, which is primarily a variable rate loan. Literally 99% of banks/lenders out there structure these as a “floater” against The Prime Rate. Many self storage owners just don’t understand this as they have a fixed asset with a sales/income cap.
SBA Loans Place in Self Storage
With this said, SBA loans do have a place and use within the self storage industry. In comes back to high leverage. No where else in the industry can you get 85% or even 90% financing. It just doesn’t exist. If you want or need that high of leverage than the SBA is your best choice.
Also, if you don’t have a lot of partners and or other affiliates, then the additional underwriting doesn’t really apply as the closing/underwriting process is very similar to a conventional loan when you don’t have additional affiliates to deal with.
Another major benefits is that there are NO demand clauses, loan covenants or balloons to deal with on SBA loans. This point shouldn’t be brushed off. If you as a borrower got pushed around by your bank during the last few years, you know how critical this benefit is. As long as you make your payments you don’t have to worry about having your loan called.