As many people know by now, self storage properties are now eligible to be financed under SBA loan programs thanks to the 2010 provisions in the Small Business Job Act.  Of course this type of property and business has been fastest growing and very stable for past 30 years and provides investors with good annual returns however due to its special purpose nature, many lenders shy away from it.  Now, there are many capital providers that are marketing to the mini storage owners with their SBA loan products. 

Despite the fact that a number of these financings have previously closed, the loan volume is not near what one would expect with the SBA eligibility.  Industry experts blame the misinformation and I think it's the wrong impression that most borrowers have regarding the SBA loans in general.  Prior to 2008, SBA financing was an overwhelming, time consuming and expensive solutions for most borrowers and many went through it because of the high loan to value that banks allowed under this program.  I think that most borrowers don't realize how simplified and transparent the whole process is now and super cheap rates that SBA lenders offer for their guaranteed loan programs

Listed below are the two common self storage loan programs.  Each has its advantages and disadvantages and has their niche lenders.  

The SBA 504 loan

This product is the most beneficial for owner user commercial property owner that provides long term fixed financing at a great low rate.  This loan program is lesser-known and not often used for self storage properties because it's less profitable for the lenders and riskier.  Here is how the SBA 504 loan program is structured:

A first trust deed loan is provided by the bank or lending institution which makes up the first 50% to 60% of the loan amount. The second loan is offered by Certified Development Company (CDC) which is usually 40% of the total financing amount.  This loan is 20 year fixed for 20 year term and the rate is published by the CDC and has a 10 year step down pre-payment penalty.  The maximum loan amount provided by CDC is $5M.  Here is an example.  Let's assume you are purchasing a mini storage property for $1M and would like to put the minimum 15% down.  Keep in mind that this type of property is considered as special purpose and you can leverage up to 85% total loan to value. 

First Loan – 50% of the $1M purchase price which is $500,000

Second Loan – 35% of $1M purchase price which is $350,000

Buyer injects $150,000 in equity

With this loan program, the lender has a first trust deed with 50% equity cushion so the bank's risk is relatively low.  The terms for first mortgage are generally 5, 7 or 10 year fixed with 25 year amortization.  There are some lenders that offer first mortgage for 20 or 25 years fixed which matches the maturity of the CDC debenture.  Of course longer the terms are the more expensive the rates get. 

The SBA 7(a) loan

The 7(a) product is most popular because it's safer and extremely profitable for lenders.  The SBA financing that lenders provide under this program is a single loan for up to 90% loan to value of the property or equipment and administration guarantees 75% of the loan amount.  This means that lender has only 25% of its capital in risk and that's why this program is more widely available than the 504 loan program and is a favorite choice for self-storage loan.

Loan companies are able to finance owner user properties under this program for 90% loan to value but since self storage is special purpose, 85% LTV is the norm.  SBA 7(a) loans are adjustable with prime rate with spread of 1.5% to maximum of 2.75% that is allowed by administration.  However some banks can fix the rate for 3, 7, 10 or even 25 years fixed.  When the rates are fixed, the rates are considerably higher and longer the fixed terms are, the higher the rates would be. 

Qualification 

To qualify for SBA financing, business owners' net worth should be less than $15 million and net income of less than $5 million per annum.  Additionally, the net income of the business should be enough service the debt.  Of course, each lender has its own underwriting criteria and have their own minimum debt service coverage ratio but most have minimum 1.25.1 ratio.  What this means is that your net income is 125 times the annual mortgage payment.  There are some banks and SBA lenders that go as low as 1:1 or even below that.  There are few that would even calculate the cash flow and debt service ratio based on pro forma performance and financials.   Finally, each lending institution has its own specific type of properties that they would finance so it's possible some don't finance your project but some would happily fund it. So it's important to apply to a lender with appetite and understanding for self storage industry in general.