Lenders have warmed up to self-storage loans
Basics of self-storage loans
- Traditional banks and lenders offer self-storage loans, and a number of companies specialize in this niche asset class.
- There are SBA-backed loans for storage facilities.
- Lenders evaluate the credit quality of borrowers and the condition of buildings.
- Lengthy experience in the self-storage industry is not required to obtain loans.
The self-storage industry doesn’t get much business press, but it has proven to be a high-yielding asset class that has lower maintenance costs than other commercial enterprises and offers higher returns on original investment.
Self-storage also is a big business. There are more than 50,000 facilities across the United States. During the recession, it was hard for people to get loans for storage facilities, but in a good economy, self-storage facilities tend to do well.
Several traditional banks and other commercial lenders now offer loans to build storage facilities, purchase existing facilities and refinance existing loans. A number of lenders even specialize in this type of asset. Lenders typically offer fixed-rate commercial loans for storage facilities with terms from 10 to 15 years. Longer terms also are available that combine acquisition or construction financing with working capital. As with other commercial loans, borrowers will have to jump through several hoops, however.
Lenders primarily look at the credit history and net worth of the borrower, along with the quality of the property itself. Borrowers will need a solid credit score, and are often vetted in other ways to prove their good character and past track records. The borrower doesn’t necessarily need long-term experience in the self-storage industry, however, and can get a loan even if they have no experience owning or operating a facility. To support the loan application, the borrower can affiliate with a franchise company or management company.
As for the property, lenders typically want to see healthy income reports and occupancy trends on the property. Properties also typically must be paved, and have other working infrastructure in place, such as utilities and security lighting.
As a rule of thumb, the debt-service coverage for a loan on a self-storage facility must be at 1.25 — in other words, the projected income of the property must exceed the amount to service the overall debt by at least 25 percent.
SBA self-storage loans
Beyond traditional commercial loans, small business owners also can obtain loans for self-storage facilities through the Small Business Administration (SBA). The SBA offers two programs, the 7(a) and the 504 loan programs.
The 7(a) program is suitable for loans less than $5 million. It is typically more popular with smaller companies, because borrowers can use the loan proceeds to fund acquisition or building projects, as well as for working capital. These loans carry 25-year terms.
The SBA 504 program loans have 20-year terms, and are typically larger loans that exceed $5 million. SBA 504 loans can be used for the purchase of land, including existing buildings, and for the construction and renovation of a storage facility. Funds from a 504 loan cannot be used for working capital.
The SBA doesn’t loan out the money. Borrowers must apply through an SBA-approved lender, which will process the application.
Financing older buildings
It is possible to get loans on older and underperforming storage facilities. Several lenders offer short-term, interest-only loans that will allow owners to stabilize and renovate a property, and then refinance into a longer-term fixed rate loan.
The bottom line is that owners and investors in storage facilities have numerous financing options, which should increase as the economy improves.