Incidents of credit-card fraud and identity theft have risen dramatically in recent years. With increased use of e-commerce and technology in business, it has become easy for thieves to steal and misuse credit-card numbers.

The dangers do not always come from outside a company. As a selfstorage operator, you should beware of employees who steal tenants credit-card numbers and use them fraudulently. The following are examples of the most common ways employees use credit cards to steal from a business and its customers:

• A facility manager documents credit-card numbers and expiration dates as tenants pay their monthly rents over the phone. He then uses them to make online purchases.
• An employee pockets cash payments from tenants and charges their rents to other tenants credit cards. By stealing cash instead of making fraudulent purchases, these thieves attempt to cover their tracks. If the credit-carrying tenant notices the double charge, it is easily explained as an error.
• Credit-card skimming is one of the newest types of theft. An employee swipes tenants credit cards through an unauthorized magnetic card reader, which records their data. The information is then copied onto counterfeit cards or sold to other parties.

Protect Yourself

Employee-dishonesty insurance protects you against losses from robbery, burglary, theft, embezzlement and other risks. This coverage can be tailored to fi t the size and scope of any operation. In most cases, business-property and liability package policies can be endorsed to provide coverage for employee dishonesty, the loss of money and securities from the premises, and the loss of other covered business property such as computers.

There is a popular misconception that employee-dishonesty insurance will cover injuries, property damage or litigation that arises from employee credit-card theft. However, insurance policies actually exclude coverage for injuries or property damage arising from an illegal act. The following are tips to deter credit-card theft in your operation:

• Hire the right employees. To determine if potential hires are trustworthy, always checks applicants references and previous work experience. Conduct background and criminal checks on prospective employees who will have access to tenants personal information.
• Create a caring culture. Research suggests one of the most effective theft deterrents is treating employees well. Companies that establish and communicate positive company values can experience a significant reduction in employee-related crime.
• Consistently balance all incoming funds and outgoing expenses. Most self-storage software programs create reports to simplify this task.
• If you suspect a problem, get to the root of it. If you notice a recurring issue when one particular employee works, try to confirm doubts by moving the employee to another shift with different co-workers.
• If you use temps, hire only those who have had thorough background checks and closely manage their activities.
• Restrict access to tenant information to those employees with a business-related need to use it. Train your staff in protocol for keeping that information secure.
• Provide paper shredders for employees to dispose of personal customer information.
• Use credit-card machines that print only the last five digits of credit-card numbers on receipts.
• If tenants call in to make monthly payments, consider using an automated telephone-payment service. This prevents tenants from giving their credit-card information to an employee.
• Use a third-party processor to handle credit-card payments. The setup for this kind of service is typically free or carries only a small, one-time fee.

This article is a guideline to aid in minimizing risk in self-storage facilities. The information it contains is intended to be of general interest and does not address the circumstances of any particular individual or entity. Nothing in this document constitutes legal advice, nor does any information constitute a comprehensive or complete statement of the issues discussed or the laws relating thereto.

Amy Brown is part of Universal Insurance Facilities Ltd., which 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, call 800.844.2101; e-mail [email protected]; visit www.vpico.com/universal.

I recently visited  two self-storage businesses that were similar yet very different. The owners were smart, hard-working and ambitious. The facilities were well-located, and their sizes and pricing equal. And theyd been in business the same length of time. But at one store, most of the units were rented and the owner spoke of opening another facility. The other said business was just OK. He was wondering whether going into self-storage had been a mistake.

There was another fundamental difference: The more successful facility had great retail sales. I mentioned to the struggling owner how nice the office looked at the competing site. He said, Yeah, when Im doing better, I may spruce up my place, too. I suggested that making a good first impression was something that shouldnt be left for later (and assured him I wasnt just trying to sell him merchandise!).

I reminded him that lot of his customers are probably using self-storage for the first time. People feel most comfortable at chain stores, restaurants and gas stations, even if theyre visiting a place thats new to them. Why? Because of the way the place looks. Im no expert on interior design, but I have learned that a neat, bright, store-like setting not only conveys a professional image, it puts customers at ease because it seems familiar.

Show me a Sign

Professional signage also plays an important role. Major retailers use exterior signage to trigger an immediate response in customers. Popular choices are enticements like Back to School Sale and Two-for-One Sale. While many self-storage facilities advertise with signs that read, We Sell Boxes, how many use ones that say, Moving, Shipping and Storage Supplies or Garage Organizer Sale? Signs should promote your products and services in terms of how they relate to consumer use.

Interior signage, on the other hand, is meant to steer sales. Take, for example, signs that persuade you to do something: Super Size It! or Try Our New Desserts. Studies have shown that featured products sell even without sale pricing. Want to sell more than locks? Feature kits with boxes, tape, packing materials and labels for one package price. And the price, mind you, doesnt have to be discounted. It must, however, be well-displayed and properly promoted with signs.

Sign me up

What types of signs look best to you? If youre like most people, hand-written signs (and the products they feature) come across as low-quality. A store dotted with handmade signs looks like a rummage sale; and a self-service business with shabby signage looks unprofessional. To inspire confidence in your customers, follow these simple rules:

1. Convert your office into a store. People are more comfortable in a retail environment than an office, so use your products to create a more familiar atmosphere.
2. Consider your retail products, displays and signage as decor. In the interest of consistency, buy these items from no more than one or two sources.
3. Get free merchandising ideas from your products supplier. The best vendors provide plan-o-grams that identify what to stock and how to arrange it on displays. Do not leave this task to your employees.
4. Use displays and signs that look good together. When in doubt, ask your merchandise supplier.
5. Get the opinion of friends. Ask people who are not in the business to critique your store. It might give you a fresh perspective.

Finally, its hard to convince customers you run a tight ship if your premises are not shipshape. Its just smart business to look every bit as good as you really are. Remember, you only have one chance to make a good first impression.

Roy Katz is president of Supply Side, which distributes packaging as well as moving and storage supplies. The company has developed merchandising programs for many leading companies including Storage USA, the U.S. Postal Service, Kinkos and The UPS Store/Mail Boxes Etc. For more information, call 800.284.7357 or 216.738.1200.

Judging from the following data, whats selling is just about every type of self-storage facility, from those with less than 5,000 square feet to others with 350,000 square feet. They range in age from new to more than 30 years old. Some sales involve converted industrial buildings of more than 50 years old. As to who is buying, the answer is anyone who can find a facility to acquire. Investment demand has never been greater.

This article looks at data from 195 self-storage facilities that transferred ownership between January 2003 and April 2004. For the most part, they were single-property acquisitions by individuals and some major players, including institutional investors and REITs. I selected facility data randomly from publicly available sources. I have not personally verified the numbers, but the publishing source has reportedly confirmed the facts with the buyers, sellers or brokers involved. As the map shows, the sales occurred in major markets across the country. As the data demonstrates, you cannot listen to or rely on a single source for answers to questions like What is the current cap rate?, How much are people paying? and What markets are hot and which are not?

Capitalization Rates

One of the more interesting bits of information to be found in any sale is the capitalization rate, or cap rate. Unfortunately, due to the difficulty in obtaining the data to calculate cap rates, they are seldom reported. In my sample, only 38 of the 195 transfers (19 percent) reported a cap rate. Those rates ranged from 5.26 percent to 12.70 percent, and the average was 9.14 percent (the median was 9.00 percent). This range represented cap rates based on the trailing net income as well as the buyers pro forma income. Therefore, the average or median disclosed from the data is misleading and of little help in determining the cap rate for any particular facility.

You can follow the trends and talk to the experts, but the truth is, selecting the proper cap rate to reflect the risk of a property is difficult. The reason is simple: There are numerous variables; reporting is inconsistent; and methodology for calculating the rate is different and usually does not disclose the investors motivation.

Most major investors require brokers to sign confidentiality statements, which prohibit them from disclosing the purchase price or net operating income, so calculating the cap rate is not possible. Therefore, unless you have access to the actual data, what is available from the marketplace usually involves someones opinion, which is not very solid ground on which to determine value. Investors should always check the price they agreed to pay (based on a cap rate) to see how it compares to the facilitys replacement cost.

Sale Price per Square Foot

While everyone is quick to agree the cost approach is not an appropriate method to value existing self-storage facilities, check out the premium some investors are paying over replacement costs. Twenty-two percent of the investors paid more than $75 per square foot. In most instances, they will tell you there are barriers to entry, meaning it is very difficult to find land to develop, the entitlement process is expensive, or no existing buildings are suitable for conversion. The following chart illustrates the prices paid per square foot of net rentable area of my sample.

Assessed Value per Square Foot

Another interesting facet of this analysis was the range of assessed value per square foot of facilities at the time they transferred. Keep in mind many taxing jurisdictions trigger a reassessment upon transfer. Therefore, the risk of real estate taxes going up should be reflected in the cap rate.

For instance, if two identical facilities were offered for sale but one was subject to a tax reassessment upon transfer, would you be willing to pay the same price for both? Of course not. With all else being equal, you would pay less for the one subject to the possible tax increase. Therefore, the cap rate on the one facility would be much higher to reflect the risk of increased expense. There are operators who purchase facilities not knowing taxes will increase and, as a result, their returns are marginal.

Facility Age

Ever wonder how much the age of a facility impacts its selling price? In our sample, age had very little effect (see the following scatter diagram). When comparing the age of the facility to the price paid per square foot, there was no statistical correlation, meaning age alone did not impact how much someone was willing to pay. That makes sense, given that tenants in older buildings typically paid the same rent as tenants in newer buildings.

In the diagram, each dot represents an actual sale. Thus, a facility that was only 1 year old (red dot) sold for slightly less than $20 per square foot. Another facility that was 50 years old sold for more than $120 per square foot (yellow dot). All else being equal, age does not have an impact on price.

Market Summary

Some interesting statistics emerge when studying individual markets, particularly when paying attention to the cap rates in a given area relative to the purchase price per square foot. As noted earlier, very few sales report the cap rate. In the markets represented on the following chart, only 27 of the 116 sales (23 percent) included cap-rate information. Other sales in these same markets demonstrate a wider range of cap rates, so unless you have access to a larger sample of sales, you could be misled. The sampling shown is too small to draw any meaningful conclusions, but is intended to demonstrate the wide range in various markets. (See the table below.)

An investor buying a portfolio of facilities in each of these markets would probably base the purchase price on a cap rate below the lowest of the rates demonstrated here. This just points out the importance of knowing not only your local market conditions and whether your facility is investment-grade, but also who the buyer would be before you can determine the proper cap rate.

click here to view table

Conclusions

It is not easy to determine the proper cap rate for a specific facility. Cap rates on individual properties vary by market, given local conditions. Rates on portfolios, however, are generally the same, given geographic diversity. Investors, who buy portfolios of several facilities at a time, take the strong performing facilities along with weaker ones at the same cap rate.

With the intensity of self-storage development, the determination of future risk is made even more difficult by unknowns in future tenant demand. Investors should put less weight on cap rates, given the variables involved in their calculation and the inconsistency in how rates are reported, and give more consideration to the price paid per square foot.

There are two cap rates for each transaction. One is based on a facilitys trailing 12 months of net operating income. The other is based on the buyers pro forma net operating income. For investment-grade facilities, there are two distinct buyers, individuals and major players, both having different motivations.

Charles Ray Wilson is President of Charles R. Wilson & Associates Inc., which specializes in the valuation of self-storage nationwide. Mr. Wilson also owns Self Storage Data Services Inc., a research firm. Both companies are based in Pasadena, Calif. For more information, call 626.792.2107; e-mail [email protected].

As I write my last column for 2004, I cannot believe another year is almost over. Our industry confronted some major issues in the past 12 months. For one, FBI agents visited facilities and talked with owners and managers about the need for extra diligence in the operation of their businesses. A year-old law, the Service-members Civil Relief Act, continued to trip up owners who are uneducated about the need to protect active-duty military and National Guard customers from unjust auctions of their belongings. Fortunately, illegal lien auctions performed on some delinquent units have gotten only local media attention. But this is a poignant reminder of the world in which we live.

Next, the national Self Storage Association (SSA) acquired a new executive director, Michael T. Scanlon. He is already making his presence felt at the SSA. There are only a few states without organized associations to carry our flag in front of state legislatures and executive department agencies. In the years ahead, well see state associations play a more important role, sharing ideas and strategies for dealing with the many issues we will continue to face.

One of the biggest accomplishments of 2004 will be the SSAs National Consumer Demand study being conducted by Dr. George Leon of National Analysts. Results are expected early next year. While we can speak from our personal experience with customers about why they chose to store with us, there has never been an accurate predictive model the entire industry could use. Are you targeting all the market segments that might use storage? Are your marketing dollars aimed at the right audiences? Is there really demand for another store in the market area? Is there an end in sight for storage demand? These are just a few of the questions I hope the research will answer.

Finally, I have witnessed a change in how we conduct business across the country. Customer-service-oriented companies continue to grow with strong occupancies and rental-rate increases. At the same time, old line operators let deferred-maintenance issues mount at their stores, and the What do you want? attitude of underpaid, unmotivated employees results in declining business. Competition persists for all of us. The answer is not to cut prices. Self-storage is still one of the best entrepreneurial business opportunities when taken with the right approach.

Where to Look for Workers

I am constantly asked by owners about the best way to find new employees. In many markets, traditional classified newspaper ads are not generating quality prospective candidates, and online searches can draw wannabes looking for unrealistic income.

During a recent visit to an Albany, N.Y., convenience store, I was reminded that many of us have great employee prospects and dont even realize it. A large sign on the Stewarts Shop front door read, Our best employees come from our loyal customers. Interested? Call or go to our website, www.stewardshops.com. This company has more than 300 locations across New York and Vermont. It has made the conversion of customers to employees part of its human-resource operations.

If you are seeking full- or part-time staff, are you talking to your customers? Do you have a sign posted in your office to let them know you are looking for employees? I urge you to give it a try. You may be surprised by the results.

Even the Big Guys Use Business Cards

I recently purchased my second set of Bose Acoustic Noise Cancelling headphones, which I use faithfully as I fly around the country. I had a bit of a surprise when I opened the package. Amazingly, even a company the size of Bose, with its multimillion-dollar marketing budget, still understands the power of a business card.

Inside the travel case was a stack of courtesy cards, which read, Our customers tell us they are often asked about their Bose Quiet-Comfort 2 headphones. For your convenience, we are providing this handy courtesy card for you to pass along. The card did not say the company would do anything special for me for being a spokesperson for the product. In fact, it implied it was doing me a favor. While I am sure many customers simply throw the cards away, a few like me dutifully pass them out whenever somebody asks about the headset.

Bose understands people will recommend its products simply if it asks them to. So why do self-storage operators seem to have such a problem promoting their referral programs, especially when they actually provide cash or discount incentives for customers help? If you are not using a referral program, start one. The best source of marketing you can ever hope for is the recommendation of a satisfied customer.

Lianne Marshall, president of the Storage Center in Rhode Island, sent me an excellent book that describes how to create customer evangelists. Authors Ben McConnell and Jackie Huba make a compelling case when they state, Customer evangelism cuts through the muck of advertising clutter. Friends, family and colleagues influence our behavior more than any repetitive ad or aggressive salesperson can. If you want to stay competitive, pick up a copy of Creating Customer Evangelists and learn some strategies for turning customers into part of your sales force.

Finally, dont forget to print business cards for all of the members of your team, regardless of their position on your staff. It must be difficult for employees to take pride in their job or work for a company that wont even spend $50 or $60 to provide them with business cards. Even still, I encounter cardless managers in offices across the country as I travel.

Holiday Decorations

In less than a month, the winter holidays will be upon us. For some, that means rent-collection problems, but for others, its an opportunity to say to their local communities, Hey, look at us! If you have been involved in the construction of a self-storage store, you know that getting a facilitys sign approved by the zoning committee can be a huge problem. I am always amazed that communities that are more than willing to take our tax payments dont want us to advertise our businesses.

The holidays are one time a year when you can add lights and other attention-getters to the outside of your store without a whimper from municipal officials. Adding decorations is an annual opportunity to change the appearance of your buildings and office. Many managers take a great deal of pride in their holiday decor. The environment it creates can be infectious. It reminds people who drive by your store daily that you are there and an active part of the community. This season, dump the Bah! Humbug! routine and lighten up your storage world. And dont forget that candy canes arent just for kids!

Giving Thanks

I want to thank Inside Self-Storage Publisher Troy Bix and Editorial Director Teri Lanza for allowing me the opportunity to write this column and share my thoughts on the industry with others. Thanks also to you readersI hope you have benefited from my ramblings. May the blessings of the holiday season enrich your life and that of your family and co-workers, as well as this planet we call home. See you at the ISS Las Vegas Expo in February.

Jim Chiswell is the owner of Chiswell & Associates LLC. Since 1990, his firm has provided feasibility studies, acquisition due diligence and customized manager training for the selfstorage industry. In addition to being a member of the

Inside Self-Storage Editorial Advisory Board, he contributes regularly to the magazine and is a frequent speaker at ISS Expos and various national and state association meetings. He introduced LockCheck, an inventory data-collection system, to the self-storage industry. He can be reached at 434.589.4446; visit www.selfstorageconsulting.com or www.lockcheck.com

In todays self-storage market, with spiking steel prices and an upward trend in interest rates, facility owners need to consider every money-saving technique available. Of course, the best method is the one that does not require you to spend money to save money.

Over the past few years, cost segregation of depreciable assets has been a hot button in the self-storage industry. We have done a good job of breaking out expenses, such as fencing, pavement, software, soft costs, signage, etc., to maximize our write-offs according to IRS depreciation codes. The major component that has been neglected, however, is the actual building.

With a true-tax lease, you can accelerate the write-off of your storage buildings from 39 years down to the actual term of the lease. Most leases are structured between six and 15 years, essentially doubling or even tripling your write-off for the same dollars invested, which is your building cost.

What Is a True-Tax Lease?

A true-tax, or operating, lease under IRS regulations is a contract entered by the lender (lessor) and the customer (lessee), who has the right to possess and use the leased asset (the building) in exchange for periodic payments over a specific time table. A true-tax lease is separate from capital (dollar-buyout) leases because the lessor is treated by the IRS as the owner of the asset for federal tax purposes and permitted to claim depreciation on it.

With the above criteria met, the lessee is able to deduct 100 percent of all rental payments as an operating expense for federal tax purposes. This is the basis behind giving the lessee the opportunity to expense, in most cases, the largest cost of a new facility over a much shorter time frame than the 39-year depreciation method.

Key Guidelines

To qualify as true-tax, a lease must comply with the IRS guidelines. If the criteria are not met, the lease must revert back to more traditional financing and write-offs. Below are some general conditions. A lease will not qualify as true-tax if any of the following are true:

• The lessee has any equity in the leased asset.
• The lessee overloads payments in a specific time period during the lease term.
• The lessee receives ownership upon completion of all payments.
• The lessee has an option to buy the asset at an agreed price in the beginning of the lease period.
• The lease states interest and principal or any payment that could look like interest and principal.
• The lessee pays much more than current fair rental value for the leased asset.

Income-Tax Considerations

Tax deductions are easy to figure with a true-tax lease because the lessee writes off the full lease payment. The tax savings of a lease are calculated by multiplying the payment by the effective income-tax rate. The effective rate should also include any state and local income taxes. For example, if your federal income-tax rate is 28 percent and your state tax rate is 8 percent, your effective tax rate is 36 percent. Also, if you are self-employed, you need to figure in FICA. This could have a net result of more than 50 percent tax savings on net income. As always, it is important to check with a CPA or tax planner about the effects of tax leasing in your business.

The key to maximizing your tax savings for your investment is being able to use the true-tax lease in combination with more traditional depreciation. To make this unique combination work, it is critical to find a lender that specializes in leases and loans.

Ronald J. Pope is district manager for Wells Fargo Financial Leasing Inc., which offers traditional loan packages as well as commercial leasing for a variety of industries, including self-storage, car washes, apartments, retail, light manufacturing, strip malls and others. For more information, call 518.359.7920; e-mail [email protected].

There is a direct correlation between the reliability of the loan quote from your lender and the quality of the information you provided in your loan package. If you want a quote you can take to the bank, take the time and effort to give your source sufficient, accurate and timely information to make an informed judgment.

A well-constructed loan package contains information that falls into five categories:

1. Summation and request
2. Propertys physical aspects
3. Propertys economic aspects
4. Market analysis
5. Borrower/manager

Summation and Request

This section is your lenders first exposure to the transaction. Everyone wants to make a good first impression, so along with the salient facts about your property, make it clear what you are looking for in terms of your financing request. This can save a lot of time, especially if the loan structure you desire does not fit the lending programs your source offers.

In your request, let the lender know whether you desire a fixed or floating interest rate, the length of the loan term, your desired prepayment scenario, and any other special needs or requirements. If you are not sure what you want and would like the lender to provide options, say so. And dont be afraid to be aggressive. Keep in mind, however, that if your lender perceives you to be unrealistic, your deal may not get the level of attention you want.

In terms of factual information, this section should include:

• Property name and address
• Year constructed, year expanded, year renovated (whichever applies)
• Size of property (gross and net rentable square feet)
• Size of site
• Current occupancy of property
• Name of owner
• Name of key individuals
• Name of management company
• Current property debt (how much? with whom? maturity?)
• Reason financing is needed
• Development cost for property (if newly constructed or proposed)

Propertys Physical Aspects

This is the section in which you tell your lender everything he needs to know about the asset that will secure the loan. If your request is for a refinance and you have a copy of a previous appraisal, the Property Description section might be the best source for this information. In this section, you want to include a brief description of the site, addressing size, shape, topography, frontage and ingress/egress. specifically, the description should include:

• Gross size
• Net rentable size
• Number of buildings
• Number of stories
• Unit mix
• Climate-control area size
• Construction attributes (metal? masonry? asphalt? concrete?)
• Yard storage (boats, RVs, etc.)
• Any unique aspects about the property
• Pictures

A simple way to be sure you have provided enough information is to ask yourself whether you would feel comfortable deciding to buy the property if you were given the same details. Pictures are an extremely potent way to get your lenders attention and put your loan package in play quickly. Take several photos of the property as well as the surrounding area. An aerial photograph is an added bonus if available.

Propertys Economic Aspects

While the other sections of the loan package help your lender determine whether to offer you a loan, this section determines the size of the loan he is willing to make and under what terms. There are not a lot of items in this section, but they are extremely important.

They include:

1. Current rent roll
2. Current operating or income statement
3. Historical operating statements
4. Budget
5. Tax and insurance records

The rent roll should show every unit in the property, including unit number and type (for example, 5-by-10 or 12-by-20 CC, with CC meaning climate-controlled). It should also indicate whether each unit is leased or vacant, the current applicable rental rate, the actual rent you are receiving, and how long the current tenant has leased the space. Include rented and vacant units so your lender can use the rent roll as a tool to determine gross potential income.

The operating statement should include the longest possible portion of the current year. For example, if you are compiling your package in August, include at least a June 30th year-to-date statement and maybe even a July 31st version if available. Historical statements should include the two full years prior to the current. In the self-storage industry, it is beneficial if the statements can be shown on a monthly basis. This allows your lender to accumulate his own operating statement for any period of time he wants, which will lead to a more accurate loan quote.

Your operating statements should segregate the rent income generated from renting units from the other possible sources, such as sales of packing materials and boxes, truck rental, late-payment fees, etc. In the expense section, use summary line items to keep the operating statement more manageable. A good operating statement can have as few as 10 to 12 expense line items vs. the hundreds found in many accounting systems. In preparing the statement, eliminate noncash expenses such as depreciation and amortization. You may also eliminate the interest you pay on current debt. If your statement includes these items, dont worry, your lender can eliminate them manually.

Before you submit your loan package, go through the operating statements and look for unusual fluctuations or items that appear out of sync with the rest of the statement. If you find any, add a footnote explaining the issue. This will help the lender understand the operating statement and avoid unnecessary questions and answers.

If you prepare a budget for your property, include it in the loan package as your estimate of the propertys operations for the foreseeable future. One caution: If the budget was prepared more than six months ago, review it carefully to be sure the estimates are in-keeping with current market conditions. Whether it has improved or declined, an accurate budget is more valuable to you and your loan source.

Finally, include a copy of your latest actual property-tax and insurance-premium bills. Because these are material and sometimes volatile expenses, your lender will inevitably ask for these items as part of their underwriting process. Save yourself some time and include them in the package.

Market Analysis

Your lender will want the same type of market information you would if you were considering buying the property. This datawill take two forms: macro-market information and comparable-property information.

Macro-market information deals with the entire market in which your property is located, such as the San Diego Metropolitan Statistical Area. It will include how broad the total market is in terms of numbers of properties and rental units, average rental rates across the market for different unit types, and average occupancy rates in the market. Access to this information is not always easy and varies greatly from city to city. One of the best sources is your local self-storage association. You may also call a local appraiser familiar with the industry.

Comparable-property information deals with the properties that compete directly with your own for tenants. Your lender will want to compare the unit types offered as well as their rental rates, and the occupancy rates of the applicable facilities. If you do not do so on a regular basis, you will have to shop the competition to accumulate this data. Market information is not only important for the purpose of estimating future rental and occupancy rates, but also for anticipating how an appraiser will view the market and make his assumptions.

Borrower/Manager

Whether you are looking for a recourse loan from a local bank or a nonrecourse loan from a national CMBS lender, the borrowerand those individuals who make up the borrowerwill be an important underwriting factor. Assume any person who has decision-making authority or a 20 percent or larger ownership interest in your property will be important to your lender. Include a resume and recent financial statement for each individual.

The resumes should include as much information as is practical but should be specific about self-storage experience. This includes how many years in the industry and how many properties owned or managed. If you have owners with a wealth of industry experience, dont be shy about making your lender know about it.

If you dont have personal financial statements on hand, they can be easily obtained from your accountant or you can pick up a form at a local bank branch and prepare it yourself. Provide an accurate account of your current liquid and real estate assets as well as the offsetting debt for those assets. Financial statements require you to estimate the value of your real estate. Be as realistic as possible in this exercise without being overly conservative.

In some cases, the owners of a facility do not have a wealth of experience in the industry. In other cases, they may have none at all. This does not make financing impossible, but it makes the role of the property manager much more important to your lender. Include a full resume for your manager or management company, highlighting self-storage experience along with experience in your specific market. Include the number of years in the industry, the total number of properties owned or managed, and the number of properties currently managed. Include it alldont leave anything out.

What you want from your lender is a timely response to your loan package and a reliable quote that will stand the test of detailed underwriting. To achieve this, take the time and effort to make your package as complete and accurate as possible. Doing so will make it the best on the desk; and the best package on the desk ends up at the top of the pile every time.

Tom Walsh is a director for Collateral Mortgage Capital LLC and office manager of the companys Atlanta commercial loan-origination office. He has worked in commercial real estate finance for 20 years. Collateral is a national mortgage-banking firm founded in 1933. It represents several national and local institutional loan sources that serve the self-storage industry. For more information, call 770.817.1600; visit www.collateral.com.

Unbelievable is the only word to describe continued financing opportunities for self-storage and most other commercial-property types. To illustrate, the following chart shows a sample of long- and short-term index rates over the last 10 years.

Todays rates are still near the historical lows of 2002-2003, but they are creeping up. Even so, overall rates for adjustable loans are still generally in the 4 percent to 6 percent range, with five-year fixed rates in the 5 percent to 6.25 percent range and 10-year fixed rates in the 5.5 percent to 7 percent range. The lowest rates are still being offered by the conduit and insurance-company lending market, with banks, savings and loans (S&Ls) and credit unions (CUs) trailing by at least .5 percent, although offering more flexibility and lower costs.

This year continues to be an incredible time to buy or refinance properties. The Fed has raised rates twice in the last few months, and the short-term money indexes have increased as a result. But rates are not expected to increase significantly (more than 1 percent) in the next six to 12 months as we approach the election, and continue to reflect slow but steady improvement in the economy and job market. Those not looking to procure permanent financing for two to three years will likely see rates better than those from five to 10 years ago but higher than todays.

Banks

The majority of self-storage financing continues to come from the traditional institutional lenders such as banks, with S&Ls and even CUs continuing to make inroads into the financing arena. The reason most borrowers choose their local bank is due to relationships, flexibility and lower costs. Many banks offer up to 80 percent loan-to-value (LTV), but may shorten the amortization to compensate. Additionally, they will often require only an appraisal and possibly an environmental report, but will have few if any other miscellaneous and legal fees, which are prevalent in the conduit- and insurance-lending market.

Banks are generally more accommodating with respect to prepayment-penalty language, acceptance of secondary financing, additional advances for expansion and quick closings. The main drawback to bank financing is the lack of available long-term fixed rates, especially with longer amortization periods. Most banks will only fix terms for up to five years but may offer a 10-year total term. Those that do offer longer fixed rates generally prefer a shorter amortization and are not as aggressive as their conduit competitors.

Credit Unions

The newest players on the block are CUs, which continue to expand their commercial programs on a local, regional and national basis. These lenders not only offer up to 20-year fixed rates, some with no prepay penalty, but are also aggressive with LTVs (75 percent) and amortizations (up to 30 years).

Another unique factor involved with CUs is the availability of national funds for borrowers in areas where local CUs may not be lending. CUs without commercial-lending programs often buy participation in loans made by others that have the expertise. While the local CU does not directly originate the loan, it is still involved as the entity that qualifies the borrower for financing.

Charters usually require CUs to only lend funds to members who live, work or worship in the local area, or employees and alumni of various organizations, educational institutions or governmental agencies. Since a borrower may not qualify for membership in the CU actually funding the loan, especially if it is out of state, the local CU satisfies the relationship requirement and may buy a small or large piece of the loan being funded.

Savings and Loans

S&Ls can combine the best of banks and credit unions, in many cases by offering very competitive short- and long-term fixed rates with easier prepayment language than conduits and longer amortizations than banks. Many also offer nationwide lending programs and even nonrecourse loans for those concerned about personal liability. One of the national S&Ls offers up to 15-year fixed rates, upfront rate locksand adjustable rates below 5 percent. It even has programs that allow you to convert from an adjustable to a fixed rate during the loan term at no extra cost.

Conduit Lending

In todays self-storage financing market, most of the long-term (10 years or longer), fixed-rate financing is provided by the Wall Street conduit market. These loans are pooled together, packaged and sold by Wall Street firms as commercial mortgage backed securities to investors. While they offer attractive rates (5.5 percent to 6.25 percent, depending on loan size, LTV and debt coverage), qualifying for these loans is often more difficult, especially for properties with less-than-stabilized occupancy and those coming out of construction.

As a general rule, the conduit market underwrites loans to a maximum 75 percent LTV, using the last trailing six to 12 months of cash flowless late fees, interest income and RV income, in some cases. A property in lease-up may have stabilized occupancy (85 percent to 95 percent) but not enough cash flow over the last 12 months to qualify for higher LTV requests.

In addition to offering the lowest long-term, fixed rates around, the attraction of conduit loans is the nonrecourse nature of most programs. Nonrecourse means the lender can only go after a property in the event of default and foreclosure, protecting the borrowers personal assets. These loans typically have stiff prepayment penalties tied to yield maintenance or defeasance, which can easily run six figures in the wrong interest-rate environment. They also impound for taxes, insurance and future-replacement reserves ($.15 per square foot per year) and require higher insurance coverage.

The costs to obtain conduit loans runs between $10,000 to $30,000, depending on the lender and whether you choose the large ($3 million-plus) or small ($500,000 to $3 million) loan program. These costs do not include the usual 1 percent loan-origination fee at closing.

Most conduit lenders charge a $2,500 to $5,000, upfront, nonrefundable application fee in addition to the third-party report deposit (for the appraisal, phase-I environmental site assessment, property-condition report, etc.), usually around $15,000. Lenders require an ALTA survey as well, which can run between $5,000 and $7,000. Under the large-loan program, you also incur lenders legal fees between $7,000 and $10,000. The fees tend to be less under the small-loan program, typically capped at around $10,000 to $12,000, not including the survey but including legal.

All this being said, a 10-, 15- or 20-year term at fixed rates lower than 6 percent can be worth the upfront costs for long-term property holders. Ten-year loans carry up to a 25- to 30-year amortization, while periods exceeding 10 years are generally self-amortizing (e.g., 15-year fixed rate with 15-year amortization). Many lenders limit the amortization on metal buildings to 20 years vs. 25, but not in all cases.

Most conduit lenders prefer stabilized, well-located properties in metropolitan or high-traffic areas and construction of concrete block, brick or wood frame. Two-story facilities are generally not preferred unless drive-up access is provided. It takes about 60 days to close a conduit loan. Understand the loan terms, closing requirements (insurance, title endorsements, etc.) and informationchecklists, and try to get a sample copy of the conduit lenders loan documents prior to laying out any upfront cash.

There are probably a dozen or more active conduit lenders, all with their own requirements. One may not have any legal fees and, in some cases, no need for a survey, but may be more conservative in loan dollars. Another may be more expensive but stretch the loan dollars. The key is to find the lender that most closely matches your investment strategy. Your mortgage banker/broker can be helpful in this area.

While borrowers can go directly to many of the conduit lenders to originate a loan without the use of a banker or broker, the process can be a difficult one, with lots of paperwork and red tape. An experienced professional can guide you through the process and let you know what to expect before you get started and along the way. His services will not necessarily cost additional funds, as most lenders will offer PAR or wholesale pricing to its broker/mortgage banker network.

Insurance Companies

Insurance-company lending is similar to conduit lending and rates but with easier underwriting criteria and paperwork requirements. However, it is much more conservative in loan dollars, preferring to be around 65 percent to 70 percent maximum LTV. Properties must usually be well-occupied, newer, well-located and of nonmetal construction. In effect, these lenders will cherry-pick and prefer shorter self-amortizing loans. Insurance companies also typically offer upfront rate-lock features.

Be proactive in your financing search by starting early. Lenders are very busy in the current interest-rate environment and closing times are lengthening. Dont wait until 60 days prior to current loan maturity. Give yourself at least 90 days to search for and fund the loan program best suited to your needs. Lenders are flush with money to lend so get it while its hot.

David Smyle, president of La Mesa, Calif.-based Benchmark Financial, is a mortgage banker and 20-year veteran of the commercial-banking industry. His company offers financing solutions for self-storage, apartment and commercial properties nationwide through its direct-lending relationship with bond street capital as well as other institutional financing sources. For more information, call 877.862.7916, ext. 201;
e-mail [email protected]; visit www.benchmarkfin.com.

It seems everyone I know is refinancing their home these days. They want to get in on the goods before interest ratesas rumoredhead north again. In self-storage, too, owners are being encouraged to take advantage of low rates before the train leaves the station.

Now Watch the pretty pendulum Thats it Back and forth You are getting very sleepy

In September, researchers at the U.S. central bank concluded that the unusual strategy used last year by the Federal Reserve to strengthen the economy was a huge success. Led by Fed Governor Ben Bernanke, the study claims the bank controlled interest rates, not by cutting them, but by simply promising to keep the short-term federal funds rate low for a considerable period. The influence, it is said, was five times stronger than actual interest-rate changes have proved to be.

By July 2003, the Fed had dropped the federal funds rate to a 45-year low of 1 percent, but that failed to produce what could be considered a sustainable economic recovery. So policymakers decided to stop lowering interest rates and instead make public statements about how it might change interest rates in the future.

They call it policymaking by thesaurus. But in essence, they played a game of mind management. The Feds Open Market Committee made a promise of maintaining a certain policy, then finessed its language over time to change the pledges meaning. In their study, Bernanke and his co-authors, Vincent Reinhart and Brian Sack, assert that the Feds ability to guide the economy depends more on what it says than what it actually does where interest rates are concerned. Moreover, the effects seem to be farther-reaching. Says Reinhart: Shaping investor expectations through communication does appear to be a viable strategy.

How does the Fed justify its tactics? According to the study, its approach reduced the volatility of the publics expectations in regard to Fed policy, which allowed investors to make more accurate speculations about interest-rate changes. In short, it let them test the water.

This issue is about finance: types of money, where to find it, how to get it, the best way to ask for it, etc. Several articles make statements about the condition of the economy and status of interest rates. Some make assertions or offer advice pertaining to action. Im not suggesting you disregard their counselnow may well be the time to seek out that construction, bridge or permanent loan. My caution is to do so because youve done the proper research and determined the best strategy for your particular business, and not because of urging in the industry, the media or public opinion. You dont want to be a money zombie, do you?

Now, when I snap my fingers, you will awake, turn the page and read this issue voraciously. (Hey, if the Fed can use the power of suggestion to control the economy, surely I can create enraptured readers!)

Happy money-making,

Teri L. Lanza
Editorial Director
[email protected]

Self-storage operators arent the only ones searching for an untapped market in todays competitive environment. Companies like Ford, Wells Fargo, IBM and Hewlett-Packard have begun wooing the countrys exploding Hispanic population. Could the Latino market be a potential bonanza for self-storage?

Its a great opportunity for those in the industry who are savvy enough to see the writing on the wall, says Shelly Little, consultant with Michaels/Wilder Group, a marketing and advertising agency based in Peoria, Ariz. All the data points to a trend that says this market isnt going away and is growing exponentially. Yet Hispanics are historically under-advertised to. If companies move forward and reach out to them, their efforts will be rewarded in the long run.

The number of Hispanics living in the United States is growing fantastically. From 1990 to 2000 alone, it increased 35 percent. The U.S. Census Bureau estimates about 14 percent of U.S. residents are Hispanic.

Self-storage should court Latino customers while they are getting established in the United States, advises Little. To overlook this market while it is in its infancy is not playing smart. Down the line, Hispanics will remember those businesses that were there for them when they needed a place to store their important personal and business goods, she says. Theoretically, the move will be repaid with long-term loyalty and numerous referrals.

Just as important to the self-storage equation is the market segments corresponding growth in wealth and homeownership. More than half of Latinos in the United States will own their own homes by 2007, according to a recent estimate by Hispanic Market Weekly. The populace also is gaining in disposable income. The fact that Hispanic families are typically larger than in non-Hispanic households is another telling factor.

While renting or transitioning to homeownership, they will need somewhere to store the valuables they accumulate, Little says. The changes in lifestyle that result from the increased disposable income and growth in families translates into many opportunities for the self-storage industry.

Cultural Concerns

Little counsels owners to evaluate the demographics in their current markets. Is the Latino population substantial? What is the competition doing? Investors may want to investigate the feasibility of a new facility catering to densely Hispanic areas. Also look at the type of Spanish being usedis it Cuban, Mexican, Caribbean or Puerto Rican? Before proceeding, its wise to hire a consultant or agency with expertise in working with the Latino market.

In reaching out to Hispanics, language is a major consideration. Most Latinos are understandably more comfortable conducting business in their native tongue. Although many are bilingual, they prefer to read material and converse in Spanish unless they were born and bred in the USA, Little says. Having a manager who is bilingual is really helpful. You are breaking down the barriers that make it more challenging for them to do business with you.

Because self-storage isnt widely available outside the United States, the concept will be new to some Hispanics. A bilingual manager can go a long way in enhancing their comfort level during inquiries. I think there are also issues regarding self-storage organizations not having the infrastructure in place to support the Spanish-speaking customer, Little says. All their collateral, invoices, bills, everything should be set up in Spanish.

Culture may impact the business transaction as well. A prepared operator/manager will be flexible enough to adapt. There are several segments within the U.S. Hispanic market that are used to dealing primarily in cash, Little explains. In their country, it was cash; you did not use a credit card. They may not have a bank, a bank account or a way to check credit because credit wasnt available in the country they came from. Business owners should be sensitive to this and prepared to handle it.

Se Habla Whoopsie-Daisy

Watch out for common pitfalls when targeting the Hispanic market. Failing to fully prepare is one of them. You cant just put Se habla Español in an ad and expect to be overrun with clients, Little says. And youve got to be properly equipped with a bilingual person and materials in Spanish and English when those clients reach out to you.

Translation can be dangerous terrain, as evidenced by the horror stories of mistranslated text and concepts. A few years ago, Parker Pens ran an infamous ad assuring Spanish-speaking customers that its pen wouldnt leak in your pocket and embarrass you. Instead, the translation read, It wont leak in your pocket and make you pregnant.

Little says people sometimes assume that because they took high school Spanish, theyre proficient enough to prepare their own bilingual materials without expert assistance. Its important to ensure your translations are culturally appropriate and using the version of Spanish relative to your market, she says. You can offend this market big time. Its not worth it to save a buck here or there.

A qualified marketing consultant can handle translations and recommend valuable advertising vehicles and mailing lists. They also can provide cultural insights on effective communication. For example, family, friends and loyalty are hot buttons for Latinos, who tend to favor small talk to establish a relationship before plunging into business negotiations.

Consultant Checklist

In choosing a consultant, do your homework. Look for someone who has the resources to research the market and to identify Hispanic patterns. Check to see if they are walking the walk, Little says. Do they have a bilingual staff? Do they have collateral, including a website, in both English and Spanish? Do they understand the self-storage industry and its challenges?

Erroneous assumptions about the Latino market are preventing many companies from pursuing the demographic, according to Little. Some believe there is no money there, others are scared off by the possibility of hassles and costs associated with target marketing. Its natural to be wary of uncharted territory. But Little says the bold investor shouldnt allow his fear of the unknown or beliefs in outdated stereotypes to steal away future profits.

Dont underestimate what this market offers to businesses. It may seem complicated, but it really doesnt have to be with the right agency or consultant to evaluate existing efforts, identify opportunities, develop and execute the strategy. Make the effort, she says, and you will be rewarded.

Before investing in a car wash, potential investors and operators ask these basic questions: How much does it cost? How do I finance it? What options are available? How do I put this whole project together? What kind of return can I expect? These are the fundamental questions on which your decisions will be based. Let’s start at the beginning.

The car wash-industry has traditionally been segmented into three categories of operations:

Self-Service—Commonly referred to as wand-style, quarter, do-it-yourself, etc. Here the owner washes his own vehicle. You provide only the space and equipment, he handles the labor. The wash quality is variable as it depends totally on the vehicle owner. This type of facility is generally not attended; however, it does require regular maintenance and housekeeping.

• Conveyor—Commonly referred to as full-serve, exterior or flex-serve. In this case, the vehicle is placed on a conveyor that moves it through a series of applicators, washers, rinses and dryers. Whether the owner exits the vehicle depends on the type of service selected. In a full-serve, he leaves the vehicle, and you provide the labor to clean the interior and detail the exterior. The customer enters the building to complete the sale and waits for the wash to be completed. In an exterior wash, the facility cleans only the outside of the car. In flex-serve, you offer the option of interior or exterior-only. A conveyor facility is always attended; the number of staff depends on the services offered.

• In-Bay Automatic—Commonly referred to as a rollover, in-bay or automatic. Here the vehicle passes by an automatic teller. The owner selects the method of payment and type of wash and enters the facility. At a petroleum site, the transaction occurs at the pump. The equipment may be touch-free (relying on wash solutions and high-pressure water to clean), or it may be a friction-style unit that relies on soft foam or fiber to make contact with and clean the vehicle.

How Much Does It Cost?

Each car-wash type has a different financial commitment. The investment on a self-serve wash varies by geographic area. In cold climates, the facility must have heaters, in-floor heat and, in some cases, doors. Approximately $25,000 to $30,000 should cover equipment. In warm-weather areas, only about $15,000 to $20,000 is necessary. Buildings, like equipment, will vary by climate. In cold-weather areas, they can run $30,000 to $40,000 per bay; in warm climates, $20,000 to $30,000 per bay. Land is the big variable, but costs average $3 per square foot. When all is said and done, your land, buildings and equipment should total around $80,000 per bay.

Conveyor car washes are far more difficult to price. I find estimating price per square foot works best. A typical full-service facility will require approximately 5,000 square feet. Using $200 to $250 per square foot as an average for buildings and equipment, your cost is about $100,000 plus your land, which can fall all over the map. I have seen good sites start at $10 per square foot and go up. It all depends on the market opportunity and whether the revenue can support the investment. Overall, it would be difficult to invest in a conveyor car wash for less than $1.2 million.

In-bays are more predictable in terms of price. Most will cost around $150,000 with ancillary equipment. Buildings average $100,000 to $150,000 and, again, land is the great unknown. The total project with land for a single in-bay should be around $350,000 to $400,000.

How Do I Finance It?

First, it is important to note that start-up businesses (first-time car-washers) are difficult to finance. The risk factor involved is high and, as a result, many customary channels of financing are not available. This does not mean money is not out there. It just means you have to look hard to find an acceptable source. That’s the bad news. The good news is car washes have an excellent track record, and their failure rate is minimal. Existing business owners will be surprised to learn leasing is not an option. Of course, there are always exceptions.

There are many creative ways to finance your car wash. The first is to look at the resources closest to you: family and friends. Typically, this group produces minimal returns. An offer to pay a better rate than they currently earn on their assets could be attractive.

There are always professional investors looking for an opportunity. Your cost of using venture capitalist funds will vary by the perceived risk. In most cases, the cost will be partial control of your business as well as some loss of equity. You have to consider whether this is worthwhile.

Finally, you can investigate financial institutions that may be willing to listen to your business opportunity. Fortunately, the U.S. government understands the need to encourage entrepreneurs and the creation of new enterprises. As a result, it formed the Small Business Administration (SBA). The SBA offers several programs for business finance. Two to look at are “7a” and “504.” These are guarantee programs available through your local bank. Basically, the SBA provides an insurance policy to your bank. For more information, visit www.sba.gov. There you can download an enormous amount of information as well as details pertaining to the above-mentioned programs.

As you look at the SBA or any other financing program, you need to consult with your accountant and attorney. They will guide you through the creation of your business. Other valuable resources include:

1. The International Car Wash Association (www.carcarecentral.com)
2. Local trade associations
3. Chambers of commerce
4. State and or local real estate groups
5. Small Business Development Centers (www.sba.gov/sbdc)

Putting Your Project Together

The keys to success of any new venture are fairly straightforward. If you look at why new businesses fail, the two most obvious reasons are lack of capital and execution. So as you plan your project, there are a number of items that fall in the must-do category:

1. Due diligence regarding all aspects, risks and rewards of the car-wash business
2. Thorough analysis of resources you will bring to the venture
3. Complete analysis of the competitive environment
4. Development of realistic financial goals and projections
5. Creation of a strategic plan to include vision, customer-value statement, and operating principles
6. Knowledge, understanding and commitment of financing
7. Recruitment of competent staff
8. Development of strategic alliances
9. Commitment of all stakeholders to success of the enterprise

What Is My Return?

The financial return on cash or assets for all car washes mentioned is very similar. As you begin preparing your financial projections, you will discover the need for historical information. Fortunately, a number of the industry magazines publish financial statistics for the car-wash industry. Using past industry standards as well as information from equipment vendors, you will be able to develop site-specific projections.

Typical returns should be in the range of 20 percent or better. It should be noted that return on total investment does vary, as there are a huge number of variables that affect it. The professionals you select as well as input and guidance from your financing source should provide the data you need to make a clear-cut decision to enter the wonderful world of car washing.

Fred Grauer is the vice president of investor services for MarkVII Equipment LLC, a car-wash equipment manufacturer in Arvada, Colo. He has made a life-long career of designing, selling, building and operating car washes. He can be reached at [email protected]. For more information, visit www.fredgrauer.net.