By Jim Oakley

When a developer locates a potential site, he has a gut feeling about its profitability based upon his experience. The first step is to then establish zoning entitlements and get a site plan approved. Next, he does a market analysis, which formally establishes unit mix and pricing. Meanwhile, construction costs are bid. Finally, when all these factors are known, a financial feasibility package is created. What's wrong with this picture?

Is the Site Really a Keeper or a Discard?

The basic question of how much you can afford to pay for a site should begin with some informal estimates. However, it is not enough to multiply total units times rent rates on the back of an envelope and then subtract expenses and mortgage payments to arrive at the bottom line. Peter Drucker, management expert, once said, "There is nothing so fatal as the right solution to the wrong problem."

Exhibit 1

Will it Work? What Will Work?

The land-acquisition answer cannot be based upon half a question, but a full picture can be derived from informal estimates. These estimates must be flushed through the entire construction and rent-up process, complete with monthly construction-loan payments. The answer to acquisition is a financial scenario, because it must show absorption interacting with construction costs, loan payments, leverage and down payment.

Answer These Questions in Your Head

What is the bottom-line profit if the site plan calls for 40 percent building-area coverage? Or what if it is reduced to 35 percent? Does this reduction make the project financially prohibitive? At what point will rental rates support land costs of $2 per square foot or $5.50? What if interest rates jump 1 percent? Or what if your banker insists slower rent-up occurs? The answers to these concerns are three-dimensional because they must simultaneously address absorption, financing assumptions and land costs.

Give Your Architect Parameters

Unit mix is not a design consideration, it is a financial one. Architects deserve to know financial criteria and limitations in advance of design. They shouldn't be in the position of redesigning a financial mistake. Your designers should know before-hand the financial sensitivity to construction quality as it interacts with rental rates, unit mix and allowable square footage, so that design can be financially functional as well as "zoning correct."

The Financial Snap-Shot

A financial snap-shot is still a complete financial calculation, but it is based upon informal estimates of mix, rates, absorption and financing. Later it becomes a full-color professional portrait when it is locked down with a market study validating rate, mix and absorption, and packaged with a formal narrative. Several "what ifs?" can be tested. The snap-shot can accomplish the initial go/no-go decision and is far less costly than a formalized financial package for lender or investor. It is the vital core of the decision.

Anticipating Negative Cash Flow

All projects will have negative cash during the first few months. For bankers, this is an underlying concern during rent-up. A start-up scenario must resolve initial negative cash flow. This obstacle is demonstrated in Exhibit 1.

The Case of 'Shot in the Foot'

This financial snap-shot shows six vital functions displayed monthly during rent-up to unmask where the short-falls in cash flow occur. Notice that by month 12, negative cash flows of -$60,047 have accumulated, and after the first year the project is in a negative cash-flow position of -$15,438. Surprisingly, this dilemma exists in more than 90 percent of development projects as they come on line.

'Shot in the Foot' Assumptions
Construction Costs

63,425 square feet (1,000 for manager)
$24 per square foot
$1,522,200 sub total construction cost
$152,220 developer fee at 10 percent
$1,674,420 total--$26.40 per square foot

Unit Mix and Rental Rates
32	5x5	$30
204	5x10	$43
88	10x10	$66
8	10x15	$79
54	10x20	$98
121	10X25	$112
1	15X25	$125

Occupancy starts at 10 percent as a result of pre-sales and advertising, which is normal. Thereafter, occupancy is increased at 5 percent monthly until it reaches 90 percent. (Note: A full break down of assumptions and cash flow models is available at: www.mrfeasibility.com.)

The Lethal Questions

Where is the -$60,047 that will make the loan payments during the first 12 months? Refer to Exhibit 1 for your answer. Moreover, a banker has three lethal questions: 1) Can the project make its payments during fill-up?; 2) Can you prove it can make its payments, month to month?; and 3) How much is it worth if we have to take it back?

What is Interest Reserve?

Interest reserve is the major factor helping to insure positive cash flow. It has the effect of a loan making its own payments for a short period. These loan payments are made by increasing the principal balance of the loan for each payment made. This happens for the first few payments until the "interest reserve" limit is reached. The amount of this limit is negotiable, and if bankers are shown specific monthly cash flow in a proforma, they are far more liberal about increasing interest-reserve limits.

How Much Interest Reserve?

Historically, interest reserve has been a "guess" without mapping monthly what-if scenarios. Don't assume popular spreadsheet programs calculate monthly interest reserve with mortgage templates. Most don't do these calculations because the construction loan has unequal payments of interest only, and often there are construction-draw holdbacks.

Mapping Monthly Cash Flow

The advantage of mapping monthly cash flow is to determine how much interest reserve is needed. The advantage can be proven to a lender in simple exhibits. In this example, there is -$60,047 during construction and the first eight months of operation. Accurately providing for negative cash flow during this period with a lender can avoid a very compressing first year. In the case of "All Systems Go," an interest reserve of $75,000 had been implemented. (See Exhibit 2.)

Exhibit 2

Monthly Assurance To Lender

Lenders are satisfied when they know how a project will pay for itself during construction, through occupancy, to fill-up. The example of "All Systems Go" shows positive, critical, financial events during start-up, construction and absorption. Detailed financial mapping is essential to see how positive cash flow is achieved monthly until permanent financing is in place.

The Loan Package

To create an effective lender presentation, six key financial events should be tracked together--monthly, and on the same page. The seventh event should show the investment from conception through hypothetical sale.

1. Construction Draws
2. Occupancy Level
3. Rental Income
4. Operating Expense
5. Loan Payments
6. Cash Flow
7. Overall Return

Exhibits 1 and 2 have shown the key financial events. To complete the picture, a hypothetical sale with sales costs is calculated in the final year, adding sales proceeds to cash flow in the final year.

End Result 'All Systems Go'
Invest	$402,825
Year 1	$24,504
Year 2	$118,762 + $272,156 (loan)
Year 3	$97,829
Year 4	$112,097
Year 5	$127,079 + $1,133,955 (sale)
$1,886,382 total over five years Internal Rate of Return=50.49 percent

Internal Rate of Return

The internal rate of return (IRR) for this project is 50.49 percent. IRR is a compounding return rate. A helpful translation is to describe the yearly income stream as withdrawals from a bank savings account having a 50.49 percent interest rate. If the investment of $402,825 were put in a bank account with 50.49 percent interest, this deposit would allow yearly withdraws equal to the income stream. At the end of five years, there would be a zero balance in the account.

Collecting Developers' Profit

The permanent loan is the major source of profit to the developer, but it must be justified to the lender in surgical terms. The permanent loan can be larger than the construction loan. This is the developers' profit. While the construction loan is based upon construction costs, the permanent loan is based upon an appraisal using the income approach. The difference is $272,156, as shown above. However, it must be proved to the lender, in lenders' lingo, inclusive of net-operating income, debt-consolidation ratio, loan-to-value and the expense-to-gross ratio. Don't short-change your profit here because you don't make a full case.

Talk the Talk, Walk the Walk

If you don't talk this lingo, get a professional to present your package. If you stumble to collect your thoughts and present your ratios at the wrong moment, it can be the most costly two seconds of your loan submission. Be prepared to run additional scenarios for the lender on the spot to reflect more conservative absorption and fill up, or higher expenses or interest rates.

Penny Wise, Pound Foolish

Too often developers focus on trying to minimize loan points, origination fees and loan packaging costs, while the real focus should be on financial engineering. Implementing appropriate interest reserve and permanent financing are far more important. Points, fees and analysis costs are small in comparison to the overall savings. In the example, the points cost about $129 per month because they are added to the loan. Compared to the $188,000 gross income for the project, their cost is minimal.

Take the Cure or Take the Bath

In our example, negative cash flow of -$60,047 at the end of eight months is turned into a positive position of $24,504 at the end of the first year. Proper sizing of the permanent loan lends $272,156 to the developer's bottom line in the second year. Return of investment capital or profit is vital to doing additional projects. With today's high-tech lenders, financial feasibility isn't really complete unless it shows the whole picture. If you're not using a monthly financial map of the vital functions, you're making guesses, not decisions. The difference is hundreds of thousands of dollars to your bottom line.

Jim Oakley is a pioneer and national authority in computer-feasibility packaging for developers, lenders and investors. His methodology was taught at both Arizona State University and its Center for Executive Development. He has addressed major national conventions, including the National Association of Estate Executives and National Association of Real Estate Educators. Mr. Oakley consults from Arizona and can be reached at (520) 778-3654; www.mrfeasibility.com.

By Jim Chiswell

This month's column provides me with a very unique opportunity: a chance to talk about a major self-storage meeting coming to Buffalo, N.Y., next month. No, I'm not pulling your leg. Inside Self-Storage is bringing its spring expo to the downtown Hyatt Hotel during May 11th and 12th. Yes, the snow will be melted by then and, in fact, May is a wonderful time of year to be in Buffalo. Let me take a moment to give you an overview of the trade fair and urge everyone to consider adding this event to his spring travel schedule.

The team at Virgo Publishing has done a great job in putting together an outstanding roster of speakers. The trade fair will feature some of the industry's leading suppliers from across the United States, who will be available for one-on-one discussions during the show. I am especially pleased that the New York Self Storage Association (NYSSA) will be holding an open forum in conjunction with the expo on that Friday.

Ken Myszka, president of Sovran Self Storage, and David Rogers, the company's chief financial officer, will give a keynote presentation, with a look at our industry from their perspective as members of a public company. They will also share their vision for the direction of the industry both domestically and internationally.

The educational workshops will feature a full spectrum of topics for both the self-storage beginner and seasoned veteran. I will be presenting a development-track session, "From Feasibility to Grand Opening," and will be joined by many of the construction veterans I have worked with around the country. Mark Deion from Rhode Island will be speaking about "Using the Internet to Revolutionize Your Facility Marketing," and a panel of self-storage operators will join him in providing practical advice on what is working for them. Ken Piken, who served as general counsel for the NYSSA while I was president, will discuss "Where We've Been and Where We're Going" from a legal perspective. Ken has been instrumental in several key court cases involving self-storage that you are going to want to hear about first-hand.

The other sessions cover a wide range of issues, such as management and security, building conversions, innovative marketing strategies, financing, property-tax issues and facility insurance. In addition to the special open forum sponsored by NYSSA, sessions will be conducted with exclusive emphasis on Canadian self-storage topics. This will provide a chance to discuss areas of specific concern and interest to our fellow owners and operators from Canada, or to those interested in building in there.

Of course, the Buffalo expo won't be all work and no play--an evening cocktail reception is being planned and a number of other options will be available to all who attend. I look forward to welcoming everyone to my home town.

Welcome Back, Michael

Several years ago, Coopers and Lybrand acquired Michael Donohue's company, which specialized in dealing with real-estate taxes for the self-storage industry. Michael called me the other day to let me know that, after extensive negotiations, he had reacquired ownership of his company and is returning to the ranks of entrepreneurship. He has continued to do an outstanding job for his clients while a part of the Coopers and Lybrand team, but there is nothing quite like being able to call your own shots. I want to wish Michael continued success with Property Tax Advisors, because if he is successful, it means an owner's tax assessment has been reduced. Our entire industry benefits directly and indirectly from the work Michael has done in the past--and the work I know he will do in the future--with tax assessors across the country. If you are facing a property-tax problem, you can reach Michael at (703)518-4425.

Traffic-Study Results

Last year, I asked owners and managers to supply me with some basic information about their facilities and the number of vehicles per week/month that came through their gates. I have completed phase one of this traffic research and have already sent out a memo to everyone who participated.

The results are very much in line with what our industry has been telling planning and zoning boards around the country: Self-storage develops very minimal traffic for its total square footage. The results of the research data showed average cars per day, per 100 units, to be just 6.54 vehicles. For example, if your project is 60,000 square feet and has 550 units, you could expect to see 36 cars per day once your project has achieved a stabilized occupancy.

I realize this average figure may not reflect what you experience. I welcome additional input to this ongoing research project, on an anonymous basis. Please send me your total square footage, total units, percentage of unit occupancy and the total one-way vehicle count into your facility on either a weekly or monthly basis. The more facilities that participate in this research, the more significant the results become. I thank you in advance for the additional data.

Jim Chiswell is the president of Chiswell & Associates of Williamsville, N.Y. Since 1990, his firm has provided feasibility studies, acquisition due diligence and customized manager training for the self-storage industry. In addition to contributing regularly to Inside Self-Storage, Mr. Chiswell is a frequent speaker at Inside Self-Storage Expos. He can be reached via e-mail at Jchiswell@adelphia.net; phone (716) 634-2428; www.Jimdot.com.

By Tara Collins

Higher interest rates have slowed the progress of smaller self-storage financing transactions. However, most lenders say there's still plenty of cash to go around and creative deals to be made.

Acquisition and development money can come from several sources. Wall Street firms provide institutional dollars. Banks and credit companies provide traditional financing. Mortgage companies and brokers can round out financial options by offering nontraditional sources as well. Real-estate investment bankers can go to bat to solicit needed funds for development, acquisitions and mergers.

We spoke with several key players in the financing industry, asking them to share their views on the market, lending terms, interest rates, the state of the industry and more. Check out what the insiders have to say about the marketplace, preparedness and financing beyond 2000.

The Upheaval of 1999

Despite increases in Treasury bonds and interest rates, lenders are eager to lend. That's good news for owners and developers. The bad news is higher interest rates crunch the total dollar amount borrowers can receive while elevating cap rates and squashing the asking price a seller is garnering. "There has been a lot of talk by Greenspan and the Feds that they're going to raise rates, but Treasuries will react before rates are even raised," points out Eric Snyder, director at Irvine, Calif.-based FINOVA Realty Capital. "Recently, Treasuries have gone up at least 70 basis points (BP) in the last 60 days. As you see Treasuries go up 70 BP, a fixed-rate loan that was at 7 percent 12 months ago nowadays runs 8.75 percent to 9 percent."

David Smyle, president at La Mesa, Calif.-based Benchmark Financial, also blames Treasuries for higher interest rates. "The 10-year benchmark is hovering around 6.7 percent, up approximately 2 percent since 1999. Speculation is for rates to stabilize, but probably not to the levels we saw in 1998 and early 1999. There are a number of treasuries out there that lenders can pick and choose to quote from. The most common is the benchmark, or 'on the run,' Treasury. When a lender quotes a 10-year Treasury, it's important for the borrower to ask the lender to identify which Treasury he is using. They could be quoting another month's Treasury. Treasury auctions come out several times during the year: February, May and November. So, if you're quoting the 'on the run,' you are quoting the most recently issued, what price it is trading for today."

Rocketing Rates Impact Lending Practice

Rising rates ultimately affect debt-coverage ratio (DCR), loan-to-value (LTV), borrower willingness and investor perception. According to Michael McCune, president of Argus Self Storage Sales Network in Denver, "In addition to the Fed's moves, investors are beginning to think there may be some new inflation coming. To get the interest rate that would be applicable for a 25-year self-storage mortgage, you would add about 2.5 percent to the then current Treasury rate--or significantly more than 9 percent today. This add on, called a "spread" in the business, is to recognize that a self-storage loan is riskier than a government bond."

Shrinking spreads and rising rates make it harder for lenders to meet a borrower's request. The difficulty in underwriting is attributed to the standard 1.30 DCR. "This will require some lenders to go down to a 1.25 DCR to get the dollars out or provide earn-out scenarios allowing borrowers' to achieve their financing goals," explains Benchmark's Smyle. "We may also see 30-year amortizations on newer properties in an attempt to meet the DCR requirements.

"DCRs are a function of the loan amount requested, the interest rate being charged and the amortization. With a higher interest rate, your annual debt payment goes up and the DCR is a calculation of the project's net-operating income divided by the annual debt payment. So, the higher the debt payment, the lower the DCR is going to be. As the DCR becomes lower than 1.30, lenders start cutting the dollars down so they can meet that DCR."

As a result, Snyder sees FINOVA cutting back on its underwriting. "We're requiring borrowers to meet the 1.25 DCR and an 80 percent LTV. You'll find that most of the market is now moving the DCR from 1.25 up to 1.30 and the LTV's down from 80 percent to 75 percent. It's becoming more stringent in terms of the way we're underwriting them, and borrowers can't get the same amount of dollars that they're used to getting. In the past, we would take the last three to six months of income, annualize it to determine the project's total revenues, and then lend off of that. Now we're sticking to a trailing 12 months, even if the property is relatively new. Most borrowers who could get fixed-rate financing prior to stabilization now have to wait until their facility is completely stabilized for 12 months before they can even come to a permanent lender."

The Changing Face of Financing

Neal Gussis, senior vice president of Chicago-based First Security Commercial Mortgage, sees the demand for financing as filling a "need" vs. refinancing. "Most financing deals today are either for acquisitions, properties that are rolling out of construction financing, or properties that have loans maturing in the next year," he says.

Currently, self-storage spreads vary from 160 BP to 250 BP for loans over $1 million depending on loan size, and DCRs and LTVs resulting in overall rates in the 8.3 percent to 9.2 percent range for the typical 10-year term with 25-year amortization. "Gone are the days of the sub-8 percent fixed rates, although adjustables can be found in the high 7 percent to low 8 percent range," notes Gussis. "Loans under $1 million can expect to pay fixed rates above 9 percent."

Snyder at FINOVA feels the lending climate is favorable but not superb. "Most lenders will do self-storage; they aren't backing out, but are more cautious in their underwriting. What we used to do were 'earn outs,' where you would get one or two additional fundings after your initial funding. Most permanent lenders would fund the loan and then securitize it in the CMBS market. In the past, we held the loan and took the risk until we funded an earn out because the CMBS markets were relatively stable. But now, they have gone all over the board. Treasuries and spreads go up, CMBSs go up; the risk is too significant. Most lenders have said they'll only provide one funding."

As a result, Gussis sees sources becoming more diverse. "Many, but not all, of the national conduit lenders are less interested in deals less than $2 million. This industry has an enormous number of properties that fall under this category. The good news is many of the local banking institutions have shown desire to lend for these smaller loans. The industry is going through change and consolidation. Conduit lenders who have traditionally offered long-term fixed rates are facing additional pressures because now owners are also considering shorter term deals and/or variable-rate deals."

Variable-rate loans are the hot ticket for 2000. "We'll still provide a fixed rate, as well as a floating rate," notes Snyder. "But we're adapting to the new interest-rate environment. We have also looked at self-storage more cautiously as a product. For the most part, it's a recession-proof product. As lenders, we're not too concerned if the economy is strong. In good times, people are storing their toys and spending money. In down times, companies are downsizing, people are moving into smaller homes, so there is always a need for self-storage. Our biggest concern is overbuilding. The first thing our analysts do on a loan request is call the planning department of the respective city and ask if they have any new facilities planned to come on line or are currently expanding. Fifty percent of every deal has something coming online in their market."

What to Look for in a Financing Provider Industry Knowledge: According to Eric Snyder of FINOVA Realty Capital, "Find out what experience the lender has in self-storage. A lender without experience in self-storage may not give the borrower full credit for the facility's earning potential. As a typical example, many facilities operate with a collection of late charges on a monthly basis. A less experienced lender would not give the borrower credit for that income. Also, there are truck rentals and month-to-month leases that may give a borrower difficulties when trying to explain this to the lender. Lenders should know the business at hand." Flexibility: "If a developer has exhausted his search for construction financing from his local institutions, he may want the help of a local/regional firm experienced in placing commercial construction loans," says David Smyle of Benchmark Financial. "Using a brokerage firm usually costs the developer an extra 1 percent to 1.5 percent in construction-loan origination fees. But if the firm gets the job done, it will be worth it." Experience: Kevin Gannon at Robert Stanger & Co. says to never underestimate past performance. "Look for a company with a track record of performing on transactions similar to what you are trying to accomplish. Be it consolidating and creating a public company or obtaining financing at the entity level to consolidate your holdings and provide financing, you need someone who has done it before."

Thinking Big

Finding big money lies on a platform of assets, according to Kevin Gannon, managing director at Robert A. Stanger & Co. in Shrewsbury, N.J. "You need assets under management, and more is better; $50 million is a good base to start raising outside capital. No one really wants to talk to you unless they can spend $20 million to $30 million. If you only have $10 million in assets, you don't have enough management infrastructure to support a larger business. The cost of your management is burdensome. You need so many people on staff to manage three properties or 30. It's better to spread it out over a larger portfolio."

Brad Stoesser, analyst for Morgan Stanley Dean Witter's U.S. Real Estate Securities Fund (MSDW), says big money is out there. Stoesser's fund will allocate 4 percent to 5 percent of its portfolio to self-storage in 2000, roughly $77 million. "As a fund for institutional investors, we invest strictly in stocks. We deal primarily with the four public REITs (Public Storage, Shurgard, SUS, and Sovran). These REITs, with assets over $100 million, are getting higher yields and better returns off developments because the acquisition market is deemed to be apparently tight right now."

Looking for big money provides opportunities for firms like Robert A. Stanger to serve as matchmaker. "In the past year, we've raised capital for entities looking to expand their business," says Gannon. "Many of the self-storage REITs are trading at good discounts in excess of 15 percent. One reason this may have occurred is because the market was overheated and corrected itself. As a result, a bit of disappointment set in with investors. Alternative investments like tech stocks were skyrocketing. Hot capital rushed over there, leaving real estate a bit on the cool side."

Argus' McCune sees higher interest rates providing REIT investors with a thin silver lining. "There may be some potential benefit from all the recent gyrations in the stock market. While the impact of rising interest rates on asset values is fact, all of what follows may just be gross speculation, and we will just have to 'hide and watch' to see what really happens. With the pressure on the high-flying tech stocks, there may be some renewed interest in the high dividends paid by the REITs. This might allow the REITs to get back into the stock market and buy some additional units. However, even if this does happen, the interest rates will continue to impact the pricing of facilities."

Five Things to Avoid When Asking For Money 1. Don't lie. "Be honest and upfront," says Snyder. "Whatever the property's history, it will surface prior to loan closing. If we know about it upfront, we can work with the borrowers to remedy it." 2. Don't be forced into any deal you aren't comfortable with. "As with any business transaction, deal with people that you feel have the ability to support your transaction," says Gussis. "Feel comfortable that your lender contact is going to be able to support you and your transaction through the process." 3. Ask and answer questions. "Experienced mortgage professionals should be able to give you all the particulars of a loan program," notes Smyle. "They should be asking you questions to prompt your thought process about issues you may not realize are important. Your mortgage professional should represent you as your agent, and have no outside influences such as spiffs, servicing fees or prizes awarded based on volume with a lender. In reality, an experienced mortgage firm should narrow their search down to five or six best lenders after finding out your particular needs from the initial interview." 4. Be a Boy Scout. "Be prepared to present yourself in a well thought-out plan. Address the use and deployment of capital," says Gannon. "Demonstrate an exit strategy over a period of time. Ordinarily, this new money is going to want an exit strategy. That may be to form a public company if the market conditions permit. It may be a sale of the assets or a merger with an existing entity. You have to be prepared to discuss and cede that control to the new investor. If in four to five years, you don't have public market, you have to be prepared to sell the assets. If that's what it takes to get the new money a return on its investment, be prepared to cash out."

Sticking With Friends

Many companies are taking the initiative by aligning their allies, combining portfolios with unlikely asset classes. The new trick is balancing money opportunities through joint ventures and creative stock options, which produce stabilized incomes and black bottom lines.

Stanger's Gannon attributes these creative dealings to public market volatility. "I think what happened was that the returns weren't up to par last year. The capital continued to dribble out of REITs overall, and now they are trading at heavy attractive discounts from the buyer's perspective. The bad news is that event makes capital formation at the public level more difficult. So the UPREIT-type transactions and equity raises done previously can't be done any longer--they're just too dilutive. You wouldn't sell interest in your company at a 30 percent discount, but you would sell it if it were at a real fair value or higher price. So companies are forming joint ventures with institutions to do development projects. We're seeing more patient money doing off-balance sheet development activity."

And wheel and deal they are. "Some companies are doing interesting deals to get a higher yield on their development," notes MSDW's Stoesser. "Some of them are having funding issues as far as raising capital; they can't do it through the equity markets, so they are splitting it with a JV partner. For example, SUS just sold off several properties to Fidelity and retained a portion of that--25 percent or so. Now they can utilize that count roll for other things, to go buy a few properties or develop more.

"Similarly, Public Storage is issuing a pseudo-common stock. It's not common, but it's like an equity stock, just not preferred. Initially available only to shareholders, they are issuing these to raise more capital. At year-end, they gave shareholders the option to take distributions as stock at 65 cents per share or take it at cash at 62 to 63 cents a share."

The self-storage asset class was legitimized in the '90s. "Prior to that, it was considered an 'also-ran' asset class," adds Gannon. "Institutions didn't pay much attention to the industry. They waited to see how this business panned out. Then the Shurgards and U-Hauls of the world showed up; the industry started to consolidate. New players came on the scene like Storage USA, Storage Trust, Sovran. Now you have players out there that have legitimized the industry.

"Last year, we did the Devon transaction, which involved one of the Goldman Sachs affiliated Whitehall Funds, putting $100 million into Devon's new-development activities. People aren't generally rolling up their assets and forming a REIT. They are looking for institutional partners to provide financing in addition to bank financing."

Come For Dinner

"Bring good records," chides Snyder. "We'll look at cash flow three years back; we want to mark the trends. By keeping good records and explaining where the money goes (like capital improvements or non-property related expenses), borrowers can help us get to a higher NOI on the property which means a higher loan value."

Gussis suggests learning from the past. "But don't live in it. The future is yours. If you are seeking financing today, see if the economics of a financing transaction supports your short and long-term earning objectives. If your earning objectives are obtainable today, you should finance today. The driving force will be finding a lender that can match your financing desires. "

Smyle agrees with the idea of knowing what you're looking for. "Parameters such as recourse, prepayment penalty, term and loan costs are important to many borrowers. Is interest calculated on a 360 or 365 day basis? The 365-day basis can add nine to 10 BP to your effective interest rate when comparing against 360-day quotes. How long will you keep the property? Loan prepayment may subject you to stiff penalties upon payoff or may restrict your ability to finance additional construction to the property. Most lenders do not want to be in a second mortgage position. Meanwhile, borrowers may be willing to pay more costs or put up with full impounds to get the program of their choice.

Stoesser believes in developing market concentration. "In general, if people want to eventually get institutional investors, they need to continue to grow. Also, they need to focus, build up a base and develop market concentration, as opposed to having a store here, a store there. Market concentration brings higher returns. When one property fills up, you can defer customers to your other property that's three to five miles away."

Gannon believes you need to bring a plan to the table. "What are you going to do? Expand the existing facilities in your portfolio. Develop additional facilities. Option some land to develop. Acquire in-fill properties in the area where you already are established. If you're in Ohio and you have properties in Cincinnati and Cleveland, maybe there are outlying properties to acquire so your cost of management doesn't change. Having land for development in a good location is a good sign that you have a good place to put the capital."

What If...

For Gussis, success in obtaining financing comes down to two words: what if. "Ask 'What if?' in your business strategy," he suggests. "Each 'what if' has a relative weighting or probability. Pose both positive and negative forces that may affect you achieving your monetary objectives. Every person has a relative risk tolerance. After your analysis, if it makes sense today to finance, then you should proceed and start talking to lenders. Bottom line: In most instances, money is still available at reasonable terms and rates."

Benchmark's Smyle is also optimistic. "There is plenty of money to go around, but competition will be stiff. I believe we will see the marketplace for borrowers broaden with the addition of more banks, S&Ls, thrifts, and even credit unions in some parts of the country making inroads against the traditional conduit (Wall Street) lenders. These lenders will offer lower adjustable rates and shorter term fixed-rate products with prepayment flexibility and lower costs in order to compete. On top-quality, stabilized properties, insurance-company money may also be available at the lowest rates and more flexible terms."

On the other hand, McCune sees growth coming from education. "People are still learning to use our product. Only about 5 percent to 6 percent of the population has ever used self-storage. Thus, unlike apartments or offices, we don't need live bodies to populate our product--just more junk. If just one percent more of the population learns about and uses self-storage, our potential market grows by 20 percent. No other kind of real estate can make that claim. Having an investment community knowledgeable about the potential of our industry will raise our values and liquidity."

Tara Collins is a freelance writer working out of Red Bank, N.J.

Contacts Neal Gussis, Senior Vice President First Security Commercial Mortgage 150 S. Wacker, Chicago IL 60606 (312) 425-9366 Fax: (312) 425-9366 e-mail: neal.gussis@firstsec.com David Smyle, President Benchmark Financial 8080 La Mesa Blvd. #214 La Mesa, CA 91941 (619) 465-6200 Fax: (619) 465-1693 loans@benchmarkfin.com Bradford Stoesser, Analyst Morgan Stanley Dean Witter U.S. Real Estate Securities Fund 1221 Avenue of the Americas 22nd Floor New York, NY 10022 (212) 762-7421 Fax: (212) 762-7536 bradford.stoesser@msdw.com Kevin T. Gannon, Managing Director Robert A. Stanger & Co. Inc. 1129 Broad Street Shrewsbury, NJ 07702 (732) 389-3600 Fax: (732) 544-1170 FAX info@robertstangerandco.com Eric Snyder, Director FINOVA Realty Capital 19900 MacArthur Blvd., Suite 1100 Irvine, CA 92612 (949) 442-8000 Fax: (949) 622-3467 esnyder@FINOVA.com Michael Kidd, Executive Director Self Storage Association Washington, D.C. (703) 921-9123 Fax: (703) 921-9105 Michael L. McCune, President Argus Self Storage Sales Network 2755 South Locust, Suite 111 Denver, CO (800) 55-STORE Fax: (303) 300-3532 www.self-storage.com

By David Wilhite

If there is one absolute truism in the self-storage industry it is that you, as a facility owner, do not take possession of your customers' property; you act as a landlord and not a warehousemen. That is why you have a carefully-worded contract that clearly spells out that you are not responsible for any damage to your tenants' stored goods--you don't take care, custody or control of their possessions. However, certain situations can create a legal liability on your part for loss or damage to your tenants' goods that you need to guard against--which brings us to the topic of this month's column: customers' goods legal liability insurance.

Customers' goods legal liability is an important coverage unique to the self-storage industry. It provides coverage against loss of, or damage to, your customers' personal property if you are found to be negligent (note that "negligent" is a euphemism for "legally liable," which will be explained shortly, and not a moral judgement against you). Customers' goods legal liability also provides for defense and legal costs, even if the lawsuit is found to be groundless or fraudulent.

Let's look at an example of how this coverage works. Suppose high winds from a tremendous storm rips the roof off of one of your storage units. Assuming you have adequate business owner's insurance coverage in place, you would be insured against the damage to the building if wind is a covered cause of loss. Let's further assume that, as a prudent facility owner, you have a signed contract on file with your tenant that clearly states you are not responsible for any damage that might occur to his stored goods, and that he should either provide his own insurance or be personally responsible for any loss. So far, so good--you've taken steps necessary to protect yourself against litigation and don't have any cause to worry at this time.

Now let's assume that, as soon as the storm passes, you immediately call an emergency damage-repair service to cover the damaged roof until permanent repairs can be made. However, before they can arrive, the rain and wind return in force, further damaging your tenants' stored goods. At any point, the tenant can file a claim that you are "negligent" (i.e., legally liable) even though you had no control over the situation (which can be considered an act of God). You might be deemed negligent, even though you immediately acted in a prudent manner to protect your tenants' stored goods. In such a situation, the value of having
adequate customers' goods legal liability cannot be overestimated, as courts are awarding higher monetary judgements than ever in such cases.

It is important to remember that this coverage protects you, not only against damage to your tenants' stored goods for which you are determined to be legally liable, but also against the legal expenses that inevitably arise, even if a lawsuit is found to be without merit. In many instances, just one or two legal consultations will cost more than the annual premium. The good news is that the cost of customers goods legal liability coverage is quite reasonable--ranging from $300-$1,000 a year for $500,000 coverage.

Speaking of coverage limits, it is a good idea to consider securing an adequate amount to protect yourself against claims of negligence. Consider how much you can afford to lose should a judgement be held against you and protect yourself accordingly. And, of course, you should always take preventative measures to protect yourself against litigation in the first place.

Five Steps to Help Protect Yourself Against Claims of Negligence

1. Keep a signed lease contract on file between you and your tenant. This is the single most important tool you have for protecting yourself against claims and negligence. Its importance cannot be overemphasized.
2. Use a lease that contains language providing for the maximum dollar value of goods that a tenant may store on your premises. Such language may help limit your liability in cases where a judgement is held against you. We recommend that you consult with a legal advisor you can trust when drawing up such language.
3. Offer customer-storage insurance (CSI) to your tenants. There are precedent-setting court cases in which the self-storage operator was found to be not liable for damage to a customer's goods because CSI was made available. This coverage can be secured through various sources and should be made available to every tenant.
4. Keep a signed statement that property is stored at tenant's sole risk on file. Such statements are usually furnished as lease addendums and are supplied with the application for customer-storage insurance. A signed lease addendum is an important tool for limiting your liability in cases that claim loss or damage due to negligence.
5. Implement a regular program of preventative maintenance. For example, you might consider having the roof of your storage facility inspected once or twice each year by a licensed roofing contractor to alert you to the potential for problems or damage.

Remember, no matter how large or small your self-storage facility may be, securing adequate coverage is essential for protecting your business and your peace of mind.

David Wilhite is the marketing manager of Universal Insurance Facilities Inc. Universal offers a complete package of coverages specifically designed to meet the needs of the self-storage industry, including loss of income, employee dishonesty, comprehensive business liability, hazardous-contents removal and customer storage. For more information, contact Universal at Box 40079, Phoenix, AZ 85067-0079; phone (800) 844-2101; fax (480) 970-6240; www.vpico.com/universal.

By Harley Rolfe

They call economics the dismal science. Boring as the subject may be, it guides sellers in effectively diagnosing and treating soft income and low occupancy. One of the incipient conditions of the self-storage industry is commodity competition. Simple economics sets forth the rules we need to deal with it. When all facilities are seen by prospects as the same and there are too many units around, trouble is brewing. Raw commodity competition is no fun. Your choices vis-à-vis price competition are to do something dangerous, such as talk some sense into you rivals, live with it, or do what others in a competitive business do--employ the marketing process.

Keep Your Eye on the Ball

We must find a way to be unique enough to impel prospects to consider our offering as special. Marketers call that "differentiation." Keep your eye on that ball. The prospect must reduce his choices to one in order to act. He will choose location or price as his basis unless we help him to go in a different (our) direction.

If we are really good, we can create some killer features that are so unique and appealing that we are the only choice--a monopoly. Monopolies have picked up a bad name, so marketers often talk about "unique selling positions," or "exclusive" this or that, but they're all the same thing. Monopolies are not illegal; however, abuse of the economic power generated by one is. We know the difference and want to compete fair and square. When I say compete I mean win--wrest control of your pricing and policies away from your rivals.

Right Question?

You often hear that marketing asks the supplier to put himself in the position of the tenant. So, the operator says to himself, "What does a person shopping for a self-storage unit want?" Wrong question. Try this one: "What is a person who is looking for a self-storage unit trying to get done?" The first question leads to the characteristics of a unit (size, location, cleanliness etc.). The second question identifies the interest in the first place.

The tenant is moving to a new home. He has too much stuff for his basement, he's got an assignment in Greece, and he needs to store most of his household goods, etc. This is a whole or "global" understanding of the situation and puts you in the right place. Concentration on the first question will cause the operator to remain a commodity. Attention to the second question gets to the real concerns or goals of the prospect. It leads the operator to involve himself in provisions beyond the walls of a unit and into the tenant's mind. Some storage operators may rebel, saying that such things are not his province and are a lot more trouble. He confines his attention to his units. If so, he has decided that remaining a commodity is OK.

Differentiation: The Only Way To Go

You--along with everyone else in the business world--have only one way to achieve competitive marketplace independence: differentiation. It should be something unique and promotable. If it's good, others will copy it. If not, you'll drop it. Thus, the process is dynamic and never-ending as marketers strive to use one or more of the following differentiation choices:

Innovation. The offering has physical features that are unique and desirable. Such things as climate control or coded gate-entry/security systems are a couple of examples. Location might be one, if it is singular. An advantage of these is that they are capital intensive, which poses a barrier to easy duplication.

Packaging. Self-storage has immense opportunity for the packaging form of differentiation. The activities the prospect is generally confronted with in using storage are often grubby, and usually allied with other elements. That has all the makings for packages. If we can add convenience to the offering mix, we earn a premium for being unique.

One of the hardest ideas to accept is that, in most cases, self-storage is merely a component. It is no different than being the supplier of flour for a bakery. Without the other components (sugar, baking powder, etc.) the flour by itself has little value. This is true of most commodities. However, assembled with the other needed components and converted into what the user really wants, we have an excellent chance of being very valuable. That's synergy--where the sum is greater than the parts. The total value of the "cake" is much more than the cost of the physical components and labor. Not only is the buyer attracted to an approach that gives him a complete answer to his problem, he is also willing to pay a big premium for being relieved of an onerous task. "Convenience" is a separate characteristic of an offering that is both distinguishing and claims its own reward.

Consider a house move. Selling boxes or offering truck-rental services isn't enough. They may be included, but the package must look to the prospect like a better way, one that eases his chore. The operator should make the critical decisions. He should point out or include the best transportation options and packing materials, and set up a computerized property record-keeping system. The latter will help him know where tenant possessions are (which boxes, located where in the storage facility) and would even be helpful in the case of property loss. Have labor assistance on tap. Use off-peak concessions from movers. You have contacts he doesn't have. You are in a strong position to help. After all, usually, he's never done this before. In addition to distinguishing your facility from those of your peers, you can also look forward to a value addition for taking more responsibility. Making suggestions is not enough; you need to take a load off the prospect.

Positioning is the other main option. That's the difference between a Timex and a Rolex. Both keep time, but are perceived as distinctively different. Applied to self-storage, that means a differential offering that answers the question, "How are the needs of a person moving into a $80,000 house different than those of one moving into a $500,000 residence?" Pursuing the rest of the marketing aspect, where does a differential attitude kick in and what media is relevant to the either? Let's say there is a predictable difference between the expectations of a buyer of a $350,000 home and someone moving into a $100,000 track house. You compose an offering that recognizes those differences, then determine the most effective way of reaching those prospects

Many of you may feel that putting up a good facility, staffing it with responsible people, keeping it clean and pricing it fairly should do the job, but when enter competition enters, things change. Don't tell me that marketing is a lot more trouble. That I know. Tell me how to get yourself out the cycle of price competition another way. A commodity is the way to go until the arrival of competition trips it up. Then you are confronted by the futility of unrestrained price competition. Differentiation is the way out.

Missed some previous issues? Check the Web at www.hardnosed.com.

Harley Rolfe is a semi-retired marketing specialist whose career includes executive-level marketing positions with General Electric and AT&T. He also owned lodging and office facilities for more than 20 years. Mr. Rolfe holds a bachelor's degree in economics from Wabash College and a master's degree in business administration from the University of Indiana. He can be reached at his home in Nampa, Idaho, at (208) 463-9039. Further information can also be found in Mr. Harley's book, Hard-Nosed Marketing for Self-Storage.

No one likes to contemplate the consequences of fire, wind or other perils, but it's a fact of life that disasters can and do happen. Therefore, as a responsible self-storage facility owner, you need to have an action plan to ensure the safety of your operation. For example, it's a good idea to keep copies of your valuable papers and records of your inventory in a secure location off site. It's also helpful to photograph or videotape your business personal property to document your claim in the event of a loss. Most business experts also recommend you review your insurance coverage with your agent or broker at least once a year to better protect yourself against changing exposures that occur over time.

What to Do After a Loss

The first thing you should do after a loss--and note that some business insurance policies require you to do this--is take immediate action to protect your property against further damage. Depending on the circumstances of your particular loss, this might include calling a public utility to shut off the power to your premises (as in the case of flooding). Assuming that your claim is covered, the cost of any emergency measures should be picked up by your insurance company. (Be sure to keep your receipts for repairs). Of course, it goes without saying that if a loss forces you to evacuate your premises, you should notify the police department before leaving your facility unlocked and unattended.

The next thing you should do after a loss is to make an inventory of any items that have been lost, stolen or damaged. This serves two purposes: It can help you generate an action plan for getting your facility back in operation, and can greatly speed up the processing of your claim. Seeing the destruction of your business and personal property can be traumatic, especially in the case of a fire, but remember that you should not dispose of any damaged goods until your claim has been fully investigated by your insurance adjuster.

The third thing you should do is get in touch with your insurance agent or broker as soon as possible after a loss--the more quickly he is contacted, the sooner your claim can be processed. Advise him of any loss or damage, and follow up with a letter detailing your loss (keep a copy of the letter and all other correspondence for your records). In situations where you need to evacuate your premises or have lost access to public services, be sure to give your agent or broker a telephone number where you can be reached. And try to avoid discussing the circumstances of your claim with anyone except your agent or broker--doing otherwise may actually put your claim in jeopardy.

Filing Your Claim

In order to be reimbursed by your insurance company after a loss you will need to file a claim. This is the formal document upon which payment will be adjudicated according to the terms and conditions of your policy. In most cases your insurance agent can complete and file the claim for you over the phone, although in some instances you may be required to file the form yourself. In either case, supply your agent with as much detail as possible. Remember to give your agent or broker copies of all police and/or fire reports, repair receipts, and other pertinent documentation.

The Role of the Claims Adjuster

Once you have reported your claim to your agent or broker (who represents you), he will immediately contact a claims adjuster (who represents the insurance company). The claims adjuster's job, after thoroughly investigating the nature of your loss, is to make a judgement call on behalf of the insurance carrier to pay all, part or none of your claim, according the terms and conditions of your policy. While most claims are settled promptly and fairly, some are more complicated and may require some interaction on your part. In such cases, your agent or broker should work with you to help resolve your claim to your satisfaction.

What You Need to Know About Your Deductible

When your claim is settled, the amount that the insurance company pays out to you might be subject to a deductible. Choosing a larger deductible allows the insurance company to charge a smaller premium, since you have agreed to pay a larger share of any incurred damages. Most self-storage facility owners choose a $1,000 deductible on their insurance policies.

Remember, no matter how large or small your self-storage facility may be, securing adequate coverage is essential for protecting your business and your peace of mind.

David Wilhite is the marketing manager of Universal Insurance Facilities Inc. Universal offers a complete package of coverages specifically designed to meet the needs of the self-storage industry, including loss of income, employee dishonesty, comprehensive business liability, hazardous-contents removal and customer storage. For more information, contact Universal at Box 40079, Phoenix, AZ 85067-0079; phone (800) 844-2101; fax (480) 970-6240; www.vpico.com/universal.

By Rick Dodge

Roof maintenance is one of the most overlooked issues of a building project, yet it's the simplest maintenance to perform. Like most other major purchases, such as a car or your home, in order to increase the life of the product, periodic maintenance is required.

When was the last time you inspected the roof of your self-storage facility? Whether it is a built-up system (tar and gravel) or a metal roof, inspections are very important to increasing the life of the roof. These inspections are just as important as changing the oil in your car, or visiting the dentist or medical doctor for physicals.

The fact is most property owners or managers do not maintain their roofs properly, causing the rapid decrease in life cycle of the roof. It then just wears out before its time. Some of the simple areas of a roof to inspect are as follows:

Built-Up Roofs

• Bubbles in the asphalt topping
• Cracks in the asphalt topping
• Water ponding
• Flashing attachments loose
• Exposed sealants have cracks and/or bubbles
• Gutters and downspouts

Thru-Fastener Metal Roofs (Screw-Down Panels)

• Missing screws
• Screws popping up
• Rubber washers deteriorating
• Lap joints separating
• Flashing fasteners loose
• Exposed sealants have cracks and/or bubbles
• Gutters and downspouts

Standing-Seam Metal Roofs

• Panel laps separation
• Flashing fasteners loose
• Exposed sealants have cracks and/or bubbles
• Gutters and downspouts

Regardless of what type of roof your facility has, the most common and overlooked area for problems are the gutters and downspouts. Customer debris, soda cans and leaves are the biggest cause of water-drainage restrictions. Downspout exits become blocked and the water backs up most often into the building at the eaves.

For roofs that have seen time pass them by, there is a solution: retrofit roofing. Retrofit roofing (re-roof over the existing roof) can be a salvation to replacement roofing as well as enhancing your facility for appearance and value. These systems are generally lightweight and add very little dead load to your existing structure. These types of roofs also add positive drainage, which can decrease further deterioration to old roofs and erosion to your building. Some other advantages include the following:

• No expense for disposal of old roof materials
• No disruption of normal business
• Additional insulation can be added to increase thermal efficiencies
• The speed of completion

Retrofit roofing most commonly utilizes standing-seam metal roof panels, which install by the use of clips, eliminating the need for exposed fasteners. These types of roofs are now standard for most self-storage facilities, which will increase your facility value by upgrading to more recent standards.

Retrofit roofing is affordable and can be phased into a project over time without creating undue pressure on the wallet. Since most self-storage projects have multiple buildings, retrofitting one or two at a time can help defray costs. This also allows you to prioritize your roof problems and resolve the most serious ones first.

Basic re-roof costs start at approximately $2.25 per square foot. This would provide for a new slope of at least 1/4:12 with light-gauge framing members attached to your existing building, galvalume standing-seam roof panel system, and pre-painted flashings such as gutters, downspouts and gable trim. Other considerations must be made for parapets, roof steps and roof penetrations such as HVAC units, firewalls and vent pipes. Insulation can also be added for buildings with climate-control units or those to be converted to climate control. Product warranties are generally for 20 years and installation warranties vary depending on vendor.

Don't wait for your roof to be a problem. Inspect it periodically and develop a program for maintenance. This will increase your project life expectancy and provide the high rewards you expected.

Rick Dodge is vice president of sales and operations for Rib-Roof Inc., a Rossville, Tenn.-based manufacturer of metal-roofing systems, retrofit-roofing systems and light-gauge building systems for the self-storage industry. The company's services include design, engineering and nationwide installation. For more information, call (800) 876-9062; www.ribroof.com.

By D. Carlos Kaslow

Ultimately, self-storage is about collecting rent. The overwhelming majorities of customers pay their rent when it is due and cause very few problems for facility owners and site managers. A relatively small number (3 percent to 7 percent) of the customers are collection problems. Collection problems can frequently turn into legal problems if not handled carefully. The largest verdicts against self-storage operators have been awarded in wrongful sale cases. Just consider the sheer size of the three highest verdicts:

1. $1.2 million (reduced to $750,000 by the trial judge) by a Texas jury
2. $590,000 by a Los Angeles jury
3. $342,000 by a San Diego jury

These verdicts are startling because they are large and because they are rare. It is unusual for tenants to recover six-figure verdicts, though such verdicts are becoming more common. A judgement of this size can cripple a business. Yet, it is possible to effectively handle delinquencies without undue risk. It begins with the operator's attitude toward non-paying customers.

After leading a seminar on the potential pitfalls of overly aggressive lien enforcement, I was addressed by a storage operator who gave his view of the matter: "I can't mess around too long with customers who won't pay," he said. "If I don't get the money, I don't have a business." I thought for a moment before responding, "Any one customer is less than 1 percent of revenue. You can afford to be careful."

One reason storage operators can afford to be careful is that 45 state legislatures have enacted lien laws that provide a low-cost remedy for evicting customers and disposing of the stored property. Self-storage operators have an advantage over most other landlords in that they don't have to go to court to evict non-paying tenants.

The effective handling of delinquencies begins with understanding the state self-storage lien law. Only Alaska, Montana, Nebraska, Vermont and West Virginia have not enacted lien statutes specifically for self-storage. Operators in these states usually rely on contractual liens, which give them a remedy similar to that provided by the statutory liens.

It is generally simple for a storage operator to enforce his lien rights but care must be taken to avoid mistakes. The storage operator and all personnel who have responsibility for collecting delinquent rent should be familiar with their state lien law. It is good practice to have a copy in the rental office.

It is also imperative for storage operators to understand that there is an important difference between complying with the state lien law and developing sound rent collection procedures. For example, many state lien laws only require that a single written notice be sent to a delinquent customer before property is sold. While the law may permit sale after sending a single notice, a smart storage operator would have collection procedures that include sending out several notices and making telephone calls to delinquent customers. Storage operators who follow just a few simple rules can effectively manage their delinquent accounts and reduce their exposure to large wrongful-sale verdicts.

1. CREATE A DELINQUENT ACCOUNT PROCESSING PLAN

This is one of the most important aspects of your overall business operations plan. It should cover every step from the date rent is late to the eventual sale of the delinquent customer's goods and an accounting of the proceeds. A good delinquency plan begins with reading the state lien law. All required statutory steps must be integrated into the plan. Remember that all the steps provided for in the lien law must be followed, but the lien law does not provide all the steps that should be followed. A good plan is designed to allow the operator to establish contact with the delinquent customer and should provide the tenant a reasonable time to pay delinquent rent.

2. DOCUMENT EVERYTHING

A storage operator who sells a delinquent tenant's property will have the burden of proving compliance with the law. Failure to keep clear records is one of the most common mistakes that self-storage operators make. It is not enough to do everything right. You must be able to prove you did everything right. Compliance is proved by thorough and clear business records that document each step that was taken leading up to the sale. When a telephone call is made to a delinquent tenant, the person who made the call should record when the call was made and the result of the call. When a letter is sent, it should be copied and filed. If a notice is returned by the post office, it should be filed. Storage operators who keep clear and detailed records are also less likely to make a mistake when processing delinquent accounts.

3. REVIEW BEFORE SALE

This step can virtually eliminate mistakes by an operator who is implementing a sound collection plan. Before holding a sale of any storage space, the tenant file should be given a fresh look. This should be done by someone who does not have direct collection responsibility. The review should be detailed and designed to pick up little mistakes. Bookkeepers and accountants are very good at this type of review. What kinds of mistakes can such a review pick up? A few years back a storage operator sold all the property of a tenant whose rent was not delinquent. At some point during the collection process, an incorrect space number was used on one of the notices. This incorrect space number was carried through the process, and the contents of the wrong space were sold. A detailed file review prior to the sale would have disclosed this inconsistency and saved the storage operator $20,000.

CONCLUSION

Storage operators who have a collection plan, document their actions and review customer files before a sale cut down on most of the potential legal pitfalls associated with processing delinquent accounts. Dealing with delinquent customers is never easy, but it helps to keep things in per spective. The goal is to avoid selling your tenant's goods. You may have to do this, but it's not the goal. The goal is to get paid what is owed or as large a percentage of the debt as is reasonably possible.

Selling your customer's property is just one method of reaching the goal and it is the method that creates the greatest potential legal risk for the storage operator. Keep in mind that any one space represents less than 1 percent of the typical storage facility's monthly revenue. The property inside the storage unit may be everything the customer owns. Storage operators can afford to be careful.

D. Carlos Kaslow is an attorney specializing in legal issues pertaining to the self-storage industry. A frequent contributor to the magazine and a seasoned speaker at Inside Self-Storage Expos, Mr. Kaslow is also the editor of The Self-Storage Legal Review, a bimonthly newsletter on legal issues pertaining to the self-storage industry. For more information or to obtain a subscription, Mr. Kaslow may be reached at 2203 Los Angeles Ave., Berkeley, CA 94707; phone (510) 528-0630.

I bought my first piece of real estate last year, but unfortunately, it lacks something, a certain set of luxury items I swore I would never be without, a certain fundamental convenience no home should lack--a washer and dryer. And since there always seems to be a more immediate financial demand for items such as mini-blinds, curtains, paint, carpeting, tile, etc., Sunday evenings will oft find me decked in my most shamefully ragged sweatwear, hauling a hockey bag of dirty laundry down to the local coin-op.

You'd think I'd dread this menial task, but aside from the accompaniment of a good book, there's something else I treasure about these excursions, and that's the unexpected yet refreshing conveniences: The coin-op not only offers the standard equipment, but you can buy laundry detergent and fabric softener from a vending machine. There's an ATM machine. You can purchase long-distance phone cards and stamps. And, let's not forget the coffee machine that offers both lattes and cappuccinos, and the ice-cream machine, complete with Klondike Bars and Drumstiks. It's nice when a chore can be lessened by some simple perks such as these.

Now, imagine I'm a storage customer renting my unit. I'm likely not looking forward to the inconvenience of packing, moving, loading and unloading, not to mention organizing my items in a 6-by-6-foot space. Imagine my pleasure at finding I can purchase everything I need to accomplish the job at hand--from boxes and tape right down to a rental truck--right there at the storage facility. Now imagine you're the operator reaping the added profits from the sale of these items. Are you liking where I'm going with this?

Storage managers all over the country are discovering the benefits of offering ancillary products and services to their customers, from both a financial and service perspective. It could be a simple but effective way to boost business.

But as an operator, profits aren't your only concern. You need to keep on top of all your management responsibilities, such as routine maintenance, rentals and collections. This month, Rick Dodge shares suggestions for the upkeep of one of your facility's most important construction features: your roof. Read how to create an effective rental agreement--one of your most important management tools; then follow up with Carlos Kaslow's article on delinquencies, collections and liens. Also in this issue you'll learn how to handle those occasional irate tenants, participate in virtual records management and file an insurance claim.

We hope you enjoyed the Las Vegas Expo and returned home with plenty of ideas and resources to make your operation run smoother and more profitably. And if those don't work, I'm telling you, get your hands on that coffee vending machine...

Warmest wishes,

Teri L. Lanza
Editor
tlanza@vpico.com

For a complete list of references click here

Have you always wanted to offer medical benefits to your employees but been put off by the high cost? Now it's easier and less expensive than ever to offer the benefits your employees need. Universal Insurance Facilities Ltd. has come up with a limited medical-benefit plan called Fundamental Care Plus. Designed to help your employees pay for everyday medical expenses that arise out of illness or accidental injury, Fundamental Care Plus costs far less than a typical HMO plan and can be a big advantage in helping you recruit and retain your hourly employees.

Plan Highlights

Fundamental Care Plus is an affordable limited medical-benefit plan designed to pay for those everyday medical expenses that arise out of illness or accidental injury. The basic plan provides for a limited number of doctor visits and a specific amount of hospitalization, with prescription and vision discount benefits*. The plan can cover both the employee and his family. The benefits are simple to manage and the monthly premiums are extremely affordable. A dental plan and an employee personal property protection plan (which is similar to renter's insurance) are available options. (See Table A for actual costs).

The criteria necessary for you as an employer to offer the plan is simple. The basic requirements* include the following:

• Employer contributes at least $20 of each enrollee's monthly premium
• Average age of enrollees must be 40 or under
• Coverage is subject to approval prior to initiation
• Pre-existing conditions are covered after 12 months of continuous coverage
• Enrollees will be issued individual certificates of insurance

The benefits of offering the program include improved recruiting and lower turnover, reduced workers compensation claims, less absenteeism and better employee relations for you; and help with everyday medical expenses, coverage for emergencies for the entire family, and prescription and vision savings are the benefits for your employees.

See policy for exact terms and conditions. Discount plans are not provided by or underwritten by Continental Assurance Company. Coverage is available now for residents of the United States except in the states of Minnesota and Vermont. For more information about program details and prices, please call Universal Insurance Facilities Ltd. (800) 844-2101.

Table A Rates and Enrollment--Monthly Rates
Fundamental Care Plus Medical Plan
Employee	$ 48.75
Employee +1	$107.25
Family	$170.62
Dental Assistance Plan
Employee	$ 14.95
Employee +1	$ 29.90
Family	$ 44.85
Personal Property Protection Plan
Employee Only	$ 8.25

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Frequently Asked Questions

Q: Can I still use Fundamental Care Plus even if I have other insurance or receive another form of assistance?

A: Yes. The plan can be used with health, disability or accident plans.

Q: How do I enroll?

A: Simply complete your enrollment form and return it to your employer.

Q. What do I receive after I'm approved?

A.: Once you are approved for enrollment in the plan, we will send you a certificate of insurance based on the coverage you select and an ID card. It will be effective the first of the month following your enrollment.

Q: How does the prescription plan work?

A: Fundamental Care Plus members utilize a network of some of America's largest pharmacies. You will receive significant discounts for brand and generic prescriptions. You will receive a listing of participating pharmacies on your ID card. Show your ID card to receive the discount.

Q: Do I have to pick my doctor and hospital from a pre-approved list?

A: No. You have the freedom to select the doctor or hospital of your choice.