Investors are becoming more aware of the self-storage industry, which is growing more competitive overall. Learn why an SBA 504 loan from the Small Business Administration is an excellent financing option for self-storage operators.
Investors are drawn to self-storage facilities. There's a lot to appreciate here—low building costs and overhead, mostly self-sufficient operation, tremendous consumer demand, and enormous profit potential
However, as the sector expands, market competition grows as well. When it comes to financing a self-storage facility, the Small Business Administration's SBA 504 loan program provides a viable financing option self-storage operators and owners.
The SBA 504 loan program provides the most cost-effective approach to finance a self-storage acquisition, construction project, renovation, or expansion. The loan has a minimal down payment and a fixed interest rate that is near all-time lows.
Let's look at why the SBA 504 loan program is so good for self-storage owner-operators, especially in a competitive market.
Less Cash Injection Needed
SBA 504 loans allow self-storage owners to buy, repair, construct, or refinance commercial real estate with a 10% down payment, allowing them to keep more working capital on hand. Renovations, equipment, closing fees, and soft costs can all be included in the overall project budget. The down payment is 10% of the total unless your company has been in operation for fewer than two years, in which case a 15% down payment is necessary.
Long-term Fixed-Rate Loans
On an SBA 504 loan, there are two loans. The SBA guarantees the second lien, or loan. A typical lender provides the first mortgage, which accounts for around half of the entire project cost. The 504 loan typically represents 40% of the overall project cost and has a long-term, fixed interest rate for up to 25 years, with the loan completely amortized for the whole time. This means there will be no final balloon payment. Monthly payments are fixed for the duration of the loan, making them affordable and allowing business owners to keep overhead costs under control for the long run.
Versatility
There is no cap on the overall project cost with an SBA 504 loan, but typically the largest SBA loan structures are up to about $18 million. Plus, there is no additional collateral required, unlike the SBA 7(a) loan.
This loan is commonly used for self-storage for the following reasons:
- Acquisition: Those looking to purchase an existing self-storage facility frequently use an SBA 504 loan to finance the purchase of the property.
- New construction or expansion: SBA 504 financing can be used to construct a new self-storage facility or to expand an existing one. Conventional construction financing, on the other hand, might be difficult to come by in certain areas and may require a down payment of up to 40%.
- Renovation: Refurbishing or repairing an existing building can be expensive, therefore owners frequently seek additional funds to cover these major expenses.
- Refinancing: If your initial real estate financing had a balloon payment, a variable or high interest rate, or was a short-term option, refinancing with an SBA 504 loan results in reduced payments and a longer repayment term. This option also allows you to take cash out.
CDCs' assistance
Certified Development Companies (CDC), nonprofit companies that manage SBA 504 loans on behalf of the SBA, supply the loans. In the United States, there are around 200 CDCs. The SBA regulates all of them, and they all charge the same rates. CDCs assist entrepreneurs throughout the lending lifecycle. They assist you with the application and documentation, and they remain your partner throughout the loan's term. They may also assist you in finding the best first-mortgage lender if necessary.
Eligibility
Because of the moniker “Small Business Administration,” many business owners believe they don't meet the requirements. The program's eligibility is determined by the company's net worth and average net profit after taxes over the previous two years. Most for-profit, privately owned firms qualify, which often surprises business owners.
The First Steps toward getting an SBA 504 loan
Despite popular belief, the SBA 504 loan process is straightforward and takes no longer than a traditional loan. The very first step you need to take in order to begin the SBA 504 loan process is to contact an experienced commercial mortgage advisor, preferably one who has vast SBA loan experience.
The reason we suggest working with a commercial mortgage advisor is because they guide you toward the right bank that best fits your funding situation. Every bank has a slightly different appetite on what they like to lend on. Your mortgage advisor will steer you in the right direction.
With just a few documents, prequalification can be accomplished at no cost or obligation. The procedure will assist you in determining your borrowing capacity as well as providing details on the required down payment and monthly payments. You'll be able to move forward with confidence when the proper opportunity comes along, and it may even provide you an advantage over your competition.
Beau Eckstein is a commercial mortgage advisor specializing in SBA loan programs. He can be reached at (925) 852-8261. If you'd like to set up a discovery appointment with him, click here.