When Lance Comstock, veteran self-storage security expert, acquired Preferred Technology Inc. of Scottsdale, Ariz., in 1998, he envisioned a one-stop global company capable of delivering state-of-the-art security and management systems to the self-storage industry. With strategic expansion and product enhancements, that vision has become reality.

Over the past four years, PTI Access Control Systems expanded its already national operation to Asia, Australia, the Caribbean, Europe and New Zealand. All of the company's offices--including its corporate headquarters in Scottsdale, PTI East in Baltimore, and international offices in London (PTI Europe) and in Brisbane, Australia (PTI Australasia)--have streamlined their operations to accommodate this tremendous growth. With more than 88 team members worldwide, each department--from business development to project management/installation to technical support--has been restructured to serve customers efficiently with the most progressive service and products in the industry.

July saw the company's acquisition of Real Management Systems, the unveiling of the technically advanced Apex Series keypads and wireless door alarms, and the emergence of new corporate branding. Now, PTI Integrated Systems is ready to lead a progressive new era in the global self-storage market.

Reliable Security Systems

PTI continues to deliver its faithful Falcon security system and reliable keypads with optional features to provide secure control of each facility. It also still offers its hardwired individual door alarms, lighting, CCTV digital surveillance and facility-communication systems. Integrating the Falcon security system with the user friendly, Windows-based Falcon 2000 security system allows easy maintenance and flexibility, so multiple facilities can be managed from a single location using secure Internet technology. The Falcon systems interface with most industry-management software systems. With the invaluable feature of being a stand-alone system, the Falcon even ensures security will be maintained in case of a power outage or computer failure.

Technically Advanced Security Systems

In July, PTI was pleased to unveil its newest line of security products: Apex Series keypads and the new 900MHz spread spectrum wireless door-alarm system. The Apex Series keypads have many additional features, including CodeExpress, and enhanced functionality for greater interaction between the system and user in an updated attractive case. The technology of the Apex Series allows for future enhancements to accommodate the ever-changing needs of the self-storage operator. PTI's new 900MHz spread spectrum wireless door-alarm system uses wireless technology to make retrofitting any facility hassle-free and very affordable .

SiteMaster interactive graphics display all facility activities in high-resolution, color-coded graphics with smooth panning and split-screen views of the entire facility. SiteMaster Graphics ties in with the CCTV digital surveillance and facility-communications system to provide a live view of every part of the facility.

Management Software

The PTI TaskMaster management system is a customer-based account-management system that runs on any Windows operating system. PTI uses the most progressive programming tools to allow maximum flexibility and database security.

TaskMaster allows operators to build a complete customer profile and account history and maintain customer data in a fully searchable database. The system tracks and manages delinquent accounts, and generates standard reports on facility financials, space efficiency and utilization, collections, daily deposits, and more. Reports can be produced manually or be completely automated. With up-to-the-minute account information readily available, TaskMaster provides comprehensive data that can be used for detailed business analysis and target-marketing campaigns designed to increase revenues for self-storage facilities.

PTI has secured TaskMaster with multiple levels of user security to ensure operators have access to the information they need when they need it, while restricting access to sensitive information to owners and/or management personnel only. Because the system is customer-based rather than unit-based, managers can easily assign multiple units to a single customer, consolidate customer billing, and process multiunit customers with a one-step payment process.

Integration of E-Commerce

With the addition of TaskMaster's online reservation/payment system, prospective customers can select, lease and set up automatic billing of their storage space from their homes via the Internet without any interaction with the on-site manager. Current tenants of the facility with Internet access can make credit-card payments directly posted to their accounts within TaskMaster.

Integration--The Complete Management System

When integrated, PTI security and management systems work as one to control and manage all aspects of a storage facility. An interactive graphics program displays not only the physical activity on a site, but the account status and retention of all historical information of each customer, including facility access. This makes the PTI Integrated Systems management-control system one of the most progressive and powerful management tools available in the global self-storage industry.

Between its technical achievements and the acquisition of a progressive management software system, PTI has elevated its level of sophistication in a seamless, integrated management-control system. All of these elements, combined with expert consulting services and project management, professional installation and reliable customer support, have allowed the company to be a leading global provider of integrated security and management software systems.

For more information, visit www.ptiaccess.com or call 480.991.1259.
Elizabeth Attree is a freelance writer based in Scottsdale, Ariz.

The simplest and most profitable type of self-storage operation is one that operates as a commodity. It offers conventional self-storage units with no bells or whistles. If an owner can operate that way, stay full and apply steady rate increases over time, he is in self-storage nirvana.

I know there is a lot of talk about the increasing role of marketing in the self-storage industry. The reason to engage in marketing is to solve a problem confronting the operation and, usually, the problem is the onset of competition. I sometimes speak to an operator who tells me he has a killer feature that saves him from aggressive competitive pressure and, generally, it's location. Then I ask if he regularly gets calls asking for the rates on a 5-by-10 or 10-by-20. If he says "yes," I know his prospects don't regard him as unique and he is being shopped.

With competition comes the endless tussle to make your offering different and, hopefully, better. The process is continual; the ideas that work will be copied and you'll drop the ones that don't. Our job as marketers is to continuously come up with approaches that dazzle prospects and confound rivals. Let's take a look at one approach that holds promise.

Horse of a Different Hue?

In the January 2001 issue, I commented on the market power of convenience in the design of self-storage offerings. When convenience is evident to a prospect, he will accord preference and premium to it. "Preference" means he buys your product over that of others, and "premium" means he'll pay more for it. Since tenants often dread the grubby work associated with the use of our product, an approach that relieves that woe is welcome.

One approach does just that. Known by several names, I'll refer to it as "containerization." You may know it as mobile or portable storage--the use of transportable vaults to store tenants' property. The portable storage unit is delivered to the tenant's home or office, filled with his property, then picked up and transported to a storage location until the tenant is ready to access it again. This approach offers several advantages for a self-storage prospect:

• The use of a self-storage unit is always hobbled by one choke point--transportation. The prospect must have a way to transport his belongings to his unit. While business/commercial/government entities usually have ample transportation, personal-use prospects often do not. Facilities offering the container approach solve the problem for the tenant.
• With portable storage, the prospect does not have to handle his stuff twice, moving it into and then out of the conventional storage unit. He loads it once at home and unloads it once at the final destination.
• As an operator of portable storage, you become a warehouseman rather than a landlord and accept liability (insured) for damage to or loss of the prospect's possessions. You may not consider that to be an advantage, but your prospect will.

The portable-storage approach also offers some advantages to the operating facility:

• Your effective service area is no longer confined to physical proximity to your address. Considerations of location disappear. The effective service area goes to many miles--I've heard as many as 35. That kind of radius will usually include the whole metropolitan area and some cornfields to boot.
• You can use any size storage unit you happen to have available to store vaults--it's your choice. You orient your offering/pricing to the number of containers the user needs. The fact is, you don't really need a regular self-storage unit as long as you can protect the containers from the elements and offer security. I once suggested to an operator that the approach didn't even require he be in the self-storage business. He could just operate with trucks, containers and any storage area that offered physical protection and security. He disagreed. I never knew why.
• The cost of entry to an existing self-storage operator is not high. Initially, you can rent trucks with suitable loading accessories. If you confine pickup and delivery days, you can use low-rent periods to further control your start-up costs. Since the tenant loads the containers, the only facility personnel needed is a driver who can handle loading containers on and off the trucks. You would also need some suitable material-handling equipment (also rentable) and containers.
• Portable storage is different, and that's always a marketing advantage. It prevents the prospect from directly comparing your offerings with those of rivals. That's the only way out of the commodity spiral. The trick is to be different and better. This approach qualifies.
• Once operational, container storage is a crafty way to test a new market. You can rent any suitable space in a proposed market area and be functional with very little preparation.

Keep in mind not all storage applications are well served by the portable-storage approach. Applications that require regular access are awkward. The way to accommodate that situation is to have a secure room dedicated to a particular tenant for purposes of access. The container is taken from its normal location and placed in the access room. But there is administrative clumsiness in this approach. The tenant must make and keep an appointment to get to his property and, inevitably, he must be charged extra for that effort. But in situations where the tenant can store the container and forget about it, the container approach is superb and should earn you the convenience premium.

The portable-storage option gives you the chance to tout something new and different. I've written before about the power of choice in appealing to tenants. Many of the options offered tenants are contrived. This one is for real. It offers a real difference replete with great advantages. Even if few actually take advantage of the option, you can change the focus of tenant consideration from choosing among rivals to choosing among your offerings.

As the press of competition increases, more operators will be searching for ways combat it. Many will make their appeal through traditional self-storage. Others will understand that to be truly unique, they need to look at the problems confronting prospects and solve them. And that solution may be the offering of portable storage.

Harley Rolfe is a semi-retired marketing specialist whose career includes executive-level marketing positions with General Electric and AT&T. He also owned lodging and office facilities for more than 20 years. Mr. Rolfe holds a bachelor's degree in economics from Wabash College and a master's degree in business administration from the University of Indiana. He can be reached at his home in Nampa, Idaho, at 208.463.9039. Further information can also be found in Mr. Rolfe's book, Hard-Nosed Marketing for Self-Storage.

Records management is an anomaly in the world of business. The industry is good in an up economy but even better in a down economy. Why is this so, and what makes records management a can't-miss business for the next decade or more?

Merriam-Webster defines the word "anomaly" as a "deviation from the common rule or an irregularity." It is widely accepted that business and the economy run in cycles. There is a time for a "bull" market and time for a "bear" market. They are the yin and yang of the ever-changing business climate in our economy. But every so often, an anomaly occurs. The records-management business is one.

Those of us who invested in the dot-coms have flocked back to the more stable investments that are real and tangible. Since the fall of the dot-coms, the presence of Iron Mountain, the world's largest commercial-records organization, as a stable, old-economy leader has grown. On July 31, the company published this statement in a press release:

Storage revenues increased for the second quarter of 2001. This marks the 50th consecutive quarter for which Iron Mountain has reported increased storage revenues. Storage revenues, which are considered a key performance indicator for the records and information-management services industry, are largely recurring since customers typically retain their records for many years ... Our annuity-like revenue stream remained strong, as expected ... We are particularly heartened by our performance in light of the current economic climate and continue to see strong primary demand for our core services as we help our customers save money through outsourcing.

Richard Reese, the CEO of Iron Mountain, gave the keynote address at this year's PRISM International conference in Bal Harbour, Fla. PRISM is the trade association for the commercial records-management industry (www. prismintl.org). Reese's speech was part of a panel discussion on the state of the industry and predictions for the future of commercial records management. Following are some of his comments:

According to Reese, "The U.S. [records-management] market is a $5 billion market and in the rest of the world it's a $5 billion to $6 billion market." He said Iron Mountain research shows the records-management market is only 40 percent captured in the United States and only about 10 percent captured in the rest of the world. At this point in his presentation, Reese drew a standard S-curve for the audience, which illustrated the industry from the beginning--in roughly 1950--to today. Records management, he said, has grown to be about 40 percent outsourced from businesses, while the rest of the volume is "in the hands of our biggest competition--the customers."

"There is more business out there than in our collective hands," said Reese, who projects the industry is in a period of "high-opportunity," moving toward an inevitable period of saturation. Although he admitted he does not know when saturation will occur, he said, "It is a slow curve--probably 20 or even 30 years." Reese went on to say, "The future is bright. Paper is not going away." In an era of computers, this seems to be at odds with logic.

Many experts and industry observers have discussed and written about the "paper phenomenon" and determined the movement to digital records is more a sociological issue than a technological one. Next to every computer are a printer, fax machine and copier. Our tendency is to print things out and read them. At the same time, in the United States and much of the developed world, we are focused on short-term profits, the mentality of which ensures the bottom line is attended to each quarter. Movement to digital systems in corporations requires three things: huge capital investments, great attention to detail and commitment. This translates into a strategic plan. In a world filled with tactical solutions, strategy is rarely found.

The outsourcing of administrative, noncore services from businesses began in the 1980s. Companies such as Xerox, IBM, EDS and many others focused on providing noncore activities for companies that had little expertise in administrative chores. Around the world, the outsourcing of nonessential services has become the norm. Most businesses would never consider cutting their own grass or running a cafeteria for their employees. The same has become true for copy centers, mailrooms and file rooms. Outsourcing off-site records management is rarely ever more expensive and is generally more efficient then running it in-house. It is literally one of the easiest services to sell.

In his presentation, Reese made it clear commercial records centers that move into the future, offering services businesses demand, will survive and prosper. Iron Mountain is investing many millions in its future. Make no mistake though--storage is the basis of the business, but storage alone cannot withstand competition in a saturated market without services based in technology. Internet access is a must and provides an edge in marketing. Scan-on-demand and online document repositories will become commonplace.

I estimate our commercial records clients who develop new records centers in this fast-growing, high-opportunity market can achieve 100,000 billable units of storage in two to two-and-a-half years. There are three requirements, however, for this to happen: a full-time sales effort, a formal consultative selling process and a managed sales cycle. These are essential. In addition, you have a real commitment to this business. It will bring you an annuity-based business--one that grows from a combination of existing and new customers for years to come.

Regular columnist Cary McGovern, CRM, is the principal of FileMan and FIRMS (FileMan Internet Records Management Services), which offer full-service records-management assistance for commercial records-storage start-ups in self-storage operations. For assistance in feasibility determination, operational implementation or marketing support, or for questions on the FIRMS Sales Manager, call 877.FILEMAN, e-mail [email protected]; www.fileman.com.

By Doug Carner

Last month's TechTalk column provided simple steps to vaccinate your business computers against malicious scripting viruses. This month you will learn how to safeguard your web surfing and business e-mail against deadly computer viruses.

Web Security

If you use Microsoft Outlook to receive e-mail, a virus-infected message can easily use Window's powerful ActiveX controls to initiate a full virus invasion. Why take the chance? Since Outlook shares many of its security settings with Internet Explorer, you can protect both programs at the same time. The only downside is that some websites will now need to ask your permission to load. It may be a bit annoying, but it is truly better to be safe than sorry. Here's what you do:

• Once your computer is up and running, open Internet Explorer (web browser).
• Click on the TOOLS menu up top, then click on INTERNET OPTIONS. A new window will appear.
• Click on the SECURITY tab and four icons will appear at the top of the window.
• Click on the left-most icon labeled INTERNET and then click on the CUSTOM LEVEL button.
• At the bottom of the new window, select "Medium" as the custom setting.
• Click on the RESET button, and then confirm the change you are making.
• At the top of the window, scroll through the list of settings and find the one labeled "Run ActiveX controls and plug-ins." Change the setting from "Enable" to "Prompt."
• The next item is labeled "Script ActiveX controls marked safe for scripting." Change this setting on this item from "Enable" to "Prompt."
• Click on the OK button at the bottom of the window. This will bring up a confirmation question. Select YES.
• Now select the next icon at the top of the window, LOCAL INTRANET. Again click on CUSTOM LEVEL.
• Select "High" from the list, click the RESET button, and confirm this change.
• As we did before, change the "Run ActiveX controls and plug-ins" and "Script ActiveX controls marked safe for scripting" items from "Enable" to "Prompt." Click OK and confirm your changes.
• Select the third icon at the top of the window, TRUSTED SITES, and click on CUSTOM LEVEL.
• Select "Medium" from the list, click the RESET button, and confirm this change.
• Again change "Run ActiveX controls and plug-ins" and "Script ActiveX controls marked safe for scripting" from "Enable" to "Prompt." Click OK and confirm your changes.
• Select the forth icon, RESTRICTED SITES, and click CUSTOM LEVEL.
• Select "High" from the pick list, click RESET, and confirm this change.
• For the last time, change "Run ActiveX controls and plug-ins" and "Script ActiveX controls marked safe for scripting" from "Enable" to "Prompt." Click OK and confirm your changes.
• Click OK to exit this section and then exit Internet Explorer.

If you browse the Internet using Netscape Navigator, here is what you'll do:

• Once your computer is up and running, open the Netscape browser.
• Click on the EDIT menu and then on the PREFERENCES option.
• Click on "Advanced" and a list of options will appear on the right.
• Uncheck ENABLE AUTO-INSTALL and uncheck ENABLE JAVA.
• Click OK to save your changes and then exit the Netscape browser.

You are now very well protected against all known (and most unknown) virus invasions that try to self-install themselves to your computer. Your primary vulnerability lies in the fact that you might unintentionally invite a virus into your system. Unfortunately, this is very easy to do with e-mail attachments.

E-Mail

It may surprise you to learn that Microsoft's Outlook program is unable to show you the "real" file type when attachments have dual extensions. An attachment labeled FAMILY.JPG might seem safe in Outlook, even though the real file name could be FAMILY.JPG.EXE and it is likely hiding a dangerous virus. It is extremely unlikely that a legitimate source will ever send you a file with dual extensions.

Never open any attachment unless you are either expecting the message or see personal information in the message body. Even then, you should verify the attachment has only one extension. In Outlook you only need to select SAVE ATTACHMENTS from the FILE menu. Now you will see the complete file name. You can cancel this save function since it was just a method to help determine the safety of an attachment.

As a last journey into the land of healthy paranoia, files that end in .BAT, .COM, .EXE, .PIF and .SCR (just to name a few) can never be guaranteed safe. For example, HAPPY99.EXE was a popular e-mail attachment that displayed a beautiful fireworks show on your computer screen. It was also a pervasive virus.

You must use prudent judgment. A decent virus-checker program, such as McAfee VirusScan or Norton AntiVirus, will catch all but the newest viruses. While these programs are quick to react, they are often the cures after your computer has been infected. By now you have implemented the Windows settings noted in part one of this column (see last month's issue), and you have just finished implementing the browser and e-mail precautions noted here. You can now safely navigate the hazardous waters of the web as you work.

Doug Carner is the vice president of marketing for QuikStor Security & Software, a Sherman Oaks, Calif.-based company specializing in security, software and management for the self-storage industry. For more information, call 800.321.1987; e-mail [email protected]; visit www.quikstor.com.

This was the most difficult article to write. I was presented with the task of writing it just before one of our country's most trying times: the terrorist attacks on the World Trade Center and the Pentagon. Like many other people, I now have a new understanding of how trivial many of our daily activities and priorities are.

I have decided to write a lighthearted article about financing, which is my livelihood and something I regard with extreme seriousness and diligence. I say lighthearted because in the last few days, I realized these issues are minor in comparison to the profound devastation that has been brought upon our country. My thoughts and prayers continue to be with the victims of this tragedy and their friends and families.

The television show Who Wants to Be a Millionaire? was a hit when it made its debut two years ago, and it's still going strong. Let's play the self-storage financing version of this popular game. (But please understand: The dollar amount specified for each question is for illustrative purposes only!) Let's play!

Fastest Finger question: Please put in order (from lowest to highest), the monthly payments on the following loans, given the same loan amount and interest rate:

a) A loan with a 25-year amortization
b) A loan with interest only
c) A loan with a 15-year amortization
d) A loan with 20-year amortization

Answer: b, a, d, c. The longer the amortization period (or the period of time in which principal is paid down), the lower the monthly payment. In the case of an interest-only loan, no principal is paid down on a monthly basis.

$100 question: What is the color of money?

a) Blue
b) Green
c) Red
d) Fuchsia

Answer: b) Green. From a financing perspective, the real questions are 1) how to optimize your access to money and 2) the terms in which it is available.

$200 question: Loans made for developing a self-storage property are called:

a) Construction loans
b) Permanent loans
c) Mezzanine loans
d) IOU

Answer: a) Construction loans. A construction loan is made based on the project's estimated cost. Typically, it is provided in draws based on the project's completion and its payments are interest- only for a two- to three-year period. Many construction loans then have the option to convert to an amortizing loan for a specific time period. All construction loans are recourse, which means you personally guarantee the loan payment.

Permanent loans are generally based on the property's operating income and are made after you have stabilized operations. They come in all forms, and you should seek a loan with terms that most closely suit your investment strategy. Mezzanine loans are sometimes available as a second tier of financing for a loan that exceeds 75 percent of value. Mezzanine loans are usually only available for larger projects or portfolios.

$300 question: LTV refers to:

a) Local tax voucher
b) Loan-to-vacancy
c) Loan-to-value
d) Load the vault

Answer: b) Loan-to-value. This refers to the loan amount as a percentage of the appraised value. This is the lender's most important criteria in determining how much money to lend you. Most lenders base loans on a maximum of 65 percent to 75 percent of appraised value.

$500 question: DSC refers to:

a) Debt-service coverage
b) Default-standard covenant
c) Debt-servicing contract
d) Debtor's second chance

Answer: a) Debt-service coverage. Along with LTV, the second most important criteria for lenders is the DSC. For self-storage properties, lenders are currently quoting between a 1.25 and 1.40 DSC. The DSC is based on an "underwritten operating income" determined by the lender. Typically, this underwritten net-operating income is based on the trailing 12 months. Lenders will also adjust the net-operating income to account for nonrecurring income and expenses, management fees and replacement reserves. Except for instances when a property is in lease-up, the maximum LTV will be the criteria that will establish your loan amount.

For example, a stabilized property appraised at a 10 percent cap rate may obtain a loan for 75 percent of value, which may equate to a DSC of 1.40. Please also read and understand your loan application because your DSC may be based on a minimum (floor) interest rate or constant (the annual debt payment in comparison to the beginning loan amount).

$1,000 question: A recourse loan requires the loan be secured by:

a) The property only
b) Other assets
c) The facility and other assets
d) Your word

Answer: b) The facility and other assets. A recourse loan is made based on the borrower's financial wherewithal and credit strength, in addition to the underlying asset's strength. There are also nonrecourse loans and partial-recourse loans. Partial-recourse loans limit the amount of the loan guaranteed by the borrower. Most nonrecourse loans are associated with loans that are securitized (conduit loans). These loans are made based on the continued operating viability of the underlying self-storage property. Nonrecourse loans have "carve-outs" that exclude such acts as fraud, misapplication of funds and all environmental risks.

$2,000 question: Which of the following is not an index used in determining mortgage interest rates?

a) LIBOR
b) Prime
c) 10-year Treasury Yield
d) NASDAQ

Answer: d) NASDAQ. Certainly the stock market has a profound effect on the financial marketplace and has direct correlation to the indices mortgages are based on. LIBOR (London Interbank Offered Rate) and prime are generally associated with construction loans and variable-rate loans. LIBOR is quoted daily in business newspapers and compares most closely to the one-year Treasury Security Index. The 10-year Treasury Yield is generally used as an index for 10-year fixed-rate money. During the current uncertain business climate, these indices may show signs of extreme volatility, thus forcing lenders to apply overriding floors and ceilings in their interest rate provisions.

$4,000 question: Which of the following is not a form of a prepayment provision (penalty)?

a) Treasury defeasance
b) Sliding scale
c) Yield maintenance
d) First-born

Answer: d) First-born. Treasury defeasance refers to replacing the cash flow that would have been generated by your monthly mortgage payments with Treasury securities that would yield equivalent payments. Sliding scale refers to a prepayment penalty as a percentage of the outstanding balance. Yield maintenance is similar to Treasury defeasance except you pay a lump-sum penalty at the time of loan payoff based on your note rate in comparison to current indices. These formulas are explained in greater detail in various loan documents.

$8,000 question: To obtain permanent financing, occupancy generally needs to be higher than:

a) 50 percent
b) 70 percent
c) 75 percent
d) 100 percent

Answer: c) 75 percent. Most lenders expect a facility to be at least 75 percent occupied, physically (as a percentage of square feet) and economically (as a percentage of potential rental income). Please keep this in mind when developing your sites. Larger facilities take longer to lease up. In many cases, developing a facility in phases could very well be the best business plan.

$16,000 question: Conduit loans are:

a) Kept on the bank's balance sheet
b) Securitized on Wall Street
c) Fully recourse
d) Good for expansions

Answer: b) Securitized on Wall Street. Lenders typically do not keep these types of loans as an asset on their books for a long time period. Conduit loans are pooled with other commercial loans and used as collateral by investors who buy securities, which then serve as their security investments. Their investment returns are funded by the cash flow generated by the underlying mortgages. These loans are made to the facility owner on a nonrecourse basis (with standard carve-out exceptions) and are long term in nature. However, you will be unable to secure additional funding or secondary funding for these loans. Accordingly, facilities still in expansion would generally not be good candidates for a conduit loan.

$32,000 question: Which of the following items are generally discounted or not allowed as income by a lender?

a) Late fees
b) Administrative fees
c) Truck-rental fees
d) Lock and box sales

Answer: c) Truck-rental fees. All of the other income items listed are typically considered part of continued self-storage income. Most lenders limit the amount of "other income" ("other" meaning excluding rental income from self-storage units and parking) to not more than 6 percent. In circumstances where historical income supports a higher percentage, lenders may make exceptions. Truck-rental income can be discontinued at any point and is, therefore, either discounted or not taken into consideration by most lenders.

$64,000 question: B-piece buyers buy:

a) First-generation self-storage properties
b) Auctioned units
c) Securities
d) Mortgages

Answer: c) Securities. Conduit loans are sold as CMBS (commercial-mortgage backed securities). B-piece buyers invest in the riskier portions of the securities offered in the CMBS marketplace. These investors are at higher risk when borrowers default or if other unforeseen events occur. There are fewer than 10 active B-piece buyers, and the CMBS marketplace is very much at the mercy of these investors. Prior to securitizing a pool, B-piece buyers can discard any loan from a mortgage pool they deem is unfit for their investment criteria. Therefore, securitized or conduit lenders have become increasingly more diligent in underwriting loan requests. Self-storage properties with superior historical results, management, location and physical attributes will continue to have better access to capital and more beneficial deal terms.

$125,000 question: What is the approximate value of securitized self- storage loans?

a) $1 billion
b) $2 billion
c) $3 billion
d) $10 billion

Answer: c) $3 billion. There have been nearly $3 billion of self-storage loans securitized representing slightly more than 1,100 properties. In comparison, approximately 18,000 retail and 18,000 multifamily properties have been securitized. Self-storage properties have performed very well in comparison to other property types. In fact, self-storage enjoys the lowest default rate. This information is provided by Trepp LLC, a leading provider of CMBS data.

$250,000 question: In efforts to support our economy, the Federal Reserve Bank (Fed) has decreased the discount rate several times this year. What always happens when the Fed lowers the discount rate?

a) Rates on variable-rate loans decrease
b) Rates on fixed-rate mortgages decrease
c) Rates on variable- and fixed-rate loans decrease
d) You are able to obtain a larger loan

Answer: a) Rates on variable-rate loans decrease. When the Fed lowers the discount rate, it in effect lowers "short-term" interest rates. Variable-rate loans may not be short term, but they are generally linked to "short-term" indices, such as the prime rate, LIBOR or one-year Treasury. In taking this step, the Fed's intent is to enable property and business owners to borrow at a lower rate for development and infrastructure. However, even with lowered interest rates, lenders are being more conservative with loans they provide their customers.

Many fixed-rate mortgages are based on "long-term" indices, such as the 10-year Treasury Yield, which increases or decreases based on two main factors: 1) supply and demand and 2) inflation risk. Even when the Fed has lowered the discount rate, it isn't uncommon for the 10-year Treasury Yield to increase because of the market's concern over higher inflation.

$500,000 question: In the future, mortgage interest rates are more likely to:

a) Be below 7 percent
b) Be between 7 percent and 8 percent
c) Be above 10 percent
d) Be between 8 percent and 10 percent

Answer: Poll the audience! Throughout the year, my clients have taken advantage of some of the lowest rates ever offered by capital sources. It is extremely difficult--even impossible--to predict future rates. The only thing we do know for certain is interest rates will continue to increase or decrease. With the financial market's current unique circumstances, many lenders have actually put floors or minimums on the interest rate at which they will loan money. I would say your risk of interest rates rising greatly outweighs the possibility of interest rates falling further.

$1,000,000 question: Capital is going to:

a) Be abundant in the future
b) Be available for only "A" properties
c) Be non-existent in the future
d) Be as available as it is today

Answer: Call a lifeline. As its familiarity with the industry grows, the lending community's appetite for providing self-storage loans has been increasingly stronger during the past several years. Each lender has unique objectives and subjective criteria that dictate its desire to lend you money. There is certainly a trend in which higher-quality self-storage operators enjoy better loan opportunities as lenders become more cautious.

Who is your best deal advocate? That depends. Consider short- and long-term investment objectives in determining your financing request. Most of the lenders are no longer actively promoting their programs to our industry directly at tradeshows or through industry publications. It may be wise to seek the services of a mortgage banker/broker whose full-time job is to work with capital sources to obtain the best overall deal.

Thanks for playing, and may all of you become winners when financing your self-storage properties.

Neal Gussis is a senior vice president at Beacon Realty Capital Inc., a financial-services firm that arranges debt for self-storage and other commercial real estate owners. Mr. Gussis has arranged financing in excess of $500 million for his self-storage clients. He can be reached at 312.207.8240 or [email protected].

By Fred Gleeck

One of the three biggest mistakes I see made by self-storage operators is not having a comprehensive marketing plan. Over the past several issues, I've shared information about specific marketing techniques. But in addition to individual techniques, you should have a plan in place for their implementation.

As a self-storage operator, you fall into one of three categories: a) you are considering opening a storage facility; b) you are already building a self-storage facility; or c) you are an existing owner of a storage facility. No matter which category you belong to, you need a marketing plan for your facility. Those considering getting into the business should create one to see if they are willing to do the work. Those who are building should do so to ensure they open the doors and have people flock to them. Exisitng owners should have a marketing plan to move occupancy rates in the right direction or keep them steady.

You say you have a marketing plan in your head? That's not enough. You must have a written plan. The plan should list actions that should be taken daily, weekly, monthly, quarterly and yearly. Let's look at each time period.

Here is a list of things you should be doing on a daily basis:

1. Track all incoming calls to determine their sources. Without accurate measurement, you have no idea what's going on in your business. Keep track of the total number of calls, sources of the calls and the percentage of calls that turned into visits.

2. Speak with your manager once a day to see if he needs any help. Support your manager. I met a CEO on a plane not long ago, and I asked him what he felt his primary mission was. He said, "To be a broom. I'm here to sweep problems out of the way for people who report to me."

3. Make at least five to 10 outbound calls each day to drum up business from commercial accounts. All managers should have a quota of outbound calls to make. If they don't like the idea, they are in the wrong business. This is a sales job, not a caretaker job.

4. Send out postcards to those people who called during off hours. Use a caller ID device to record the phone numbers of people who call when the office is closed. Use an online reverse directory to get their addresses. Then mail them a postcard with a time-sensitive offer. Calling those people back might be perceived as intrusive. A postcard is not.

On a weekly basis, you should:

1. Call all the "centers of influence" in town to remind them you exist. Call the real estate offices, truck-rental places and all of the other folks who have the potential to send you business. The key is "non-pushy" persistence. If you keep reminding people you're there, they are less apt to forget you.

2. Call your own facility and disguise your voice to hear how your employees really handle themselves when they talk with customers. I'm amazed at how few owners call their own facilities. This is such a simple but important thing to do. I got one owner to call his facility, and he was appalled at what he heard. It was only then he understood why occupancy was down.

3. Look for opportunities to get coverage by the local media. There are countless opportunities to piggy-back storage onto a current-events news story. Find one angle each week and send out a press release. It's not that difficult, and if you get coverage, it's well worth it.

4. Consider running specials to rent slow-moving units. Look at those units that aren't moving and make weekly adjustments if necessary. Waiting until the end of the month may not give you enough time to properly react to your competition or the changing market in your area.

On a monthly basis you should:

1. Call and/or visit your competition to see what they're up to. You say you have done this? How many times? This is an activity that needs to be done at least once a month. To defeat your "enemy," you must know him. If you're uncertain, read Sun Tsu's The Art of War.

2. Conduct regular training sessions with your managers to keep them up-to-date. Conducting monthly meetings for your managers and other employees makes a lot of sense. Most managers are willing to learn, but most owners claim they don't have the time to teach. Make time for this activity and you'll make more money in the long run.

3. Read industry trade magazines to keep abreast of current issues. Owners and managers must be committed to staying up-to-date with the latest industry information. If a manager isn't willing to read and discuss the trade publications, you have a problem.

4. Schedule a monthly coaching session by phone with an outside self-storage expert. Managers will listen to experts above owners. Using an outside expert to give basic feedback is a great idea. Doing this over the phone takes an hour each month and pays off in spades.

5. Go to monthly networking events, such as at the chamber of commerce. Managers and owners should make an effort to get out into the community to network, but most networking is done incorrectly. There should be a purpose. Networking should be done to get business, not just schmooz people.

6. Review occupancy rates by unit size to make necessary price adjustments. Most people tend to look only at the overall occupancy rates and adjust prices upward or downward on that basis. That is misguided. Instead, look at your occupancy rates specifically by unit size, then adjust accordingly.

7. Hold a contest for your managers, and vary them from month to month. Yes, your managers are already getting paid a salary, but you need to keep them motivated. Give them some realisitc goals to shoot for and then reward them for meeting those goals. This strategy is inexpensive and effective.

On a quarterly basis, you should:

1. Hold unannounced, random events for your customers to thank them for their business. There is no better way to get a buzz going about your facility than to do some random act of kindness for customers. For example, wash the car of each one of your tenants who comes into the facility on a given day.

2. Create seasonal fliers. Fliers are inexpensive and effective. You can create them for any and all services at your facility. In addition to handing them out off-site, you can design ones you put under people's unit doors to announce various promotions

3. Test a piece of direct mail on a targeted group within five miles of your facility. Direct mail and Value-Pak mailers can be effective. Make sure to constantly test new offers. I've seen promotions that pulled nothing and I've seen those that pulled a 7:1 return on the dollar. You won't know until you test.

4. Find an additional item to sell at the office based on customer feedback. If you aren't selling retail items in your storage office, you're losing a lot of potential revenue. You've established a relationship with your renters, now sell them something. Listen to customers and test the items on a limited basis to start.

5. Work at your own facility one day each quarter to find out how things really work. Owners sometimes never even see their storage facilities. Working at your own facility is the single most-effective means I've seen for owners to understand what really goes on in their businesses.

Once each year, you should:

1. Go to the annual self-storage conference and expo in Las Vegas and bring your manager. Not only is it the best convention of the year, there are great educational seminars. The trip can serve as an information-gathering event as well as a thank you for your manager's efforts throughout the year.

2. Have a qualified consultant do an external marketing audit of your facility. Looking at your business yourself is a worthwhile endeavor. But nothing can beat having an outside expert visit your facility and provide feedback. An expert can usually discover some hidden profits. One word of caution: Be sure to hire someone with a valid reputation.

3. Review your numbers with a qualified expert to see what areas of your business can be improved. You'll be surprised what a well-trained pair of eyes can find.

If you think this is a lot to do, you're right. But if you have a marketing plan soundly in place, you'll keep your occupancy rates high and experience less of the yo-yo cycle so many operators encounter. You don't just need marketing when times are tough, you need it when things are going smoothly. This will help keep occupancy and profitability high.

Fred Gleeck is a self-storage profit- maximization consultant. He helps storage owners before and after they get into the business. His is the author of Secrets of Self Storage Marketing Success--Revealed! and numerous other training items for self-storage operators. To get regular tips on self-storage, send Mr. Gleeck an e-mail at [email protected]; call 800.345.3325.

By Jeffrey Greenberger

Some of you reading this article are already in the business of offering outdoor or covered vehicle and boat storage. Others are considering it. If you are using, or plan to use, a self-storage lease with no modifications to accomodate this service, you are taking a risk. I hope this article will encourage you to consider some additional provisions in your existing lease. These suggestions will help protect you against the problems that tend to occur with vehicle and boat storage.

What Can Happen

A client of mine recently had the following dilemma: A person stored an RV at his facility. The renter stated she was a friend of the family that owned the RV and claimed the owners were too ill to store the vehicle themselves. My client completed the rental agreement with the owners' names and the name of the person storing the vehicle, but the friend was the only person who signed the lease. She made several rent payments; however, other payments were made by the RV's actual owners. Thus, everyone in this story had some type of contractual claim to the RV in storage. There were, in essence, three lessees.

The couple who owned the vehicle divorced, and the woman who stored the vehicle for them wound up dating the ex- husband owner. The ex-wife and the woman who originally signed the rental agreement both made claim to the vehicle. Both wanted the gate code changed to exclude the other from removing the RV from the premises. Since the friend who stored the vehicle was now dating the ex-husband owner, she also had some claim via title to the RV.

Outdoor vehicle/boat storage is particularly complicated because there are titles involved, yet your rental agreement may not be with the titled owner. The self-storage manager is stuck trying to figure out which claimant has right to the vehicle. In this situation, given that both parties made rental payments, the facility could not change the code on either party's request. We resolved the situation by ordering the vehicle off the property. The facility then offered to allow either party to enter into a new rental agreement after the RV was removed.

Fortunately, the situation was corrected, but it could have gotten much more complicated. It just goes to show that you can get into trouble by not paying attention to outdoor-storage issues in advance. I have always preferred my clients not allow more than one person to sign the lease, and the name of the lessee and the name on the vehicle title are the same. This will help avoid scenarios like the one described above.

Lease Considerations

It is difficult to define outdoor storage spaces, especially when the area where you permit such storage is not paved and striped. It is even more difficult to prevent a tenant from parking in the wrong spot or "crossing the line" between spaces. It is, therefore, important to have some sort of language in your lease that describes the space rented, but not so closely you would be in violation of the lease if another tenant accidently parked in part of it. Consider using the following language in your lease:

The foregoing description of the premises/space is for identification purposes only. There shall be no adjustment in the rent payable hereunder and the agreement shall remain in full force and effect if the premises actually contains more or less square feet than set forth herein or if the premises is not the same one as identified.

In case you need to locate the owner in the event of an emergency or default, consider obtaining the following information on your rental agreement: the year, color, make and model of the vehicle or boat; the license-plate number and state; and the vehicle's VIN or other identification number. You should also obtain a copy of the vehicle or boat registration. Institute a policy, stated clearly on your rental agreement, that if the person listed on the registration is not the person signing the agreement, the lessee must submit a notarized statement, signed by the owner, indicating it is acceptable to store the vehicle/boat in the owner's name. This is important for several reasons: First you want to make certain you are not storing a stolen vehicle. Second, without such a statement, you can run into difficulties if there are ever problems between the titled owner of the vehicle and your tenant.

The next consideration is what to do with vehicles in the event Mother Nature or an emergency presents a reason to move a vehicle. While our buildings may be able to withstand excessive heat, drought, or heavy rain or snow, there are issues involving climatic conditions when storing vehicles or boats out-of-doors. If you do not provide in your lease the right for you to move or remove outside-storage vehicles when necessary, you could be creating a problem. This will come in the form of a claim for conversion or breach of lease in the event you need to move stored vehicles. Emergency moves as well as those related to routine facility maintenance (painting carports, repaving, etc.) must be provided for in your lease. Consider a provision that contains the following:

A Lessor specifically reserves the right to move or remove the stored vehicle from the leased space at any time, and without notice to Lessee in the event of an emergency. For the purpose of this section, "emergency" shall be defined as any event which jeopardizes the health, safety and/or well-being of the self- storage facility or any of the buildings or land appurtenant to the buildings or any property or chattel stored at the self-storage facility. The Lessor shall exercise reasonable caution in removing the vehicle(s) and will endeavor to notify Lessee of the new location of the vehicle or return the vehicle to the Lessee's space after the maintenance or emergency has concluded. Reasonable notice shall be provided to Lessee before Lessor removes the vehicle for any non-emergency purpose.

All self-storage owners should be concerned about hazardous waste. RV and boat storage present a special problem because they contain hazardous waste just waiting to spill or explode onto the property in the form of gasoline, lubricants, battery acid, tires, sanitary-toilet chemicals, etc. Given the volume of liquids and lubricants stored in an RV, a leak or spill could create a serious environmental hazard on your property. To make matters worse, some tenants try to store extra gas, chemicals, tires, etc., in their stored vehicles.

Without certain limiting language in your lease, you could create an event of default under your mortgage by failing to prevent hazardous waste from being brought in and used on your property. Failure to properly limit the amount of hazardous waste could also cause you to waive certain coverage in your insurance policy. It is appropriate to check with your insurance agent or read your policy to determine whether storing vehicles with any amount of gas and oil in the tanks or operating parts is permissible. If not, it is necessary to find a policy that does permit this use. In the meantime, you should have rules and regulations limiting the amount of gas and oil that can be stored in the leased space and requiring a drip pan be placed under each vehicle. Consider adding the following language to your lease:

Lessee covenants and agrees to use and occupy the leased space solely for the purpose of storage of the vehicle identified herein, and specifically agrees that Lessee shall not use the premises for the storage of any gasoline or other fuel, oil, grease or other lubricant, tires or batteries, or any other accessories except for such gas, oil, grease, or other lubricant as may be contained in the operating parts of the vehicle stored at the facility, and in no case may the stored vehicle contain more than one-quarter of a tank of fuel. All sanitary toilets and collection tanks shall be appropriately drained before storing the vehicle at the leased space and, if appropriate, the stored vehicle shall be properly winterized prior to the month of ______ each year. Lessee shall at all times maintain a drip pan under all tanks and operating parts of the stored vehicle sufficient to retain all fluids maintained in the stored vehicle.

Finally, assuming you have a default clause in your lease, make certain one of the remedies under that clause permits you to terminate the gate-access code of the stored vehicle. For example, if the tenant removes his vehicle for the weekend and has not paid his rent, you can prohibit him from returning the vehicle until rent is brought current. Further, if the state in which your facility is located permits removal of the vehicle by towing to an impoundment lot as a remedy to default, give yourself that right in your lease and post whatever necessary signage is required in your state. Once you have the vehicle towed off the property, you can also turn off the gate code and prohibit re-entry. In some states, you can consider the tenant a trespasser if he tries to re-enter the facility. Consider the following language:

In the event of a default, once the vehicle is removed by the request of Lessor or is voluntarily removed by Lessee, then Lessee shall lose any status as licencee to enter the self-storage facility or the leased space and may be considered trespassing on the land in which the facility is located.

The most important moments in the relationship between self-storage manager and tenant are the initial meeting and the moment when the rental agreement is presented and signed. These constitute, for lack of a better term, a "honeymoon" period. The tenant should be willing to provide you the information you need and sign the documents necessary to protect you in the event of a problem or default, and rent himself a space. If you wait until after the rental to ask for a copy of the vehicle title or the VIN, there is no reason for the tenant to surrender this information. Therefore, make certain you have all of the information you need and the rental agreement is fully and correctly completed and signed by the titled owner of the vehicle being stored in the very beginning.

Jeffrey Greenberger practices with the law firm of Katz Greenberger & Norton LLP in Cincinnati, which primarily represents owners and operators of commercial real estate, including self-storage. Mr. Greenberger is licensed to practice in the states of Ohio and Kentucky, and is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. He is a regular contributor to Inside Self-Storage magazine and the tradeshows it sponsors. For more information, Mr. Greenberger can be contacted at Katz Greenberger & Norton LLP, 105 E. Fourth St., Suite 400, Cincinnati, OH 45202, or by calling 513.721.5151.

Shed providing density storage of boats up to five levels high.

Self-storage operators and developers in recent years have targeted the ever-expanding boat-storage market as another potential source of revenue. Providing ground-level storage of boats in vacant lots, under canopies or in individual storage units can generate reasonable fees. However, by overlooking the vertical storage of boats, self-storage operations are missing out on far greater income.

The vertical storage of boats is known in the marine industry as dry-stack storage. The concept is to store boats vertically, two to six levels high, in storage racks. Large forklifts that can handle boats up to 50 feet long lift the boats to their respective racks.

Dry stack was pioneered by modifying warehouse pallet racks to store boats on land in limited applications. Since the boats were small, the forklifts needed to handle them were relatively light-capacity, and the racks themselves were light-duty. The typical system had open racks designed to store small boats (14 to 20 feet long) in single-bay cubicles. The height of the racks was limited to the lift height of the forklift, usually 20 to 25 feet. These early dry-stack systems were often installed inside clean-span buildings that measured 80 to 90 feet wide. These systems provided water access to boat owners, along with protection from vandalism and the elements.

As boating has become readily accessible to more people, the demand for water access has increased dramatically. The majority of new housing developments have covenants that prohibit storing boats at one's home. While new marinas continue to be constructed, many of the best sites are sold for the development of waterfront communities. This creates even more pressure to increase the supply of boat slips--wet and dry.

Dry-stack storage has become the essential answer to the increased demand for water access. Today's dry-stack applications give marinas a method of supplying boat owners a slip for their prized possessions. Whether the marina is very large or quite small, dry stack greatly increases the number of boats in a facility. It adds a tremendous benefit to the revenue stream for the marina, with construction costs far less than that required to add more in-water slips. It can also enable the marina to reconfigure its wet slips to accommodate larger boats, while providing a home for displaced smaller boats.

As the demand continues to exceed the available slips, off-water dry-stack storage facilities become attractive alternatives for boat owners. By using the same type of marina forklift to handle the boats, these off-water sites can accommodate double or triple the quantity of stored boats as can the ground-level storage lot. And these facilities can be constructed on land far more affordable than premium waterfront property.

Dry-Stack Systems

Free-standing open racks, doubling the storage capacity of the yard.

There are three basic dry-stack systems: free-standing racks, covered sheds and fully enclosed buildings. All of these systems should be designed to resist environmental loads as specified in the local, state or federal building codes. And each of these systems should be designed to store current and projected boats. In most marketplaces, these structures are being designed for much larger (heavier, wider, taller and longer) boats than their predecessors. The racks can be constructed to store two or three large boats side by side on a given shelf level. The racks can be designed to store boats and trailers in the same or separate bays.

Covered sheds are the dry-stack structures most consistent with self-storage applications. These include roof-covered systems, three-sided covered sheds and bow-to-bow covered sheds. They provide protection from rain, snow and ultraviolet rays that can seriously damage a boat's interior and exterior. All three sheds are rack- supported structures, with the racks providing the main support of the building components. For the most part, these systems are open on and accessed from the stern side. The three-sided sheds can have individual doors placed on each unit, or can have large sliding doors that span the full height of each storage bay. In most cases, a fenced yard will provide the desired security for the boats.

Fully enclosed buildings are considered the ultimate dry-storage structures, as they provide the maximum in boat security and protection from the elements. These buildings are either clear-span with free-standing racks or rack-supported. In the latter, the racks are the integral support of the building structure and must be designed to take all applicable environmental loads (wind, snow, etc.). Since they provide the utmost protection for the boats, these structures most often generate the highest storage revenues.

Fully enclosed boat-storage building.

The dry-stack storage operation will require more labor than the typical self-storage facility. A trained forklift driver must handle the boats on the upper levels. It is not a self-storage operation in that the customers are dependent on others to access their stored boats. But the convenience, security and protection dry stack provides can result in significant revenues, especially when multiplied by two, three, four or more levels. For example, a lot measuring 150-by-150 feet can provide efficient, accessible storage for approximately 20 to 30 boats. Two four-story, covered sheds on this same level lot can accommodate up to 112 boats.

Dry-stack storage is not for every self-storage facility. However, many businesses should look seriously at developing this vertical boat-storage application as part of their existing operation. The density storage of boats will greatly enhance their revenue stream and profitability. By dry-stacking boats, profits will definitely stack up for the storage operation.

Patrick Farrell is a co-owner of Coastal Marine International Inc., a manufacturer of dry-stack boat-storage systems. The company has provided storage for more than 30,000 boats to marinas and storage operations throughout the world. For more information, call 704.948.6895 on the East Coast or 209.523.5012 on the West Coast. Visit www.boatracks.com.

Whether you call it portable self-storage, storage-to-go or pick-up and delivery, it is probably the hottest new wrinkle in the self-storage business since climate-control. The idea is as simple as self-storage itself: The storage facility delivers a storage container to the customer's home or place of business. The client fills the unit and locks the door, and the container is picked up and returned to the storage facility. Two of the largest self-storage operators in the country--Public Storage and Shurgard Storage Centers--have jumped into the business along with a number of regional and local operators.

While storage-to-go may be a great business opportunity, it is not self-storage. The providers of this service take possession of and transport customer's goods. The customer has limited access to his container and generally cannot access the property without the assistance of the business operator. The relationship between the storage-to-go operator and his customer is most likely a bailment rather than the landlord/tenant relationship that governs self-storage.

Research Before You Start

Storage operators should research the business carefully before providing this new service. If you treat your storage-to-go customers as traditional self-storage tenants, you could be making a grave error. There are a number of legal issues that should be considered in preparation for such a venture.

The one mistake you do not want to make is thinking you can take a self-storage rental agreement and use it for the portable-storage business. A self-storage rental agreement assumes the facility operator is renting real estate. The portable-storage operator rents personal property-- the container--and agrees to store the container in a warehouse or other suitable place. Legally, these are very different businesses and require different types of contracts.

Don't assume you can use your state self-storage lien law in the portable-storage business either. This is possible in California and Florida because the lien laws were amended to include this new business. In other states, it is unlikely self-storage lien laws will apply because, like a self-storage rental agreement, these laws assume self-storage is a rental of real estate, not personal property. Before venturing into the storage-to-go business, consider the following:

• Is the transportation of goods a regulated business in your state? Trucking was once a highly regulated business. It is less so today. Some states have completely deregulated this business; others regulate certain aspects of it. One area that is often regulated is the transportation of household items. Check the laws regulating trucking in your state.
• Storage-to-go is most likely a form of bailment. This means the storage-to-go operator, unlike the self-storage operator, takes possession of the property, and the customer cannot access it without the aid of the storage-to-go service provider. You will need a different type of contract if you enter this business. Your self-storage rental agreement is not the right type of contract for this business.
• Do you have the right insurance? Storage-to-go has exposures that are not present in a traditional self-storage business. You need more than just coverage on your vehicles. You need to have coverage on your customer's property while it is being transported. You should check with your agent as to whether your current policy covers stored tenant property while on the premises.

Most liability policies exclude coverage on the property of others in your care, custody or control. A bailee by definition has care, custody and control over the property he stores. Be certain your insurance carrier will continue to insure your facility if you enter this new business. The specialty insurers provide customer-goods legal-liability coverage that provides defense and indemnity of customer claims of property loss or damage even if it is in your care, custody or control.

Storage-to-go may be a great business. The financial commitment of the industry's largest companies certainly suggests this. However, we advise you do your legal homework before jumping into these uncharted waters.

From the SSA Rental Agreement Handbook, Copyright © 2000. All rights reserved. Self Storage Association Inc., 6506 Loisdale Road Springfield, VA 22150.

By Michael L. McCune

This article represents the inauguration of a new series of monthly articles for Inside Self-Storage dedicated to the real estate market. In the future, this column will offer a dialogue with industry experts on the state of the self-storage and real estate markets. Twice each year, our experts will focus on each of five regions and national trends. However, we thought we would kick off the roundup with an article on why self-storage is such a great real estate investment. This article previously appeared, in part, in the Market Monitor newsletter. I think you will find it interesting as well as encouraging. Next month we will look at the Northeast and poll our experts on what is going on with real estate in that region.

The self-storage industry has grown up over the last quarter century. In the not too distant past, everyone in the real estate business thought those little "tin" buildings just couldn't be worth much--and they certainly weren't very pretty. The institutional-type investors much preferred to run the boss out to a new luxury hotel or mega-mall and say, "Look at what we just bought!" As they were getting they're picture taken with the trophy project, they thought about how great the picture would look in the annual report. Meanwhile, the lowly self-storage developer was sitting at his kitchen table with pencil and calculator in hand saying something like, "Gee, these numbers sure look good." Slowly but surely, some of the real estate gurus began to catch on--after they stored some of their junk at a self-storage facility, did a quick calculation of the rent per square foot and estimated the costs.

During our rather brief history in the self-storage business, perceptions have changed somewhat, but not dramatically. The facilities look better, but no one calls even the best self-storage facility a "trophy." Wall Street endorsed some self-storage REITs, but now seems to have moderated its appetite. There was even a brief time recently when the folks east of the Hudson thought self-storage should be included in portfolios of real estate loans, but that concept, too, has now faded to near extinction.

A Hidden Beauty Is Found

Despite mainstream real estate investors continuing to yawn about the self-storage business, I thought we might explore the reasons they overlook the best of all real estate investments. Having kicked around the real estate business for the last 30 years--and having worked with just about every type of property: office, hotel, industrial and retail--I am prepared to make an argument that self-storage may well be the best type of investment you can make in the real estate world. It is the "Snow White" of real estate--a real hidden beauty.

This is not to say all self-storage is better than all other real estate; but, on average, the income-producing characteristics of well- conceived self-storage are better than those of other types of real estate. I must warn you, however, my "mirror on the wall" only reflects certain attributes, such as product-demand growth, cash flow, return on equity, break-even risk, additional capital costs and other mundane numbers. If you'd like the mirror to reflect more subjective criteria--such as annual-report picture value or suitability of a property as a location for your daughter's coming-out party--my mirror probably will not suit you. So for the balance of this article, I am going to make several arguments about the relative merits of self-storage investments compared to other types of real estate. Let's see how this reflection compares and see if we think, like the Prince, we have indeed found Snow White.

It Is a Growth Industry

One significant factor makes self-storage a better bet in the long run than a lot of other real estate types: Its market is growing faster than the population. First, only about one-third of Americans have ever used self-storage. Second, after a period of time--say five years--many self-storage facilities report most of their business--say 80 percent--is from repeat customers. If you look at what these statements mean, it is clear customers are not only discovering self-storage but, more important, they are learning to use it repeatedly. The point is, the growth of self-storage is not limited to the population growth in a market. It gets a great boost from "moving up the learning curve" of the consumer.

Icing on the Cake?

There is one other factor that probably impacts growth demand but is harder to quantify, and that is the fact self-storage doesn't require a "body" to make it useful (although there may be one occasionally). Hotels, apartments, offices and homes all require human beings or they are not very useful or profitable. Self-storage, on the other hand, thrives on our fast-growing accumulation of stuff and our emotional attachment to it.

To get a perspective on the potential for self-storage in our society, just think of all the things you are saving for your children vs. what your parents saved for you. This is to say nothing of your own "toys" you can't bear to part with but need a resting place. The net result is the demand for self- storage is growing very rapidly and in excess of the rate of population growth--at least for the time being. We also know that fast growth in demand covers a lot of sins in real estate, but it also enhances our ability to earn greater returns on our self-storage investments than other types of real estate.

If you want more proof of these arguments, think about what has happened to self-storage rents over the past 25 years. Despite the fact the industry built approximately 30,000 facilities in that general time frame, rents have continued to go up, proving the total demand has exceeded the supply and the population growth. Of course, you might say rents have gone up for all real estate types, and that is generally true; but when you think of the relative absorption of supply in such a short time, the story is truly remarkable.

Cash Flow

I am now going to explain five reasons the cash flow on self-storage is higher--and probably more secure--than on other kinds of real estate. This translates to higher returns on your investment, less risk and possibly higher prices. All of my arguments are based on the assumption a facility is well-maintained, in a good location and in a rational market (i.e., one that is not overbuilt). Remember: Even though we believe self-storage is the best real estate investment, this doesn't mean it will bail out "dumb deals."

Zoning. We all know that securing zoning for self-storage is becoming more difficult in almost every community. It is not that self-storage is a bad civic citizen (actually, it's among the best); but it is not glamorous, there are no sales taxes and the real estate taxes are usually modest. What planning commission in its right mind would ever approve a project that had no glamour and didn't produce a lot of taxes? This, of course, tends to restrict additional development and increase cash returns of existing facilities as demand builds. If you have a good facility, it is increasingly likely the local zoning board will not jump through hoops to help developers build potential competition.

Cap rates. In Chart 1 (compliments of Ray Wilson of Charles Ray Wilson & Associates), you'll see some national averages of cap rates on competing real estate types. A cap rate is really the annual return you can expect on your investment (i.e., a 9 cap rate equals a 9 percent return, etc.). As the chart shows, the returns on self-storage are generally higher than most other real estate types. At first glance this looks like only a "so what" difference, but closer examination shows self-storage will yield 10 percent to 20 percent more in annual cash for the same dollar of purchase price.

If you leverage your self-storage investment (i.e., get a mortgage), the difference in cash-on-cash returns becomes truly impressive. For example, compare a self-storage facility at a 10 cap rate and another real estate investment with the same net operating income at an 8.5 cap rate. The cash-on-cash return on the self-storage is 13.4 percent vs. 7.4 percent on the other investment (see Chart 2).

Capital risks. Often times, investors for other types of real estate overlook the requirement (and risk) for additional capital. Hotels always need new furnishing and redecorating; office buildings require massive amounts of tenant finish and commissions; apartments need everything and often. (If you would like some detailed comparisons, drop me an e-mail and I will send you some startling numbers on this capital demand.) However, as one industry wag puts it, self-storage has its own capital requirements to handle--a new broom about every three months! While this comment is somewhat facetious, the capital demands of a self-storage facility are very small, not only in relative terms to other real estate, but also in absolute terms.

Operating costs. Once again, self- storage appears to have an advantage because the operating costs for self-storage usually have only a small exposure to volatile energy costs and labor. Many other real estate types have as much as 70 percent of their operating costs consumed by energy and labor. Because of the lack of exposure to dramatic changes in these key expense components, the risk for self- storage is reduced and the consistency of income is improved.

However, what is a blessing for self- storage is also, in some ways, a curse. The reason, of course, is the lack of glamour or, as one of my friends in the self-storage finance business, says, "no glass, no granite." This lack is a blessing because all of the return comes in the form of cash flow and not ego satisfaction. While you probably won't hold your daughter's wedding reception in the parking lot of your facility, you will have the cash flow to rent the place she really wants.

The curse, however, comes when you sell. Buyers are seldom ever so smitten with a self-storage facility they forget the numbers. The usual buyer of self-storage is someone just like you--in it for the money. In almost every case, the buyer already owns a storage facility, knows the market cap rates and operating costs, and refuses to overpay. Thus, it is unlikely you will find the "greater fool" who will pay above market cap rates, or the non-self-storage investor who will take the time and energy to understand the product and bid up the price to his own detriment. While we can earn great returns as owners, we aren't likely to sell a project on cap rates much different than those we bought it on--although, from time to time, cap rates do vary.

Sometime in the future, as the market gets better educated on self-storage, we may see these cap rates decline and our selling prices increase. But in the meantime, just enjoy the returns. When someone asks the question, "Mirror, mirror on the wall, what is the fairest real estate investment of them all?" and the mirror provides an accurate reflection, it is likely there will be a series of bright blue garage doors staring back.

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.