SBA self-storage options- 7(a) or 504?

We have financed millions of dollars in SBA loans for self-storage facilities since SBA began allowing it.

All of them have been done as a SBA 7(a) loan.

Borrowers typically have two SBA loan options-

-the SBA 7(a) loan

-the SBA 504 loan

 The SBA 7(a) loan seems to be a better fit.

Why?  A complicating factor of the SBA 504 program is that it has a job creation provision.   The requirement that borrowers create jobs does not seem to work well for self-storage operations.

The SBA and self-storage

SBA loans are well suited for self-storage facilities.

According to the Self Storage Association, there are 2.21 billion square feet of self-storage in this country. That means there are more than 7 square feet of storage per U.S. resident.


You might want to check out this article from Inc. magazine:

http://www.inc.com/best-industries-2010/self-storage-and-mini-storage-leasing-industry.html

SBA loans for self storage facilities- cash flow

For SBA loans, the borrower’s ability to repay the loan from the cash flow of the business is the most important consideration in the loan making process.

SBA allows lenders to determine repayment ability through either an analysis of actual cash flow or by using the “rule of thumb” method. “Rule of thumb” cash flow is defined as earnings before interest and taxes, plus depreciation and amortization, less total debt service.

If a self storage facility can demonstrate repayment ability based upon this rule of thumb approach, it can most likely obtain a SBA loan.

The SBA and self storage- Acquisitions

SBA financial assistance is available to acquire existing self storage facilities.

Down payment requirements will vary depending on the financial performance of the facility to be acquired and the financial strength of the buyer. In most cases, buyers should be prepared to put 15 percent down. The down payment should not come from a borrowed source.

The historical cash flow of the facility will be based upon tax returns.

The seller of the facility is required to sell his entire interest. He can not retain any ownership interest.

The SBA and self storage- Refinance

The SBA 7(a) loan program can be used to refinance debt on a self storage facility.

The debt must qualify under SBA eligibility criteria.

That means that the original use of the proceeds of the debt to be refinanced must have been for an eligible purpose. Examples of eligible purposes include construction, acquisition and debt refinance. If the debt had been used for a cash distribution to the owners, it may not qualify.

The debt to be refinanced must also be on what the SBA calls "unreasonable" terms. Loans not fully amortized, meaning they have a balloon, are considered unreasonable by SBA.

The SBA and self-storage

If you are trying to figure out where it says SBA loans are now eligible for self-storage or mini-warehouses, you won’t find it.

Sometimes it is not what SBA says, but what they don’t say.

The old SOP (Standard Operating Procedure) used to include this language

“Mini-warehouses, office suites, shopping centers, flea markets, and mobile home parks, are not eligible unless they provide sufficient services. Sufficient services shall be deemed to exist when more than 50% of the business’s revenue for the prior year is derived from the services provided rather than from rental income.”


With the release of the new SOP on October 1st, 2010, that paragraph was deleted.

The deletion was deliberate and represents a change in thinking by the small business administration.

The SBA and hoarding

If you make the mistake of watching the wrong channels on TV, you’d think the biggest problem facing the nation is hoarding. Public awareness of the condition has recently experienced an increase with the launch of two competing reality television programs about the subject, Hoarders and Hoarding: Buried Alive, airing on the A&E and TLC networks respectively.

Is it coincidence that the new SOP now allows SBA financial assistance for self-storage facilities?

SBA has dramatically changed its thinking on “passive income”.

For example, under previous guidance, businesses such as self-storage facilities were ineligible for SBA financing unless more than 50% of their revenue was from sources other than rent (the “sufficient services” test). The new guidance in SOP 50 10 5(C) eliminates the “sufficient services” test in order to make SBA loan guarantees available to more of these types of businesses.

That means self-storage facilities are now eligible.