Terry Campbell General Manager – Self-Storage, Live Oak Bank

Although more than half the year has passed and plenty of new self-storage developments have come on line in 2017, there are still markets across the United States with pent-up demand for storage. However, whether acquiring, converting, or developing self-storage properties, those who are seeking to either enter the industry or expand their presence may have difficulty obtaining financing soon.

According to Terry Campbell, general manager of self-storage for Live Oak Bank, a Wilmington, N.C.-based lender that has funded 110 self-storage loans between May 2015 and May 2017, lending may start to slow down over the next few quarters as he’s heard talk amongst some of those in the lending community as well as self-storage brokers that many banks are beginning to tighten their purse straps. “Some are saying that they are about to reach their maximum appetite for commercial lending,” says Campbell, who joined Live Oak Bank in 2015 after spending 20 years with a major self-storage building manufacturer.

Moreover, Campbell adds that banks are being more cautious about lending to borrowers with minimal equity. For the most part, lenders are seeking borrowers who have the ability to put a large amount of equity down and have equity in other properties or endeavors. Therefore, borrowers with little equity or no previous self-storage experience may need to seek funding from another source.

A Good Alternative
Small Business Administration (SBA) loans may be the answer to the capital quandary. In fact, Campbell calls SBA loans a “good fit” for those who don’t have the traditional amount of equity that is needed. “SBA loans offer lower down payments,” he says. “They allow borrowers, who may not be able to get funding otherwise, a realistic way to get loans.”

One of the SBA loans for storage-related business ventures fall into the 7(a) loan program. With the 7(a) loan program, there is a maximum loan amount is $5 million; however, in some cases a bank will offer additional amounts through a conventional companion loan. Live Oak Bank can finance up to $7.5 million, depending upon the use of the proceeds. However, the SBA does not set a minimum loan amount. Live Oak has additional options to go higher than that amount for the right deal and the right borrower. Moreover, SBA 7(a) loans have no balloons or financial covenants and cash flow-based loans are not network or LTV (loan to value).

According to the website SBA.gov, “SBA can guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000. SBA’s maximum exposure amount is $3.75 million. Thus, if a business receives an SBA-guaranteed loan for $5 million, the maximum guarantee to the lender will be $3.75 million or 75 percent.” Therefore, compared to traditional construction loans, SBA loans could be a more favorable option for those looking to be self-storage owners.

The SBA.gov website goes on to say that, “The requirements of eligibility for the 7(a) loan program are based on specific aspects of the business and its principals. As such, the key factors of eligibility are based on what the business does to receive its income, the character of its ownership, and where the business operates. SBA generally does not specify what businesses are eligible. Rather, the agency outlines what businesses are not eligible.”

Nevertheless, SBA.gov lists several eligibility requirements. “To be eligible for assistance, businesses must:

  • Operate for profit;
  • Be small, as defined by SBA;
  • Be engaged in, or propose to do business in, the United States or its possessions;
  • Have reasonable invested equity;
  • Use alternative financial resources, including personal assets, before seeking financial assistance;
  • Be able to demonstrate a need for the loan proceeds;
  • Use the funds for a sound business purpose; [and]
  • Not be delinquent on any existing debt obligations to the U.S. government.”

The website also notes that SBA loans are not available to any “business owned 20 percent or more by a person who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral depravity”.

In addition, there are stipulations as to what an SBA loan can finance. For example, in a self-storage application, SBA loans can be used to purchase furniture, fixtures, supplies, materials, and/or real estate (including land and buildings). They could also be used to construct a new building; renovate an existing building; refinance existing business debt; establish a new business; or assist in the acquisition, operation, or expansion of an existing business.

While the specific terms of SBA loans vary, as they are negotiated between the borrower and SBA lender, both fixed and variable interest rate structures are available. Live Oak Bank, the second-largest lender of SBA loans in the U.S., offers a 25-year amortization term and its borrowers may be able to inject as little as 10 percent equity. Campbell also mentions that SBA loans may be able to include enough cash to get a newly constructed self-storage facility through the lease-up period.

Is It Feasible?
On top of the standard SBA loan requirements, there is one additional caveat at Live Oak Bank: They won’t invest without a feasibility study. “Absolutely do a feasibility study,” Campbell advises. Regardless of the lender or the loan type, he is adamant that every borrower “do their homework” before attempting to obtain financing.

Feasibility studies have saved overzealous developers from building facilities on seemingly perfect plots that were peppered with problems. For instance, there are parcels with too much competition or not enough traffic or shoddy soil. And there are rural markets that don’t have enough demand and urban markets where land prices or low rents make self-storage cost prohibitive. When the land is right, feasibility studies can help determine how many floors to build and how many units to have as well as what products to offer, such as climate-controlled units.

Without a doubt, feasibility studies are crucial for a multitude of reasons, but the main purpose, from a lender’s perspective, is to determine whether the property will be able to support itself. “Hopefully the smart ones are requiring feasibility studies,” says Campbell, who adds that Live Oak Bank’s self-storage team does site evaluations and provides guidance to borrowers. “We are experts in self-storage and SBA lending. We want to do our part in keeping the industry healthy by not taking part in any project that may not be a success, and a feasibility study by a seasoned feasibility expert is a major key in that decision.”

Campbell couldn’t be more right in regards to feasibility studies; it’s always in your best interest to hire a consultant with ample self-storage knowledge in your desired market. Due to the nuances of the storage industry, an experienced professional will provide the most accurate and honest report as to whether the site would be suitable for a successful self-storage facility.

Be Prepared
Not unlike other loans, applying for an SBA loan requires plenty of preparation and involvement. There are several forms to complete and numerous documents to collect such as financial statements and income tax returns for the past three years. Moreover, be sure to include the results of the feasibility study in your loan application packet to ensure the lender that your project works.

SBA.gov provides a loan application checklist, and Campbell suggests having most—if not all—of your ducks in a row prior to approaching a lender.

“Try to be Johnny on the spot when supplying info to the bank or lender,” he says, as any missing documentation can delay the approval process and loan processing time. “You become part of our team, and providing the needed documents in a timely and complete manner is crucial in keeping progress moving forward in a timely manner.”