I recently signed a management contract on a facility in central California that was a Small Business Administration (SBA) foreclosure. The site had obviously been mismanaged or the SBA would not have taken it back. There was no on-site manager, just a person brought in by a local management company the SBA had hired to operate the site during the foreclosure process.

A water pipe had broken and flooded the on-site manager's apartment over the weekend. It was a total disaster, causing the apartment to need complete remodeling, not to mention the replacement of all major appliances, bathroom pullmans, kitchen sinks, carpeting, flooring, etc.

The office and facility will also have to be reorganized. There are approximately 50 units full of items that appear to be mostly junk--no locks, no leases. The back perimeter fencing has been cut and several units broken into. There is no electronic gate or computerized accounting system in place.

We have all heard about sites like this one. They can be a bargain if purchased at the right price and you are willing to do the work necessary to turn these "diamonds in the rough" into potential gems. This is not the first time I have taken over a site like this one. The experience can be challenging and overwhelming at first, and extremely rewarding in the long-term. But where do you start?

The Physical Plant

First, you should take a good look at the "bargain" you just purchased. Very often, these properties are sold as is. Take a checklist with you and look at the site through the eyes of the tenants renting there. Obviously, any safety hazards or security issues should be your first priority. Roofs, doors, driveways, the office, the apartment, fencing, gates and landscaping are just a few of the major items to look at. Is the facility in need of repairs, or is it just a matter of cosmetics?

Fixing roofs, elevators, fencing and gates will probably be your most costly expenditures. If you have plenty of capitol to invest, then you might want to look at installing an electronic gate and keypads, video cameras and individual door alarms. Sometimes it is merely cosmetic items that need to be attended to: New paint, driveway sealant and general clean-up can do wonders for a site.

Don't forget your office or on-site apartment. The on-site apartment may need all major appliances, carpeting, flooring, paint, kitchen cabinets and a bathroom remodel. If there is no apartment, you will want to build one. Will you need to remodel the office? Does it need counters or built-in work stations? Does the restroom need remodeling? You should also think about whether you need to purchase new desks, chairs, file cabinets, computers, printers, fax machines or telephones. Don't forget about office supplies, such as file folders, printer paper, pens, etc.

Do an inventory of your facility equipment. Will you need a new golf cart, charger, ladders, drills, light bulbs, cleaning supplies, brooms, door hasps, hinges, bug spray, rodent poison? Be sure to order all of these items immediately. How about your sign? Do you have a new facility name? Will you need new flags or banners? What about the landscaping? Don't overlook anything.

Begin contacting local, licensed contractors and begin getting bids for all of the major work that needs to be done. Obtain at least three bids, and remember that the cheapest is not always the best. Also, don't forget to inquire about worker's comp verification. Ask for references, make a decision and schedule the work to begin.

Administration

Obviously, this part is much easier if the site is automated--then it becomes a matter of printing reports, doing a physical walk of the site, and matching unit numbers with sizes, occupied units, delinquent and lien-sale units, and vacant units. If you are on a manual system, then it will take you longer to do the same things. If you are lucky, you will have a site map of your units; if not, then you should consider having one drawn. Going to the city zoning office to obtain the original plans might be a good start when reconstructing your site map.

Once you have physically walked the site, an assessment of the tenant files is a must. Does every unit have a signed rental agreement and insurance addendum? If not, you must begin getting those signed. Post a sign at the entrance gate asking that all tenants stop by the office. Mail each tenant a letter explaining that there is a new owner and they must sign a new lease. Keep in mind that, in most states, you are required to give a tenant 30 days notice for any changes in the rental agreement, such as rental rates, due dates, and office or gate hours.

I suggest having three-part, numbered leases. Put the original white copy in the tenant file, give the tenant a copy, and reserve the third copy for monthly review when you do your site visit. Determine whether you need insurance addendums and a "rules and regulations" sheet. You may also want to have new facility forms or business cards printed.

Abandoned Units

What if you have units with no locks or leases, but items still within? You must begin playing detective. Go through each unit and open boxes. Can you find a name or address, anything that will give you a clue as to whom those items belong to? Go back and check tenant names on the computer or ledger cards. Look at past tenants, move-out logs, company files. Do any of the names match?

If you hit a dead end, then you have a choice: You can take several of your larger units and move the items into them, keeping them together, and wait to see if anyone comes to claim them. Be sure to take photos and have at least two people witness that you have moved all the items from the original unit. If, after six months to a year, no one has come to claim the items, begin throwing them out or sell them at auction, disclosing that they are "company" units. Units filled with items that are obviously trash--old newspapers, one shoe, an oily old shirt, a broken chair--should also be photographed. The items can be thrown away, the unit cleaned and rented to a new tenant.

When dealing with a situation such as this, remember: document, document, document. Keep detailed records and photographs of the disposal or removal of items from a unit. Always be sure that you did everything possible in your search to find the proper tenant prior to taking the abovementioned steps in case a tenant comes back for the items. When auctioning, be sure you list those units as "company" or "unrentable" units. This is where you are likely to find a mystery tenant that the last manager used for theft of rent.

Money Matters

How are your facility's rates? Is it time to raise the rent on all units, or just those of certain sizes or tenants? What about your late-fee structure--is it in line with other facilities? Is there any marketing being done? If so, is it effective? How is your Yellow Pages ad? When it is time to renew, will you want to make changes? What are your outside advertising costs?

Do you sell any auxiliary items, such as boxes, moving supplies or locks? Will you need to order them? Don't forget about company vacant locks and overlocks. Call a locksmith and have the office, apartment and other facility door locks changed and several sets of new keys made.

Management

If you purchase a site that is not as bad as the one I described earlier, but is what I would term a "normal" purchase, then you probably have a manager running the site. When a new owner buys a site, very often it is a difficult time for the manager. This person doesn't know what will happen to his job or, if he lives on site, his housing situation. Sometimes, with the larger national companies, the managers will stay with the company and simply transfer to another site, leaving you to find a replacement manager. If the facility was sold by a smaller, private owner or company, then the manager may stay on and want to negotiate their employment with you.

This is time for you to assess the management staff and see if you want to keep them. You must determine why the facility was sold in the first place. Was the old owner retiring? Was it a probate sale? Was this a facility that one of the "big guys" bought and is now spinning off? Or, was it a foreclosure sale brought about by mismanagement? Was the current staff partly at fault for the foreclosure?

If members of the staff are willing to stay, will they be receptive to your new policies, be flexible to change and be willing to help you clean up the site, if needed? What about wages, and bonus or benefit programs? All of this will have to be renegotiated with the management staff.

If the managers don't want to stay, or you don't want them to stay, then you need to begin the process of searching for a new staff. Your search will be easier if you know what you will expect from the new management. Will you need them to clean, help paint, organize the office, research those "missing" tenants in the units with no locks or leases? As with the existing staff, what will you be willing to pay the new managers, and what bonus or benefit plan will you design? Make sure you get a new letter of employment signed once all terms are agreed upon, and don't forget an apartment lease if they live on site. Think also about a management-changeover form when you turn over items such as drawer money, petty cash, inventory and facility keys and equipment.

The Rewards

Purchasing an existing site has many challenges, some similar to a new facility, such as marketing, training management staff, organizing the office, etc. Yet, there is nothing that cannot be overcome, changed or repaired at your existing site. Take before-and-after pictures--you'll be glad you did. If this is your first venture into the self-storage business, then give serious consideration to hiring a professional management company; perhaps your lender will require you to employ one. This company will have expertise in opening new sites or know the challenges of turning around distressed properties and making them profitable.

Purchasing an existing site is a learning experience. You might make mistakes, but you will learn from them. Keep in mind that your facility will operate at a certain income level. Once that level is achieved, is it acceptable? If not, then you should consider either an exit strategy or looking ahead to your next self-storage acquisition.

It can be extremely rewarding to take an existing, distressed site and turn it around to create a profit, but wipe the fairy dust out of your eyes and roll up your sleeves. You've got work to do--so get moving!

Pamela Alton is the owner of Mini-Management^®, a nationwide manager-placement service. Mini-Management also offers full-service and "operations-only" facility management, training manuals, inspections and audits, feasibility studies, consulting and training seminars. For more information, call (800) 646-4648.

A broker should have one goal: to find you a good deal. In addition to having a reputation for integrity and honesty, he needs to work with the investment community to create an atmosphere of interest in your property. He should also advise you on how to attain maximum value for your site. To do so, he must understand financial market conditions, the investment community and target investors.

The process can be complex, given all of the issues that need to be addressed prior to marketing the asset. Owners need to understand the selling process is a multifaceted task and, more often than not, patience results in maximum value.

Finding a Specialist

Finding a qualified and experienced broker who specializes in self-storage properties isnt all that different from finding a good doctor, accountant or auto mechanic. A vigorous use of common sense and professional and personal relations, as well as some independent research, should yield a strong candidate list from which to choose.

Obtaining the maximum profit for your property will be best accomplished by an established broker, one who has been in the business long enough to know how deals are put together and how sellers, buyers and brokers work in concert. A knowledgeable and successful broker puts your best interests at the forefront of the transaction.

As brokers compensation is only secured when a deal is completed, one who is not experienced in self-storage may be tempted to rush negotiations or settle for reduced results. Therefore, it is advisable to avoid brokers who specialize in other areas of real estate. They are unlikely to know the regional and national buyer pools, as well as the intricacies of the industry.

Experience, Reputation, Education

After you have created your list of candidates, youll want information about each brokers background and experience. An experienced, qualified professional should provide you a proposal that includes a list of closed self-storage sales and a personal resume. The following points can be used as a guideline to help with your final decision:

What is the brokers reputation for honesty, experience, thoroughness and accessibility? Has he been involved in any lawsuits? Is he in good standing with the state real estate board?

What are the brokers weak points? Even in the best working relationships, there are always a few bumps along the road. Ask whether a candidate returns calls on the weekends or after hours, or will provide you with regular marketing updates. These issues need to be discussed and resolved. If the broker is not a good communicator, your property may stay on the market for a longer time than necessary. When properties stay on the market too long, the buying community tends to devalue the asset.

What are the brokers strong points? There may be one aspect of marketing your property that is of paramount importance to you, and youll want to make sure you find someone who can satisfy the requirement. You want a broker with imagination, one who can think on his feet, speak clearly and with confidence, and write creatively about your property in the marketing documents to highlight special investment features.

What is the brokers experience in marketing self-storage properties? Ask the broker for a resume of completed sales. Have him provide you sample marketing brochures used in completed transactions and advertisements created in the selling process. If necessary, contact the owners of the sold properties for further input.

How large is the real estate firm? You may have a choice between a broker in a large real estate firm or an office that offers specialization in self-storage. You may receive better service and faster results with a specialist, as market surveys, buyer contacts and requirements tend to be timelier. With large firms, its always possible to get lost in the shuffle or serviced by a less experienced broker or assistant. Remember, time is of the essence in attaining maximum value.

What are the brokers sales skills? Dont let your evaluation of a broker be solely driven by his self-promotion. In real estate, sales skills are less important than understanding financial records, general construction, facility design, marketing and investor connections. The marketing of a property must be conducted in an industry standard, professional manner. Has the broker sold properties similar to the one being sold? Make sure he is familiar with appraising the asset and setting the asking price to current market conditions. If not, the property will not garner interest and will gain the wrong reputation.

Are your questions being answered? Beware if a broker does not address issues that concern youeither he doesnt know the answer to your question, or his listening and communication skills are lacking. The investment community will likely experience the same communication issues with the broker, which will cause your property to be on the market longer than necessary.

Are you being rushed? Anxious to close the deal and earn the commission, a broker may minimize or gloss over problems. Carefully review his listing proposal and marketing suggestions. Brokers are responsible for completing a wide range of documentation, and improperly completed documents can create future legal issues for sellers of real estate. Checking on a brokers ability to handle document formalities is a must.

Will the broker disclose key information about you? Ethically speaking, your broker cannot share important information about you or the property without your approval. Confidential information, such as your need to sell immediately or key negotiating points, cannot be disclosed to any potential buyer or broker. If you learn your undisclosed agenda is being shared, it may be due to the brokers eagerness to close a dealany dealirrespective of whats best for you.

How will the property be advertised? Find out where and how often the property will be advertised. Will it be listed in the newspaper, industry publications and/or the real estate firms website? Buyers typically target a wide geographical area, and find it more convenient to scan real estate-related websites than track down individual ads from multiple metropolitan newspapers; so make sure your broker is comfortable with Internet advertising and savvy about technology. The web has created a strong nationwide buying pool because of its far-reaching capabilities. With the online tools available, you can expect almost immediate e-mail response to new property listings and quick replies to your inquiries.

Signing a Contract

If youre satisfied with the proficiency level, knowledge, and professional and personal style of a broker, youre ready to negotiate an exclusive listing agreement. Generally speaking, this is a written service contract that solidifies the business relationship, with conditions for a specified term.

The contract should be drafted in a manner that will protect both parties from misunderstandings that may arise during the working relationship. In all likelihood, the broker will draft an industry-approved contract crafted to meet the unique requirements of the transaction. Most terms and conditions contained in the agreement are negotiable.

Some of the issues include:

• How the broker will be paid
• The scope of the exclusive arrangement
• How your broker will handle conflicts of interest
• Unique details specific to the transaction
• Term and exclusions
• Marketing strategy and advertising budgets

If you carefully document your needs and requirements in the listing agreement, youll greatly reduce the chances of disputes during the term of the contract.

Unwavering determination is a necessary characteristic of a qualified broker. Not only does it demonstrate integrity and willpower, it means the individual will work for your best interests. Couple this characteristic with experience, financial know-how, extensive investment contacts, clever writing skills and solid communication proficiency, and you will end up with a broker youll use for many years to come.

Stephen Grossman is a senior vice president with Lee & Associates-Newport Beach Inc. He has been responsible for the sale of more than 500,000 square feet of entitled land and the sale or escrow of more than 2 million square feet of existing self-storage facilities. For more information, call 949.724.4709; e-mail sgrossman@lee-associates.com.

Starting in the late 1990s, things got even betterwell, maybe not all better. Business was still good, even though rental rates werent rising as quickly as in the past and vacancies were no longer just seasonal. It was clear something in the real estate world was helpingfacility sale prices were rising dramatically. As it turns out, the increase was not exclusive to self-storage but across the board in commercial real estate. The cause was falling interest rates.

Prices shot up, but the returns were so wonderful that the demand for real estate radically increased. In search of income-producing property, investors of all types began to actively pursue self-storage facilities. For the first time, our product became truly integrated into the real estate arena. Facility value went up by at least 20 percent, just because of increases in the assessment of income. Obviously, the swell in prices had a dramatic impact on owners equity. We learned something from real estate: Low interest rates are not only good for the bottom line, they really take selling prices to a higher level.

Driving the Business

So far, the convergence of self-storage and real estate has been quite satisfying. Property prices are up, and operating costs after debt service are down. But each business has its own cycle. While self-storage is driven largely by product demand, real estate is more affected by interest rates.

There are some other drivers that may double back and haunt the self-storage industry. The most important is the role of low interest rates and high real estate values in creating a situation of overbuilding. Developers motivation to build is often a curious mix of uninformed optimism, availability of low-cost money (almost always other peoples money), and what appears to be great selling prices. A study of actual self-storage demand is usually never done or done only to satisfy the lender.

Whether or not a professional usage study is conducted, a developer seldom believes one that indicates low demand. He claims the analyst was too conservative and finds another who has a more favorable opinion. Thus, with the push for development the real estate cycle can provide, a market can become saturated in relatively short order.

Understanding Supply and Demand

To understand the natural cycle of the self-storage business, we must also look at supply vs. demand from an operators perspective. Demand is not as well understood for self-storage as it is for other types of real estate. This is because most other real estate demand is related to population and income. (It takes people to rent an apartment or office, and they need income to shop retail.) If you know those factors, you can project demand with some confidence.

Self-storage demand, however, has many generators, and none of them has a long history. You could look at populationafter all, it takes people to put stuff in storage. But one person might rent three units for a year, while another rents one for three months. One person doesnt need storage because he has a basement; another needs a unit because his basement is full.

The fact is self-storage demand is hard to predict. The Self Storage Association has commissioned some studies that may help us better understand it. There are also some independent industry experts who have done interesting and useful work in this area, and they are beginning to get a realistic range on demand. But our knowledge of what drives self-storage use is still limited, even with the sophisticated tools available for projecting demand in other industries.

What We Know

Without an accurate forecast of demand, it is difficult to predict the performance of existing selfstorage facilities. It is even more difficult to get a good measure on new sites being built. Lets summarize what we do know.

With isolated exceptions, rental rates have not increased much, and there have even been some dramatic declines. Vacancies have increased, and few facilities are actually full (95 percent occupancy or higher). These factors indicate demand is flagging in light of increasing supply. While it may be rightly argued that the slowdown in the economy is causing the problem, it is not at all clear that this is enough to overcome the high cycle of development, particularly in some markets.

The market for commercial real estate continues to value all kinds of properties at almost record values. Interest rates are moving up, as the Federal Reserve has raised rates five consecutive times. However, investors actively seek opportunities in which they can lock in a low interest rate and get a good property. Even though prices are at all-time highs, the leveraged rates of cashon- cash return are also high (12 percent to 16 percent) by any historic standard.

This is not because properties are great bargains, but because mortgage rates are still very low. When the rates begin to move up with the Fed (they usually lag, but ultimately move more), this unusual and favorable buying and selling will no longer exist. (Youll notice I did not equivocate in predicting the situation will end, but the timing is still in question.) The only way buyers can compensate for higher interest rates is to buy properties for lower prices or out sit the game.

The Actual State of the Market

The self-storage market is immensely flush with money from buyers and their lenders, and buyers are paying the highest prices in the last 40 years for real property income. In addition, buyers have finally recognized self-storage as a legitimate and respected type of real estate.

As evidence, look to the fact established types of real estate have cap rates in line with those of selfstorage. The following chart reflects this parity. Also, the spreads lenders charge above Treasury bond rates are generally comparable with the other types of real estate, once again indicating self-storage has arrived in the real estate world. The net result is the risk premiums that were calculated in values in past transactions are absent in current pricing.

Capitalization Rates Range and Average by Industry   Range Average Self-Storage 8.0-9.0 8.95% Industrial Warehouse 7.0-9.7 8.40% Industrial R&D 7.5-10.0 8.9% Retail, Regional Mall 6.5-9.5 8.2% Retail, Power Center 7.0-10.0 8.4% Retail, Community 6.8-9.5 8.3% Office CBD 6.8-10.0 8.5% Office Suburban 7.0-10.0 8.6% Apartment 6.0-9.8 7.7% Hotel 9.0-12.0 10.0% Source: RERC Real Estate Report (Summer 2004); Self-Storage Economics (Investor Survey, Fall 2004)

Owners of existing facilities should also do some forward thinking. It is entirely possible this elegant confluence of two disparate trends leading to exceptional value and liquidity of investments could turn into the perfect storm. After all, trends change. For example, if interest rates rise and overbuilding creates substantial vacancies and rate decreases, the impact of increased selling prices could affect the equity and value of an existing property. Owners would be surprised to learn how sensitive the values are to even modest vacancies, rate reductions and increases in cap rates.

Lets take a look at a sample market. The local population is 211,200. The market has six existing self-storage facilities at 40,000 square feet each, for a total of 240,000. Average occupancy is 88 percent. A developer comes in and adds a 60,000-square-foot facility. Since demand for the product has not changed, average occupancy now drops to 70 percent. The population has to increase 25 percent just to return to the previous self-storage demand. But even the fastest growing Metropolitan Statistical Area in the United States only grows at a rate of 3.9 percent per year. Average population growth is 1.3 percent annually.

Now take a look at the accompanying charts. Sample Facility shows the operating numbers from one of the original six facilities in our example. The last chart shows what can happen as a less competitive facility reacts to the overbuilding.

Sample Facility Size 40,000 Square Feet Average Rent (10x10) $71/month Rent/Square Foot $8.52/year Current Occupancy 88% Market Occupancy 70% Potential Rent $341,000 Rents Collected @ 88% $300,000/year Expenses $100,000/year Net Operating Income $200,000/year Value @ 9.5 Cap Rate $2,100,000 Loan Amount @ 75% $1,575,000 Debt Service @ 6.5% $128,000/year

 

Existing Condition Phase 1 Phase 2 Phase 3 Potential Rent $341,000 $341,000 $323,760 $307,000 Percent of Potential 100% 100% 95% 90% Rent Collected $300,000 $273,000 $259,000 $215,000 Vacancy 12% 20% 20% 30% Expenses $100,000 $100,000 $100,000 $100,000 NOI $200,000 $173,000 $159,000 $115,000 Value @ 9.5 Cap $2,100,000 $1,817,000 1,674,000 $1,210,000 Loan $1,575,000 $1,575,000 $1,575,000 $1,575,000 Equity $525,000 $242,000 $99,000 Whoops! Equity Reduction N/A 46% 81% 100% Loan Payment $128,000 $128,000 $128,000 $128,000 Cash Flow $72,000 $45,000 $31,000 ($13,000)

Will the perfect storm come to fruition and, if so, when? No one knows for sure, but the trends are not positive. Add the fact that submarkets may not reflect the national market because of localized overbuilding, and it becomes clear the answer can vary widely.

Where to Go From Here

In light of all this information, how do you proceed? First, examine your own objectives. If you are young, hope to grow a successful self-storage business, plan to stay around a long time and are willing to compete, then get one of the great mortgages available today. This will not only save you money, it will help lower your cost of operation in difficult times. However, if you are thinking about retiring or find your partners difficult to live with, or are engaged in estate planning, you may want to think about selling. Capital gains tax rates are also at 40-year lows.

First review your property and the market. Talk with the city planners and building department and see what plans developers have for your area. Visit your 10 nearest competitors (and proposed competitors) and get their thoughts. Review your results from the last few years, including rental rates and occupancies. Look at economic occupancy, not just physical occupancy. Make a chart of how your property compares to those of immediate competitors. Look at visibility, location, traffic count, amenities and rates. If you honestly complete this investigation, you will know how you will fare in a storm, even a perfect one.

The question you must answer is if the risk and effort are worthwhile. How long will the window of opportunity last in the self-storage and real estate markets? Long enough, I hope, for your objectives to be met.

Michael L. McCune has been actively involved in commercial real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In 1994, he created the Argus Self Storage Real Estate Network, now the nations largest network of independent commercial real estate brokers dedicated to buying and selling self-storage facilities. For more information, call 800.55.STORE or visit www.selfstorage.com.

Spring is fast approaching, and now is the time to look at your facility with fresh eyes. Take time to walk around the property and plan those long-awaited maintenance, repair and upgrade projects.

Curb Appeal

In some parts of the country, winter brings harsh weather that can take a toll on buildings. Since curb appeal is such a big selling point for self-storage, if a site looks run down, prospects will rent at the wellmaintained facility down the street. Start your spring maintenance by running through the following checklist:

• First is the facility exterior. How does it look upon approach? Do your buildings need new paint or facade?
• Take a look at your landscaping. Does the lawn need fertilizing, reseeding or replacement? Do flowers, shrubs and trees need replanting, trimming or replacement? Perhaps its time to call a few landscapers and get bids. Consider adding flower boxes by the office or redwood barrels or planter boxes to make your entryway inviting. Dont forget a nice park bench for outside seating.
• If you have canvas canopies over your windows or entry, see if they need replacement or repair.
• Consider the condition of any flags on the property. Does the flagpole itself need painting or replacement? If you dont have one, consider adding a flagpole and U.S. flag.
• Do your facility signs need repair or replacement? If they are lighted, make sure all bulbs are burning brightly.

Ask yourself how others might see your facility. Would you rent a unit at your site? Consider what you can do to make it more inviting and clean with great curb appeal.

Exterior Maintenance

Now take a walk around the facility, thinking about general maintenance. Look carefully for the following:

• If the storage buildings are made of steel, examine the condition of the exterior corners, which often get clipped or dinged by tenant vehicles.
• Check the roll-up doors. Do they need to be cleaned, repainted, repaired or replaced? Maybe they need new springs, hasps or sliding latches.
• Check the rain gutters for dents and excessive debris. Clean and replace as necessary.
• Early spring is the best time to check for roof leaks. Repair and reseal as necessary.
• Repaint and re-stripe bollards around the site.
• Check exterior lighting on the buildings for burned-out bulbs and broken fixtures. Confirm and reset the operation of any lighting timers.
• Test or replace all fire extinguishers.
• Take a look at all driveways and consider resealing for cracks. Dont forget to re-stripe those parking spaces.
• Trim trees and bushes away from perimeter gates and fencing and look for damage to these structures. Consider repainting and repairs.

After you create a detailed list of items requiring maintenance, determine whether they can be handled by facility management or if you will need a licensed, insured and bonded contractor. Gather bids for all repairs and get them done before peak summer rentals begin.

Interior Upkeep

Peruse your building interiors, including your office. Your lobby is the first thing tenants see of your site after its curb appeal. They will judge the rest of your operation based on what they see in your office/lobby.

• Look at your entry, hallways and stairwells. Do they need painting or repair?
• In what condition is your interior lighting? Pay attention to all fixtures, including your Exit signs. Replace any failing bulbs and replace broken lights.
• Consider the interior of the storage units themselves. Obviously, you can only check those that are vacant. Are they clean and equipped with rodent control as well as a posted copy of your facility rules and regulations? Make sure all unit numbers are visible and in good condition.
• If you have a multilevel site, have the lifts and elevators serviced.
• Look at the condition of your hallways.
  Does the concrete floor need resealing?
• Is it time to clean unit doors or replace sliding latches?
• Check all moving carts and dollies and make any necessary repairs.
• Look at your office from a tenants point of view, keeping in mind décor as well as functionality. Is it bright, inviting, clean and uncluttered? Look at the cleanliness and condition of any plants, wall art and furniture.
• Examine all office equipment, including printers, fax machines, etc. Replace and repair as necessary.
• Never forget the important role of smell in making a first impression. Your office area should smell clean and fresh.
• Pay careful attention to your tenant restroom. It should be clean, wellstocked and in good working order.
• Clean all windows and doors.
• Make sure your Open sign is clearly displayed.
• Ensure retail items like locks, boxes, and packing and moving supplies are organized, clearly priced and well-stocked.
• Neatly display tenant-insurance information, facility brochures and business cards, etc., on your counters. If you have office furniture, make sure its clean. If its old and worn, perhaps its time to replace it.

By taking a fresh look at your facility, you will see what needs to be done to make its the best it can possibly be. Youll feel good about working at your site and make tenants will feel good about renting there.

Pamela Alton is the owner of Mini-Management, a nationwide manager-placement service. Mini- Management also offers full-service and operations only facility management, training manuals, inspections and audits, feasibility studies, consulting and training seminars. For more information, call 800.646.4648.

The Ten Commandments were chiseled into stone tablets, but your rental rates should not be. Many well-intentioned owners and managers are leaving a great deal of revenue on the table as a result of rental rates that appear to be chiseled in stone. This causes distress to the overall self-storage market.

Self-storage is a supply-and-demand business. In many markets, occupancies are higher than they have been in years, and many operators are doing a great job of managing that demand by maximizing their rates and balancing their inventory. Others, however, are reluctant to increase rates, despite running at or near 100 percent occupancy. A recent study of several markets across the country showed that despite high demand, rates are still lagging behind at many sites.

In todays competitive environment, even incremental increases in revenue through effective rate management can have a dramatic effect on your facility value. For every dollar of rate increase, you improve your facility value by at least $120 ($1 multiplied by 12 months at a 10 percent cap rate). Given the ebb and flow of business cycles, we all need to maximize revenue when we can. Following are some things to think about when it comes to rental-rate management.

Basing Rates

Do you manage your rates based on the competition? When you consider the development of a new site or your site is in lease-up, your competitors rates are important. You have to know what the market can bear, especially when youre in a race to fill your site. Once your facility is stabilized, however, its rates should be minimally impacted by competitors.

Quite simply, if you have few or no units of a particular size to rent, you should raise the rate, because the demand has exceeded the supply. It doesnt matter what your competitor charges for that size. You cannot be completely oblivious to the market, but you should base rates on personal inventory more so than competition. We recently found a huge disparity in rates between two facilities in St. Petersburg, Fla.:

• Site A, with a 96 percent occupancy, rents 10-by-10s for $125 and 10-by-20s for $199. It only has one or two of each size available.
• Site B, which is only a quarter-mile from site A, rents 10-by-10s for $80 and 10-by-20s for $110. It is 100 percent occupied.

We couldnt rent a unit at Site B for any price, yet the facility still lists its rates 80 percent below the closest competitor. Rates should be managed per unit size, not site occupancy. You never want to be in a position where you dont have a unit to rent to a new tenant.

Take a page from the motel-management handbook: If you only have one or two of a popular size unit to rent, increase your rate. If your 10-by-10 drive-up units are full but you have vacancies in your 10-by-10 climate-controlled units, raise the rate on your driveups instead of lowering the rate on the others. Its simple: If you are 95 percent or more occupied on a particular size, your rate is too low.

Finally, flexibility is key. Dont print your prices on your business cards or anywhere else. Once youre committed to the rates, its difficult to change them on the fly as supply and demand changes.

Micromanaging

Do you review your rental rates at least once per month? Do you have an evaluation system in place? People generally consider micromanage to be a dirty word, but when it comes to rates, micromanagement is a necessity. Across all markets, the self-storage operators with established revenue-management processes have higher rates and revenue than those without them.

Develop a system for managing rates or seek outside help. After many years of using a manual, twice-per-year system, one of the larger self-storage operators now has an automatic system that reviews rates twice a month. As a result, its rates and revenues are significantly higher. There are even software programs that offer revenue-management assistance. Work with your consultant to determine which product will work best for your situation.

Increases for Existing Tenants

An effective revenue-management process also includes regular, systematic rate increases for existing tenants. When (not if) you decide to increase rates depends on various factors, but you should introduce at least modest increases annually. Your timing and the amount of the increase, as well as its success, will depend on current occupancy levels, street-rate increases, market factors and the ability of your manager to deal well with customers.

Discounting

Believe it or not, there are still self-storage operators offering move-in discounts on every unit size, despite occupancy levels. Why would you offer 50 percent off the first months rent on your last available 10-by-10, or offer to match a lower rate on your only vacant 10-by-20? Move-in incentives should only be used during lease-up or to help fill a high-vacancy unit size.

Sales Training

Your ability to sell storage greatly influences your confidence to increase rents. Owners reluctance to raise rates is often related to fear of upsetting customers or a resignation that their managers cannot sell the higher rates and its easier to leave things alone. Ensuring managers are well-trained to sell unitsinstead of hoping they can rent themis a small investment to make to create greater facility value. An effective sales presentation can overcome rate-related anxiety.

So while it may have been necessary that the Ten Commandments were chiseled into stone, you will be better served to have your rates written in pencil and keep a large eraser close at hand.

Bob Copper is the founder of Self-Storage 101, a provider of do-it-yourself management tools. The company empowers managers and owners to take control of their assets and compete with institutional players at a fraction of the cost. For more information, call 866.269.1311; e-mail management@selfstorage101.com; visit www.selfstorage101.com. RK Kliebenstein is the president of Coast-To-Coast Storage. He can be reached at 561.638.1851 or via e-mail at rk@askrk.com.

Like a grizzled cowboy unimpressed with greenhorn notions, Executive Self Storage Associates (ESSA) has blazed a trail in management and consulting services, driven by plain old common sense and know-how. President Joe Niemczyk came to the industry 22 years ago with a fresh eye for professionally marketing self-storage. Since ESSAs incorporation in 1987, details have evolved, but the company philosophy hasnt changedand why should it? Experience has proven Niemczyk right: Self-storage handled as a retail product, rather than a real estate investment, yields higher profits.

We tend to market and advertise the product like a candy bar each property, every size and every location, is a different product and has to be marketed to a different user, Niemczyk explains. We take a close look and really identify our markets carefully.

The retail approach extends to training as well. ESSA extensively trains managers to serve the self-storage customer rather than tenant. Rigorous follow-up completes the golden triad of ESSAs methodology. Niemczyk enlists the services of mystery callers and shoppers on a consistent basis to ensure staff feedback and re-evaluation.

This is where many other operators fall down on the job, he says. Our priority is to manage, train and continually monitor our people so they not only have the tools but the ability to be true professionals at their craft. People will back pedal to old habits if they dont get any prompting or feedback. Follow-up takes a lot of work, but it certainly makes a difference on the bottom line, without question.

Can You Hear Me Now?

ESSA begins by streamlining operations and harnessing managementcontrol reporting for smart market decision-making. The companys unconventional next step, however, isnt about increasing the number of phone calls to a facility. Its focused on training on-site personnel to cope with the already existing call base, because, as Bill Clinton might say, Its the closing, stupid.

Using specific training methods, ESSA teaches managers to increase the closing ratio from the industry standard of 28 percent to a far more profitable 40 percent to 60 percent. Many operators are simply unaware of the importance of closing a deal when a prospect calls, according to Niemczyk. I have people come to me all the time and say, Im not renting enough units. How much advertising do I have to do? I tell them, If your store is getting 100 phone calls a month, you dont need to spend money on advertising, because the problem lies elsewhere. My job is not only to make the owners money, but to tell them where they can save.

Once telephone training has been completed, ESSA jumps that next hurdle: getting the phone to jingle jangle jingle faster than a pair of rodeo spurs. Its an assignment that belongs to Niemczyk and his district managersnot the facility managers, who have enough on their plates.

Their job is to handle the store and the phone call properly, and to take care of customers, Niemczyk explains. I will get the phone to ring. Then I can determine whether or not they are doing their job by seeing how many of those calls can be converted into a sale.

While Niemczyk acknowledges Yellow Pages as the industrys top advertising tool, he does so grudgingly. If thats the only advertising you do, it has to be No. 1, he says. A lot of small operators think you throw your ad in the Yellow Pages and thats all you have to do. But its a lot more complicated than that. You have to know your market and know your competitors.

ESSA typically incorporates fliers and inserts in its advertising plan, as determined by individual location. Niemczyk also focuses on driveby visibility and the value of frequently changing a sites look so the public doesnt stop seeing it. Another way ESSAs team reaches current and prospective customers is by enriching the on-site impression. We look at all five senses, Niemczyk says. What do the offices smell like? What do people touch and what do they have to taste while they are there? Do they hear music? The whole thing is an atmosphere we have staged for that customer to experience when he comes in.

Vitals

ESSA began as a result of intense research in the industry indicating a high demand for professional management and consulting services for independent owners of self-storage. About 40,000 facilities nationwide were researched, revealing only 6,000 were managed by professional organizations. Today, ESSA is headquartered in Denver with regional offices in Southern California and Florida. The company oversees operations for 47 facilities in Colorado, Florida, Idaho, Massachusetts, Nevada, New Mexico, Ohio, Oklahoma, Utah and Washington. Niemczyk, former president of National Self Storage in the early 80s, recently bought out ESSAs other partners to become sole principal.

In this industry, reputation is everything. I have many clients who have been with me 10 to 15 years, and they are with me because they are confident everything is going to be accounted for and I care about their business, Niemczyk says of his personal commitment. They know I will do anything that is ethical, moral and legal to win on their behalf.

Niemczyk describes ESSAs fee structure as one of the most attractive in the industry. Clients are charged a flat fee of $1,500 a month in addition to a 3 percent to 5 percent charge depending on location. An initial set-up fee of $3,500 plus expenses is also assessed, which includes hiring of managers, and implementation of bookkeeping, computer and office organization. A one-year contract is required, and other costs such as mystery shopping also may be charged to the store.

ESSA management services include market research, accounting and financial responsibilities, marketing and advertising, and employee supervision and training. For more information, call 303.703.1290; e-mail joe@executiveselfstorage.com; visit www.executiveselfstorage.com.

R. CHRISTIAN SONNE sure hoped the famed Kinsella line If you build it, they will come was true, because if they didnt come, not much would be built. Last fall, Sonne committed his business, Self Storage Economics (SSE), to lead an ambitious charitable project in Mexico. In a partnership with Corazón for Christmas, the California-based real-estate consulting company would erect an entire house in a single day for a family in need.

SSEs formidable task was to raise $5,500 and enlist the help of 50 volunteers to travel to Nuevo Milenio, Mexico, for 12 hours of hard labor on Dec. 11, as directed by organizers of the familia Corazón program. Sonne strongly believed in the project. But would his enthusiasm be contagious?

One thing that really appealed to us about Corazón is the people who receive the benefit really work hard for itthey prepare for it and are on the site working with us. Its really a hand up, not a hand out, he says. We saw this as an opportunity to do something tangible, meaningful and lasting for a reasonable amount of time and money.

In September, SSE launched its campaign with a letter to clients across the United States, asking for help. Details about the project were posted on the company website and e-mailed to registered users. At the companys Huntington Beach home office, staff quickly rallied behind the program. We have four appraisers, along with myself, a database manager and one administrative-support person, Sonne says. There was no requirement or anything, but everybody decided to participate.

And staff members werent alone. Something about Corazón for Christmas, or Heart for Christmas, resonated with SSE customers. Within six weeks, $4,000 had been donated and dozens of people had committed to the trip. Bank clients called to say theyd bring four or five people to volunteer. Its just been overwhelming to see the response to the program, Sonne says. Even people whove known us only through the Internet, with whom weve exchanged data and other things over the years, are contacting us to say they just like the sound and feel of this project.

House Proud

Corazón for Christmas is an all-volunteer, longstanding nonprofit organization formed in 1978 to serve the poor in Mexico. Corazón helps the poor by allowing them to earn their way out of poverty. Through working on neighborhood projects, family members earn hours they can exchange for food, clothing, tools and other supplies.

House building has become a cornerstone of the organization. One day isnt much time to build a house, but Corazón has perfected the process over the years. Each structure is 16 by 20 feet, built on a concrete slab poured ahead of time by village residents as a community project. The house has no plumbing or electricity, but includes four windows, a tiled kitchen counter, stove, sleeping loft and provisions for a future toilet. Such a design lends itself to the program because families can later earn assistance in improving the home with drywall and bathroom upgrades.

Corazón is similar to Habitat for Humanity, acknowledges Sonne, who was drawn to the idea of helping the poorest of the poor in Mexico, where social services are scarce. He discovered the home-building project while actively seeking a worthwhile charity. The self-storage industry and business in general has been very good for Self-Storage Economics, he says. I subscribe to the idea of corporate philanthropy, of giving something back and sharing the good things we have. Corazón brought to mind our personal values of relieving suffering wherever there is need.

Alive in 2005

This past Christmas season was the first time SSE participated in the Corazón program, but it wont be the last. Already Sonne is planning for next year and inviting everyone in the industry to join the effort. Information regarding donations and volunteering in 2005 is on the companys website.

This project is new for us, but I hope its only one of many in years to come, Sonne says. People are so generous in the selfstorage industry, and its fun getting to know them. I really enjoy serving as an appraiser to the industry, and this takes it a step further: Its great conversation with people about how life is good, and how its good to give something back.

As of press time, more than enough volunteers had committed to the Dec. 11 home-build date, and Self Storage Economics was well on track to reach its monetary target. For photographs and a summary of how the project unfolded, visit www.selfstorageeconomics.com.

Site Selection

We all know the intensity with which so many developers have descended on the hot self-storage markets. In some instances, one ideal location may be presented to 10 prospective buyers or more. But the truly great sites are not those picked over like fruit at the market but like those ripening on the tree, hidden from view and available only to those who reach for them through exploration and discovery. Doubtful but creative locations will be the harvest for our future.

Consider the opportunities created by urban-infill conversions, joint ventures with retail developments and secondary parcels on primary projects. High-growth areas are drawing interested developers like available land did in the 1800s, and futuristic analysis will surely come into play. Maps from statistical projectionsincluding key demographic components, supply calculations and industry analysiswill help target areas of possibility. Creative and innovative tools will replace hours of driving and scouting.

Market Analysis

Getting an objective opinion about any site is easy. Finding a qualified person to provide it is not so simple. In some markets, good data has become more difficult to gather, as some operators feel sharing information is counterproductive to their objectives. This is false and dangerous thinking. Failure to provide sound information to qualified analysts will lead to poor decision-making on behalf of many developers. There is nothing worse than a novice building new sites based on bad advice. The results are not only bad for the party in question, they hurt every operator in that market.

The success of a development does not end with selection of the land parcel. When choosing a site on which to build, ask your consultant if he has ever discouraged a projectthis will tell you something about the reliability of his counsel. A stamp of approval means nothing if the project doesnt make good investment sense. An analyst who gives the thumbs up to every site may not be discriminating or trustworthy.

Construction

Before building, you must know your market and all of its obstacles. Barriers to entry come in many forms. Some will be legal and legislative. Zoning and community review boards are playing larger parts in the approval process. Site coverage, water retention and landscapingnot to mention stricter building codes and the rising cost of materialsall impact the cost of construction. Many new developments look to set themselves apart from the competition with design and features not seen on older facilities. These, too, will add to costs.

Competition

Another (and perhaps more frustrating) obstacle to development success is existing competition. Whether attempts to derail a project are overt or covert, we have all heard war stories about competitors attempts to block new facilities. Sometimes current owners or managers appear at town meetings to oppose a project. Other times they work behind the scenes to sway committee members.

I once heard of an owner who paid phony residents to voice dissent at community council meetings, thwarting a proposed site for two years before it was dropped from the table entirely. I also attended a meeting at which a lobbyist, who was hired and paid $25,000, made attempts to block a project. He eventually succeeded in limiting the size of the facility the new developer could build. I also have also seen a lone community resident pose so much opposition to a project that the developer scrapped it rather than continue the lengthy fight through the courts.

These roadblocks come in many often unforeseen forms. Be aware how previous developers have fared in an area before making an attempt of your own.

What Is Overbuilt?

Finally, it is important to fully comprehend an areas level of absorption. One industry benchmark claims average absorption should be no more than 4 to 5 square feet of storage per capita. On a national level, this may be a good guideline, but its not necessarily true for all markets.

For example, a new project was proposed for a 5-mile trade area with nine existing competitors. Even though the absorption rate was close to 7 square feet per capita, the market had great income averages, and the proposed site was off a main highway. Storage was a widely accepted service in the area, as few of the existing facilities were new. There was minimal evidence of discounting, and occupancy was at capacity across the board. This market could easily support another site without damage to existing businesses.

In another situation, however, two new sites were proposed for an area. Though the market demonstrated a lower rate of absorption, rents at existing facilities were heavily discounted and occupancy hovered in the mid-80 percent range. It was a bad time to add more storage to the mix.

Prospective developers should understand every market is unique. The only way to determine the likelihood of a projects success is to investigate from all angles. Get a truly independent analysis and a clear picture of what is happening in the area you want to develop. Examine all mitigating factors and projections, then decide if the project makes good economic sensenot only for the investor, but the overall market.

David Blum, an industry consultant, is president of Blum Management Services Inc., based in South Florida. He is also past president and founder of the Florida Self-Storage Association. Mr. Blum has more than 10 years of experience in self-storage and more than 35 years of business experience. For more information, call 954.255.9500; e-mail dblum@blumms. com; visit www.blumms.com.

The very first Italian self-storage facility opened in 2000. Since then, a considerable number of stores have arrived on the scene, and public awareness of the service has increased accordingly. Back when the self-storage market was an undiscovered country of unknown potential and risk, Casaforte Self Storage S.p.A. forged ahead and offered the product in Italy. Today, the company has 10 active facilities in the country, another four slated to open, and two already operating in Switzerland.

Cesare Carcano, a Casaforte director, was among those first explorers who witnessed the birth and growth of the European industry. He shared his insights and experiences on the industry frontier with Inside Self-Storage.

Is self-storage a product or a service?

We think of self-storage as a public-utility service. In the future, we expect every town will have at least one facility, just as today they all have nurseries, schools, hospitals and so forth.

What is it about this sector that attracted and motivated you to become involved?

From a business point of view, the most interesting thing is certainly the novelty factorthe presence of a fresh market waiting to be conquered. There is a lot to be done, which is stimulating and motivating. Our group decided to try out a move into self-storage because we felt that with the sturdy competences we had already built up in the logistics sectorand given the useful synergies it could potentially providewe were in a really good position to establish a self-storage company with a strong national presence.

Which factors would you say have the greatest relevance to self-storage success: space, people, possessions or security?

Without a doubt, we put most of our efforts into ensuring the quality of the space and the efficiency of the security systems. But we cant afford to ignore people and things. Its essential to be hospitable and considerate toward our customers and their possessions, especially in the case of private individuals. Things often take on an enormous emotional significance for their owners, and we have to demonstrate respect and care for objects.

What is the state of the self-storage market in Italy, and what are its long-term prospects?

The Italian market is not moving as fast as the other markets in Europe, even though every day we see evidence of a growing public awareness and appreciation of the service. The prospects are interesting, but I think Italian players are going to have to keep pouring their energy into public education if they want to catch up with European growth rates.

In any case, it is certain the Italians tend to appreciate branding and networking; they respond to the ubiquitous presence of a visible logo and consistently high-quality service associated with it. These are all things in which we firmly believe, and in which we invest.

What starting point do you recommend for those wishing to start a self-storage company in Italy?

Begin with a business plan that is broad and well-structured. The players succeeding at the moment are all large companies that already possess a lot of facilities. It is unlikely, given the level of awareness of the service on the part of the general public, that anyone can have any success just by setting up a single facility. In Italy, the brand and the network count for a lot more than they do in other European countries as symbolic guarantees of quality.

How does the average Italian customer rank the following aspects of self-storage: efficiency of the structure; pleasant and attractive atmosphere; customer care; security; price; and flexibility?

All of these are equally important, with the possible exception of price, which might be said to be the least important. All of the others definitely come at the top.

How has the Italian publics perception and understanding of self-storage evolved?

Public awareness of the service only increases in very small steps. Lets keep in mind, though, that the very first self-storage facilities in Italy are only 4 years old, and there are only about 30 facilities in the whole country. In order for the service to be understood and exploited to the fullestwhich would obviously benefit the providers but would benefit the consumers even morethere needs to be an ongoing investment in promotion of self-service and public information about it.

What, in your experience, is the most effective medium for conveying the self-service message to the Italian market?

Every place in Italy is different with regard to the variety of channels and media available and how attractive these are to the public. You have to look around and observe what people do, watch, listen to and like. The one thing that has to remain constant and coherent, even if it is realized through a different mixture of media, is the aim of the promotionthat is, to invite and persuade the public to visit the facilities.

Self-storage is a new idea, and we are not yet accustomed to it in this country. Before the Italians can fully understand it, they need to be helped in getting familiar with the service. But all it takes to really understand the usefulness and convenience of self-storage is to see one of the facilities at close quarters, and to talk to someone who can explain in detail what kind of spaces are offered and how the service works.

What ideas do you think should be emphasized in telling the Italian market about self-storage?

Perhaps two ideas should stand out: flexible space that you can take up for as long as you need it, and space just like at home, where your privacy is respected and the surroundings are comfortable.

How would you explain self-storage to a 5-year-old child?

Id present it as an adventure. Id take him to one of the facilities and let him explore it and look all around it. There wouldnt be any point in trying to explain it until hed had a chance to look around. Self-storage is a service that needs to be tried out.

Sabrina Tordo is the marketing and communication manager for Casaforte Self Storage S.p.A. For more information, visit www.selfstorage.it.