Self Storage- SBA Funding 09 13 2021

[Henry Clark]

Self Storage- SBA Financing 09 13 2021

Our 7th location has taken about 3 years to get financed on our Self Storage project. The project was under a Construction Loan interest only while we processed our SBA loan. The original SBA loan proposal took 9 months to process, which was extremely long compared to the 3 to 4 months projected. We then got the property and proposed facility appraisal and the appraisal was about $1,000,000 over cost. Which is great, but I found out I could not use that appraised equity value on the next phase of this project which was to be Flex/Contractor buildings. SBA requires 51% occupancy by the applicant. Plus they just didn’t like the idea to begin with. Thus I stopped the loan process. Even though they were going to give us 6 months both principal and interest for the SBA portion of the loan with the Covid funding/ARRA.

This is an 8 acre property, we split 4 acres for the Self Storage and the other 4 acres is to be for a Flex/Contractor complex. The SBA loan took all 8 acres as collateral. I knew if I proceeded with the loan they probably would not rescind the additional 4 acres. Put the loan on pause. Did a Subdivision of the land with the city. This took about 6 months. Finally got the subdivision approved.

Went back to the SBA and put in a request for the property to be released. Covid hit. Three quarters of SBA personal were switched from loans to process PPP (Paycheck Protection Program). Thus any loaning processing got extended indefinitely due to lack of resources. This was a simple request since the total Appraised project plus the original land purchase we paid ($200,000), left the banks with about $600,000 “extra” collateral value. Far more than the 10% requirement, which with the collateral they have could be an $8mm project.

Loan Signing- September 13, 2021

10%- our portion

45%- Local Bank

45%- SBA

Terms:

Local Bank- 4.25% 10 year term; 5 year fixed/renewal; At 5 years renewal interest will be 1% point over index, currently at 3.25%. No prepayment penalty. No origination fee from the initial Construction loan.

SBA- 2.86% was 4.7% when we started the above process; 20 year fixed; 10 year descending early payment penalty.

Cash flow:

Principal and interest is $8,500 per month. Currently we are running $12,500 at 48% financial occupancy, and can cover. Normally we shoot for a 65% occupancy for breakeven (P/I, property tax, insurance, income taxes, etc). Since we developed this location and had the hard costs, we were able to do a Cost Segregation, thus no Income taxes for the first two years, to help with cash flow.

Shortcomings/Whoopee:

The above additional Appraised value can only be used through another SBA loan. When we met with the banker today, let him know we are already to start Phase 2 (see separate post). The additional collateral from Phase 1, covers phase 2, thus no more capital infusions. We also discussed our Flex/Contractor building project, which there is a separate Post, and he noted the 4 acres at the appraised value will cover LTC/LTV at 25% up to a total $2mm project, so no cash infusion for that project is required. Things are looking good.

Wisdom learned:

a. Always segregate properties up front, if you plan two different projects. We knew up front we would not do the full 8 acres in Self Storage (market risk management- 230 built, another 200 phase 2, Could have built another 350 on the flex site). Intentionally built the storage on the backside of the property and left the front for the Flex buildings to utilize the Vehicles per day around 15,000 on 4 lane road. Will make it easier to rent the Flex buildings.

b. Bad luck is good sometime. SBA 2.86% versus if done earlier 4.7%.

c. Don’t underestimate how long the government takes, both on the Loan processing and the re-zoning/subdivision process.

d. Construction period interest. This is before we started renting was about $50,000. Due to the weather and construction taking about an extra year, we were about $35,000 over our original budget.

Start small and Make Your Big Mistakes Early

Yep, still learning.  Ya'll are probably getting bored reading these posts.  About another year and another 700 units built on existing sites and I will be done posting.  Just passing the time, sharing experiences.