Phasing for Greater Profits

By Dan Curtis

Profit is, of course, the ultimate goal of any self-storage project. Profit is the best return with the least risk--the least risk for the owner, but also for lenders or the owner's available cash. It is in this context that phasing makes good sense.

In the early stages of project planning, the best and most efficient layout needs to be established. The plan that best fits the property will take the following factors into consideration:

• Entrances and exits
• Setbacks and easements
• Utilities
• Construction costs
• Generated income
• Competition
• Available capital
• Types of buildings

It is during the early stages of planning that phasing should be considered. In general, phasing delays the final decisions of unit mix and construction, allowing for them to be based on actual events and not just estimates. There are several types of self- storage projects that may need to be phased:

• Conventional
• Climate-controlled
• Multistory
• Conversions
• Combinations of the above

Conventional Storage

In order to phase conventional storage, land must be left available on the site for additional buildings. Extra land should be a strong consideration from the initial search for the property. Many times, larger tracts of land can be purchased for a more reasonable price.

One good idea is to move ahead and pour the concrete slabs for all phases during phase one. Then, when occupancy on phase one hits 60 percent, the construction process can begin again on phase two, which should require about half the time it took to build the first phase. More of the costs will be during the first phase, as the building with doors and partitions is about all that is required in the second. Electricity will probably be needed for lighting, but most of the planning will involve first-phase costs. The second phase will take advantage of construction changes and building innovations.

Climate Control

Climate-controlled space is handled similarly to conventional space when phasing. Many times, the complete building will be constructed with the heating and air-conditioning systems already in place. The hallways, doors and some of the partitions can be omitted. By leaving the doors, hallways and partitions out of the first phase, the unit mix can be adjusted to whatever is renting most successfully. This ability to change the unit mix will keep the project on track, allowing the owner to have units to suit all needs.

Multistory Buildings

Multistory buildings will need to be built out with the exception of doors, hallways and partitions. One recent four-story project left one floor for conventional units only (no HVAC). This was done to offer climate- and non-climate-controlled spaces at the outset. The eventual goal was to convert the entire project to climate control, thus increasing revenue.

Multistory buildings are usually 60,000 to 100,000 square feet or more. Most often, the first half of the project is built with phasing in mind. Usually, it will require seven months or less to complete a project, and a 50 percent lease-up should occur within one year. At that time, second-phase work should start. Completion should be expected about four months later. Of the total cost, about two-thirds will be in the first phase with the balance being in the second phase.

Improved Financial Statements

The impact of phasing on the financial statement is shown in two or three different ways. Rent-up percentages are higher. This is a confidence builder for the lender. High mortgage payments are not being made early on, but are delayed until a time when the project has more operating income. In fact, some projects will have cash flowing by the time the second phase is completed. The impact on reduced negative cash flow is very positive and lender confidence will be improved. Since phase two will have a unit mix based on actual units rented, income will be improved. If the market wants improved security or any other features, these needs can be accommodated in phase two. Again, income will be improved.

Adjusting to Competition

Not only will phase two correct unit mix and construction problems, but it will allow an owner to adjust to a new competitor just down the street. If this new competitor has a different type of storage, which might be considered an improvement over what was built during phase one, it is possible to make adjustments. Many times, projects are completed without climate control. If competition swings toward offering this feature, the already completed project is out of the market. Attempting to add climate control to an already completed project is very difficult because insulation, doors and electrical systems are not conducive to making the necessary changes.

Phasing is a process well-known to the large operators in the industry. It offers flexibility to market changes. It minimizes capital exposure and reduces risk. Phasing needs to be seriously considered on every project, even conversions.

Dan Curtis is president of Atlanta-based Storage Consulting & Marketing, which specializes in market studies, feasibility, site layout and design, marketing, conversions and climate control. For more information, call 770.432.2417; e-mail [email protected].