Over the last several months, there has been a growing buzz in the self-storage industry regarding changes to the Small Business Administration's (SBA) lending guidelines. These new and exciting developments mean self-storage is now eligible for SBA financing, which brings immediate liquidity to the asset class. It's anticipated both smaller facilities as well as ones in secondary markets will accrue the most benefits, given that before now, these two groups have typically only been able to secure financing from smaller, local lenders.
Because the SBA program is so new to the industry, it's natural to have questions about program eligibility and how the process works. Additionally, there are a number of misconceptions about SBA loans that lenders are eager to put to rest.
For instance, many believe the U.S. government is the actual lender in an SBA transaction, when it's actually participating lenders who fund the loans with a partial guaranty provided by the government. This guaranty allows SBA-approved lenders to offer financing options to borrowers and industries that may otherwise have difficulty securing a conventional loan.
Another point of confusion is many borrowers believe all SBA lenders are the same, but this is not true. There are hundreds of SBA lenders in the United States, but few specialize exclusively in SBA lending.
I recently spoke with George Vredeveld, president and CEO of Quadrant Financial Inc., a large SBA lender, to address many of the questions and misconceptions many in the self-storage industry have about this new lending opportunity.
SBA financing is designed for operating companies, commonly referred to as "owner-operators." Historically, the SBA viewed self-storage as a "passive" real estate investment. What it found is most of the individually owned self-storage facilities were in fact being operated and managed by the owner. It was an issue of "active" vs. "passive" management and the fact that self-storage facilities are an actual business, as compared to a retail strip center with multi-tenants, which would be considered passive.
In general, SBA financing is for actively owned and managed facilities. SBA doesn't specifically preclude a facility from being managed by a third party; however, most SBA lenders will prefer and many will require the owner be actively managing the property. In short, if you have a third-party managed facility, it will be extremely difficult to find an SBA lender to fund the request, even though it's technically allowed by the SBA.
Until recently, SBA 7a lending was the only program under which debt refinance was permitted. The recent Jobs Bill (Small Business Jobs Act) made refinancing eligible under the SBA 504 program, but for a limited time frame and with certain specific qualifications. The two programs are really designed for different borrower types.
SBA 7a is designed for borrowers who have multiple uses of proceeds (real estate, equipment, working capital, etc.), who typically have a loan-to-value (LTV) in excess of 90 percent, want to refinance, or have a shorter holding time frame. SBA 7a is a variable-rate program with a three-year prepayment penalty, whereas part of the SBA 504 loan is a 20-year fixed-rate bond, which carries a rather steep 10-year prepayment penalty.
SBA 504 borrowers typically have a long-term holding period, a single use of proceeds (real estate or equipment purchase), and will sacrifice flexibility for an attractive long-term fixed rate. In short, 7a borrowers will sacrifice interest-rate volatility for flexibility and the ability to have higher leverage and multiple use of proceeds. SBA 504 borrowers sacrifice flexibility and limited uses of proceeds for a long-term fixed rate.
Editor's note: The U.S. Senate passed the Small Business Jobs Act in September. It will provide small businesses with $12 billion in targeted tax breaks.
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