I recently assembled a roundtable of real estate experts to discuss the state of self-storage in the Northeast. To help quantify the trends they’re seeing in today’s market, I asked them to rate their markets on a scale from one to five (rating specifics differ for each topic). I’ve also added my comments on their average response. Joining us in the discussion are: 

• Guy Blake, Pyramid Brokerage Co., Kingston, N.Y.
• Linda Cinelli, LC Realty, North Branch, N.J.
• Joe Mendola, NAI Norwood Group, Bedford, N.H.
• Chuck Shields, Beacon Commercial Real Estate, Philadelphia 

How has self-storage revenue held up in your market over the past 12 months?
[Scale: 1 = down dramatically, 3 = down moderately, 5 = no change/steady]
 
Blake: Four. In Upstate New York, revenue is down only slightly, but delinquencies are up.

Cinelli: Three. In New York City and northern New Jersey, revenue hasn’t dropped drastically, but it has dropped. Owners are cleaning up their expenses, cutting costs and just hanging in there.

Mendola: One. I define dramatically as 7 percent to 10 percent from a high occupancy of about 87 percent on average. I can only think of one facility in my New England market that’s maintained its physical and economic occupancy with less than a 5 percent reduction. The resulting revenue for these facilities is down as well.

Shields: Four. My sense is the overall market may be slightly down and, in some cases, no change. Many owners will make allowances/discounts on their current rates to maintain occupancies with tenant retention as their primary goal, as well as securing new tenants. For these reasons revenue has declined.
 
Average response: Three. Overall, we’re seeing revenue has been affected by the recent economic downturn, but self-storage has fared better than other types of real estate in this market and will likely be able to recover more quickly once the economy turns around.
 
What’s the availability of financing for new buyers in your market?
[Scale: 1 = very difficult to obtain, 3 = difficult, but still available, 5 = readily available]
 
Blake: Four. Local and regional banks and credit unions are still lending at reasonable terms, i.e., 70 percent to 75 percent loan-to-value, 10-year fixed at 6.5 percent interest, and 20 to 25-year amortization.

Cinelli: Two. Inexperienced buyers won’t be able to get financing in this market unless they have real money in the deal. Buyers with a track record can get financing, but the deal has to make sense. We’re seeing capitalization rates around 8.5 percent for a class-A product and up to 11.5 percent for other products.

Mendola: Five. Community banks in New England are ready to lend up to about $2 million. The credit rating and outside income for the buyers have to be good, but the financing is available to those who meet the requirements.

Shields: Three. Almost all new developments and those with significant vacancies and build-out risks are not finding financing. Existing facilities with some stabilization are finding it more difficult to finance than in the past. Financing outlets (banks, lending institutions, etc.) are much more conservative in their lending requirements. They want stable incomes with a minimum of 12 months financial history, not pro forma. In addition, they’re requiring buyers to have more equity in the property than before.
 
Average response: Three and a half.  There are still some opportunities out there for financing, but buyers must be very realistic about their own position and be prepared to meet many more lending requirements than in the past.
 
What’s the quality of buyers in your market?
[Scale: 1 = limited interest, 3 = somewhat serious, 5 = serious/qualified]
 
Blake: Three. The quality of buyers depends largely on the quality of the property being offered. Class-A properties get “A” buyers, class-B properties get “B” buyers and so on. Right now we’re seeing buyers who are somewhat serious about buying, but they’ll wait to get the best deal possible.

Cinelli: Four. Most of the buyers we see today have serious interest in buying facilities, but their criteria for properties has gotten more strict. They are only looking for facilities with qualified financials that can be verified.

Mendola: Three. Buyers have the financial ability to invest, but their criteria for rating an investment is very strict.

Shields: Three. Recently I’ve seen more buyer inquires as to what’s available in the market. Cap rates have risen somewhat, and buyers seem to feel that conditions aren’t as scary as before. Optimism isn’t quite there yet, but buyers are serious enough to position themselves to react if the lenders ease up a bit. Buyers are also realizing that not all real estate, in this case self-storage, is being sold at a “fire sale.”
 
Average response: Three. Clearly there are buyers in the market today who are waiting to capitalize on the lower prices and distressed facilities on the market. Time will tell if the gap between the buyers and sellers will narrow to the point that more transactions will begin to take place and the market can approach equilibrium.
 
How serious are the sellers in your market?
[Scale: 1 = just checking values, 3 = testing the market, 5 = really want/need to sell]
 
Blake: Two. There are not many sellers out there, and the properties I’ve seen tend to be distressed and/or overpriced.

Cinelli: Two. Sellers in our market are not serious enough to make the right deal. Many are holding out for higher prices and don’t recognize that cap rates have gone up and values across the market have gone down. There are some situations in which sellers need to sell their properties because of pressure from the bank, but we’re not seeing many of those yet.

Mendola: Three. Sellers today are testing the market. Almost all of the sellers of properties I’ve listed are not over leveraged and have sufficient cash flow to pay their mortgages. As a result, they’re not willing to dilute their equity with a discounted sale price.

Shields: Three. It’s difficult for many sellers (any owners of real estate) to come to the realization that the present value of their property isn’t what it was from the historically high real estate market of a few years ago. If their facility could sell for a 7 percent cap rate at the height of the market, it’s now at a 9 percent cap rate. This is causing many sellers to question if they want to sell. Do they test the market or wait and see if it comes back up?
 
Average response: Two and a half. Sellers in today’s market are generally not willing to come down on their listing prices unless they’re under pressure from their lenders. As many sellers aren’t in dire financial situations, many choose to test the market and see what kind of offers they can bring in, but they’re not particularly motivated to go through with a sale unless it’s on their terms.
 
Michael L. McCune is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self-storage buyers and sellers and operates www.selfstorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE. 

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The Louisiana Self Storage Association Board of Directors recently elected Jim Ponti of Extra Space Self Storage as association. The association also appointed Shawn Herrick as its new executive director. She can be reached at 866.857.8473.
 
The board also includes Lana Griffin, past president; Mitch Clark, vice president; Al Gardes, secretary; Tanya Amburgy, treasurer; and members at large, Shaun Ferguson, Allison Walling and Eric Avery.
 
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Extra Space Storage Inc. will release its financial results for the three months and year ended Dec. 31, 2009, on Feb. 22 after the market closes. The company will host a conference call at 1 p.m. ET on Feb. 23 to discuss the results. Hosting the call will be Spencer Kirk, CEO and chairman, Kent Christensen, executive vice president and chief financial officer, and Karl Haas, executive vice president and chief operating officer.
 
During the call, company officers will review fourth-quarter and annual performance, discuss recent events, and conduct a question-and-answer period. The Q&A will be limited to registered financial analysts. All other participants will have listen-only capability.
 
To participate in the call, dial in at least five minutes prior to start time. The phone number is 877.407.0789 for domestic callers and 201.689.8562 for international callers. The conference ID is 343772 for all.
 
A recording of the call will be available through March 10. The phone number to access the playback is 877.660.6853 for domestic callers and 201.612.7415 for international callers. The account number is 3055; the conference ID remains 343772.
 
The conference call will also be accessible online through the Investor Relations page at Extraspace.com. To listen to a live broadcast, go to the site at least 15 minutes prior to the scheduled start time to register as well as download and install the necessary audio software. A replay of the call will be available on the website for 90 days.
 
Headquartered in Salt Lake City, Extra Space is a real estate investment trust that owns or operates 766 self-storage properties in 33 states and Washington, D.C. The company's properties comprise approximately 510,000 units and more than 55 million square feet of rentable space.

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The self-storage industry recently suffered another high-dollar wrongful-sale verdict in the case of Dubey v. Public Storage, the third lien-sale case in a year with a notable verdict or high award.  It’s time to conclude that lien sales, if not done properly, pose a huge risk of exposure to your business, both financially and from a consumer-relations standpoint. If you don’t know how to do a lien sale correctly, you need to learn. 

Easier Said Than Done

Properly conducting your lien sale is not as easy as it sounds. Many state self-storage statutes have inconsistencies that make it difficult, even if you follow the statute closely. For example, several require that you send a notice to the tenant via Certified Mail, including a demand for payment within X number of days of notice receipt. This is easier if delivery is presumed in your state statute; however, delivery is not presumed in most states when a notice is mailed. It’s almost impossible to make a demand for payment within any number of days after delivery because you don’t know when or if delivery actually happens. 

There are other problems with your state statutes that are more subtle. For example, your statute may have a presumption of delivery for your Certified Mail notice, but can you really presume it delivered when you get it back marked “undeliverable”?

There are also problems simply because many statutes are creatures of the ’70s and ’80s and have not been modernized. How can you run an ad in a newspaper of general circulation in a city or town in which the facility is located when the local newspaper has folded? All of these issues come together to make lien sales more difficult to conduct, and courts seem to be losing patience with self-storage operators who make mistakes in their sales.  

Please note: Courts seem to be awarding the largest verdicts for sales that shouldn’t have occurred at all, such as when the tenant was current at the time of sale. But there are decisions creeping up, such as in the Cook v. Public Storage case, in which the tenant was delinquent and should have been sold, but the operator made mistakes in the sale and a large verdict was awarded.

So how do you protect yourself? A lien sale or threat of a lien sale is still the strongest and, in some cases, only option for dealing with a tenant who isn’t paying rent. While this article can’t address state-by-state concerns, here are several general suggestions:

• Make sure your tenant is actually in default.
• Know, understand and follow the technical requirements of your statute.
• Have insurance to protect against any errors.
• Know what kind of sale you can have.

Tenant Default  

In both of the $1 million-plus cases for wrongful sale cited above, the tenant was not actually in default. In one case, the tenant had pre-paid rent for a year; in the other, the facility manager misassigned the tenant’s name to a unit not occupied by the tenant. There have been countless other cases in which the tenant wasn’t actually in default when his unit was sold. Those are the stories that grab the court’s and media’s attention and tend to vilify the self-storage industry. 

Self-storage lien-sale statutes are remarkably similar to Uniform Commercial Code liens a bank might use to protect its equipment. But because ours is an industry that deals more with consumers than businesses, it’s easier to paint a negative picture of storage-related litigation. People care more about wrongfully sold wedding photos than a wrongfully sold forklift. 

What should we take from the two recent large verdicts for wrongful sale? It seems courts have no tolerance for an operator’s mistake in selling the belongings of someone who isn’t in default. Plus, they are finding ways to make sure operators are punished handsomely for these errors, including awarding punitive damages well in excess of the value of the property sold.

While there’s no absolute way to guarantee you’re right about every defaulted unit you sell, you should have a solid set of crosschecks that ensures the unit you’re selling belongs to the tenant, and the tenant is actually in default, not a victim of a misapplied payment or other error on your part.  

Know Your Statute

Many operators don’t regularly review their state statutes regarding lien sales. You can’t conduct a lien sale safely without frequently reviewing your statute. Almost every default presents some wrinkle that, read in light of the statute, might change your view of the statute or how to handle the default. 

Your best option is to have your attorney prepare a checklist and timeline summarizing your statute’s various stipulations to properly comply with the law. These should include your company’s policies such as reaching out to the tenant to settle the debt before a lien sale. Many people think they can simply follow the procedure from one state, but this is incorrect. While many statutes are similar, they’re not identical.

As an example, take the notice that generally must be sent by you to the tenant before exercising your lien-sale rights. Many operators refer to this as the “certified letter.” Most statutes that require some type of certified letter have some similarities, like requiring the letter to include the owner or manager’s contact information, and the date, time and place of sale. However, there are differences in the 49 statutes.

In some states, the letter must be delivered via general mail and Certified Mail. Some statutes require certified or personal delivery, others registered mail. Some require that you mail the notice to any alternate contact in the rental agreement, to all lien holders, or even the Department of Taxation before it is valid.

Some statutes require that the notice include an itemized statement of all charges due, others do not. Some require you include all charges you expect to incur up to the date of sale, others do not.

The failure to review and understand your statute may cause you to use a notice that’s not appropriate or correct for your state, thereby creating a potential defect. If you’re going to perform lien sales, you have to do them properly to avoid the possibility of someone raising a defense or claim of improper sale that could result in a judgment against you. 

Insurance

You should not conduct any lien sales unless you have self-storage insurance coverage for wrongful sale and disposal. This is specialty insurance not included in your liability policy―it’s a rider you have to purchase.

Given the recent large judgments for wrongful sales, you should buy as much coverage as you can possibly afford. Even if you have not wrongfully sold, most of these policies provide a defense to the claim. Do not think that because you have insurance you can be sloppy about your sales. The insurance company will likely review your lien-sale process before issuing coverage.

Know the Kind of Sale You Can Have

Common questions asked by operators include: Do I need an auctioneer? Can I sell it myself? Do I have to sell at the facility? Can I sell it in lots, or do I have to sell it piecemeal? Can I have a garage-style sale instead of a true lien sale? The answer to these questions is found in your state self-storage statute. 

If your statute refers to an auction, you must conduct an auction with a licensed auctioneer, or somebody else acceptable under the auctioneer statute in your state. This information is never found in your self-storage statute. The requirements of an auction are always found in the auctioneer statute in your state. 

Do you have to sell the items at your facility? This is almost always required by your statute. There are some exceptions, such as if the facility is not suitable, the statute may require the sale be conducted at the closest appropriate location. Those who allow a dealer to pack up everything and take it to an auction house 20 miles away to combine with other property for sale are likely violating their state statute. 

Can the items be sold in piecemeal or lots? Generally, the statute doesn’t speak to this, and you can sell either way. However, holding a garage-style sale is usually not acceptable because you’re setting a price for the items rather than letting the free market set their price or value.

If you’re uncomfortable about how you’re conducting lien sales or if this article raises questions or concerns, you need to get answers before your next sale. Consult with your attorney, your state self-storage association or other experts in the industry. Learn how to correctly conduct lien sales or you many find yourself on the losing end of a wrongful-sale lawsuit.

This column is for the purpose of providing general legal insight into the self-storage field and should not be substituted for the advice of your own attorney. 

Jeffrey J. Greenberger is a partner with the law firm of Katz Greenberger & Norton LLP in Cincinnati and is licensed to practice in Kentucky and Ohio. Mr. Greenberger primarily represents the owners and operators of commercial real estate, including self-storage owners and operators. To reach him, call 513.721.5151; visit www.selfstoragelegal.com.

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On Feb. 25, MiniCo Insurance will present a free webinar for independent insurance agents who want to leverage social networking to identify and prospect for self-storage owners. "Prospecting the Self-Storage Owner Through Social Media" will address how independent insurance agents can use social networking to identify the decision-makers in the self-storage industry and develop agency prospects. Topics include:

• How insurance agents can maximize social media
• Best business practices for connecting with prospects
• Attracting self-storage followers
• Networking with self-storage decision-makers
• Promoting an agency’s product lines

The webinar will be presented by MiniCo representatives Mike Schofield, president, Rebecca Morse, circulation and social media manager, and Krys Morrison, customer-care coordinator. Online registration is required for the free, live event and can be completed at Minicoinsurance.com.

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REB Storage Systems International, which designs, manufactures, distributes and installs records-storage and materials-handling systems, has expanded its global presence with a new office on the outskirts of Dublin, Ireland. Subsidiary REB Storage Equipment Worldwide Ltd, will be the sales and operations support office for all of Europe. It will also serve clients in Africa and the Middle East.
 
The Dublin office will be staffed by senior account executive David Tozer. Lori Palmer, executive vice president, is overseeing the launch of the new office and actively interviewing candidates for employment. Administrative and other manufacturing support services will be provided by the company’s head office in Chicago.

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On Feb. 24, Bob Hayworth, owner and CEO of Baja Construction Co. Inc., will present a free webinar titled "Above the Roof, Below the Roof: Making Money on Both Sides," addressing the revenue-generating possibilities of self-storage roofing, including the use of solar panels. Hayworth will address ways to maximize solar-power utility rebates, tax-free grants and other tax savings. He’ll also talk about how to sell electricity created by solar panels to utility companies, and the process of renting shaded parking for the storage of boats and RVs. The event will take place at 1 p.m. ET.

Hayworth and Baja Construction will also be participating at the Inside Self-Storage World Expo in Las Vegas, March 1-3, as both exhibitor and presenter. Hayworth, in conjunction with and Robin Heuer and Matt Harrison of iParkSolar, will present two seminars on March 2.
 
“Solar Technology 101: Incentives, Rebates and Feed-In Tariffs,” at 8 a.m., will provide an introduction to solar-electric (photovoltaic) systems and how they can be adapted to a self-storage operation. Attendees will get information on the benefits of installing a solar-electric system, including federal, state and local tax incentives, utility-rebate programs, and financing and grant opportunities.
 
“Using Solar in Self-Storage: An Economic Model for Optimizing Your Site and Maximizing Your Investment,” at 9 a.m., will provide detailed information about economics of adapting renewable energy, including real-world and first-hand data on existing solar self-storage facilities. The presenters will showcase operational facilities as well as one in development, outlining the costs involved. They’ll show a breakdown of expenses vs. tax incentives, grants, and rebates. They’ll also show existing and potential revenue streams as well as the breakeven points and return-on-investment analysis for each project.
 
Baja will be found in booth #300 of the ISS exhibit hall.  For expo details and to register, visit www.insideselfstorageworldexpo.com.

To register for Hayworth’s free webinar, visit Ministoragemessenger.com/webinar.

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Extra Space Storage Inc. has closed its previously announced joint venture with an affiliate of Harrison Street Real Estate Capital LLC. HSRE contributed approximately $15.8 million in cash in return for a 50 percent ownership interest. Extra Space contributed 19 wholly owned properties, and received approximately $15.8 million in cash and a 50 percent ownership interest.
 
The joint venture assumed approximately $101.0 million of debt, secured by the properties in California, Florida, Nevada, Ohio, Pennsylvania, Tennessee, Texas and Virginia. Extra Space will continue to operate the facilities.
 
Headquartered in Salt Lake City, Extra Space is real estate investment trust that owns or operates 766 self-storage properties in 33 states and Washington, D.C. The company's properties comprise approximately 510,000 units and more than 55 million square feet of rentable space.
 
As of this month, HSRE has acquired or is in the process of developing more than 60,415 self-storage units.

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On Feb. 18, Holliday Fenoglio Fowler LP (HFF) will host a free webinar titled “Capital Markets and Self Storage Market Overview,” 1 p.m. to 2:20 pm CST. The online event will address the intricacies of the capital markets as they relate to commercial real estate and self-storage in particular. The presenters will discuss property values, cap rates and real estate transactions. Time will be allotted for questions from the audience.
 
Webinar space is limited to 100 attendees and can be reserved at https://www2.gotomeeting.com/register/702821330.
 
HFF operates out of 17 offices nationwide, providing commercial real estate and capital-markets services to the U.S. commercial real estate industry. Since 1998, the firm has completed more than $232 billion in transactions. Its Self Storage Group has completed nearly $300 million in transactions since the capital-markets correction began in 2008.

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