SINCE 1987, QUIKSTOR HAS PROVIDED DEPENDABLE SECURITY AND SOFTWARE SOLUTIONS TO THE SELF-STORAGE INDUSTRY. The company offers a complete system that integrates security, management and marketing. Its proven lines of affordable, forward-looking products give businesses a healthy profit margin, and its marketing team can quickly design a security and management solution that provides a competitive edge.

For more than 15 years, self-storage operators have turned to QuikStor for innovation and leadership. To plan a custom business solution, call 800.321.1987; visit www.quikstor.com. International customers call 818.922.2000.

Management Software. QuikStor has produced management software for the self-storage industry since 1987. Its newest offering, QuikStor Express, has once again set an industry standard. Built-in video tutorials, vivid screens and training mode make it easy for employees to become proficient with the software. The colorful QuikMap feature allows managers to quickly locate any unit by its status or location.

With QuikStor Express, managers can verify a customer's checking account before they accept the payment. The software also allows tenants' monthly rent payments to be automatically withdrawn from their credit cards or checking accounts. Every year, QuikStor management software processes more than a billion dollars in self-storage income. As a result, the banking industry rewards QuikStor's customers with the lowest processing fees available--just 25 cents for automatic rent collection.

Access-Control Keypads. Driveways and doorways can be secured with QuikStor-900^TM keypads. In keeping with their reputation for durability, extreme protection against abuse by nature and vandals is standard. Each keypad is manufactured to meet strict ISO-9000 standards and undergoes rigorous quality control and testing. The bright, customizable display screen greets tenants with a welcome message, instructions and a clear explanation of why access was granted or denied. The integrated intercom allows hands-free conversation with the facility manager. Access-code use is permanently recorded while the covert camera quietly captures the user's identity.

Pay-At-The-Gate^TM is another of QuikStor's industry innovations. If a tenant is denied access because of a past-due balance, he can pay the debt by inserting a credit card directly into the keypad. Customers love the convenience and owners collect revenue instead of dealing with vacancies and auctions.

Enterprise Management. Using QuikStor Enterprise remote-site software, self-storage operators can gain instant information about occupancy, vacancy and individual tenants. They can also manage delinquent accounts, update records, add tenant notes, make reservations for any location, and even establish a centralized call center.

QuikStor includes password controls, data encryption and automatic off-site backups to ensure the privacy and security of sensitive business files. Reports are printed and/or e-mailed automatically on the schedule and to the specified recipients. This ensures concise revenue and marketing analyses reach staff, business partners and accountants.

Camera Surveillance. Operators can protect their sites with QuikCam, QuikStor's digital video recorder. The video quality is amazingly detailed at 640 vertical lines per camera--that's 22 percent sharper than a DVD. Quik-On^TM recording eliminates the lag time and tape changing of traditional security VCRs by only recording when motion is detected. The unprecedented storage capacity retains weeks or months of detailed camera activity.

QuikCam makes it easy to quickly review video from any date, time and camera zone. Operators can freeze on an image, zoom in, then print, e-mail or burn it to a CD. While an operator views prior events, QuikCam continues to record new camera activity facility-wide.

Finally, QuikCam is a powerful marketing tool, showing tenants the view from the camera aimed toward their storage space via the Internet. For example, tenants can check the covers on their boats or recreational vehicles during a violent storm. "Public" cameras can show prospective tenants what a facility has to offer via a website. An offsite, high-level manager can view all the password-protected cameras facility-wide.

Wireless Door Alarms. QuikStor's family of individual door alarms remains a popular choice for wireless self-storage protection. More than 150,000 are in service at locations of every design and construction material. QuikStor alarms operate for 20 years between battery changes and protect facilities of any size and shape, even with nonadjacent property. Individual door alarms can be rented to tenants for a modest fee, keeping rental rates affordable while offering advanced security. The company also carries wireless panic pendants, key-chain gate openers and exclusive sensors for recreational vehicle and boat protection.

Intercom Options. QuikStor offers a complete selection of high-quality intercom, music and paging options. Music, prerecorded sales messages and manager notifications broadcast across a facility at a manager's command. Intercoms are seamlessly integrated into a facility's drive-up, elevator, entrance and off-site locations to provide enhanced customer service.

Construction Corner is a Q&A column committed to answering reader-submitted questions regarding construction and development. Inquiries may be sent to [email protected].

I own a carwash and would like to get into the storage business. What is the best way for me to determine my unit sizes when designing my site? --Larry in St. Louis

Competition and market analysis! Unit sizes differ so greatly depending on region that the only true way to determine what to build is to see what units your competitor is renting and how fast he is renting them. There are a couple of ways to go about this. First, check with competitors within a 10-minute radius of your site. See which unit sizes are sold out and which ones they are pushing with incentives. This will give you a good idea of which sizes are being rented and how you should design your site.

In many cities and counties, building layouts are a matter of public record at the local building department. Use this to your advantage to determine what your competition found through market research and what he built. In a perfect world, your site would have all 5-by-5s. This philosophy is based on what is called a "bankers mix," which simply means more money is generated by renting out two 5-by-5 units than a single 10-by-10. Of course, this is based on whether 5-by-5s are selling in your area, so do your research thoroughly before deciding on your unit mix. By using these methods, you should be able to come up with a mix that will fill your site quickly at the maximum rent, without having many vacant units left over.

My contractor told me I should install cantilever gates vs. the traditional sliding gates. The cantilever gates seem to be much more expensive, and I can't get a good answer as to why I should go that route. Any suggestions or advice would be helpful. --Richard in Buffalo, N.Y.

A cantilever gate is great when limited horizontal space restricts the movement of a traditional sliding-gate system. Another factor to consider is climate. A sliding gate can suffer when snow and ice collect on the gate track, sometimes breaking the chain or burning out the gate operator. Living in Buffalo, I can see why your contractor is steering you toward a cantilever solution. A cantilever gate is immune to snow on the ground; it is vertically lifted above the snow to allow easy access. It would be a wise investment to spend the extra money now. It will save you a lot of time, aggravation and money down the road.

Construction Corner is contributed by Tony Gardner, a licensed contractor and installation coordinator for QuikStor, an industry security and software provider since 1987. For more information, visit www.quikstor.com.

VERY FEW PEOPLE BUY A SELF-STORAGE FACILITY FOR PERSONAL SATISFACTION OR TO IMPRESS THEIR FRIENDS. If, for example, someone were purchasing a diamond or an automobile, the reasons to purchase and the elements of value would be much different than those for acquiring a self-storage facility. In reality, the only reason to buy a facility is it produces income--more income than could be produced at similar risks in other types of investments such as stocks, bonds, carwashes or hotels.

It is now clear the principle underlying theme of value as it relates to self-storage is the ability of a facility to generate income and compete against other facilities in its marketplace. In the valuation process, little concern is given to any characteristic of a facility that does not contribute to the production of income. To measure the value of a given site, we have to understand not only the amount of income it generates, but the nature and reliability of that income. This income stream must then be compared to other forms of real estate to determine the appropriate level of return on investment to induce buyers to purchase self-storage over other options.

A Word About Appraisals

This article focuses on the three traditional approaches to value used by real estate appraisers: 1) the income approach, 2) the comparable sales approach and 3) the cost to replace the facility. In appraisal theory, all three approaches provide the same answer to the question of real estate value. However, because of the importance of income in generating value, a great deal of focus is placed on understanding its composition and nature. As you will see, the other two appraisal approaches are also important in determining and confirming value.

The Source of Value

In self-storage and most other income producing real estate, the source of value is either current actual income or the reasonable potential of future income. The potential future income can come in the form of increased actual income or the proceeds from a sale of the property. Income seems like an easy word to understand, but in determining real estate value, the term income has several meanings.

For purposes of determining value, the definition of the net operating income (NOI) is important. NOI is merely the product of subtracting the operating expenses from the operating revenues. Operating revenues are those generated from the day-to-day operations of a facility, such as rent, reasonable late fees, lock sales, box sales and auctions. They are not proceeds of sales of equipment or partnerships in the property, insurance-claim payments, proceeds of refinancing or other nonreoccurring income.

The key to understanding operating revenue is it occurs in the ordinary course of the primary business on a recurring basis. In the case of self-storage, it takes the form of rent from tenants. Other revenue can be included only if it is ancillary to the main business of renting space. It will not be considered real estate in valuing the project if it is more than ancillary to primary business. For example, if box sales contributed 60 percent of the total revenue of a facility, that income would be viewed as being of a business other than the primary real estate.

Operating expenses used in valuation are most interesting for what they do not include: interest, depreciation, large equipment costs or amortization on a loan. Also, for valuation purposes, operating expenses do not encompass any personal expenses. However, they may include some things not currently being paid for by the facility, such as management fees. The reason for including management fees, even if they are not currently being paid, is the next owner would have to pay them or provide the service himself.

Operating expenses used in valuing a property can also include increased property taxes caused by the sale of the property. This is because the new buyer will have higher tax expenses (and, therefore, less income) than the current owner. The expenses included are the usual recurring costs such as labor, utilities, legal fees, insurance, advertising, repairs and telephone fees.

If you subtract operating expenses from operating revenue, the product is NOI. For example, assume the operating revenues are $342,000 and the operating expenses are $120,000 (about 35 percent) for a resulting NOI of $222,000. It should be noted that, except in extraordinary cases, the buyer would only consider "trailing income," i.e., the last 12 months of actual NOI, not projections of rent increases in the future.

NOI is not cash flow. Cash flow is the NOI minus the debt service, the principal and interest on any loans. Cash flow is not a component of valuation; however, it is a very important component in calculating the return on equity, which is the ratio of the debt service to the amount of equity required after placing a loan on the property.

How Much Will the Buyer Pay for the Income?

Now that NOI has been calculated, it must be determined what reasonable buyers in the marketplace will pay for the level of NOI the facility has available. This relates to the buyer's perception of risk and his requirement for a return on investment. The market value of the property is the capitalized value of the income stream that can be reasonably expected to be achieved in the market.

How is the expected rate of return determined for a market? Appraisers use comparable sales to help determine value. In this case, previous sales of self-storage are examined to determine what rate of return buyers demand to purchase a given facility. For example, a comparable sale may have been a first-class project in a large metropolitan area with an NOI of $160,000 and sales price of $1,641,000. This would indicate the buyer required a 9.75 percent return on NOI. Another sale of a class-C facility in a small declining industrial town sold with a $120,000 NOI and a sales price of $1,043,000 , indicating the buyer was willing to buy only if he could achieve a return of 11.5 percent on this property with more risk and less potential for income growth.

After looking at many such sales, it becomes clear the market for selling self-storage facilities exists almost exclusively at rates of return of between 9 percent for the very best properties and 11.5 percent for the properties with the most risk and least quality. The chart below shows some recent sales. Because there is a supply of buyers and sellers willing to conduct business at these rates, it is very rare to find a sale outside that range.

For example, if a seller will not sell for the market rate of return for his property, another will sell for that price, satisfying the buyers in the market. The fact most self-storage facilities are bought by current owners already familiar with the business means the range of market values is very narrow; they know the risks and rewards of self-storage.

Computing Value

Now it's time to calculate the value of the self-storage facility used in the above discussion of NOI. The NOI in the example was $222,000. Now that we know the range of returns buyers expect (and at which other sellers are willing to sell), the value can be determined by learning just a bit more about our hypothetical property.

First, assume the property is new in a fast-growing area. It has low vacancy and good construction. If this property compares favorably to the one that sold for the 9.75 percent return, the NOI divided by the rate of return would be $2,256,000. Now assume the sample project closely resembles the project in which the buyer required an 11.5 percent return. The value would then be $222,000 divided by 11.5 percent, or $1,930,000.

Real estate professionals refer to these market rates of return as capitalization rates, or simply cap rates. The accompanying chart shows some characteristics of projects relating to various cap rates. It should be used as a general guide in developing values. Clearly, there are other adjustments to be made in calculating values of self-storage facilities, such as a deduction for excessive deferred maintenance or the economic consequences of a high-rate loan that must be assumed. Positive adjustments can be made for extra land or rental rates that are grossly below market.

The Last Approach to Value

As you may recall, there is a third way to look at value: the cost-to-replace method. This method simply attempts to develop the current costs to replace the project today. Theoretically, it should produce roughly the same value as computed in the above analysis--when the appraiser makes the right adjustments. However, it is more than an exercise in good appraisal to make this comparison.

In today's market, there are a number of projects for which the value computed on income capitalization significantly exceeds the replacement cost of the project. The situation provides an incentive for developers to build additional units that could cause rental rates to decrease. Overbuilding continues to be the most significant risk to self-storage values. Sophisticated or well-represented buyers always make a calculation of replacement cost and make an adjustment to the NOI of a facility for sale if there is a significant potential exposure to overbuilding.

Lenders, in their appraisals, are becoming even more sensitive to replacement costs and are often using them as an upper limit to loan value. While not a rule, it appears when values derived from income capitalization exceed replacement-cost valuations by more than 15 percent, adjustments to the income valuation become necessary to consider.

How to Value Your Property

The above review will provide most of the mechanics to help you get to a preliminary or ballpark value for a facility. However, you have to be impartial when making a judgment call regarding income and expenses and compare your project to the chart to get an estimate of the cap rate.

Then talk to a professional--a broker or an appraiser--and ask him for an estimate of value. Talk to him in detail about how he developed his value and see if you concur. Unless you fully understand all the assumptions he uses and agree with them, you should hire an appraiser to do a complete appraisal. Such assurances will allow you to enter the sales process with confidence you are pricing the property correctly. The time to be sure is before you list the facility. Understanding and setting the value of the property is the single most important step in the selling process.

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

Theoretically, a cap rate is the rate of return you could expect to get in perpetuity if you pay "all cash" for an investment, with all other factors remaining constant. The formula for a cap rate is the net operating income (NOI) divided by the price of the property. Conversely, price is determined by dividing the NOI by the cap rate.

Since my entrance into self-storage in 1992, I have seen cap rates fluctuate from 10.5 percent or 11 percent to the mid-8 percent range. In the early to mid '90s, cap rates were certainly above 10 percent and, in most instances, closer to 11 percent across the board. Transitioning into the late '90s, large publicly traded real estate investment trusts (REITs) brought the cap rates below the magic 10 percent barrier.

I vividly remember the great earthquake that took place in Northridge, Calif., in 1994, destroying homes and displacing thousands of people. It was a tragic event. Occupancy rates in storage facilities shot up to nearly 100 percent within a couple of months, just as the advent of the REITs was taking foothold. At that time, sellers received a twofold increase in the value in their facilities, one from increased occupancy, and a second due to lower cap rates paid by the REITS.

Today, it is not unheard of to find cap rates in the very low 9 percent to even a high 8 percent range. I have encountered a bit of softness in the market--from rental rate and occupancy standpoints--due to increased competition and other economic reasons; however, with interest rates on storage facilities being lower than those previously on home mortgages, you can still acquire a facility at a very low cap rate and have positive leverage.

The cap rate investors are trying to achieve is related to initial and stabilized income numbers. In many instances, initial cap rates are lower than stabilized as operators often feel they can add value to any given property based on their management expertise or economies of scale (i.e., they have other facilities in the area and can share operating expenses). However, assuming a property is fully leased--and with the exception of a normal 5 percent to 7 percent physical vacancy at market rates, with market expenses--the spread between your going-in and stabilized income will be minimal; thus, the going-in cap rate will be more reflective of the stabilized one.

On the other end of the spectrum, I have seen properties at above-market rents that are fully leased as a result of excessive rental concessions and specials. I have also seen fully leased properties with several competitors under construction, which will ultimately place downward pressure on rental and occupancy rates (in the short to midterm). In these instances, the stabilized cap rate may actually be lower than the initial; therefore, you would expect to have a higher initial cap rate at acquisition.

Nonetheless, I have never seen cap rates at this level, nor the infusion of capital from institutional investors and small, private operations looking to diversify. Assuming the debt/equity and economic markets stay relatively stable at these rates, I believe cap rates will remain relatively the same as well.

Matthew T. Pipkin is a senior vice president with Lee & Associates, Newport Beach, Inc. He has been responsible for the recent sale of more than 500,000 buildable square feet of entitled self-storage land, and the sale or escrow of more than 2 million square feet of existing self-storage facilities. For more information, call 949.724.1000; visit www.lee-associates.com.

SELF-STORAGE IS NOT BRAIN SURGERY. COMPARED TO MANY BUSINESSES, the cost structures, labor involvement and customer interactions are very simple. How complicated is the expense structure? You have utilities, management payroll, some advertising and maintenance. You collect rent on the units--end of story. If you can keep ahead of your breakeven point, you are making money. Of course, the devil is in the details; and it is the details that determine whether you can make a purchase work financially.

What Are You Looking for?

Before you even look at your first property, ask yourself how this purchase is going to fit into your life. Are you going to run the property yourself? Are you going to be an active or absent owner? Will a management company run the store for you? What sort of a return on your investment would you like to make? Are you buying to hold? Are you buying to prep the property for sale? These questions and others will tell you what you have to look for in a potential return. It will also tell you how you will manage the property.

Once you know a little more about your particular needs, start looking at properties. There are several brokers who specialize in self-storage. They can help you find facilities for sale. You can also visit self-storage facilities in the area and see if any owners are interested in selling.

Once you have an interested seller, stop and slap yourself in the face. Take a reality check. Look in the mirror and see if your face has the word "sucker" written all over it. The self- storage business has been a good one for many years for people who have an excellent location or a firm grip on expenses. Lots of people have wanted to break into this business. The fact that you want in may mean someone out there will try to play you like a fiddle.

Don't Be a Sucker

Many years ago, I was involved in dog training and breeding and bought many dogs. It would crack me up to see some of the things people would do to pass off a dog as more than it was. For example, Doberman pinschers should not have any white on their chests. One of the things I would have to do when buying a Doberman was check for hair dye or mascara covering a white spot on the chest. Rottweilers should have deep red rather than pink pigment in their mouth and lips. There were a few times I rubbed food coloring off of a rottweiler's mouth when evaluating it for purchase. If people resort to this kind of silliness over a dog worth a few thousand dollars, imagine the temptation when unloading millions of dollars of storage.

Knowledge is your best defense. Know the local self-storage market, including rental rates in the area. Know the tax structure and land-use policies. Know local consumer habits. Know the weather. Know the labor market. If you carry this knowledge into negotiations, you will not shoot yourself in the foot.

The ways in which you can let yourself be fooled in a self-storage purchase are not that different from those in any other business acquisition. You may see misstated earnings or expenses, inaccurate occupancy rates, unrealistic estimates of good will and brand value, untrue reports of the condition of structures, omissions in descriptions of land-use policy and outright lies about environmental risks.

What is the seller's motivation to sell the property? You may never know the truth. Is it possible when the lock was cut on unit 135 to inventory it for auction, the manager found an unidentifiable barrel of stinky, smelly, goopy gunk? If the purchase of your new facility means the EPA will quarantine your site for months while cleaning up toxic sludge, you won't be happy. Environmental risks are real. Make sure you have an environmental consultant look the place over carefully. Make sure your contracts cover you in case you do buy a barrel of toxic waste.

Maybe the seller wasn't making any money. This is not a bad thing. Many times, a change in management and a fresh coat of paint is all that is needed to turn a store around. But protect yourself from paying too much for a sinking ship.

Sellers may misstate earnings by doing several things. A "pay one month, get two months free" promotion will make month No. 1 look pretty good and boost occupancy rates, but it could be used to fool a buyer into believing occupancy rates and earnings are much higher than in reality. It would take very little time and effort for a seller to create phantom tenants. Some current tenants may not be real people at all and may have had the first month's rent paid in cash by the owner. Unless you check leases and call tenants, you will not know how many are real and how many fictitious. You will also not know how many tenants are the owner's siblings, cousins and in-laws.

Misstated Earnings and Expenses

How do you protect yourself against misstated earnings? Get a good estimate of rentable space. Do it with a tape measure if you must. Assume some units may be unrentable. If you know what the high and low rents and occupancy rates are in this market, you can do your own calculations on what the rent roll would be. Work out several scenarios. If you can still make the return on investment in the worst-case scenario, you have an excellent purchase before you. Use the numbers the seller gives you as a test as well. If the numbers are way higher or lower than your research has shown you, ask the seller to explain.

A seller can also misstate expenses. Some sellers are involved in other businesses and may have begun charging the facility's expenses to another business in anticipation of the sale. He may have cancelled service contracts or advertising in preparation for the sale. He may have been paying some payroll off the books, or paying some expenses with cash to hide the items. Regular expenses may have been stated as capital expenditures. Does this remind you of recent events in big business?

Protect yourself from misstated expenses with good knowledge of what it will take to run the store. You should be able to get accurate utility and tax costs from the local government and utility offices. Calculate the rest on your own with the knowledge you have of the local storage market. Can you make your investment work using low-, middle- or high-expense calculations? Where does the seller's expense estimate fall into play?

Anticipate Costs and Obstacles

What is the condition of the property? What is going to soon need replacing? What can be spruced up with cleaning and painting? What warrantees have expired or will expire soon? Not anticipating the replacement of 40 roll-up doors could put a big cramp in your first-year income projections. Here again, use your newfound knowledge of storage to estimate the maintenance, repair and replacement costs. Get some help. Contact builders and suppliers of the type of structures you have and learn all you can from them. How does the seller's estimate compare with your figures? You have probably all seen the Tom Hanks movie "The Money Pit." No new owner wants to remake that movie at his storage facility.

Ask yourself what system improvements will you have to make. Will you need new computers, gates or management software? These are expensive to replace and time-consuming to integrate into operations. Also ask what it will take to hire, train and empower a new management team.

What will take satisfy and entice local consumers? How much are you going to have to spend to fill up the store? If the seller has over-inflated the goodwill the store has in the community, you may have a tough job on your hands. He may have been so unpleasant to do business with consumers have a bad association with the store. It may also be once the "under new management " sign goes up, the neighbors will be happy to give you a chance.

Pay particular attention to the location and accessibility of the store. If the location is difficult, you may never be able to overcome it. Every community has some commercial locations that never succeed. The access isn't right, or the visibility is poor. If the facility you are considering is on one of these accursed spots, think carefully about the purchase before you make it.

Have you learned all there is to know about land-use policy in the area? The seller may brag there is room for 800 more units on the lot behind building No. 2, but if the city has banned all new storage construction, it is of no value to you. What are the municipality's long-range plans and how will they affect you? If the state plans to build a new interstate exit by your property in 10 years, is that going to be good? Maybe or maybe not, but you need to know about it.

What weather considerations are there? The old-timers used to say you should buy wet and sell dry. There is a lot of truth to that. Does building No. 1 take on 2 inches of water every time it sprinkles? Do tornadoes strike this side of town twice every spring? Any information like this is valuable.

Seek Help

You may want professional help to make a good buying decision. There are many people in the industry who offer services to buyers. If you read through this publication, you will find people who have developed, bought and sold many properties, as well as consultants who can help every step of the way. It is well worth the money to have someone knowledgeable assist with the evaluation and examination of a self-storage property. A professional can do three things:

1. Stop you from making a bad purchase. This could save you hundreds of thousands of dollars in grief.

2. Help you negotiate a better price and terms. This could make a deal work for you.

3. Assure you that you are making a good purchase. Sometimes a good purchase may not be totally obvious to the inexperienced.

In Sum

Don't let the "sucker" sign on your forehead get you into trouble. Learn everything you can about the local conditions effecting the store that interests you. Get professional help. Run the numbers again and again until you are satisfied you have covered the most likely scenarios. If you make a good purchase, you can successfully open your store and start making money.

Tron Jordheim is the director of the PhoneSmart Call Center, which serves the self-storage industry as a rollover off-site sales force. He has started several successful businesses from scratch and assisted with acquisitions as general manager of the Mid-Missouri Culligan Bottled Water franchise. For more information, call 866.639.1715; e-mail [email protected].

Las Vegas, the gambling capital of the world, makes its money against 50/50 odds. If you're at the Inside Self-Storage Expo in Las Vegas this year, don't lose too much money gambling—Europe's self-storage marketplace offers far better odds for success! But you can only pick the right numbers if you're an educated player. If you're not experienced in the European arena, the new hot marketplace will only give you 50/50 odds at best.

Let's look at calculated risk in the European marketplace. The psychological distance created by the expanse of the Atlantic is your biggest hurdle. It means you have to have someone in Europe with the necessary business experience. You must be able to trust your representative to set up and run the business for you. You need to have plenty of cash, lines of credit or funding, a leader or strong team, and a quality business plan. With this as a start, you've increased your odds of success. Now, there is only one major obstacle left to overcome before you can get going--available property. This is the largest barrier to entry into the marketplace, even for locals.

Let me give you an example of how long it can take to secure the almost perfect drive-by location in Europe. I have recently been involved in a deal that took 12 months from the date of first offer on a leasehold building. In the year prior to the offer, the buyers looked at the building several times. So why did it take so long, and is this par for the course?

In my opinion, this timescale is normal for leasehold premises. In Europe, the current available property split for potential conversions to self-storage buildings is roughly 50/50 freehold and leasehold. The leasehold option is becoming increasing popular because it is less capital intensive. But with leaseholds, there is generally a lease in place and a tenant who wants to get out of his commitment, which complicates things from the start. However, this situation has one key benefit to the would-be operator: The current tenant may well offer an attractive initial rent-free period at the start of the term to encourage you to take on his liabilities.

The above-mentioned deal consisted of a tenant with 23 years remaining on a 25-year lease. He had never occupied the building since its completion two years ago. You would have thought, under such circumstances, the deal would have taken far less than 12 months. So, why didn't it?

The first six months were spent haggling over the rent-free period with the current tenant, who was paying for an empty building. As each month passed, the tenant had fewer options. The risk of losing the deal to a competitor declined and the strength of his hand decreased. When the final rent-free period was finally agreed upon—18 in the first 24 months, giving the buyer $650,000 in free rent—the hard work really started as the legal process began.

The landlord had to agree to a new sub-lease. A license to alter had to be agreed for the tenant's improvements, a guarantee had to be put in place, a rent bond had to be agreed, covenants had to be considered, and the current tenant's half-completed works in his license to alter had to be considered. These were just the basics, without even considering the amount of work needed to put all parties together to meet the same goal.

So, that's how painful the whole getting-started process can be. Then, in Europe's uneducated consumer marketplace, the real work starts generating occupancy. In perspective, the 12 months spent obtaining the site is easy compared to filling the place. This European game is only for the brave who have good local knowledge and fairly deep pockets.

If you don't have all these cards in your deck, you're far better off sticking with Vegas odds. Enjoy the show and feel comfortable in the knowledge that when you've lost your stake at the proverbial poker table, you can just walk away.

Andrew Donaldson is the founder and chief executive of Active Supply & Design (CMD) Ltd. of Cheshire, England. He is also the founder of the Self Storage Sentinel newsletter, Rent-A-Space Limited (now a multi-site operator) and selfstorage.uk.net. For more information, e-mail [email protected]; visit www.askactive.com.

Do you think large buyers pay more than individuals? They certainly search aggressively and may buy more, but they don't always pay more. Some small, sometimes obscure, buyers pay more than the rich and famous. The profile of the highest bidder is sometimes an unsophisticated individual who is hard to locate.

Where Are the Good Brokers?

When you sell your home, you can drive through the neighborhood to learn which broker has the most "For Sale" signs. When you sell self-storage, you can read trade magazines and newspapers to learn which brokers advertise. Brokers who don't advertise their properties probably aren't exposing them widely enough. On the other hand, brokers who advertise the same properties every month aren't selling them. Good brokers should already be contacting you or nearby owners through mail, e-mail, fax, newspapers or trade magazines.

What Is My Broker's Track Record?

Ask your broker how many self-storage properties he has sold in the last one-, three- or five-year period. A high number of actual sales indicates a broker has the ability to establish market prices that successfully motivate buyers and sellers to complete transactions. Specialists should sell seven to 10 self-storage properties per year.

Respecting track records reduces your risk of hiring the wrong broker. Brokers may fail for several reasons. First, new brokers with no track record often neglect to learn the business before they run out of funds. The attrition rate among new brokers is so high, experienced sellers generally avoid them. Second, mediocre brokers often overprice properties from lack of knowledge or simply to obtain listings. Overpriced listings damage credibility in the marketplace and kill interest from potential buyers who might otherwise consider a purchase. Third, brokers may misrepresent properties to lure buyers, fall out of contract when the truth is revealed, lose credibility in the marketplace, and then fail to sell your property. Approximately one-third of all real estate listings expire unsold. You can save yourself a lot of brain damage by limiting your search to brokers with a record of success.

How Do I Know My Broker Will Obtain Top Price?

This is tricky because the question presupposes a standard of measurement for comparison. Buyers often assume cap rates (income divided by sales price) offer a measurement of value. Unfortunately, cap rates depend on income, which lacks generally accepted accounting principles or even consistent underwriting methodology.

Marketing packages are like tax returns, which present different incomes depending on who did the preparation. Buyers and sellers legitimately calculate income differently for two reasons: First, buyer and seller own the same property in different time periods. Time changes some costs, such as property taxes, which often increase after a sale. Second, buyer and seller may have different operational practices. For example, $30,000 of truck-rental income for a seller has zero value for a buyer who will shut it down. Negotiations about the value of income from items such as uncommonly high late fees are like arguing how many angels can stand on the head of a pin. Reasonable minds can differ.

That's not all. Not only are cap rates calculated inconsistently, they differ by location, future-income prospects and business climate. California income is worth more than Georgia income. Income from a facility in rent-up commands a premium. A 10 percent cap rate is attractive at a 5 percent cost of borrowing but not at an 11 percent cost.

Should you ask a broker about his ratio of expired listings to sales? After all, Babe Ruth held the record for home runs and strikeouts. As a practical matter, the failure rate is a questionable indicator. Just as a surgeon may intentionally accept high-risk cases that result in many deaths for no fault of his own, a broker may accept listings from owners who are unwilling to accept lower market prices after a defect is uncovered (environmental issue, cloud on title, new competitor, etc.).

Ask your broker about his pricing. He should be able to readily provide you concrete examples of deals he has executed and how he may have handled various obstacles and negotiations. In the current business environment, the beneficial impact of low interest rates on property values has been tremendous and seems to be increasing the volume of real estate sales. But unless you are a sophisticated owner familiar with a broker, his properties, his marketing and his prices, you probably can't evaluate his price performance and need to concentrate on his track record. The bottom line is, good brokerage can dramatically impact pricing.

Reputation: Is There a Broker's Broker Anywhere?

Sorry, but no. Doctors use the best doctors, and lawyers use the best legal counsel. But brokers use themselves, for better or worse, and seldom recommend others. Fortunately, other industry players (management firms, top operators, etc.) are knowledgeable and in a good position to recommend. They are exposed to brokers' marketing packages, fliers, seminars, board meetings and articles. Ask them for their opinions. They know the score.

What Fee Is Appropriate?

Fee is important only if you want the broker to succeed. Negotiating your fee below market levels is as counterproductive as negotiating fees with your doctor at the operating table or your attorney while he is preparing your case. Cooperating brokers won't show your property to their best customers if the fee is minimal. Smart buyers and sellers, who are often brokers, don't ask to participate in fees if they want to be offered the best opportunities. Brokerage fees are negotiable and are generally around 6 percent for small properties, 5 percent for large ones and less for portfolios. Fees may trend downward as technology improves and distribution costs decline.

How Will a Broker Sell My Property in Nowhereville?

This is a question about technology and how to identify buyers. A good broker has access to the names, addresses and phone numbers of all self-storage facilities in the United States. If a facility is small (less than 40,000 square feet), a good broker will advertise heavily and mail fliers to: 1) self-storage owners in a 25- to 50-mile radius, 2) business owners in a 3- to 10-mile radius and 3) brokers in a 15- to 30-mile radius. If a facility is large, it should be advertised heavily, with large national buyers being mailed, e-mailed, faxed and called.

What Makes an Outstanding Broker?

If there is one characteristic top brokers share, it is perseverance. They also demonstrate imagination in the use of their marketing materials. Good marketing packages, like good business plans, excite buyers with a compelling case for improving the performance of a property a seller no longer wants to own. If a broker can't get a buyer to see a property differently than his seller does, the sale is probably lost.

Good brokers create beliefs that determine how a property is seen. Look at the Frazier Spiral below. Do you see a spiral? If so, it is because the title has affected your beliefs--you see a spiral that doesn't exist. What you are actually looking at is concentric circles. Do you see the metro-Atlanta dumpsite in the below photo? It is actually an active volcano on the tropical island of St. Lucia. Believing is seeing, not vice versa. The marketing package of a good broker shapes a buyer's beliefs.

Begin your selection of a self-storage broker from advertisements in trade journals, newspapers or fliers you receive. Ask brokers for a list of their self-storage sales. Read their marketing packages and ask yourself if you would buy from them. Call a management firm or large operator listed in a trade journal and ask for recommendations. Good brokers pay for themselves by obtaining far higher sales prices than the fees they charge. This can save you hundreds of thousands of dollars and a lot of brain damage.

Burt Gay is senior director of the National Self-storage Group at Marcus & Millichap. He sold $22 million of real estate in 2002, including 12 self-storage facilities. He serves on the board of the Georgia Storage Owners Society and is a certified commercial investment member. Mr. Gay has a background as a chief financial officer and a certified public accountant. For more information, call 770.393.1700; e-mail [email protected].

If you're just getting started in the self-storage business, this is the article you need. There is a lot of misinformation about marketing in the industry. Before you develop some bad habits, please keep reading.

Here are the five primary areas you need to work on as you get started as a new storage owner. Marketing is your responsibility--it cannot and should not be delegated to your manager, management company or any other entity or person. Implement these five ideas and you'll hit your occupancy goals faster than 90 percent of the folks out there.

Premarketing

It is never too soon to kick your marketing into gear. As soon as you've broken ground on your storage facility, start putting your marketing plan together--not just a mental marketing plan, but a physical one. You'll need to be doing this immediately after you begin building. Waiting is not a good idea when it comes to creating demand for your facility.

One of the best marketing tools to exploit before opening is publicity. Very few owners seem to spend much time in this area, and I don't know why. When used correctly, publicity in local media can generate a lot of interest in a facility for very little money. Coverage in the press is viewed much differently than advertising. Advertising of any sort might be seen as sales hype, but an article about your facility in the paper has more credibility. You should always be looking for media hooks so you can fire out a press release to your local media. Spend an hour a month working on publicity and it will more than pay for itself.

Promotional Material

One of the first things you'll need to think about is your facility brochures. You'll need a minimum of two different ones--at least one for commercial tenants and one for residential customers. Why? Because people want to feel they are dealing with specialists. A commercial tenant would prefer to think you deal primarily with people like him. The same is true of a residential customer.

Any brochure you put together must have five major components:

1. A compelling title to put on the outside. You should not put your name on the front--this gives the reader no convincing reason to even open the brochure. Instead, use a persuasive line like: "Seven Things You Must Know Before You Rent a Storage Unit."

2. An interview with a typical renter. Use a Q&A format to make it easy to read. Put this interview on the front inside panel.

3. A list of features and benefits about your facility. Depending on the brochure, adjust your features and benefits accordingly.

4. A map to your facility.

5. A web address.

Missionary Work

Before you open, you'll want to concentrate on two primary groups for doing what I call your "missionary work." This is where you'll go out and personally meet and greet potential users and reccomenders for your storage facility.

Commercial Tenants. One group to concentrate on is your potential commercial tenants. Visit any and every business within three miles of your facility. Try and get in for a quick visit with the office manager or someone in a position of authority to explain that you'll soon be opening. Offer them some special deals and leave some literature about the facility.

Residential Tenants. Another group to target before opening is future residential tenants. These are people who live within a few miles of your facility. I suggest you visit people and go door to door taking a survey on their storage needs. Give out discount coupons in exchange for their participation.

Yellow Pages Ads

Many storage owners think placing a Yellow Pages ad constitutes a marketing plan. Wrongo! There is no doubt a Yellow Pages ad should be one part of your marketing effort, but over reliance on this medium would be misguided. In the grand scheme of things, the Yellow Pages are one of the most costly means of marketing in the storage industry.

Your goal as a new owner is to virtually eliminate your need for a Yellow Pages ad in five years or less. Is this a scandalous statement? I guess it might be, but it's 100 percent true. I would much rather see you concentrate your efforts on less costly and more efficient means of marketing. Afterall, once you've designed and placed your ad, your work is over until next year.

Here are some key suggestions for when you do place your first Yellow Pages ad:

• There are often numerous Yellow Pages books in any given market. Don't be fooled! There is usually just one that is truly used by people in a particular community.
• Paying for premium placement is never worth it. You'll hear from every Yellow Pages salesperson how important it is to appear at the beginning of a section. Baloney! There is no research or evidence to support the assertion that being first in a section generates more calls.
• Don't rely on "image advertising" in your Yellow Pages ads. This is how you'll find more than 90 percent of ads are designed--they try to create "brand awareness" or some such nonsense. When you hear this tag line from an ad-design consultant, run the other direction. McDonald's may need to concern itself with getting its name out there, but you need to concern yourself with one thing and one thing only: renting units.

The sole purpose of your ad is to get the phone to ring. To make this happen, you need to include:

• A great headline. Do not use the name of your facility at the top of your ad. Frankly, no one cares. Instead, combine your biggest benefit with your customers greatest need. It's never a bad idea to use price to get them to call. I suggest you offer some very small units (lockers) so you can use a headline such as: "Units Starting as Low as $9.95 a Month."
• A list of features and benefits. It's great to present the benefits of your facility in your ad. However, don't forget to attach a benefit with each one. For example, if you say, "Ten different unit sizes," you should then say, "so you only pay for the space you need."
• A storage hotline. Every facility should have a number people can call with a recorded message of its features and benefits.
• Maps. Every ad should have a small map with major cross streets to make your facility easy to find.
• Websites. Always include your web address in your ad.

Hiring and Training Managers

Your manager is the key to your marketing effectiveness. The wrong manager can kill you. The right one can make you exceedingly wealthy. There are two components to hiring a good manager. The first is hiring right. The second is training him to effectively implement your strategies.

How do you hire correctly? There are many businesses in this industry that assist with manager placement and training. You can also visit www.kolbe.com, a site administered by experts in hiring for any field, including storage. It will help you create a profile for the job of self-storage manager. It also includes an inexpensive tool to determine whether your well-screened applicants are as good a match as you think.

On the training side, you'll want to make sure every manager learns three things:

1. How to turn callers into visitors (or phone-sales skills). The key to success in this area is teaching the manager to highlight your facility's USP (unique selling proposition) during the first few moments of a call.

2. How to convert visitors into renters. To increase your in-person sales-closing ratio, your manager shouldn't let anyone leave the facility before he tries to close them on renting a unit.

3. How to provide great customer service. If your manager does this, people will come back when they need storage and refer you to all their friends.

Five Things to Remember

1. Don't believe conventional wisdom. Most self-storage owners handle their marketing incorrectly. Playing follow the leader in this business will take you down the wrong road. Do things differently.

2. You are responsible for your faciliy's marketing efforts, not your manager. Your job is to get the phone to ring. The manager's job is to get the customer to visit and then rent him a unit. The manager should help in the marketing process, but you are ultimately responsible.

3. Don't rely on Yellow Pages advertising to make your storage business work. Many people who have done this have failed miserably. Grow your business with a strong outbound marketing effort.

4. Look like a specialist to anyone who walks in the door. Make tenants feel you know and understand their particular need.

5. Keep learning and studying marketing. You can never know too much about how to improve your business.

Fred Gleeck is a self-storage profit-maximization consultant who helps owners/operators during all phases of the business, from feasibility studies to creating an ongoing marketing plan. Mr. Gleeck is the author of Secrets of Self Storage Marketing Success--Revealed! as well as the producer of professional training videos on self-storage marketing. To receive a copy of his Seven-Day Self-Storage Marketing Course and storage marketing tips, send ane-mail to [email protected]. For more information, call 800.FGLEECK; e-mail [email protected].

NOW THAT WE ARE INTO A NEW YEAR, IT'S TIME TO TAKE A GOOD LOOK at your facility's bottom line from 2002 and ask yourself some important questions. Did you achieve the goals you set for your facility? Did you perform your best? Did your management company work well with you? Do you even have a management company, or do you need one? What can you do better this year? How can you motivate staff to achieve the facility's goals? And what are those goals? The key to success in the new year will be the effective cooperation of all a facility's important players: the owner, the manager and, where applicable, the third-party management company.

A Manager's Perspective

As a manager, ask yourself: Are you happy at your site? Did your owner give you the tools you needed to succeed? Did he give you the authority to make daily decisions? Do you feel appreciated, or is it time for a change? If it is time to move on, do you have an updated resume, and are you mentally prepared for a new position?

Take the lead in the area of marketing. You know your site better than anyone--who your clients are and where they come from--and you should have an idea how to market to them. If you don't, educate yourself. Read trade publications, plan to attend a convention, and read books or articles on marketing. Fresh ideas from outside the industry might assist you in designing a marketing program.

Let your owner know your goals for your site, how you plan to make it better and the tools you will need to do your job. Make business and personal goals. Take time for personal growth, i.e., join a gym, take some adult-education classes, learn how to paint or make pottery. Do something for you, apart from your site. Refreshed managers make better, calmer decision-makers who can handle the daily grind of managing a storage facility.

A Management Company's View

As a management company, can you do things better? How will you go about it? Are your managers and owners happy with your performance? Are you happy with your performance? Do you need to hire more staff at your home office? Can you make your monthly or quarterly reports better? Are there clients that take up all of your time, ones whose voice you cringe to hear on the phone and with whom it is just not worthwhile to work? Do you need to prospect more for new clients? If so, how will you do it?

Keep in mind, all the onus does not fall on you. You need the right tools to do your job. The facility owners need to give you authority to manage your sites, to make daily decisions and carry them out. You need to work hand-in-hand with your owners and site managers to reach the goals you want to achieve.

To All Owners

We can all perform better and do things that make a difference in our businesses. First, you need to have a clear idea of what you want to achieve, then make a plan. Your first step should be to sit down with your management company or managers and evaluate last year. What worked? What didn't? How can you improve?

Make a budget and include any upgrades, such as new software, maintenance projects, renovations on the office or manager's apartment, increased wages, etc. Everyone should receive a copy of the budget, including the managers. Without a road map, how can they be expected to reach their goals? Managers need to know there are expenses involved with operating your business. Just because they bring in $56,000 per month doesn't mean it's all profit.

Open communication is one of the keys to success at your site. Ask for your management company's or site manager's input. They know your site--what is good or bad about it--and they can help make a plan to improve it. Marketing, collections, maintenance--all these items need to be discussed and a plan designed to carry out and achieve goals. Give managers the authority to manage the facility. Let them know you trust them to do their jobs. If you don't trust them, you should replace them.

It is your duty to provide site managers and the management company the tools to do their jobs. These include sufficient salaries, an achievable bonus program, and the funds for operations, marketing and upgrading the facility. They also include motivation and guidance to compete in the marketplace. If your managers need to brush-up on training, hire someone to provide it. Send them to seminars and order industry publications.

If you are not good with people, or can't direct or motivate them, consider hiring a management company to do the job for you. It can be your liaison and buffer against the daily grind of managing a facility. And keep in mind your accountant or CPA is not a good alternative to a management company. Writing out checks every month is not property management! A good management company can motivate managers, keep an eye on the bottom line and strive to increase monthly income.

If you think you might need a management company, look for one that is well-rounded, flexible and offers a variety of services. It should have quality managers to work your site, and be able to handle all your training and daily operations. You should feel comfortable working with this company and have positive, effective communication with its staff.

Owners, site managers and management companies need to work collaboratively to make a facility as productive and profitable as possible. By working together, you will achieve your goals and everyone will have a prosperous year ahead.

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

There are a few things you need to determine before you start the field work on a feasibility study:

1. Will the local municipality of your proposed location allow self-storage and, if so, in what zonings?

2. Does the site you've chosen need a zoning change or just a conditional-use permit? What type of signage will be allowed?

3. Does the site pass the phase I environmental assessment?

4. What type of return are you or your investor seeking? Will this property meet your objectives?

These are questions you must answer before starting the actual feasibility report. The days are gone when you could operate under the philosophy, "If I build it, they will come." If your answers to the above questions are positive, the rest of this article is for you. I will outline what is needed in determining feasibility and issues to address. The following information is needed for all types of storage, i.e., typical outside-access or hallway units, climate-controlled units, outdoor or covered parking, and even wine storage. You must consider all types when examining the needs of your market area.

Shop the Competition

You must first map out all existing self-storage facilities within the proposed site's community and visit them all. The best way to get correct information is to present yourself as a prospective tenant. If you tell them you are interested in building another facility in the area, they will tell you they have a lot of vacancies and are giving heavy discounts--nobody wants more competition.

Once you are in the office, pay attention to its appearance and that of the manager. What are the office and access hours? Is access the same for typical and climate-controlled units? Are there climate-controlled units? Keep track of the security each facility offers and whether the manager explains its features to you. Get as many prices on different size units as possible. Do the facilities charge a security deposit, administrative fee or both? Did they offer a move-in or long-term-rental special? Take a picture as you leave--after you visit a few facilities, you forget which ones are which.

Afterward, call each facility and shop it on the phone. How is the manager's phone technique? Are the pricing and specials the same as those presented in the personal visit? You need to gather as much information on the competition as possible. You will be competing with them for new tenants and you want to find your own niche.

Is There Already Too Much Storage?

When conducting your feasiblity study, determine your actual market. This could be as far as 10 to 15 miles in rural areas or as little as a few blocks in some metropolitan areas. Once you have determined your target market, you need to establish the occupancy rates in the area, which can be accomplished in a number of ways.

When visiting competition, ask the manager how many total units he has and how full the facility is. Most managers are all too happy to talk about themselves and their property, if they are asked the right questions. Some, however, will not tell you anything. Then you need to drive through the facility at night, counting locks. If you need gate access, you may need to rent a small unit to accomplish this. Keep in mind some managers keep locks even on empty units, so this may not always be the best indication of occupancy.

Once you know each facility's occupancy, determine its actual square footage. Again, there are a number of ways to do this. The first way is to measure the outside of each building. If you are dealing with inside storage, calculate 70 percent coverage, or take the total number of units and multiply by the average unit size, usually between 100 and 120 square feet.

Once you know the amount of storage currently built and the occupancies of each facility, it should become clear if there is still demand for self-storage in the area. A word of caution: Just because all facilities are full does not mean there is demand. Are you visiting facilities in a college area during summer break when all facilities are full? There are a number of reasons why facilities fare well during certain times of the year and not others.

Finally, you'll want to compare your proposed facility with its competition in terms of demographics, visibility, traffic count, management, security, accessibility, appearance and structure. All of these factors need to be considered, but do not necessarily decide not to build just because the facility is lacking in one area. I've seen facilities do very well in economically challenged areas. I've also seen facilities do very well in areas that appear overbuilt because of a lack of or weak competition.

What Sizes Do I Build?

When shopping your competition, ask managers what sizes they run out of first and which people ask for the most. The actual unit mix is very important. If you build a "bankers mix"--a lot of smaller units, which have the highest rate of return per square foot--and not many larger ones, you may wind up with a lot of units you cannot rent. This type of mix looks great on economic projections, but there are only so many people who want or need 5-by-5 and 5-by-10 units. Vacant units mean less income.

What Type of Income Can I Expect?

Remember that your facility does have expenses. I'm amazed how many people subtract their mortgage from their income and think this is an indication of their monthly profit. Operating expenses include utilities, salaries, services, advertising and marketing, property taxes, insurance, supplies, repairs and maintenance. You need to include a line item in your budget for each expense projected.

Determining income is easy. You've already found out what the competition charges and determined a unit mix. Now multiply the number of units built in each size by the price you will charge, taking into consideration a move-in special if you feel one is needed. Keep in mind you cannot expect to be 100 percent occupied, so 85 percent is a good average to use. Add to your rental income proposed late fees to be collected (usually between 1 percent and 2 percent of the rental income), merchandise sales (also between 1 percent and 2 percent) and any other fees you might charge, such as administrative fees. Your total income minus expenses--not including the mortgage--will give you your net operating income (NOI).

Take into consideration that during rent-up you are not already 85 percent occupied. This is why you have a rent-up reserve when taking out your construction loan: to cover the short fall until maturity. Some people say you can budget a 5 percent monthly increase. I do not agree. Using this calculation, if you build a 300-unit facility, you only need to net 15 units a month; but if you build a 600-unit facility you need to rent 30. Just because you need to rent 30 units to meet your 5 percent does not mean the area will provide that many renters! I prefer to do a monthly budget, deciding how many units will rent each month and taking into consideration a move-out rate of approximately 10 percent. Then, whatever monies are left after paying your mortgage at the end of each month can be distributed at your discretion.

What Will My Property Be Worth?

The self-storage industry usually calculates the worth of a property by taking the annual NOI of a mature facility--usually one that is 85 percent occupied--and dividing it by a cap rate. This rate can be anywhere between 9 percent and 13 percent depending on the age of the facility, the type of construction used, and how the facility compares to competition. For example, if the facility has an annual NOI of $360,000 and you divide by a 10 percent cap rate, you get a value of $3.6 million. If the construction loan for the facility was $2.5 million, your profit would be $1.1 million minus your down payment and interest for the original loan amount. Are you going to make the return on investment you need?

The reality is, if you do not do your homework and have an "If I build it they will come" attitude, the possibility of failure is high and the bank will foreclose on the property. The good news is, for people who do their homework, there are still many locations that will perform to the standards they set.

Stephan Ross is president of Cutting Edge Self-Storage Management & Consulting, which specializes in feasibility studies, third-party management, auditing and training for the self-storage industry. He has more than 15 years experience in the industry and is a frequent speaker at Inside Self-Storage Expos. For more information, call 801.273.1267 or visit www.cuttingedgeselfstorage.com.