The staff of Inside Self-Storage recently had the opportunity to speak with RK Kliebenstein, president and founder of Boca Raton, Fla.-based Coast-To-Coast Storage, to discuss what is on the horizon for self-storage operators and developers. For more information, call 877.622.5508; www.askrk.com.
What is Coast-To-Coast Storage all about?
Coast-To-Coast Storage is the first generation of a company that will become a "one-stop shop" for real-estate developers and owner-operators. We have selected products and services that assist existing operators and those who are just getting started in the business. Our focus is to improve profitability for existing stores and increase the likelihood for success in self-storage start-up operations. Our first service was feasibility studies, and then we quickly added management and marketing consulting, website design and, most recently, financing. In the next few months, we will extend our products and services to include evaluating storage sites for cellular and communication towers, billboards and other profit centers for operators.
What is the most challenging concern facing self-storage operators today?
Why not just lower prices and be done with it?
Surely, that is the easy way out, but it is clearly the most detrimental of all options. To destroy the value of your facility to compete with others is self-defeating and usually unnecessary. Most operators believe they have a good product. It may not be the newest, the largest or the best located, but these are the steppingstones to acquiring new customers, not reasons to commit "rental-rate suicide."
Those are pretty harsh words. What is the real message?
Even the U.S. tax code recognizes that over time, a business must replace old and tired fixtures and buildings--it is called depreciation. They allow the owner to shelter part of their income from taxation in the hopes that the money is being set aside to improve the property as it ages and keep current with the market. Operators should use this opportunity to improve their product, not destroy their income and value. Remember, for every dollar of decreased profits (lowered prices), the value of the facility decreases $10. A small math example makes this very clear:
Number of spaces rented: 300
Average rent (10x10): $80
Rent decrease: 10 percent
Loss in value: $288,800 (or 17 percent)
The function of higher loss in percentage value than in rent decrease is the expense load. The only expected decrease in expenses would be a reduction in management fee and, possibly, but unlikely, real estate taxes. Since value is calculated on net operating income, rent decreases flow directly out of the bottom line. Most improvements are capital expenditures, and they do not affect the bottom line. Therefore, no loss value in anticipated, and most likely an increase in value will occur by curing deferred maintenance or increasing the replacement cost of the facility. An added bonus: If you depreciate the improvements, the following year you may actually increase the after-tax earnings.
So, what is the logical choice? Improve the property, not decrease the rents. Owners should use maximize their own resources to evaluate the market, determine what improvements need to be made, train and motivate their staffs, and deploy a systematic strategy to overcome the competition before they consider lowering prices. Chances are, owners are already making use of the tools they have, and if the job is not getting done, it may be time for professional help.
Why is financing such an important part of self-storage ownership?
finance business, they left many self-storage operators without a source for refinance. These firms were highly visible to the industry, sponsoring conference events and purchasing large advertising space in magazines. Now, borrowers need alternate access to capital from lenders who understand self-storage loans and how to underwrite them.
Are there different kinds of refinance loans?
Basically, there are two types of refinance loans: conduit, or loans that will be securitized, and commercial bank loans. Regardless of which loan type you choose, the most important factors in getting the best loan are 1) getting the loan that is best for you, and 2) getting the highest loan amount at the best rate. We have lenders/investors who will meet both of these needs.
Why would a borrower want a "conduit" loan?
These loans have extremely high prepayment penalties, and even preclude some borrowers from paying off the loan for a number of years. The paperwork is intensive, but really not much more than commercial bank loans. The major benefits of a conduit loan are that the loan typically has limited recourse (personal guarantee) from the borrower and the loans are usually assumable.
Why not just get a local bank loan?
Local banks with which you have a relationship can be "worth their weight in gold." Often, these banks do not understand self-storage loans, so they tend to be very conservative and may not get you a loan amount high enough to meet your needs. Or they will be shorter-term loans, meaning you will have refinance costs again in just a few years. If the loan is very high, and you have large deposits, they may just be loaning you back your own money, and charging you a pretty penny to do so. Also, bank loans typically require recourse or personal guarantees, which mean that in the unlikely event of a business failure (which may be no fault of yours, as in the case of a natural disaster), the bank may be able to foreclose on the equity in your home.
What is the biggest challenge facing new self-storage facilities?
"Location, location, location!" This old trite-but-true real-estate axiom is totally applicable to locating a self-storage facility. Every developer, experienced and novice, should have an independent feasibility study conducted by an unrelated third party that has no emotional attachment to the prospective location. We conduct feasibility studies for seasoned operators moving on their second or third location who use our expertise as a check and balance to their own research and instincts. We can even help the novice developer select the market and specific property if he has not already done so.
What does a feasibility study cost?
A good basic study should cost around $5,500, plus travel and expenses. We offer a special product starting at $995, and our "Rolls Royce" study is closer to $9,500, which includes helping the developer/ owner-operator get the doors open--much more than just an opinion about the feasibility of the site. The top level of service includes design and management services.
What is in the future for Coast-To-Coast-To-Coast Storage?
We are rolling out new products and services every month. Since the launch of our company, we have added at least one new product every month. As we speak, we are committing to relationships with cell-tower companies to assist storage owners in determining if their location is suitable and marketable for ground leases to communication and cell-tower companies. We will soon be adding strategic relationships to offer appraisal, insurance, brokerage, fee management, advertising, survey, environmental assessments and engineering services. We will ultimately offer construction and total "turnkey" service. You tell us you want to be in the self-storage business, and we will locate the site, get it built, open the store, manage it and send you check when it starts a cash flow.