Last year, when you opened your holiday mail, you most likely found a greeting from your insurance company regarding your storage policy and the Terrorism Risk Insurance Act of 2002 (TRIA). You received this because shortly after the terrorism attacks of Sept. 11, 2001, building owners and managers were having a hard time securing adequate terrorism insurance at affordable rates and on reasonable terms.

President Bush signed the TRIA into law a year ago, making it so private insurers and the federal government share the risk of future losses from terrorism for the next three years. This law allows no exclusions to any states and gives policyholders the option to accept or decline the coverage. With the United States going in and out of heightened states of alert, storage owners across the nation are continually analyzing whether to buy or continue their terrorism coverage. Some are declining because they deem it unnecessary or too expensive. Some are simply counting on the government to help them out if another attack does occur.

The next time your policy is up for renewal, take some of the following information into consideration before you decide to accept or decline coverage:

Facts About the Terrorism Risk Insurance Act

• It is a mandatory federal program that expires in 2006.
• It covers events that cause at least $5 million in damages.
• It covers only foreign-led attacks on U.S. property.
• It does not cover nuclear, chemical or biological attacks.
• The federal government pays for 90 percent of any losses above a companys deductible.
• The insurer of record is responsible for 10 percent of any losses.
• Annual losses covered by the program are capped at $100 billion.

As defined in Section 102(1) of the Act, act of terrorism means any act certified by the Secretary of the Treasury, in concurrence with the Secretary of State and the Attorney General of the United States, to be an act of terrorism; to be a violent act or an act that is dangerous to human life, property or infrastructure; to have resulted in damage within the United States, or outside the United States in the case of an air carrier or vessel or the premises of a United States mission; and to have been committed by an individual or individuals acting on behalf of any foreign person or foreign interest, as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the U.S. government by coercion.

It is no secret those who wish to hoard dangerous chemicals or explosives can do so in a self-storage unit. When it comes to terrorism, it is better to be too cautious than not. Most people use their geographical location and business type to help determine their risk of terrorist attacks and the need for terrorism coverage. Even though you feel secure about your facility not being a target for terrorism, alternative preparation is not a waste of effort for anyone in the storage industry. The following is a partial list of protective measures storage owners can take that are recommended by the Department of Homeland Security:

• Maintain situational awareness of world events and ongoing threats.
• Ensure all levels of personnel are notified via briefings, e-mail, voice mail and signage of any changes in threat conditions and protective measures.
• Encourage personnel to be alert and immediately report any situation that appears to constitute a threat or suspicious activity.
• Encourage personnel to take notice and report suspicious packages, devices, unattended briefcases or other unusual materials immediately; inform them not to handle or attempt to move any such object.
• Encourage personnel to know emergency exits and stairwells and the locations of rally points to ensure the safe egress of all employees.
• Increase the number of visible security personnel wherever possible.
• Institute/increase vehicle, foot and roving security patrols varying in size, timing and routes.
• Implement random security-guard shift changes.
• Coordinate and establish partnerships with local authorities to develop intelligence and information sharing relationships.
• Limit the number of access points and strictly enforce access-control procedures.
• Approach all illegally parked vehicles in and around facilities, question drivers and direct them to move immediately; if the owner cannot be identified, have the vehicle towed by law enforcement.
• Consider installing caller I.D.; record phone calls, if necessary.
• Increase perimeter lighting.
• Deploy visible security cameras and motion sensors.
• Institute a robust vehicle-inspection program to include checking under the undercarriage of vehicles, under the hood and in the trunk. Provide vehicle inspection training to security personnel.
• Conduct vulnerability studies focusing on physical security, structural engineering, infrastructure engineering, power, water and air infiltration, if feasible.
• Initiate a system to enhance mail and package screening procedures (both announced and unannounced).
• Install special locking devices on manhole covers in and around facilities.

Universal Insurance Facilities Ltd. offers a comprehensive package of coverages specifically designed to meet the needs of the self-storage industry. For more information, or to get a quick, no-obligation quote, write P.O. Box 40079, Phoenix, AZ 85067-0079; call 800.844.2101; fax 480.970.6240; e-mail [email protected]; visit www.vpico.com/universal.

For example, there are fewer foreclosures on self-storage loans than other types of commercial loans. Also, selfstorage is countercyclical. In bad economic times, people downsize (in business and residential capacities) and use self-storage to store their inventories, furniture, personal goods, etc. In good times, they increase inventories, move or build larger homes/offices, using storage while in transit.

To fully appreciate a self-storage joint venture, a comparison of return rates on alternative investments is necessary. A most common and valuable gauge used to measure profit is internal rate of return (IRR), which measures return on cash flow and sales proceeds. IRR is a compounding rate of return over the life of an investment. For example, the income stream from already existing and rented income properties often (not always) looks like these examples:

One of the values of IRR is its ability to compare apples to oranges. To lend further perspective to the profitability of self-storage, the income stream for an existing apartment complex is shown:

Obviously, cap rates will vary in different parts of the country; but, generally, they fall between 9 percent and 11 percent. Financing will also vary on specific properties.

Developers can make substantial profits, but the financial clockwork for this is sometimes obscure. The key profit factor stems from how the project is financed. To illustrate, lets look at the following example of a typical 60,550-square-foot facility:

It becomes immediately evident development profits are substantial. Generally, developers see their first major profit when permanent financing is brought online because the permanent loan is larger than the construction loan. In the above example, the additional $69,732 in year two comes from the permanent loan displacing the construction loan. This overage can often be considerably larger than in the example, i.e., with a mini-perm loan (to be explained a little later).

How do stock investors participate? Outside investors are generally not positioned with know-how, experience and credentials to develop self-storage independently. Hence, there is a mutual advantage to combine resources with an experienced developer. The investor brings money, and the developer brings grunt work and expertise. The profits from such a venture can be split in several ways. Basically, the investor puts up the funds and is given a percentage of the project. There is often a preferred return to the investor. In the examples that follow, the investor puts up the initial investment (to purchase land and provide startup costs) and secures the construction loan until the project secures permanent financing.

Several Joint-Venture Scenarios

To illustrate the financial structure of common joint-venture configurations, well look at six scenarios using the income stream from the previous self-storage development example. Each scenario is reduced to an overall IRR for convenient comparison. Refer to the charts for all calculations.

No Preferred Return (50/50 Split). The investor puts in $504,380. There is no preferred return. The initial investment of $504,380 is returned at sale before other sales proceeds are split. The cash flow and the remaining sales proceeds are split 50 percent to the investor and 50 percent to the developer. The IRR is 22.80 percent.

With Preferred Return (50/50 Split). The investor puts in $504,380. There is preferred return of 3 percent in the first year of operation and 7 percent thereafter. The initial investment of $504,380 is returned at sale before other sales proceeds are split. Cash flow and the remaining sales proceeds are split 50 percent to the investor and 50 percent to the developer. The IRR is 25.12 percent.

Preferred Return and Loan Proceeds (50/50 Split). The investor puts in $504,380. When the permanent loan comes on line, the $69,732 is paid to the investor from loan proceeds as part of the preferred return, thus reducing the exposed investment. There is preferred return of 3 percent in the first year of operation and 7 percent thereafter. The remaining initial investment of $434,648 is returned at sale before other sales proceeds are split. Cash flow and the remaining sales proceeds are split 50 percent to the investor and 50 percent to the developer. The IRR is 25.59 percent.

60/40 Split With Preferred Return. The investor puts in $504,380. There is preferred return of 3 percent in the first year of operation and 7 percent thereafter. The initial investment of $504,380 is returned at sale before other sales proceeds are split. Cash flow and the remaining sales proceeds are split 60 percent to the investor and 40 percent to the developer. The IRR is 28.09 percent.

Developer Equity Participation (67/33 Split). The developer essentially builds the project for cost plus 10 percent. He then buys into the project with $165,067, which is the 10 percent profit from construction. He thus acquires a 33 percent position in all cash flow and sales proceeds. The investor secures the construction loan and owns 67 percent of cash flow and sales proceeds. The IRR is 38.35 percent.

Developer Equity With Preferred (67/33 Split). Again, the developer builds the project for cost plus 10 percent. He buys into the project with $165,067, which is the 10 percent profit from construction. The investor secures the construction loan, and owns 67 percent of cash flow and sales proceeds. The investor also receives a preferred return of 3 percent in the first year of operation and 7 percent thereafter on the exposed investment. The developer acquires a 33 percent position in all cash flow and sales proceeds. The IRR is 39.69 percent.

He Who Has the Gold Rules

Very often, investors focus on getting control and insisting on a bigger percentage of ownership in a project rather than looking at their bottom line. In fact, an investor is really better off having the developer be profitable rather than squeezed. Suppose the investor returns were 35 percent IRR in the first example of a 50/50 split with no preferred return? If an investor gets an acceptable return, does it really matter what percentage of the project he owns?

Instead of making profit by taking more from the developer, investors are further ahead by creating win-win situations. The last thing investors and developers need is to be sitting around the conference table with expensive attorneys wrangling about who gets what. The better idea is to create a profit by financial structuring and let the project work for you instead of you working for it.

Also, the better investors understand the financial clockwork, the less motivation it takes to protect the investment. A comprehensive pro forma over the entire life of the investment will take the stress out of this decision-making. The key for investors is to find the right broker and developer who are skilled and surgical at financial structuring.

Does this translate into risking all? Absolutely not, because the contractor is generally bonded, meaning completed construction is insured. Second, the lender has recourse to the bonded project including the land. Generally, the loan amount is 75 percent to 80 percent of the project cost including the land. Therefore, any additional recourse provided by an investor would cover only the difference between the foreclosed value and the loan amount.

A more likely worst case scenario is the project does not rent-up as anticipated. At this point, the investor has to reach into his own pocket to make payments, or rather, the difference between available funds and the amount of the loan payment. This scenario points to the importance of implementing interest reserve correctly, which will ensure positive cash flow in early months.

What Is Interest Reserve?

Interest reserve has the effect of a loan making its own payments for a limited time. The principal balance of the loan is increased for each payment made. It is important that financial structuring and packaging include exact, monthly interest-reserve calculations, because if the property does not meet rent-up expectations, there will have to be a cash call to investors to make up the difference.

In the example, the project is in a negative cash flow position of -$24,704 during construction and -$127,694 in the first years without the use of interest reserve. Then, by using interest reserve, the project can be put in a positive cash-flow position of $19,079 at the end of the first year of operation a total positive effect of $171,477. (The details of this calculation and exhibits are available upon request.) Almost certainly, a need for additional cash contingency beyond interest reserve should be provided for and resolved in the joint-venture agreement. Thus, the perception that the investor is risking all is more often an untrue knee-jerk reaction, especially if the developer has hard equity invested as in the last scenario and is sharing 33 percent of the risk in the land.

Two developers can structure financing for the same development and arrive at opposite ends of profitability. This underscores the need for investors to focus more on competent financial structuring instead of arm wrestling for a larger slice of pie. For example, the careful use of a mini-perm loan can have an enormous effect upon profitability.

The concept of the mini-perm loan is to provide a transition from the construction loan to a permanent loan. In the same example, lets say a construction loan remains in place for two years and a mini-perm loan is available, using the last six months of NOI to establish a value based upon the income approach.

Use of a mini-perm loan can add a whopping $336,023 to cash flow in year two. Adding this to the $171,477 saved as a result of using interest reserve has a total impact of $507,500. Developers should consider adding these aspects to their analysis and financial packaging, while investors should make sure these two factors have been considered. Revising spreadsheets to accommodate these factors monthly and testing several What if? scenarios will create win-win situations for developers and investors.

Jim Oakley is a pioneer and national authority in computer modeling of financial feasibility. His methodology was taught at Arizona State University and its Center for Executive Development. He has addressed major national conventions including the ISS expo, National Association of Corporate Estate Executives and the National Association of Real Estate Educators. His articles have appeared in Inside Self-Storage, Professional Builder and Lodging magazines. Mr. Oakley consults from Prescott, Ariz. For more information, call 928.778.3654; visit www.mrfeasibility.com

Heres the point: Interest expense and interest rates need to be managed and controlled just like any other expense. Dont think of interest expense as fixed or uncontrollable. To that end, a better understanding of interest-rate trends (historical and expected) and their impact on your bottom line can help you better manage this task.

A number of different interest rates could be discussed here, but lets focus on the two most commonly used by lenders to the selfstorage industry: the Prime rate, which is used primarily for variable rate construction lending; and the 10-year Treasury yield, which is used for long-term financing. Both fluctuate due to somewhat different factors and often produce differing trendsshort- as well as long-term.

This article will examine these trends and provide a brief overview of what influences them. I will also provide a forecast for those of you who may be considering getting into the business, as well as those thinking about refinancing an existing loan.

The Prime Rate

The Prime rate is the interest rate charged by banks to their most credit-worthy and stable customers. Very few borrowers actually receive the Prime rate. The typical rate for a self-storage construction loan is Prime plus 1 percent (based on the borrowers credit). In addition to construction loans, self-storage owners will occasionally obtain a Prime-rate loan as a form of permanent financing and will assume the risk of rate fluctuation.

The rate is almost always the same among major banks. Adjustments to the Prime rate are generally made by all of the banks at the same time. In recent history, the Prime rate has changed directionally as the Federal-Funds Rate (the rate charged on overnight loans between banks) has changed. In simple terms, the Federal Reserve Board lowers the Fed-Funds Rate during recessionary periods to help stimulate the economy, and raises the rate when it thinks there is concern for inflation.

The Prime-rate trend over the last 10 years shows we are (at the time of this writing) at 4 percent, after dropping over the last few years as the Federal Reserve Board lowered the Fed-Fund Rate in an attempt to stimulate the economy. It is interesting to note in June 2000, the Prime rate was at 9.5 percent and stayed at this rate for almost nine months.

For those self-storage owners who are currently borrowing funds using a variable-rate loan based on the Prime rate, the impact has been extremely positive to your interest-expense line. For example, if you had a $2 million loan at the December 2001 Prime rate plus 1 percent (or 6 percent) compared to the August 2003 Prime rate plus 1 percent (or 5 percent), you would be saving $1,130 per month when using a 20-year amortization schedule. However, the reverse paying $1,130 more per monthcould be true when you look at a forecast of the Prime rate out to the first quarter of 2005.

The Aug. 15 Prime-rate forecast, prepared by a major East Coast lending institution, Wachovia Corp., was developed by analyzing past trends and the underlying causes of those trends, then applying those economic models to the future. Because the forecast represents the average experience in the past, there is significant room for error.

A possible action point for self-storage owners is those of you who are currently financing your facility using a floating Prime-rate loan may want to consider refinancing and locking into a fixed-rate loan. Those of you who are considering entering the business should probably budget a higher interest expense for your construction loan to reflect the anticipated increase in rates.

The 10-Year Treasury Note

Interest rates on fixed-rate 10-year loans are priced relative to the yield on the 10-year Treasury Note. It is usually stated in terms of the 10-year Treasury yield plus a lender spread of X percentage points.

Unlike the Prime rate (and the Fed-Fund Rate), the Federal Reserves monetary policy does not have a significant impact on the Treasury yields. Instead, many complex economic factors can cause the rate to fluctuate. However, the primary driversespecially over the last eight monthshave been expected growth in the economy (gross domestic products) and expected inflation. The 10-year Treasury graph reflects a dramatic downward trend in the yield over the past 10 years. A graph on the last 20 years would reflect an even more dramatic downward trend.

Over the summer, I had a number of questions and concerns about the long-term interest-rate trends. While those few months were nothing more than a small blip in the chart, the trend is worth reviewing in a little more detail. The following graph shows a dramatic spike in the 10-year Treasury yield from its low in June 2003.

While the spike in this graph is definitely dramatic, it is not the real story. The real story is the drop in yield to the June 2003 lowand what happened to cause the rate to drop to its lowest point in more than 45 years. What are the primary reasons for the decline to June lows? There were a number of market technical factors, but the three primary reasons were:

1. The continued reduction in the expectation of inflation.
2. The overreaction to the perceived market risk of deflation.
3. The belief that the Federal Reserve Board would use unconventional stimulus measures to keep long-term rates down.

While the fear of deflation was fashionable, it was really not a risk for the national economy. Also, the Fed reversed itself and ruled out the use of unconventional stimulus measures. The result, however, appears to have been a temporary mis-pricing of the 10-year Treasury yield. In other words, the recent jump in yield and long-term lending rates is more like a return to normal. The current trend is also starting to reflect signs of an economic recovery.

As with the Prime-rate forecast, the yield on the 10-year Treasury note is expected to rise. This forecast, also prepared by Wachovia, reflects the expected growth in gross domestic products and the expected rise in inflation as the economic recovery shifts into a higher gear. The recent rise in rates and the related forecast is not a surprise to some.

In an article in Forbes as far back as March 2003, it was noted that Professionals overwhelmingly forecast a big move up in both long and short-term rates this year. The forecasted rise is also not unreasonable when you compare the forecast to the historical trends over the past 10 years.

The impact in interest-rate trends over the last 10 years has been extremely positive for the self-storage owner in that long-term borrowing rates have trended down. But what about the future and the impact of the forecasted rate increase? When you do the math comparing the rate as of Aug. 27 to the forecasted rate of 5.8 percent by the first quarter of 2005, you see it reflects a 12.4 percent increase in debt service over that time period, using the assumptions in the following chart:

1. A lender spread of 2 percent is used in the example. The actual spread a borrower obtains is based on many factors and can vary from this example by as much as plus or minus .5 percent.
2. Assumes a 10-year loan using a 25-year amortization schedule.

If you currently have a variable-rate loan, or if you have been considering refinancing your current long-term loan to lock in a lower rate and improve your cash flow, a possible action point is to consider converting to a fixed-rate loan. Although the Prime rate is expected to stay flat until early 2004, the longer-term 10-year Treasury is already moving north. Overlaying the Prime-rate forecast onto the 10-year Treasury-yield forecast, the graph points out the timing differences in expected increases, with the Prime rate projected to exceed the 10-year Treasury yield in early 2005. An example of how this information might be used is reflected in the following graph.

The graph represents two different financing strategies. The first one reflects taking out a variable-rate loan at Prime plus 1 percent in the third quarter of 2003. The second assumes taking out a fixed-rate loan for the same amount and date at the forecasted 10-year Treasury yield plus 2 percent. (Remember the actual spread could vary by plus or minus .5 percent, depending on a number of factors.)

Using these assumptions, you see the interest rate on the variablerate loan is lower for the first five quarters, then exceeds the interest rate on the fixed-rate loan. With these historical interest-rate trends and the related forecasted trend, you can now evaluate the best financing alternative based on your personal needs and long-term financial strategy.

A variable-rate loan may be right for you, especially if you plan on paying it off in the next few years. Or knowing that the general consensus is short- and long-term rates are headed up, the timing may be right to obtain a fixed-rate loan and not take the risk of short-term rates rising back their levels of most of the last 10 years.

The above example considers only a few of the variables that should be taken into account when evaluating your financing strategy and managing your interest expense. Being aware of interest-rate trends (historical and expected) and understanding some of the key drivers behind the fluctuations will help you make better informed decisions about your financing strategy and ultimately give you better control of your interest expense.

Bill Walton is a CPA and a vice president of S & W Capital and Finance LLC. He specializes in arranging financing for owners in the selfstorage industry. For more information, call 704.371.4275 or e-mail [email protected].

Fixed-rate mortgages, which are based on Treasury yields plus a spread, have begun to rise. If you aim to reduce your interest rates and are currently paying more than 6.5 percent on a fixed-rate basis, consider refinancing. If you have a variable-rate mortgage, though it may be difficult to give up interest rates in some casesbelow 3 percent, you need to consider your market volatility risk and exposure to increased future interest rates.

Despite the economy and other perceived negative factors, there is still an abundance of capital chasing real estate transactions. A case can be made that the self-storage industry is less affected by economic downturns than other real estate investments, because regardless of the economic cycle, people and businesses still need a place to store their belongings, inventory and records.

Keeping this in mind, it is not unreasonable to expect lenders will continue to provide capital to the industry. It should be noted, however, that those owners with newer properties, larger and well maintained properties, and a proven operating history, will likely find it easier and less expensive to obtain better financing arrangements than those who are performing at average or below-average levels.

Periodically, you should review and evaluate your financial structure. This review should entail:

• Looking at your current debt structure vs. available financing in the current market.
• Reviewing the potential upside or downside in refinancing at a later date.
• Assessing your propertys strengths and weaknesses relative to current and future competitors.
• Evaluating the anticipated neighborhood demographic trends.

When should you refinance, and how much can you borrow?

Refinancing is one of the few nontaxable events through which you can access cash without paying taxes! You can use the cash proceeds to pay off partners and reorganize your ownership structure, provide seed money for your next development project, expand your existing facility, acquire another property, or simply have more cash on hand and more liquidity on your balance sheet.

The primary reasons to refinance your property include:

• Paying-off a construction loan.
• Refinance a maturing loan.
• Increasing leverage and thus recap initial investment equity.
• Expanding your facility.
• Reducing or eliminating recourse.
• Lengthening the amortization term (thus reducing monthly debt payments).
• Reducing your interest rate.
• Lengthening your loan term, and/or to lock into a fixed rate.

The question invariably arises as to when is the right time to refinance. If you are seeking to optimize your loan, it is advisable to wait until the property reaches 85 percent to 95 percent of physical occupancy, and 80 percent to 85 percent of economic occupancy based on current asking rents. Lenders generally calculate income on a trailing 12-month basis. With a compelling, steadily increasing historic revenue pattern, aggressive lenders will use the most recent months to determine the loan size.

A loan amount is typically derived from the lower of maximum loan-to-value (LTV) or minimum debt-service coverage (DSC). As a guideline, it is reasonable to assume you can achieve a loan with a maximum of 75 percent of appraised value and a minimum DSC of 1.25 to 1.35. There will be lenders with more aggressive terms, while others will offer more conservative ones.

A refinance can lead to one of the great benefits of owning self-storage by rewarding you with cash in excess of current debt and, in many instances, of original cost. From a lenders perspective, however, large cash out can mean increased scrutiny and the potential to cut loan dollars, thereby reducing some of the risk in the transaction.

Lenders are getting more conservative. If you are seeking to recover your 100 percent of the initial cash investment or more, essentially removing your equity from the deal, the lender will definitely need to get comfortable with the historic cash flow, as well as your propertys ability to maintain its value. Some lenders will limit loans to a certain percentage of costs. Others will refinance your property up to 80 percent of current value. Keep in mind, the longer you own your property, the less likely it is for a lender to look at your cost basis as a constraint on a refinance.

Because of the low interest-rate environment, a loan will usually be limited to the maximum LTV allowed by your lender. Again, opportunity is knocking. Property values have generally increased. This is not a trend that is new from previous years, but the reason for property appreciation is.

The industry has had a consistent trackrecord of high occupancies and increasing rental income. For the first time for some owners, the local or regional demand/market softened, causing occupancies to decline and the ability to maintainlet alone increase rental income to be a challenge. However, because of a combination of factorsmainly the reduction of interest rates and the investors desire to invest in real estate vs.stock and bondscap rates for real estate including self-storage has decreased, thus increasing property value (assuming the operating income has remained the same).

The value of your property must also be verified by an appraiser hired by the lender. An appraiser mainly looks at the physical attributes of the propertyits location, market and operating incometo conclude a market value.

According to a recent appraisal prepared by Ray Wilson, president of Charles R. Wilson & Associates Inc., there has been a trending downward of capitalization (cap) rates for the past two to three years, which reflects the increased demand for this property type and more favorable lending rates. The research indicates trailing (based on historic operating performance) cap rates may be 9.5 percent or less, with the typical investor looking for a reasonable opportunity to increase income. Note that facilities not considered investment grade have cap rates anywhere from .75 percent to 3 percent higher than the above-stated.

Lenders lend on past performance, paying careful attention to whether it is likely you will be able to sustain or improve your operating performance in the future. Have you been able to maintain or improve your occupancy? Has your competition been able to maintain or improve its occupancy?

These questions are very important, because the lender will analyze the current market occupancy to determine the occupancy that will be used for underwriting. If the general market has shown softening and vacancies are increasing, lenders will likely be more conservative in their underwriting. In certain circumstances, a shrewd operator can demonstrate that although physical occupancy has declined or remained steady, income has risen. Often, good management can offset physical occupancy by increasing unit sizes that are more in demand or controlling expenses.

Competition always has an impact. The newer properties are often being built at prime locations with more bells and whistles. There are other properties in locations that really dont have the right characteristics for additional storage. Whatever the case, the competition in a market place represents a choice to the consumer. It creates a spectrum of amenities and prices. It is the owners and managers job to understand the market in which they compete and sell based on the attributes important to the customer base they are targeting.

Because of the cost differential of older vs. newer properties, there is a spectrum of pricing in most markets for the same size unit. Facilities with different attributes can be effective at finding renters and, more important, can achieve adequate profitability. Your market position must be explained to your lender.

Ownership qualifications are also extremely important.

It is essential to remember the property and its operations do not stand on their own. Like any good marriage, one half complements the other in terms of providing strength. It is, therefore, key to highlight your management capabilities. A sound net worth and a reasonable amount of liquid assets, in comparison to the loan request, will be evaluated in a positive manner. Whether the loan is recourse or nonrecourse, lenders like the assurance that the borrowers behind the project have the resources and wherewithal to withstand downturns or unexpected negative events.

Should you elect to refinance using a variable-or fixed-rate loan?

If you intend to make another financing decision within one to three years, variablerate loans are most likely an option for you. However, if you plan to hold on to your property and it has stabilized operations (a history of approximately 85 percent-plus occupancy), you should consider locking into a fixed-rate loan for, at minimum, the time you plan to own the property.

There are three-, five-, seven-, 10-, 15- and even 20-year fixed-rate terms available. But they frequently come with a catch: They often have prepayment provisions. These provisions may not allow you to prepay for a period of time followed by a defeasance period, whereby you essentially guarantee the interest rate you signed up at is going to be paid for the remaining period of the loan, regardless if you pay off the loan. A new owner can assume most fixed-rate loans for the maximum of a 1 percent fee. In todays low interest-rate environment, a long-term low-interest loan may add additional value to your property should interest rates rise.

Variable-rate mortgages are often based on the Prime rate or LIBOR (London Inter Bank Offered Rate) plus a spread. At the time of this writing, these rates are abnormally low. The natural instinct is to wait to refinance until those rates start to rise. The risk you must weigh is that these variable-rate loans are based on different indices than longer-term fixed-rate loans.

Short- and long-term indices rarely move parallel to each other. In fact, in July and August, while the Prime rate had decreased .25 percent to 4 percent and remained there, the 10-year Treasury rose from 3.22 to 4.56 percent in less than a 60-day period. The steep, sudden rise in long-term rates often goes unnoticed by the owner community, because it doesnt follow the daily fluctuations of interest rates as a course of its daily business.

What lenders should you seek to refinance your property?

The majority of todays self-storage financing is obtained through banks and conduits. When deciding which lender to use, the logical first step is to speak with your current lender. He is going to know your credit history the best, and if he can offer you a competitive quote, will most likely be the easiest to deal with at the lowest cost. However, lenders often change their appetite and desire to lend. Sometimes the bank that provided the construction financing does not offer competitive refinancing alternatives.

If you choose to go out to the lending community to refinance your property, select lenders who will be able to provide you the service you deserve. For example, it is not advisable to go to a lender who will focus on deals significantly larger or smaller than your transaction.

Most national lenders, specifically those who offer conduit loans, will usually avoid making loans less than $1 million. In fact, the minimum loan size for conduit lenders is often $2 million to $2.5 million. There are, however, several conduit lenders who will focus on smaller loans through their small- or microloan programs. The loan size for most of these programs is between $1 million and $3 million. Local banks desire to lend on selfstorage is all across the spectrum. Some will be extremely aggressive, while others will not even look at your financing-request package.

Banks are mostly portfolio lenders, meaning they will retain the loan as an asset on their balance sheet. Accordingly, a portfolio lender may offer more flexibility with loan terms than would a securitized lender, who will typically sell the loan after making it. It is important to ask the lender/banker whether he intends to keep your loan on his books, sell the loan or securitize the loan. If the lender intends to sell or securitize, he may have limited flexibility.

Depending on the lending institution, maximum loan-to-value (LTV) ratios vary from 65 percent to 80 percent. Although some banks will lend up to 80 percent LTV, in recent years, it is has become much more common to see quotes in the 70 percent to 75 percent range. Furthermore, many banks now limit the loan to a percentage of your initial cost (loan-to-cost ratio, or LTC), thus requiring you still have some portion of your initial investment, or true equity, in the deal. Although some banks will amortize a selfstorage facility on a 25- or even 30-year schedule, it is much more common to see a 20-year amortization quoted.

Terms for bank loans range from one to 20 years. However, it is unusual to see banks loans being fixed for more than a five-year period. Fixed-rate loans generally have prepayment penalties associated with them, whereby the borrower pays a penalty for paying off the loan early.

Many banks require recourse. Some lenders will reduce or eliminate the recourse as a percentage of the loan if certain operating- income hurdles are maintained. Given the right set of qualifications, such as a low LTV, some portfolio lenders will provide nonrecourse financing.

Conduit loans are a specific type of loan that can be made by a bank, credit company, life-insurance company or Wall Street firm. These loans are unique because, unlike portfolio loans, which are held by the bank as assets, conduit loans are originated with the intention of being pooled and sold as mortgage backed securities, hence the name conduit.

The bonds backed by the pool of mortgages are sold as debt instruments called commercial mortgage-backed securities (CMBS) on Wall Street to institutional type investors, who prefer the diversification of risk these securities offer. CMBS are examined by Wall Street bond-rating agencies, such as Standard & Poors or Moodys Investor Service, where they are rated and prioritized according to the likelihood of default.

Owners looking for long-term fixed-rate financingand who do not intend to pay their loan off earlymay prefer conduit loans. This type of financing has been a popular option in the recent interest-rate environment. A typical conduit loan has a fixed interest rate, 10-year term and 25-year amortization period. The LTV does not exceed 75 percent, and DSC is 1.25 to 1.35. There is also a rating-agency stress test a lender will need to meet that may further limit the loan amount. Conduit loans are nonrecourse, meaning they are not secured by other assets the borrower owns.

There are some drawbacks to conduit loans. Because all of the loans pooled must have similar structures, conduit lenders have very little flexibility when negotiating the terms of a loan. Also, bondholders are expecting a fixed future cash flow from the pool of loans. Accordingly, prepayment penalties on conduit loans are designed to guarantee the bondholders payment of the note rate for the duration of the term. It should be noted, however, that conduit loans are assumable to a future buyer of the property (acceptable to the lender) for a 1 percent fee. Finally, additional funding is not allowable and, therefore, may not be the optimal financing alternative if the facility has additional phases of construction to be built and leased-up.

A mortgage broker is not a lender, but instead works for the owner to arrange the financing. Essentially, the owner looks to the mortgage broker to develop a financing request package and market the request to various lenders. The industry publications list several qualified mortgage brokers who represent self-storage owners.

Is Opportunity Knocking?

In most instances, your mortgage is your largest cash outlay. Your financing expense (interest paid by you) compared with your competitors is going to affect the flexibility to keep rental rates competitive and profitable. As long as mortgage rates are volatile, there will not be an even playing field relating to the cost of your operations. Interest rates are hovering near historic bottoms. This could turn out to be an advantage or disadvantage to your business.

Neal Gussis is a principal at Beacon Realty Capital Inc., a financial services firm that arranges debt for self-storage and other commercial real estate owners. He has been actively involved in financing self-storage properties since 1990. He also serves on the Self Storage Association regional board of directors for the Central region. Mr. Gussis can be reached at 312.207.8240 or [email protected].

As I travel around the country, I continually drop in on self-storage facilities. As you might expect, I see the good, the bad and the ugly. There are some incredibly well-managed facilities, and those that need a complete marketing overhaul. Those that do it right concentrate on the basics. Thats the topic for this month: getting back to the basics.

The self-storage business is relatively straightforward. There are four steps involved. First, get people to pick up the phone and call you. Second, get those who call to come in and visit. Third, get those who visit to sign a rental agreement. Fourth and last, get those who rent from you to stay forever and tell all of their friends. If you were to get just 5 percent better in each of these four areas, youd be making a lot more money. Lets take a look at how you can do that.

Step 1: Get People to Call

Getting people to call is all about your total marketing efforts. For this article, Id like to skip right to the way the phone is answered.

Most prospects will have called you before coming to visit. The first thing people hear over the phone is your greeting. Frequently, I hear some pretty awful greetings. The best one I heard recently was, Hi, do you mind calling back? Im eating lunch right now.

There are two components to a good greeting. First, theres the verbiage what you actually say. Second, there is the way in which you say it. Heres a sample greeting: Thanks for calling ABC Self Storage. This is Fred. How may I help you? This is pretty good, but in my opinion, there is something missing. Instead, I suggest the following: Thanks for calling ABC Self Storage, the only place in town with individual door alarms. This is Fred. How may I help you?

The basics of the greeting tell us who the person has called, what makes the facility unique from others (its unique selling position, or USP), who the person on the phone is, and offers help to the caller. It is essential to put your USP in the greeting. If the caller knows or remembers nothing else after he calls you, hell remember what it is you have or offer that is different from everyone else in town.

Many managers answer the phone with a fake-sounding vocal tone that lets me know the person on the other end of the line is a loser. Dont do this. Be real. Be yourself. Dont try and put on an act when you answer the phone. Naturally, you should be polite and upbeat, but dont put on that fast-food restaurant server voicethe one that makes you sound like an automaton.

Step 2: Get Those Who Call to Visit

Remember the goal of every phone call: to get people to visit your facility. Understanding this is your goal, make sure you do everything you can to accomplish it. How? Do three basic things. First, ask the caller a lot of questions. Second, build rapport. Third, highlight your USP.

By asking potential renter questions, youll get him engaged with you. The more questions you ask, the greater that engagement will be. Help him figure out how much space he will need and what size unit will be right for him. As you go through the standard questions everyone else will ask, find some openings to ask questions that are not business-related. Get him engaged in conversation about himself and his individual situation. Remember, people buy from people they like. To be likeable, you must engage people and get them talking to you about things other than business.

Its inevitable that yours isnt the only facility the prospect is calling. Chances are, you are one of manyusually right out of the phone book. This being the case, youve got to show the prospect how your facility is different, what you have or do that your competition does not.

To get this right, youve got to survey your competitors and see what they offer. Then youll be able to find something you have that is unique. If you cant find something, youre in trouble. You must offer something that makes you different, or youre just selling a commodity. Its just like gasolinemost people who buy it, buy the cheapest brand.

If you do not offer anything unique, create something. The easiest way to do this is to offer super-small units you can rent for $9.95. Id prefer you use something other than price to compete (like youre the only facility in town with individual door alarms), but in a pinch, offering really cheap units will get people in for a visit. Get a hold of some old high school lockers to legitimately offer the really low price point.

Step 3: Get Those Who Visit to Rent

Once youve got people at your facility, you should close 90 percent or more of them in a rental. The fact they came to your facility means they will most likely rent. How do you increase your odds to make it a slam-dunk? By making sure your facility is well-kept and clean. Nothing will make people change their minds faster than a poorly kept property. Think of the Disney World standard. Keeping your facility sparkling clean will make it impossible for prospects to walk away.

When people dont rent from a facility, it is mainly because of three things: they thought the facility was unclean or unsafe, or the manager was perceived as incompetent. Keeping your facility looking good will create the assumption it is safe. Make sure you have good lighting and highlight your security system to prospects when you give them a tour. The only way to ensure your manager doesnt appear incompetent is to hire one who isnt.

Step 4: Keeping Customers/Generating Referrals

The key to making this step work is to service your customers after they become renters. Most managers spend a lot of their time trying to generate new customers and not nearly enough time taking care of those they already have.

The most important aspect to servicing customers is to listen to them. And dont just listen to themact on what they say. If a customer bumps into you in the hallway and suggests it might be a good idea to have a pair of jumper cables around, listen and then act. The most successful facilities I have ever seen are those where managers actively listen to customers and then do what they are asked.

Customers will give you referrals if and only if you ask for them, so dont be shy. After having done something for a customer and he has thanked you, ask him if he knows anyone else who needs storage. Let customers know how important their referrals are, and ask them for their help. People who are satisfied with what youve done for them will be happy to oblige.

Many facilities will compensate tenants for their referrals. This is a great idea, but no one will give you a referral if they arent 100 percent delighted with the job youre doing for them. Happy customers will generate referrals almost automatically.

Conclusion

There are lots of little things you can do to rent more units, but nothing will help you more than concentrating on the basics. If you can get 5 percent better in each of the four areas mentioned above, your occupancy rates will increase and your profitability will go up as well.

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

Selecting the right loan for your particular situation becomes even more complicated as you sift through the different loan variables, such as recourse provisions, prepayment penalties, amortization, loanto- value, debt-service coverage ratios, etc. The good news is there are enough financing options available in the capital markets to satisfy virtually any financing request. The variety of options can be categorized into three main loan types: construction, bridge and permanent. However, different types of capital sources offer many different financing structures and programs within each of these three categories.

Construction Loans

Construction loans are typically provided by regional or local banks to build a new facility or expand an existing one. Obviously, your first call should be to an experienced self-storage lender with whom you already have a working relationship, because he will likely offer the most aggressive loan terms, rate and structure.

However, some borrowers will benefit from the services of an experienced mortgage banker or broker when: 1) they do not have a strong existing banking relationship; 2) it makes sense to build a new banking relationship; or 3) they want to take advantage of a competitive bid process between multiple banks to ensure they secure the most aggressive loan possible. The banking market is so fluid with some banks being extremely competitive at one point in time only to exit the market at anotherit makes sense to nurture multiple relationships.

Once you have zeroed in on the bank you believe will best meet your needs, its important to understand its underwriting criteria for the borrower and property so there are no major surprises during the loan process. Even when you enjoy an existing relationship with a bank, its criteria can change from time to time.

If you are beginning a new banking relationship, its important to understand most banks will place enormous weight on your self-storage experience, self-storage track record and the results of a feasibility analysis. This is especially critical in todays market in which many facilities are taking much longer to lease up.

Construction lenders that offer the most competitive interest rates will require full recourse to the individual principals; therefore, they will scrutinize your personal financial statement to determine if you meet their net worth and liquidity requirements. The only rare exception to this is when a financially strong borrower convinces a bank to accept recourse only to a specific entity and then capitalizes this entity to a level that satisfies the bank.

Next, the bank will completely analyze your pro forma lease-up and operating statements that take your facility through stabilization, including your projections of rental income, vacancy, number of months to stabilization, expense ratios, etc. All of your projections will be compared to the market, so you must be able to make a strong case for a lender to use projections that are more aggressive than the actual performance of the market. Additionally, your costs to build the facility will be compared to those of other facilities recently developed in the market.

If you can get comfortable with a full recourse construction loan, you can expect to receive some very competitive interest rates. At the time of this writing, your overall interest rate can range from 3.5 percent to 6 percent for a loan that typically provides up to 75 percent or 80 percent of cost financing. The wide range in interest rates has to do with the type of bank you are soliciting, your financial strength, your track record, the size of your loan request, the market demand for your facility and the quality of your projects location.

If you have a net worth that is typically two times the loan amount and at least 10 percent to 20 percent of it is liquid, you may qualify for one of the national money center banks financing programs. These financial institutions generally offer LIBOR- (London Inter Bank Offered Rate) or Prime-based rates in the 3.5 percent to 5 percent range. That said, these banks have very different criteria among themselves.

For example, some of these banks will not budge off their 20 percent liquidity requirement and will require you maintain that 20 percent liquidity through the entire construction-loan period. Others will allow minimal liquidity as long as you have a strong track record of developing and stabilizing quality storage facilities and receive significant annual cash flow from your portfolio.

If you do not meet the requirements of a money center bank, you will want to work with one of the excellent regional banks that offer the same LIBOR- and Prime-based rates but typically use floor interest rates in the 5 percent to 6 percent range. These loans usually provide for a three-year term with a one-year extension option, a two-year term with two six-month extension options, or slight variations of the same terms and extension options.

There are also several non-bank financial institutions that offer nonrecourse or partial-recourse construction financing. These lenders are few and far between and typically very selective as to the types of deals they will fund and the track record of the developer. Since they are non-recourse lenders and their only recourse is to the real estate, there must be strong market evidence that your project will ultimately be successful. The benefit is if they like you and your project, they may provide up to 85 percent loanto- cost financing. However, the non-recourse and higher loan-to-cost features do come with higher pricing. These lenders have floor interest rates in the 7 percent to 8.5 percent range, may charge higher origination fees and/or exit fees, and may include prepayment penalties in their loan structure.

Whether construction lenders require personal guarantees/recourse, their pricing is based over LIBOR and Prime, so your rate will most likely adjust during your loan term. It is important a developer assesses the impact a floating-rate loan may have on cash flow as we enter what looks like an environment of gradually increasing short-term interest rates.

Bridge Loans

A bridge loan is a very useful loan type for self-storage owners purchasing a property that has the opportunity to increase occupancy and net-operating income, such as one that has been poorly managed, or for an owner who has the ability to increase revenue through expanding the net rentable square feet of a facility. The goal of a bridge loan is to provide a relatively short term with little or no prepayment penalty, during which time the owner can maximize the income potential of the property before placing long-term, permanent financing on it.

A bridge loan may also be used to provide a safety gap to an owner who has a construction loan maturing on a property that has not yet stabilized to a level sufficient enough to qualify for a long-term, permanent takeout loan. In some cases, a lower interest nonrecourse bridge loan may be used to replace a recourse construction loan that included a significantly higher floor interest rate than what is currently achievable in the market. Some of these loans may be nonrecourse depending on the facilities degree of stabilization and corresponding debt-service coverage ratio and whether they are priced over LIBOR.

The LIBOR-based pricing for many of these bridge loans is in the 5.5 percent to 6.5 percent range. The exception would be for borrowers who qualify for bridge loans offered by the national money center banks, which may offer a partial recourse bridge loan that burns off for properties that have reached or surpassed the breakeven debt-service coverage ratio. These money center bridge-loan rates would be in the same range as their 3.5 percent to 5 percent construction-loan rates. Also, its important to note that if your bridge loan is nonrecourse, the nonrecourse applies to most everything except for fraud, misrepresentation and environmental contamination.

The most important aspect of these loans is their flexibility. If you are leasing up a facility or repositioning it, you can receive additional funds in the form of an earn out as you improve the propertys income. There may also be a construction component in the loan if you are expanding the property. Furthermore, the length and terms of bridge loans vary, and most of them have favorable prepayment penalties or none at all. For example, some bridge programs are locked out to prepayment during the first year. They then have a 1 percent penalty in the second year, eventually declining to no prepayment penalty in the final year.

Another big potential difference between a bridge and construction loan is that if there has been enough seasoning at a facility, the lender will offer significantly more loan proceeds equal to 75 percent loan-to-value as opposed to the 75 percent to 80 percent loan-to-cost restrictions of the original construction loan.

Permanent Loans

Permanent loans are the last but, hopefully, most economically beneficial of the common loan types. Long-term permanent loans are used to take out floating-rate construction or bridge loans, typically with long-term fixed rates. The goal of the permanent loan is to secure sufficient loan proceeds to pay off the construction loan and return most of the invested equity capital to your investors and yourself.

These loans have been very popular over the past 24 months, since fixed interest rates have been at all-time historic lows. At the writing of this article, it was possible to obtain fixed rates at just under 6 percent for 10 years at loan amounts up to 75 percent of value. If you were looking for a loan amount that was just 60 percent loan-to-value, you could obtain a 10-year fixed rate in the mid- 5 percent range. Most of these loans are amortized over 25 or 30 years and are funded by lenders who trade these loans as part of a billion-dollar portfolio in the commercial mortgage-backed securities market.

In the past, it was the intent of many owners who secured long-term fixed-rate loans for their properties to hold these assets long-term. This was because the owners knew these loans were virtually prohibited from prepayment due to the high cost of yield maintenance or defeasance prepayment penalties. Also, at the time, rates in the 8 percent to 9 percent range were attractive compared to the double-digit rates previously available.

However, since we are most likely at the bottom of the cycle in this historically low interest-rate environment, many storage owners who have a shorter-term investment horizon are placing long-term fixed-rate loans on their properties. They are making this choice either because they believe the prepayment penalties will be nominal in the futurewhen rates are higher at the time of loan payoff due to the way prepayment penalties are calculatedor they want to lock in these extremely low rates to make their property more marketable during the next several years.

Owners who tied up fixed interest rates many years ago and are trying to pay them off often are looking at replacing an interest rate of 8 percent or 9 percent with an interest rate that is below 6 percent. Consequently, the defeasance or yield maintenance calculations are generating exorbitant prepayment penalties.

However, many owners who are placing fixed rates on their properties at all-time historic lows below 6 percent believe that at the time they consider prepayment, if ever, the rates will likely be a couple of percentage points higher. As a result, their prepayment penalty may be relatively low or nonexistent if interest rates at the time of prepayment have increased enough. Also, they believe they will command a higher price for their facility if they decide to sell in a couple of years when fixed rates are in the 8 percent range and they have an assumable 6 percent fixed-rate mortgage on their property.

In addition, to qualify for these low fixed-rate loans, you must be able to satisfy requirements mandated by the secondary market. Specifically, you will most likely need to form a single-purpose entity as the ownership entity of the property. This means you cannot own the property as an individual, and the entity you form cannot be engaged in any other business than the operation of your facility.

The good news is owners enjoy a multitude of financing options and are benefiting from some of the lowest interest rates in history. Todays variable-rate loans are priced over LIBOR or Prime, both of which are at historical lows. When the lenders add their margins to these indices, it equates to variable-rate loans from the mid-3 percent to the mid-5 percent range. And the fixed-rate lending market is just as favorable as the variable-rate market. Most fixed-rate loans are priced over U.S. Treasuries, which are also at historic lows. Add the additional margin or spread to todays 10-year Treasury, and its possible to obtain fixed-rate loans in the low 6 percent range.

Eric Snyder and Jim Davies are principals of Buchanan Storage Capital, which provides capital to self-storage owners nationwide, including permanent loans, bridge loans, construction loans, mezzanine debt and equity.

For more information, call 949.721.1414 or visit www.buchananstoragecapital.com.

Here are a few things you probably didnt know about rodents:

• An average-size rat can squeeze through a gap about the width of your pinky finger, an adult mouse through a gap the thickness of this magazine.
• A healthy female rat can give birth to six litters per year, with as many as 20 baby rats per litter. Each new female is ready to breed at about three months of age.
• Many fire investigators say one quarter of all structure fires of undetermined origin are caused by rodents gnawing on electrical wire.
• Even today, rats can transmit the Bubonic Plague to humans.
• Groups of rats are called packs. (You thought Sinatra just made that up off the top of his head?) Rats and mice arent all that fond of cheese.

What You Can Do

Unless you consider simply embracing the presence of rodents at your self-storage facility as some form of enlightened social consciousness, there are four basic steps to a rodent control program. To be effective, all four steps must be taken in the order described here.

The Inspection

Short of seeing a live rat or smelling a dead one, the most obvious sign of the non-rent-paying creatures is their droppings. Rodent droppings vary in size, from one-eighth of an inch to a half-inch. They are about the same shape and texture of a popular rice breakfast cereal (the lawyers for which would probably take exception to my using the brand name to make the comparison).

Other less-obvious indications are gnaw marks in electrical or PVC conduits, rips or holes on the coverings to heating and cooling ducts, and open burrows filled with nesting materials. A pest-control professional may use a black light in a darkened area to detect the presence of urine trails or special powders to track little footprints.

Sanitation

This generally tends to be less of an issue in self-storage facilities. No doubt you have rules as to what your tenants can and cannot store in their spaces. Obviously, food for human or animal consumption should be strictly regulated if not completely prohibited. Tenants should be required to dispose unwanted items and trash off-site. The facility dumpster or trash containers should be secure to prohibit use by tenantsof both the two- and four-legged variety.

Exclusion

By the time this issue of the magazine hits your desk, you are probably already thinking about weather-proofing (or wondering why you waited this long to think about it). There is no more important issue in rodent control than a tight building.

The same measures you should take to keep your energy costs down will help keep rodents out of your buildings. Always use the strongest, most durable materials to seal your doors and utility openings. It will not always be cost-effective to completely seal off the structure. Although rodents are particularly persistent and adept at exploiting structural weaknesses, the harder you make them work, the better the chances they wont get in.

Here are a few tips on rodent-proofing a structure:

• Trim vegetation away from the structure. Never allow overhanging tree braches to contact the building or roof.
• Expanding foam is just a quick fixalways use heavy-gauge hardware cloth or flashing to cover holes and gaps.
• In wooden roof structures, check for water damage or soft spots. (See comment above about rodents exploiting structural weaknesses.)
• Employ self-closing exterior doors wherever possible.
• Maintain screens on all windows that can be opened.

Elimination

One hundred and fifty years ago, it took two months to deliver a document from New York City to San Francisco. Today it takes two seconds. One hundred and fifty years ago, it took six weeks to travel from New York City to London. Today it takes less than six hours. One hundred and fifty years ago, the best way to kill a rat was a spring-loaded metal trap mounted on a scrap of wood. Today, well, the best way to kill a rat is a spring-loaded metal trap mounted on a piece of wood.

Ok, best might not be the right word for those not inclined toward handling dead rodents. It remains, however, the most effective method to quickly eliminate an established population. It also requires the least expertise and expense.

The most efficient way to set snap traps is to place them where you and the rodent can easily access them. Rodents normally travel the same path over and over to move about their surroundings, so if you see droppings, chances are your little friend will be back by soon. Simply coat the business end of the trap with a small amount of chunky-style peanut butter and place on a flat surface. DO NOT arm the trap until you are ready to place it. (I have armed a trap before I was sure where I wanted to put it, and I have the X-rays to prove it!) Ideally, you will place the trap perpendicular to a wall, with the business end facing inward. In warmer weather, check the traps daily, otherwise, check them every other day. Be patient. Rodents are sensitive to new objects in their environment, and it may take them a few days to get used to the traps, even if they smell yummy. If you are successful, simply dispose of the dearly departed and the trap together. Keep at it until the traps collect dust quicker than they collect rats.

There are a number of live-catch options available to the general public; however, these devices tend to be expensive and require some expertise. The larger the target rodent, the less effective these things are.

Another option is sticky trap or glue board. Basically, it is a piece of plastic or cardboard coated with a glue-like substance. This is placed much like snap traps. Sticky traps tend to be ineffective against larger rodents, as even professional-grade sticky stuff isnt strong enough to mire any rat with some sense of self preservation. It generally will hold a mouse or young rat. Just be prepared to deal with a very unhappy little camper if its still alive.

No primer on rodent control is complete without a word about electronic pest-control devices. Sometimes called ultrasonic or electromagnetic pest repellers, they tout high-frequency sound waves or eltro-magnetic pulses as a means of controlling rodents, insects and a variety of other unwanted wildlife. They all have one thing in common: They dont work.

In a number of cases, manufacturers of these devices have been prosecuted by the federal government for making false claims and fraud. Consider this bit of wisdom taken from official Department of Defense policy: Electromagnetic exclusion or control devices, ultrasonic repellent or control devices ...will not be procured or maintained with public funds, and personnel should discourage the use of such devices by pointing out their relative ineffectiveness. Now, go unplug them, put them in a bag, and hide them at the bottom of your dumpster, and no one will be any the wiser.

Sorry, Mickey, but the best way to control a rodent population is to kill as much of it as you can. This brings us to the subject of controlling pests with poison. There are a number of products available for use by the general public (e.g., De-Con). I cant stress strongly enough that toxic substances to control pests, sold for use by John Q. Public, should never be used in a commercial environment.

If it isnt illegal where you do business, just ask your insurance carrier what it thinks about the idea. If you are considering using either poison baits or fumigants at your self-storage facility, the limiting factor is not expertise or legality but liability. Poison baits and fumigants are a highly effective means of eliminating rodent populations, but should only be applied by a licensed, insured professional.

Ken Berquist is a field representative at R&D Pest Services in San Diego. For more information, e-mail [email protected].

Owners can assist in the process by making sure the appraiser knows and understands relevant data and the trends that impact value. By helping in this matter, the likelihood of a proper valuation increases.

Appraisals Critical Role

The appraisal plays a critical role in the financing process. Borrowers who obtain appraisals with inflated values and unsupported conclusions often experience delays in obtaining their financing. A properly prepared appraisal report can save the borrower more money in time savings than a fractionally lower interest rate. A properly prepared appraisal can also make the difference between having an acceptable vs. unacceptable after-debt-service cash-on-cash return.

Having an appraisal report that properly estimates future expenses, for example, can make the difference between obtaining the loan or being denied. Some elements of the appraisal are more important than the value conclusion. Value, for instance, is not always the critical factor in the amount of loan dollars attainable. Often, it is the debt-service coverage ratio (DCR). The DCR also has a bearing on the interest rate the lender is willing to offer.

General and Specific Data

To estimate the value of a property, the appraiser must follow a specific valuation process. The process starts with the gathering of relevant data about the income-generating capability of the property being appraised and market trends impacting its value. More than anyone else, the owner is typically the best person to provide this information. By communicating with the appraiser and providing these insights, the owner assists in the process and can expedite a successful result.

To properly analyze the property, the appraiser must consider regional, city and neighborhood trends. The owner can point out aspects of the city or neighborhood that are important to the subject. These could include traffic patterns, the direction of population growth, the location of nearby high density housing, or perhaps just the high traffic volume generated by the commuter park-and-ride lot around the corner.

Barriers to entry (a fancy phrase to express the difficulty of doing a development) are critical considerations in the valuation process. If your city doesnt look favorably upon self-storage and land available for development is limited, the risk of new competition and oversupply is reduced. Some cities have passed moratoriums on selfstorage development. These factors create scarcity, which enhances value. Make sure the appraiser is aware of them.

Provide the appraiser information specific to your facility, such as information about the site and building improvements that may not be so obvious. For instance, your facility may have a higher percentage of ground-level access units than the competition, ceiling heights that are much higher, access driveways that allow a wider truck and trailer turning radius, or a sign that is visible from both directions on an elevated freeway. Every little advantage your facility has over the competition should be pointed out to the appraiser, because it can impact the value and the appraiser could miss it.

Perhaps the most important element in the whole process is for the appraiser to understand the facilitys income-generating capability. After all, it is said that, The value of any property is the sum of the present worth of the future cash flows. Provide the appraiser the most recent income and expense data, as well as the historical data that shows trends demonstrating the facilitys past performance. Valuation is about measuring risk, and for an existing facility, it is important to show consistency in the income-generating capabilities of the subject over time. If the facility is proposed, the appraiser needs additional support for projections of revenue and expenses, as well as space (unit) absorption.

Operating Income. Real estate income includes all income directly and indirectly related to the rental of space, (i.e., real estate). Whether you are renting an apartment, warehouse or self-storage unit, you are renting space. This also means income generated indirectly from the rental of units is considered real estate income and can be included in the valuation of the real estate.

If, on the other hand, you have a large show room where you sell a considerable amount of retail product, you are in the retail business. Lenders will consider it as being real estate income when valuing your facility. Thus, income in self-storage facilities comes from the rental of space and ancillary income derived from the following sources:

• Late fees
• Administrative fees
• Sales of locks and boxes
• Sales of tenant insurance
• Auction income

Most lenders allow ancillary income so long as it does not exceed 6 percent to 8 percent of rental revenue; otherwise, it is considered business income. Income derived from the leasing of trucks is considered business income because it is derived from personal property, i.e., the truck and the contract, which is not tied to the real estate.

Operating Expenses. Operating expenses include all expenses to maintain the facility and continue production of income. If you are expensing certain items for IRS purposes, be sure to point it out to the appraiser. An automobile is not a legitimate self-storage operating expense. Neither are trips to Europe to attend self-storage conferencestoo bad.

If you were recently successful in a real estate tax appeal, make sure the appraiser knows about it. Using simple trend analysis is no substitute for a detailed, item-by-item analysis of each operating expense. If your actual expenses are out of line with industry norms, talk to the appraiser and determine why. Perhaps there are good reasons your expenses should be lower. You may be paying yourself a management fee that is twice or three times what an independent property manager would charge. Make sure the appraiser is using the right amount. Dont let him just accept your expenses for what they are; you might not be managing the facility as efficiently as you could.

Net Income. The definition of net income differs between appraisers and accountants or property managers. Thus, it is important to note for the appraiser what should be included in the income and what should be excluded from the expenses. Net operating income used by appraisers typically represents net income before capital-improvement expenses, which are generally capitalized and not expensed; the same is true of reserves for replacements.

Reserves for replacement should not be included as a line-item expense, because the capitalization rate used to capitalize the net income is typically derived from sales, which do not reflect reserves. Thus, including reserves as an expense would overstate the expenses and understate the value of the property. Since the amount of the reserves for replacement falls directly to the bottom line, the diminutions in value can be calculated by capitalizing the reserves amount by the capitalization rate.

For example, if 20 cents per square foot is set aside as reserves, and the facility has 50,000 square feet, the subjects expenses would be overstated by $10,000. Using a 9 percent capitalization rate results in a value loss of more than $100,000 ($10,000 divided by .09 equals $111,111).

Conclusions

Its your property; its your money. It is critical that you, the owner, get involved in the appraisal process. Due to federal banking regulations, the owner pays for the appraisal, but the lender hires the appraiser. It behooves you to recommend to the lender a qualified appraiser with a lot of self-storage valuation experience. Self-storage is considered a niche market, and most lenders prefer using appraisal firms that have considerable experience in self-storage. One major reason is such an appraiser already has an existing database and access to other data, which will be required to support the valuation conclusions.

You can maximize the potential of receiving an appraisal that will be acceptable to the lender. Provide the appraiser with requested information in a timely manner, and offer your knowledge about the property and the surrounding market. Please note, however, that while the appraiser can discuss elements of the appraisal process, he is prohibited from revealing any conclusions without first obtaining the permission of the client, the lender.

When the appraisal has been delivered to the lender, ask for a copy of the report; it should be interesting to see how another set of eyes views your investment.

Ray Wilson is a valuation specialist and president of Pasadena, Calif.-based Charles R. Wilson & Associates Inc., which specializes in the appraisal of self-storage facilities nationwide. He has appraised more than $5 billion in appraisals in the past five years. For more information, e-mail [email protected]; visit www.crwilson.com.

The commercial records-management industry has been entrepreneurial from its very beginning. The trade association, PRISM International, has become the only independent unifying source for the industry at large. Vendors, software companies and consultants have done their part but, because of their nature, have their own slant on financial, operational or sales practices. The industry has few best practices, standards or benchmarks to guide new entrants to the industry. This article discusses what to do and how to find your way.

Anyone interested in a new business venture should always look for best practices, benchmarks and standards of performance to assist them. So, what are these things, and why are they important? Lets look briefly at each:

• Standards of performance are established by authority, custom or general consent as a model or example. They are written statements describing how well an activity should be performed. Performance standards are generally developed collaboratively within an industry.
• Benchmarks are points of reference from which measurements may be made, or customs by which others may be measured or judged.
• Best practices are the identification and validation of thoroughly tested methods that allow industries to learn from others attempts, avoiding costly and time-consuming mistakes and duplications of effort.

Most industries share information through networks, user groups and trade associations. Although the commercial records-management industry has often attempted, in several ways, to share practices, there has been reluctance. PRISM International has been successful with one major standard, and that is the industry contract, which is the de facto standard of the industry. It passes all of the appropriate tests and is in use by most of the industry. It is perhaps the lone standard.

Beware False Claims

If you see claims by a vendor that its product or service is an industry standard, you should always be cautious. Claims like this are generally marketing ploys, since they are very difficult to prove. I have seen more and more of this, and have yet to see one that actually meets the test of the definitions stated above. So where can I find these important ingredients in an industry generally devoid of them?

Standards are generally applicable, i.e., you can import them from one industry to another. A company can embrace principals that have been adapted from similar industries. For example, in records management, software vendors have used methods from comparable industries.

Finding the Right Way

Everybody wants to find the right wayit is human nature. We learn from each other. Knowledge and experience is cumulative and built on the shoulders of those who have gone before us. Finding your way in a sea of claims and half truths is difficult, so these are my recommendations:

• Always get second opinions. There is always someone else to ask who has a different perspective or point of view. If you can find more than two advisors, ask them to list for you the features, advantages and benefits of the practice, product or service you are attempting to learn about.
• Ask the trade associations for references. The professionals in any industry are well-educated in their craft, earn certifications, and belong to associations in which they participate. The ones most often consulted in the commercial records industry are PRISM (Professional Records & Information Services Management) International (www.prismintl.org), the Association for Information Management Professionals (ARMA International) (www.arma.org), the Institute of Certified Records Managers (www.icrm.org) and AIIM (Association for Information and Image Management) International (www.aiim.org).
• Hire a qualified consultant. Consultants are a dime a dozen. Finding one that brings you value is difficult. If a consultant implies his way is the right way, you probably have the wrong one. Consultants should always provide more than one option and the benefits of each.

Issues Regarding Standards

Lets look at some issues that do exist in commercial records management:

• The standard client contract promulgated by PRISM and available to membersThis contract includes appropriate wording for limitation of liability, evergreen terms, and service and price-list attachments.
• Business rulesSoftware and operating practices that follow rules that are common for control and integrity of the system. Exception reporting and clearing methods are important to alert operators to problems before they happen. Beware of software where flexibility is more important than business rules.
• PrinciplesThese comprise comprehensive and fundamental laws, doctrines or assumptions. There are several that can be applied to commercial records management, for example:

Effective use of technologyThis principle assumes you only apply technology where it is cost reductive to you and valuable to your client.

Strategic outsourcingOutsourcing is common in many industries. It works only when you outsource an activity that is best done by another. Outsourcing should include cost reduction and work process improvement.

Batch processingThis principle goes back to some of the original factories more than a hundred years ago. It assumes any work effort is reduced when volume is increased. It is always cheaper and better to do 10 activities one time than to do 10 activities 10 times. Understanding the business they are about to enter is paramount for new operators. Acquiring solid, trustworthy information is difficult. Discerning the difference is important. Look to the professionals and experts for advice. Consider everything before you act, and always ask more than one resource.

Regular columnist Cary McGovern, CRM, is the principal of FileMan Records Management, which offers full-service records-management assistance for commercial records storage startups, marketing assistance, and sales training in commercial records-management operations. For assistance in feasibility determination, operational implementation or marketing support, call 877.FILEMAN; e-mail [email protected]; www.fileman.com.

As we approach the end of another year, its important to look forward and prepare to make next year our best ever. Whether your goal is to buy your first storage facility, expand your business, sell your portfolio, or distribute a new product or service, this article will teach you how to create compelling goals and a plan to ensure you achieve them.

Maybe youre happy with your business, but it has taken a toll on your family or your health. Maybe you want to spend more time traveling, or go back to school. No matter what your goal, there are four steps to making 2004 your best year yet.

Step 1: Get Clear on What You Want

The greatest thing about setting goals is it brings the important things in life into focus. The process helps you identify what makes you tick, what gets you excited. It helps you discover what you want and rediscover what you love to do.

Research shows goal-setting is a fundamental part to achieving success. My favorite study was conducted at Yale University beginning in 1953. Each member of the graduating class was asked several questions. Surprisingly, less than 3 percent of the 1953 graduating class at Yale said they had a clear, specific set of goals with a plan. Twenty years later, in another interview, those 3 percent with goals reported being happier and better adjusted. Whats more, that group was worth more financially than the other 97 percent of the class combined.

Still, most people dont set goals. They do what someone else tells them to, or they just focus on getting through the day. How do we stick to our goals? Those of us who set goals but fail to achieve them usually dont have compelling reasons why we must succeed. We must carefully choose goals with compelling reasons that align to our lifes priorities. Here is a brief goalsetting workshop in which you can participate:

• Put yourself in a space where you will not be interrupted for one hour. Turn off the TV, unplug the phone. Relax.
• On a piece of paper, create five sections to write down goals in these areas: personal, health/wellness, spiritual, professional and financial.
• Ask, What would I do if I knew I could not fail? Go crazy. Think about change on every level. Dont think about the past. Dont ask how. Just come up with as many things as you can for each section.
• Divide your list into 10-year, five-year and one-year goals.
• Pick the top three in each area.
• Come up with five reasons you absolutely must achieve each goal.
• Visualize achieving these goals. Make them seem so real, it is as if you have already achieved them.

Step 2: Create Your Plan

Once you have established a clear set of goals with compelling reasons, it is time to create your plan. There are three integral parts to creating a great plan that works:

• Use role models. There are two ways to learn: trial and error, and modeling. Why reinvent the wheel? Find people who are getting the results you want. Find out their beliefs, strategies and patterns. Find out how they manage themselves and communicate with the people around them. Do the same things to produce the same results. It could take you days to learn what took them years. Where do you find great models? They can be found via industry leaders, books, tapes, coaches, trainers, friends and relatives.
• Create a short- and long-term plan. Imagine the end result and work backward. Write down every step you can think of and ask yourself, If I do this, will I achieve my goal? (Usually the list is a lot longer than you expected!) Put a timeline on each step (three, six, nine and 12 months). Chunking down your plan is very important to recognize progress and avoid feeling overwhelmed.
• Create a winning environment. You are the company you keep, and the results we get in our lives are directly related to the expectations of our peers. Take a good look at the people around you. Will they challenge you to grow and be your best?

Step 3: Check In Regularly

Its important to review your goals continually. I recommend once per day or, at a minimum, once per week. Ask yourself if the results you are getting are taking you closer to your goal, but remember that success doesnt happen overnight. Thats why you included stepping stones. People often fail to recognize when their approach is not working. Or worse, they recognize the results are not what they want, but continue on the same path. Thats why step number four is important.

Step 4: Be Flexible

If the results you are getting are not what you want, change your approach. If what you are doing is still not working, change your approach. How often do you change? Until you get the results you want.

Step 5: Celebrate

Lets not forget to celebrate. In our culture, we tend to move from one thing to the next without recognizing our achievements. Lets get ourselves in the habit of celebrating every win, big or small, along the way. This helps us to enjoy the process as well as the end product.

I wish you the best of luck in 2004. I hope it is your best year ever. Please let me know how you do along the way.

Scott Duffy is the founder and principal of Self Storage Capital Group Inc., an emerging owner and operator of public self-storage facilities based in Santa Monica, Calif. Mr. Duffy is an entrepreneur and investor whose background includes more than 15 years of management experience with media and technology firms, including FOX Sports, CBS Sportsline and NBC Internet. He has also worked with best-selling authors and speakers Anthony Robbins and Jim Rohn, conducting workshops throughout the United States and Canada in sales training, customer service and personal development. For more information, e-mail [email protected].