Are you planning a self-storage construction project and in need of financing? Look no further! In this blog post, we'll delve into the key factors you should consider when selecting the best lender for your self-storage construction project, specifically for SBA 504 loans.
1. Understanding SBA 504 Loans
Before we dive into the details, let's clarify what SBA 504 loans are. SBA 504 loans are a type of financing designed for small businesses, and they are particularly well-suited for real estate and construction projects. These loans typically consist of two parts:
- First Part: This is a conventional bank loan, usually provided by a local or national bank. It covers a significant portion of your project's cost.
- Second Part: The second part is the SBA guaranteed loan, which complements the first part. The SBA (Small Business Administration) guarantees this loan, making it a more attractive option for lenders. The second part is typically funded by the SBA itself.
2. Eligibility and Project Size
SBA 504 loans are ideal for construction projects, especially ground-up developments. If you are planning a project that is fully entitled or working on obtaining the necessary permits to make it “shovel ready,” an SBA 504 loan can be an excellent choice. These loans can accommodate projects as substantial as $18 to $20 million.
3. The Role of the Lender
In an SBA 504 loan, the lender's role is crucial. The bank provides funding for both the first and second parts of the loan. However, once your project receives a certificate of occupancy, the second part, or the SBA guaranteed loan, is sold in the secondary market. This means that the bank's control over this part diminishes, and the loan becomes an attractive asset for investors.
4. Funding Distribution
Understanding the funding distribution is vital for your self-storage construction project. In an SBA 504 loan:
- Approximately 50% of the total project cost is funded by the senior lender (the bank).
- The remaining 40% of the total project cost is covered by the second lien, which is the SBA guaranteed loan.
This funding structure makes SBA 504 loans an attractive option for self-storage projects, as it provides a significant level of financing.
5. SBA Eligibility for Self Storage
It's important to note that SBA eligibility for self-storage projects has evolved over the years. Prior to 2010, self-storage was not considered an eligible project for SBA financing. However, in 2010, this changed, making self-storage a viable option for SBA 504 loans. This expansion of eligibility has opened doors for small business owners looking to enter the self-storage market.
6. Leverage and Rates
One of the most compelling aspects of SBA 504 loans for self-storage projects is the high level of leverage they offer. With the SBA guaranteed loan covering 40% of the project cost, you can secure a substantial amount of funding while maintaining favorable terms.
The interest rates on SBA 504 loans can be competitive, and it's worth exploring this financing option to determine if it aligns with your project's financial goals.
7. The Role of a Lending Company
Navigating the complexities of SBA 504 loans and finding the right lender can be a daunting task. This is where a lending company can be invaluable. These experts can help you put together a comprehensive loan package and identify the most suitable bank, credit union, or non-bank SBA partner for your project. Best of all, there's typically no fee to you, as the lending company is compensated through referral fees from the banks.
8. Loan Structure and Negotiation
The loan structure for SBA 504 loans can be somewhat complex. After obtaining a certificate of occupancy, the second lien will become a straight fixed-rate loan. As of today, this rate is approximately 6.39%, with monthly adjustments. The terms of the senior loan, provided by the bank, are negotiated separately. These negotiations can impact the interim construction phase for both the first and second parts of the loan.
9. Prepayment Penalties
Keep in mind that there is a 10-year prepayment penalty on the second part of the SBA 504 loan. This means that you'll need to carefully consider your long-term financing strategy. In some cases, borrowers opt for the SBA 7A loan, which has a shorter three-year prepayment penalty, offering more flexibility.
10. Conclusion
If you're considering a self-storage construction project and are looking for the best financing option, the SBA 504 loan can be an excellent choice. It provides the funding you need, competitive interest rates, and the expertise of lending companies to guide you through the process.
We recommend reaching out to a lending expert to learn more about SBA 504 loans and how they can be tailored to your specific project. By doing so, you'll be on your way to securing the best financing for your self-storage construction project.
In conclusion, SBA 504 loans offer an attractive and flexible financing solution for your self-storage project. With the right guidance and a thorough understanding of the process, you can make your self-storage construction project a reality.