Financing for Self Storage Facilities: SBA, Construction and Bridge Loans
Financing for self storage facilities usually comes from one of four loan types. Each fits a different stage of the project. This guide explains SBA 7(a), SBA 504, construction loans and bridge loans in plain terms. SBA program terms below come only from SBA.gov and the federal rules SBA lenders follow. Confirm current terms with your lender, because SBA updates its rules and procedures.
Match the loan to the stage of the deal
Start by naming what you are financing. Raw land and a ground-up build need different money than a stabilized facility. A half-full facility sits in between.
| Situation | Common fit | Why |
|---|---|---|
| Buying a stabilized facility | SBA 7(a), SBA 504, or a conventional bank loan | Existing cash flow supports long-term debt |
| Ground-up construction | Construction loan, or SBA 504/7(a) with construction draws | Money is released in stages as work is done |
| Buying a facility in lease-up | Bridge loan | Short term debt until occupancy supports a permanent loan |
| Expansion or conversion of a building you own | SBA 504 or 7(a), or a construction loan | Long-lived real estate improvements |
| Working capital for opening | SBA 7(a) | 504 cannot fund working capital |
Before you shop lenders, finish your numbers. A lender will want a feasibility study and a budget like the one in our cost to build guide.
SBA 7(a) loans
The 7(a) is SBA's general business loan. A bank makes the loan and SBA guarantees part of it. SBA states the maximum 7(a) loan amount is $5 million.
SBA lists eligible uses that include buying, refinancing or upgrading property and buildings. It also lists working capital, equipment, and full or partial ownership transfers. See the SBA 7(a) program page.
Term
Under 13 CFR 120.212, a 7(a) loan may run up to 25 years, including extensions. The real estate portion may add the time needed to finish construction. Loans are otherwise generally limited to ten years. The rule also says the term should be the shortest appropriate for repayment ability.
Where 7(a) helps storage owners
- One loan can combine real estate, equipment and working capital.
- It can finance a full or partial ownership transfer, such as buying out a partner.
- It can cover opening costs that a 504 loan cannot.
Ask each lender for current rates, fees and guaranty percentages in writing. SBA sets limits, but terms vary by lender.
SBA 504 loans
The 504 loan funds major fixed assets such as land and buildings. It is delivered through Certified Development Companies (CDCs). SBA says 504 maturities of 10, 20 and 25 years are available.
The same SBA page says the rate is pegged to an increment above 10-year U.S. Treasury rates. It lists eligible uses as buying, building or renovating land and buildings, plus long-lived equipment. It says 504 cannot fund working capital, inventory, or speculation or investment in rental real estate.
The SBA 504 page lists the maximum amount in two places. They did not match when we checked: one says $5 million and the other says $5.5 million. Confirm the current limit with your CDC.
Your down payment under 504
13 CFR 120.910 sets the minimum borrower contribution. It is at least 10 percent in most cases. It rises to 15 percent if the business has operated two years or less. It also rises to 15 percent for a limited or single purpose building. It is 20 percent if both apply.
Whether a lender treats a storage building as limited or single purpose is a question to ask early. It changes your cash needs. [SOURCE NEEDED: SBA guidance on how self storage buildings are classified for 120.910.]
SBA eligibility questions specific to storage
SBA programs exclude some real estate investment businesses. 13 CFR 120.110(c) makes ineligible passive businesses owned by developers and landlords that do not actively use or occupy the assets.
SBA also has occupancy rules for real estate. Under 13 CFR 120.131, a borrower must permanently occupy and use at least 60 percent of new construction. For an existing building the minimum is 51 percent.
How these rules apply to a self storage operating business is a lender and SBA determination. Ask your lender how they underwrite storage under current SBA procedures. [SOURCE NEEDED: current SBA SOP 50 10 provision on self storage eligibility.]
- Ask the lender if they have closed SBA loans on self storage before.
- Ask how they apply the passive business and occupancy rules to storage.
- Ask whether the building is treated as special purpose for 504 down payment.
- Get the guaranty fee, packaging fee and prepayment terms in writing.
Construction loans
A construction loan funds a build in stages, called draws. The lender releases each draw after an inspector confirms work is complete. You usually pay interest only on the amount drawn.
Construction loans are short term. They are repaid by a permanent loan or a sale once the facility is built and leasing. Terms, rates and required equity vary by lender. [SOURCE NEEDED: lender documentation on typical construction loan terms for self storage.]
What a construction lender will ask for
- Approved site plan and building permits, or a clear path to them
- Signed general contractor agreement with a fixed or guaranteed maximum price
- Detailed budget with a contingency line
- Construction schedule and draw schedule
- Feasibility study and lease-up projection
- Proof of your equity and personal financial statements
- Phase I environmental site assessment
Zoning approval usually comes before a construction loan closes. See what to check on zoning before you commit to land.
Bridge loans
A bridge loan is short term debt that covers a gap. In storage, the gap is often lease-up. A permanent lender wants stable occupancy and income first.
Bridge loans usually cost more than permanent debt and carry shorter terms. Plan the exit before you close. The exit is a refinance or a sale. [SOURCE NEEDED: lender documentation on bridge loan pricing and terms.]
- Know the extension terms and fees if lease-up runs long.
- Check for prepayment penalties that could block an early refinance.
- Model the refinance at a higher rate than today's rate.
Compare offers side by side
Lenders quote in different formats. Put every offer in one table so the trade-offs are visible.
Prepare your loan package
A complete package speeds up every lender. Have these ready before you apply.
- Business plan with market, competition and management experience
- Feasibility study or appraisal
- Sources and uses of funds
- Three years of personal and business tax returns, if you have them
- Personal financial statement for each owner
- Purchase contract or land contract
- For an acquisition, the seller's rent roll and operating statements
Buying an existing site? Our guide to buying an existing facility covers the due diligence lenders expect.
Frequently asked questions
Can I use an SBA loan to build self storage?
SBA 7(a) and 504 both allow construction uses. Eligibility for a storage business depends on SBA rules on passive businesses and occupancy. Confirm with an experienced SBA lender.
What is the maximum SBA 7(a) loan?
How much down payment does an SBA 504 loan need?
At least 10 percent in most cases, more for new businesses or special purpose buildings, under 13 CFR 120.910.
Can a 504 loan cover working capital?
No. SBA's 504 page lists working capital as ineligible. A 7(a) can cover it.
When does a bridge loan make sense?
When a facility has not reached stable occupancy yet and you have a clear plan to refinance or sell.