By Bruce Hurta
In the past, the SBA had maintained that a business must have a primary small business management component; otherwise, the real estate would be ineligible for the SBA loan program. Without this primary business management component, the SBA considered the property to be investor real estate rather than small business real estate.
A problem existed, however, because real estate in certain industries had both the investor profile as well as the profile of a small business with a business management component. The industry with the most “gray area” was the self storage industry.
Investment real estate is typically ineligible for SBA financing because it is not “owner occupied” by a small business as required by the U.S. Small Business Administration.
SBA lenders are required to assess each small business loan applicant’s eligibility for the SBA government-guaranteed loan program before they process the loan application. A hot point in determining eligibility for financing business real estate has always been whether or not the owner is merely an investor collecting rents and speculating for higher future values.
For many years, the SBA required participating lenders to assess eligibility by determining whether or not a self storage facility earned more income from services than from rents. Usually that was not the case, and the self storage business and its property were deemed ineligible for SBA financing. However, with the passage of the Small Business Jobs Act of 2010, all self storage properties were deemed eligible for SBA loans. No more gray area!
The SBA 7(a) Loan Program for Self Storage Facilities
The SBA 7(a) loan offers the participating lender a partial government-guaranty on a loan, which enables the lender to offer lower down payments, longer repayment terms, and easier qualifying criteria than conventional bank lending. Loans are available up to $5 million per borrower. Loan proceeds may be used for purchase, expansion, new construction, or refinancing of self storage facilities.
Other “gray area” business/properties, which were made eligible for SBA financing, include RV Parks/Campgrounds and antique malls. Both industries display characteristics of investor real estate by collecting rents; however, SBA has deemed them to be eligible for SBA financing due to the business management profile these industries require.
In this market, there are many financing options for larger, sophisticated, self storage projects. However, in many locations, there is room for a small business operator who may not have access to an array of financing options. The self storage operator’s bank may not be offering this type of financing or the down payment requirement may be excessive. For these small business owners, SBA government-guaranteed financing may come as a welcome opportunity.