SBA Loans & Self-Storage: Fact or Fiction

February, 2011

The SBA's announcement in 2010 that self-storage would no longer be an excluded property type under the program was greeted by our industry with great fervor and excitement. Although SBA financing is primarily designed for operating companies, commonly referred to as 'owner-operators', historically the SBA has viewed self-storage as 'passive' real estate investments, much like a retail or office building, and as such they were a specifically named and excluded use.

Given that many self-storage facilities are in fact operated and managed by the owner, the SBA has now reclassified the property type to one of 'active' management, causing a sea of change in SBA financing possibilities for storage owners. Amidst all of these changes financial professionals have been working diligently with the SBA lending community to better understand these programs and help bring this source of capital to the forefront of our industry.

However, as we sit here three months into this experiment, there continues to be a lot of confusion and misconceptions about these programs. The fact is that these are uncharted waters; until now it has never been done, and as a result, despite all the talk, there really are no experts, present company included. Perhaps the most difficult aspect to gauge about the situation is how it will all play out in the implementation stage.

To better understand the facts, and in an attempt to dispel some of the myths that exist about these programs, what follows is an exercise in SBA Fact vs. Fiction based on what has been learned to date.

FACT or FICTION: The SBA will be an important and tangible source of capital for self-storage financing.

This is a fact. The new availability of SBA financing brings immediate liquidity to the self-storage asset class. Generally speaking, it is likely that SBA financing will be most applicable to facilities that are actively owned & managed. Although the SBA does not specifically preclude a facility from being managed by a 3rd party, it is likely that most SBA lenders will prefer - and in some cases may even require - that the owner be actively managing the property. For these reasons, in combination with other stated SBA guidelines, it is anticipated that smaller facilities (loans less than $5M) as well as facilities located in more secondary markets stand to benefit the most from this new and important source of capital. Furthermore, even though it is technically allowed by SBA, absentee owners with investment properties that are 3rd party managed may find it extremely difficult to find an SBA lender willing to fund their loan request.

FACT or FICTION: All SBA Lenders are the same. Since these are government programs legislated by the SBA, the programs are standardized and the terms will not vary greatly from lender to lender.

This is fiction. While there are many lending institutions that have the ability to offer SBA loans, there are specialized categories of lenders that can offer enhanced services and a more streamlined process that others cannot by virtue of their contractual relationships with the SBA. Specifically, these lenders carry a 'Certified' or 'Preferred' status that places additional responsibilities on them for conducting analysis, loan structuring, approval, servicing and liquidation of loans within SBA guidelines.

Currently only a small number of lenders (approximately 450) meet the preferred lender (PLP) standards. Whereas a non-PLP lender has to submit directly to the SBA for credit approval, preferred lenders share the same approval authority as the SBA and can offer an expedited turnaround and approval on completed loan applications.

Bottom line is that if you are seeking an SBA loan, your best bet is to work with a preferred lender with expertise in making real estate loans. The SBA-guarantee process is tricky at best, and you want a lender who has run the gauntlet more than once. You can easily find out if your lender is preferred by simply visiting the SBA Web site at

FACT or FICTION: SBA loan rates and terms are set by the government and do not vary between lending institutions.

This is fiction. With respect to loan rates and terms, the SBA sets certain guidelines that lenders must work within. Generally speaking most of the SBA lender's rates and terms will fall within a fairly narrow range; nonetheless, it is critical to understand that the individual lenders definitely do maintain the flexibility to set their own rate & terms as long as they fall within the SBA's established parameters. Almost all SBA lenders offer a variable rate loan product, which is most common, and a select few will even offer fixed rate loans.

FACT or FICTION: Since the government guarantees SBA loans, the bank making the loan does not have any risk in the deal so these loans should be easy to qualify for.

This is fiction. Although the common misconception is that the U.S Government is the actual lender in these transactions, in actuality it is a participating lender who funds the loan with a partial guaranty provided by the government. This guaranty can typically be up to 75%, and the guaranty is definitely intended to motivate SBA approved lenders to offer financing options to borrowers and industries that may otherwise have difficulty securing a conventional loan. Regardless, the lending institution still has credit guidelines that is must follow, as well as the Federal Reserve and a board of directors to report to. Aside from the overriding SBA parameters, lenders are also required to work within their individual guidelines, which are governed by their specific credit policies and will impact deal points such loan to value, rate, term, and overall risk tolerance. The bottom line for borrowers is that while many loan features will be similar, each lender's individual program implementation and credit qualification process will be somewhat unique.

FACT OR FICTION: Getting an SBA loan will be straightforward. The SBA has been making loans for a long time, so the only new aspect is storage.

The fact is that obtaining an SBA loan for a self-storage facility may be more complicated than one would think. In reality, while there are over three thousand lenders making SBA loans, most of these lenders maintain an average loan amount of less than $250,000; clearly their specialization is in making small business loans and not in real estate lending. Although this subset of SBA experts will know the SBA programs inside and out, it is unlikely they will possess the knowledge and expertise to underwrite and value self-storage. To complicate matters, among the recent changes to the SBA programs was an increase to the maximum allowable loan amount from $2M to $5M. The combined effect of these factors is that many lenders will quickly find themselves outside of their comfort zone, and the end result can often be a bit of the deer in the headlights phenomena that results in a slow and painful process, often with an undesirable outcome, for the borrower.

It is advised that Self-storage borrowers select an SBA lender with extensive real estate experience. To make this determination, seek out a preferred SBA lender that maintains an average loan amount north of $1,000,000; typically these lenders will have more experience and comfort in working with larger real estate transactions.

FACT or FICTION: A borrower can be 'too strong' to qualify for an SBA loan.

This is a fact that depends on the type of borrower. SBA loans are designed for 'small businesses', so an individual borrower (person) becomes 'ineligible' when their personal liquidity (non-retirement assets) exceeds 1x the loan amount on loans over $750,000. A corporation becomes 'ineligible' when their tangible net worth exceeds $15,000,000 or their net profit exceeds $5,000,000.

FACT or FICTION: SBA loans will provide a much needed and meaningful source of construction financing for Self-Storage.

This is fiction. Technically, the SBA has no prohibition against expansion or new construction, and in fact the programs are designed to support business start-ups and expansions. The limiting factor, however, is in the overall banking and credit environment. The fact is that State and Federal Regulators are currently requiring banks to limit their exposure to real estate loans, and especially construction loans. As a result, projection-based expansion and true ground-up construction loans are very difficult to obtain in this banking environment, SBA or otherwise.

There has not been as much hype and enthusiasm about anything finance related for self-storage that I can remember for several years, and rightfully so. This topic is certainly the buzz of the industry right now, and it has created a lot of optimism amongst the borrowing community that their calls for financing solutions have been answered.

The fact of the matter is that like most things in life worth doing, there will be a learning curve and period of transition involved with getting the bugs worked out; after all - as the old saying goes, no pain, no gain. But rest assured that lenders and the financial community recognize the opportunity that exists, and they are fast at work right now figuring it out.

Inside Self-Storage February 2011

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