Ask any mechanic, dentist or specialized tradesperson, and he'll tell you: Being successful depends on having the right tools for the job as well as knowing how and when to use them. Its the same for self-storage investors and operators. In fact, a full and fully utilized toolbox has never been more critical than in todays rapidly evolving self-storage market.
Once a relatively simple business, self-storage has become increasingly sophisticated, with technology being the driving force. As a result, owners are re-tooling their businesses, improving long-standing practices with the use of new technologies. Smaller operators, however, are recognizing that scale and capital can make a big difference in the ability to fully exploit state-of-the-art tools.
For example, large operators who can fund and operate sophisticated Internet-marketing programs are better positioned to capture consumer demand. This has led a growing number of smaller operators to affiliate with larger counterparts for access to their high-tech platforms and scale economies.
One of the easiest ways to partner with a larger operator without giving up ownership is through third-party management. This arrangement, which allows smaller owners to access and leverage a larger operators technology and processes for a fee, can offer benefits of scale that include marketing, access to call centers, sophisticated revenue management, lower cost of goods and services, and other efficiencies that are quantifiable over time.
A less obvious area that can directly benefit from third-party management is financing. How? Lets take a look at how third-party management can be a valuable tool for obtaining a financing package in three different scenarios.
Shoring Up New Investors
Lenders understand that self-storage is an operational business, and they are often reluctant to bank a first-time investor. Third-party management can help new investors secure financing.
Lenders base their real estate credit decisions on strengths, weaknesses and mitigates to a transaction, which ultimately translate into calculated risks and returns. A lender may have great appreciation for the self-storage industry and be very comfortable with the physical real estate, but a lack of comfort with a particular sponsors experience can mean, at best, a higher cost of funds and, at worst, a decision not to provide financing.
An easy way for a first-time investor to overcome this obstacle is to propose the use of an experienced third-party management company to drive the operation. This may give the lender the additional level of comfort necessary to push the loan through approval.
Insulating Out-of-Town Investor Buyers
Similar to new investors, out-of-town buyers often present a paradox for lenders that third-party management can be useful to overcome. Local and regional banks, for example, are a traditional source of financing for self-storage transactions. They typically have a relationship-oriented mindset with their customers and a geographic footprint that dictates where they can lend. When an existing bank client chases an opportunity outside the banks footprint, the existing lending relationship may not be willing or able to follow that investor out of market and provide funds for the opportunity.
Unfortunately, this situation typically results in the need for a new relationship with a lender whose footprint is within the propertys market. With new relationships come questions, however, and until the lender and borrower develop a track record of success, the new lender will likely look for ways to safeguard against perceived risk in the transaction. Furthermore, the lender may have questions about the operators ability to effectively manage the asset remotely, particularly if the operator has an investor mentality and lacks operational expertise, which is commonplace today.
In situations where investors without self-storage operation experience are looking to capitalize on opportunities that are in remote markets, often the solution is to present the use of third-party management as a viable solution that will help the lender gain comfort with the transaction.
Digging Out Troubled Borrowers
A final area where third-party management can be compelling for a lender or, in this case, an equity-capital source, relates to transactions with a troubled history that are in need of a workout or debt restructure. Regardless of whether the existing owner is deemed capable, in these situations bringing in third-party management can be a useful strategy to attract new debt and equity to the transaction.
In virtually every workout or restructure situation, theres a story that needs to be told about the history of the asset, combined with an outline of a strategic plan that will be implemented to restore value. Third-party management is often a key component of this strategic plan.
If an equity infusion is necessary to rebalance the capital stack and demonstrate a renewed equity commitment to the debt lender, a logical source for the capital may be a large operator of self-storage. This company will likely stipulate its management platform be implemented to participate in the transaction. Alternatively, if the equity capital is more institutional and fund-driven in nature, the capital provider will likely rely upon an existing operating partner relationship. Either way, third-party management in all probability would be a component of the new strategic plan for the asset.
Regardless of the reason for a transactions troubled history, it can be difficult to attract new debt or equity to the deal without instilling a level of certainty about the operational capabilities of the management. Bringing in experienced, institutional third-party management is a viable way to demonstrate a renewed commitment and ensure management and operations will not be problems with the asset going forward.
Valuable Multi-Use Tool
For smaller self-storage owners, third-party management offers a number of compelling applications. Its a valuable tool that, with the right affiliate, can help alleviate financing issues that were difficult to overcome a few years ago.
Shawn Hill is a principal at Chicago-based The BSC Group, where he provides mortgage brokerage and financial consulting solutions to self-storage and other commercial real estate owners nationwide. He can be reached at 773.517.8504; e-mail [email protected] ; visit www.thebscgroup.com .
