The SBA 504 Loan as Financing for Storage Facilities in California

Self-storage is a thriving market populated by many small businesses. As the market cycle plays out, financing conditions are becoming more challenging for small business, however. Competition is increasing between large and small operators, and this makes the opportunities provided by the Small Business Administration (SBA) 504 loan program even more appealing and necessary. Business owners would do well to finance the expansion of their self-storage facilities sooner rather than later. The Small Business Administration wants to help small businesses remain competitive/compete with larger ones. The SBA 504 Loan Program was created to promote job growth and small business prosperity by offering quality financing and terms attractive to all parties.

Storage Facility Financing Is Becoming More Complex

The self-storage market is benefitting from two discrete demographic trends. As the so-called baby boomers retire and move to smaller residences, they are using self-storage services to hold treasured family possessions that they no longer have room for at home. At the same time, the millennial generation is establishing its place in the economy and acquiring a sufficient amount of possessions to demand self-storage services as well.

Nonetheless, analysts are catching glimpses of the end of the current market cycle.  In some cities around the country, market saturation is fast approaching. California has felt little of this so far, but the tendency is clear. This is going to cause small operators to encounter increasing complexity as they seek to expand.

While self-storage is an industry dominated by small businesses, the largest operators have revenues of hundreds of millions, and sometimes billions, of dollars. Due to their size, they have ample resources and access to financing to use for expansion. Large operators can attract the attention of non-bank lenders such as large finance companies and can obtain securitized mortgages (also known as conduit loans) that have conditions, such as high fees and short maturities, that smaller borrowers may have trouble meeting. This gives them an advantage over small operators as they compete for space on a market that is nearing its limits.

It is important to realize, however, that this is purely an issue of scale. Small self-storage operations have not lost their luster as candidates for financing. They also have many advantages compared to other forms of commercial real estate: They are comparatively inexpensive to build, have an extremely low rate of failure and remain profitable at a low rate of occupancy, for example. All of this makes them extremely attractive to lenders.

The SBA 504 Loan for Small Storage Facility Operators

In this context, the 504 loan is more important than ever for small self-storage facility operators. Banks and credit unions readily issue loans to the most qualified borrowers, but high selectivity, high down payments and balloon payments can limit small operators accessibility to them.

A 504 loan combines a loan from a conventional lender such as a bank or credit union providing 50% or more of the project total with a loan facilitated by a Certified Development Company (CDC) for up to 40% of the total, or $5 million ($5.5 million if the project is eligible for the SBA’s Green Energy Program).  That leaves just 10% down payment to be supplied by the borrower.

A 504 loan is more appealing to a conventional lender because the bank can cover half of the total project cost and still remain in first lien position. It is more appealing to the borrower because, regardless of the conditions on the bank loan, the borrower can receive up to $5.5 million on the favorable conditions of the 504 loan, such as a fixed, below-market rate and 10- or 20-year terms with no balloon payments. The 504 loan will have a 25-year option soon as well.

A 504 loan can be used to:

  • purchase land or buildings
  • construct, upgrade or renovate buildings
  • purchase equipment with a service life of ten years or more
  • refinance conventional debt

Thus, the 504 loan is appropriate for new construction or upgrades to storage facilities.

Go Green to Unlock Additional Financing

Self-storage facilities are well suited for the SBA Green Energy Program. A project can qualify for the program by meeting any of these three requirements:

  • Buy or construct a building that consumes 10% less energy than your current location
  • Make upgrades to the building you own to consume 10% less energy, or buy the building you now lease and do so
  • Buy or construct a building that produces 10% of the energy it consumes or that produces fuel to reduce fossil fuel consumption, or buy equipment to do so at your current location

Besides being eligible for a higher level of financing per project, program participants are eligible for $16.5 million in aggregate financing from the SBA.

You can learn more about financing the expansion of your storage facility from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender and a high-volume loan provider. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.


Barbara Morrison, a local small business advocate and civic leader, founded her first company TMC Financing in 1981. TMC is a Certified Development Company that provides commercial real estate financing to small business owners via the SBA 504 Loan Program. TMC consistently ranks among the top certified development companies nationwide, and has funded projects worth more than $9 billion across California and Nevada. Nearly 5,000 small businesses have benefitted from this financing, resulting in the creation of an estimated 50,000 jobs. TMC is also the No.1 SBA 504 hotel lender in the United States. Barbara is also the founder of Working Solutions, a Bay Area microlender whose mission is to provide micro entrepreneurs, particularly low-income individuals, women and minorities, with the access to capital and resources they need to start a successful business.
Barbara Morrison