The market for self-storage facilities has been expanding rapidly. This is a field dominated by small business. There are about 36,000 self-storage businesses today, 85% of which are small family businesses. They represent $37 billion in annual revenue and $16.1 billion in profit. And they are filling up fast, thanks in part to retired baby-boomers downsizing their homes. In addition, six of the top ten self-storage markets in the U.S. are in California.
The Small Business Administration (SBA) 504 loan program can help entrepreneurs lock down a facility for their business or help those who are already operating self-storage facilities expand.
A Look at the Self-Storage Business
Self-storage facilities are economical to operate and generally break even at 50% occupancy, meaning their average occupancy of 85% creates a solid profit margin. Demand is need-based and therefore very stable, and even tends to increase in times of recession, since homes and businesses are downsized.
Dean Jernigan, CEO of Jernigan Capital, a leader in financing the industry, estimated that 3,450 new self-storage facilities would be needed by 2020 to meet demand in the top 50 U.S. metropolitan markets. California is a particularly healthy market, where the average rent for a self-storage unit rose 8.5% ($114) in the first nine months of 2017, after healthy rises in 2016 and 2015 as well.
In addition to the thriving market, there are a number of other attractive aspects of the self-storage business. One is the flexibility it affords the small business owner: you can build a new facility or buy an existing facility; you can operate independently or you can be part of one of the numerous franchises. You can also own the facility independently and turn its operation over to a management company.
Building A Self-Storage Facility
A self-storage facility has traditionally been relatively modest in construction and infrastructure: a simple structure with no climate control, usually located on non-prime real estate. They were inexpensive to build, compared to office or residential construction, and easy to run, with low maintenance requirements. So-called first- and second-generation storage facilities were single-story with few amenities. This type of facility is still being built, but it is no longer the only choice in self-storage.
Third generation self-storage facilities are multilevel and visually impressive, with striking design and custom finishes. They are often located closer to residential and shopping areas than was previously customary. Third generation self-storage facilities might offer specialized options, such as records storage, boat and RV storage, or wine storage for restaurants. Keeping wine is actually a major self-storage activity around larger cities and affluent neighborhoods. Some facilities even receive wine shipments on the behalf of tenants.
The Self-Storage Business and the 504 Loan
The Self-Storage Emporium in Larkspur, Marin County, CA provides an example of how business owners can take advantage of the 504 loan. Business owner Michelle Larsen found she was nearly at full capacity and still had a substantial waiting list. She decided to expand and applied for a 504 loan. The loan, facilitated by TMC Financing, made it possible for the business to accommodate demand and continue growing. Now, this upscale self-storage facility owned by Michelle Larsen provides secure, reliable, and safe self-storage in a well-maintained facility with easy access seven days a week. It also offers temperature-controlled units in a variety of sizes.
Self-storage facilities became eligible for 504 loans in 2010 when the SBA changed its rules on passive income. Borrowers should be aware of outdated information that might still be accessible online.
Now that the SBA has added self-storage facilities to their eligibility list, what can a 504 loan be used for?
- the purchase of land or buildings
- the construction or renovation of buildings
- the purchase of equipment with a service life of ten years or more
The 504 loan is administered by Certified Development Companies (CDC) such as TMC, and loans are granted in conjunction with a conventional lender. Your CDC can help you find a bank to partner with for the loan, if you want. The conventional lender provides 50% or more of the total. Your CDC facilitates the SBA loan for up to 40%, or $5 million ($5.5 million if the project includes energy-efficiency measures).
- 50% Conventional lender
- 40% CDC
- 10% Borrower
Self-Storage and the Green Energy Program
Besides the higher loan cap per project, the SBA Green Energy Program offers the considerable advantage of increasing the total amount one is able to borrow from the SBA. You can qualify for the Green Energy Program by doing one of the following:
- Constructing or buying a building that consumes 10% less energy than your current location
- Building or buying a building that produces 10% of the energy it consumes or produces fuel to reduce fossil fuel consumption, using equipment financed through the loan
There are a lot of ways self-storage facilities can be made greener. Recycled and environmentally friendly components can be used in construction, for example. Energy-efficient lighting and air conditioning and solar power generation equipment can also be installed. These measures would qualify you for the Green Energy Program. They also lower your operating costs and make a great advertising feature, especially in environmentally friendly California!
If you are interested in expanding into the storage business or expanding your existing storage business, contact TMC Financing today. Whether you are just beginning to investigate your options or already have a property in mind, our 504 loan experts will be happy to advise you on how the 504 loan process works.