I recently spent four pleasant days in New York, meeting U.S. institutional investors, analysts, traders and investment bankers interested in the U.K. self-storage market. The trip was a follow-up to interest expressed by U.S. investors, who are looking for a fresh way to improve their ROI. The reasons for their interest are clear:

• While the U.S. market is still growing and consolidating, investors and operators desire faster growth.
• Investors are worried about potential weakness in the U.S. dollar and are keen for GBP earnings exposure.
• Because U.S. REITs have performed so well in recent years, big investors are looking to set up large international funds.
• The U.K. government is likely to introduce a REIT structure in 2006.
• There are only a few established self-storage players in the United Kingdom.

Market Drivers

The U.K. market is significantly less mature than that of the U.S., being some 15 years behind in its development and awareness. But it is growing at a compound rate of 20 percent per year. Though the United Kingdom has a smaller population than the United States, its people are crammed into a great deal less space This, in part, explains why the United Kingdom has higher property prices.

Given its shortage of space and high population, you would think the United Kingdom requires lots of storage. Surprisingly, this is not the case. In fact, the market is underdeveloped and most people don’t yet know it exists. The country has only 570 storage centers nationwide, offering just 0.27 square feet per capita relative to the 38,817 stores that offer 4.5 square feet per capita in the States. The potential for expansion is vast.

“Even if you factor in only one-third of the per-capita levels seen in the United States, the United Kingdom offers enormous growth,” says Nick Spoliar, a self-storage analyst with RW Baird in London. “This is why the U.K. is an attractive target for U.S. businesses looking for growth.”

Local Interest

The cash-generative nature of self-storage drives U.K. interest in this sector. Cash flow is predictable, stable and is highly visible. Revenue from established stores helps finance the acquisition of new ones, and banks are always interested in high-cash businesses, particularly when they are backed by assets.

U.K. banks are increasingly interested in lending to self-storage, and the development of a more U.S.-style valuation model is giving them confidence to lend more aggressively. This is likely to create more liquidity in individual assets, as well as increase the marketability of the companies themselves. U.K. storage businesses will have ample opportunity to leverage their cash flow and asset base to invest in more growth—a compelling situation for U.K. investors.

Tenant Mix

Due to high property and rental prices in the United Kingdom, many businesses use self-storage. In fact, about 37 percent of U.K. self-storage revenue comes from the commercial sector. These business customers rent more space and store longer than households, so each one is worth five times as much as a residential customer. The higher business use adds greater stability to the U.K. self-storage market.

“U.K. businesses are always looking to cut costs, and self-storage is an opportunity to reduce variable costs, given the expense of storing goods at their own premises,” Spoliar says. “This is a constant dynamic in the market and has two positive effects: It gives the U.K. businesses a revenue and profit upside, and it significantly reduces cyclicality.”

Barriers to Entry

The top five players in U.K. self-storage command 40 percent to 50 percent of the market, whereas in the United States, the top 10 companies command only 11.5 percent of the market. The trend is expected to continue as the U.K. market grows, though some might expect more diversification of the market. What gives?

The explanation lies in tight U.K. real estate, characterized by competing uses for land and complicated town-planning processes. These factors not only drive business and customer demand for self-storage, they ensure entrants to the industry have difficulty finding new sites. Existing large operators with specialist teams can devote the resources required to locate and open new stores. Newcomers find it hard to compete.

REITs

Because many U.K. property investors have been taken private and offshore in recent years, the Treasury is concerned with creating more liquidity in the market and bringing ownership back home. Therefore, it’s high time to introduce a REIT structure to the United Kingdom. When recently introduced into other markets, REITs have proved very successful, and self-storage is highly eligible.

“The likely advent of REITs has already changed investors’ perceptions of the property market in a positive way, and it is very likely this process has farther to run,” Spoliar says. The success of the U.S. sector is indicative of how the market may evolve in the United Kingdom.

I returned from New York very encouraged by the opportunities we will have as the U.K. market matures. The potential may even be greater than that of the United States, due to population density and pressure on efficient use of property assets. I’ve learned a lot from U.S. investors, and welcome any visitors interested in our fast-growing market across the sea.

Andrew Jacobs is the CEO of Lok’nStore Group PLC, one of only two quoted self-storage companies in the United Kingdom. Lok’nStore is the fourth-largest operator in the country, with an approximate 5 percent market-share. Mercury Real Estate, a U.S.- based property investor, recently became Lok’nStore’s second-largest shareholder, with a 10.4 percent stake in the business. For more information, visit www.loknstore.co.uk.

For investors, self-storage offers higher returns than other commercial real estate such as apartments and industrial properties. Other advantages include low overhead, increasing rental rates, and occupancy rates that average 85 percent.

The industry is also attractive from a lender perspective. In fact, it continues to receive positive recognition from rating agencies and research analysts. The latest statistics outlined in Standard & Poors CMBS Quarterly Insights report show that less than .25 percent of the $4 billion in self-storage loans the agency currently rates are delinquent. Of the 30,000 CMBS loans S&P has rated over the past 10 years, those for self-storage have the lowest delinquency rate of all property types.

Due to these strong fundamentals, lenders are providing cutting-edge loan structures and aggressively underwriting new storage properties in lease-up. As a result, facility owners can lock in full loan dollars at todays interest rates even though their properties have not yet reached stabilization. Lenders provide these loans by bridging the gap between stabilized and current occupancy with letters of credit and, in some cases, traditional earn-outs. Of course, this is subject to a property having a positive lease-up history.

Some lenders are even accommodating owners who form Tenant-in-Common ownership structures to facilitate their 1031 Exchanges. As a result of forceful underwriting, owners can even pay off their existing loans before maturityincluding prepayment penaltiesand take advantage of todays low rates and unique structures.

Interest-Only Financing

The trend toward interest-only financing continues to grow throughout the industry. This option includes several variations: 1) interest-only during the first three years of a 10-year loan followed by a 30-year amortization; 2) five-year fixed rates with interest-only for all five years; and 3) variable rates that are interest-only for the entire loan term. Interest-only financing is usually only available for borrowers requesting loan proceeds at less than 60 percent loan-to-value.

Letter of Credit

Lenders are competing heavily for quality self-storage opportunities. You can see this in their effort to provide long-term, fixed-rate loans for facilities still in lease-up as well as a host of features that benefit storage owners. For example, if a property has maintained a strong lease-up rate, it is increasingly common for lenders to size a loan by underwriting the most current month of income on an annualized basis.

Some lenders have taken things a step farther, requiring that the current months net operating income (NOI) only generates a breakeven debt-coverage ratio (DCR)provided the stabilized NOI will generate a 1.25 DCR within three to six months of loan closing. Separately, if a property has six months or more to stabilize, lenders may offer a loan leveraged at 80 percent of stabilized value by securing the shortfall of current NOI with a letter of credit. This is a major deviation from traditional underwriting that requires the trailing 12 months of income and expenses.

These new options make it possible for owners to secure a fully leveraged loan at current rates rather than taking future interest-rate risk. However, its important to realize lenders will take 60 to 90 days to fund a loan and expect an increasing income stream during this time. Its also important to understand aggressive loan structures are mostly available for A-quality developments in premier locations where the lease-up has been strong and consistent. Its difficult to obtain this type of financing if leasing performance has struggled or there are plans for new developments in the immediate market.

Still, the aggressive posture taken by the capital markets to fund less-than-stabilized facilities has had a favorable impact on the financing structures currently available. To see how investors are using the interest-only and letter-of-credit options, consider the following case study.

Case Study

Storage Etc. refinanced two A-quality properties near major freeways in Los Angeles and San Diego. The facilities have been in rapid lease-up since their development and have been predicted to stabilize within 12 months. Even so, the sponsor was concerned that if he waited until the properties achieved full stabilization, interest rates would be considerably higher. He retained a reputable financing company to provide him with a maximum fixed-rate loan based on the NOI he expects to have in one years time.

This financing structure enabled the sponsor to pull his development costs out of the project, prior to stabilization, at less than 5.5 percent for a 10-year, fixed-rate term. The total funding was based on a breakeven DCR and 80 percent of the stabilized value. The structure also included a letter of credit that bridged the gap between the loan proceeds the sponsor could obtain today at breakeven DCR and those he could get at a 1.25 DCR upon stabilization.

As the properties continue to lease, the letter of credit will be reduced to zero. The sponsor is entitled to partial releases of the letter based on a trailing three months over the course of four years from loan funding. If he doesnt obtain his projected stabilized NOI, the remainder of the letter will be used to pay down the loan. To increase cash flow during lease up, the lender also allowed interest-only payments for the first two years of the loan to be followed by a 30-year amortization.

TIC Structures

A user of a 1031 Exchange who is exploring self-storage ownership as a Tenant in Common (TIC) should consider how this affects his long-term, fixed-rate financing options. Lenders have become more accommodating toward TICs and will accept them as borrowing entities provided specific requirements are met. Mitigating factors include whether the TIC members are individuals or single-purpose entities such as limited liability companies (LLC); the number of TICs allowed by the lender (usually no more than five or six); and how long the TIC can exist before it is converted into a legal entity.

Lenders of long-term, fixed-rate loans require that a TIC be comprised of single-purpose entities, not individuals. This is necessary for the TIC to be disregarded by the IRS and meet the requirements for a tax-deferred exchange. Some lenders only permit the TIC structure for a certain period of time, typically no more than six to twelve months. At that time, they may require the entity to be converted to a traditional LLC, with a single-purpose entity as the managing member.

Prepaying Existing Loans

Some borrowers want to know how they can capitalize on todays low interest rates when their existing loan has a prepayment penalty. Due to concerns about rising rates, more and more owners are choosing to refinance their current loans by incurring yield maintenance or defeasance prepayment penalties. Thanks to lower rates, they can recapitalize their existing debt, increase their loan size, unlock trapped equity for other ventures and, in many cases, reduce their monthly loan payment.

It makes sense for some owners to pay a prepayment penalty if they can reduce their fixed rate of 8 percent or higher to 5.5 percent or lower. In addition, the after-tax impact of prepayment penalties may be diminished, depending on the extent to which these costs can be written off. Interested owners should consult a tax accountant to determine the real cost of a prepayment.

Todays self-storage financing includes some of the most aggressive underwriting in history. The trend is fueled by the enormous amount of money available in the capital markets as well as the strength of the industry. Savvy investors should realize now is a great time to review cutting-edge options and implement a financing plan that matches their investment strategy.

Jim Davies and Eric Snyder are principals of Buchanan Storage Capital, which arranges debt and equity for self-storage owners nationwide. The company gets customers the most advantageous capital due to its significant leverage with the most aggressive storage lenders. Davies and Snyder have closed more than $2 billion in storage financing since 1994. For more information, call 800.675.1902; visit www.buchananstoragecapital.com.

Borrower Behavior
How owners/investors are using finance alternatives

Source: Buchanan Storage Capital

As of Aug. 31, Buchanan Storage Capital had sourced $400 million in self-storage loans. Of those loans, 56 percent had an interest-only component. In addition, 37.5 percent of 10-year fixed-rate loans had an interest-only period for the full term. Only 8.75 percent of the loans had a letter-of-credit component, but the company anticipated the percentage to increase significantly by year end if interest rates continued to rise. Only 12 percent of the companys clients have refinanced their current loans by incurring prepayment penalties, but again, it was expected this number would climb with concerns regarding escalating interest rates.

Pricing and staff compensation for records-storage services are two areas that generate a lot of questions for new operators during the startup phase. Pricing always depends on real costs, while compensation is sales driven. This article discusses a comprehensive strategy for both.

Pricing Strategy

The first step in determining your pricing is to understand the parameters of your offering. You need to develop a Services Guidebook, which contains a name and definition for every service you offer. It also identifies a pricing strategy for each, including its resource requirements, value to the client, value to the records center, sales compensation and, finally, an implementation plan. In essence, this document outlines your business policies.

Pricing strategy generally employs a formula approach: cost plus profit margin equals price. The question that always arises in any new records center is how to determine costs before operation begins. This can be difficult, but heres a simple outline that can facilitate the process:

1. Negotiate fees with your primary outsourced resources, e.g., courier services.
2. Determine the overhead attributable for supervision of each resource, perhaps 10 percent.
3. Estimate the cost of supplies, e.g., boxes, software, hardware, etc.
4. Find out what local competitors are charging for similar services.
5. Estimate total costs using the data gathered in the first four steps.
6. Add your markup. Forty percent is usually appropriate for base-level services such as retrieval, re-filing, pick-up, delivery and box-level indexing. Other services such as re-boxing and file-level indexing may have much higher margins.
7. Measure your calculations against your competitors price lists.
8. Decide if you want to offer discounts to encourage new business. For example, consider offering a deal in which you bring in a new clients initial boxes at a reduced rate or no cost.
9. Set your final price.
10. After three months, review your costs and adjust price based on actual results.

Staff Compensation

The right compensation program is the one that gets your sales staff to bring in new business. Good salespeople are driven by rewards. As the owner, you have the choice of basing their pay on storage revenue or service revenue. You can even try some combination of both to create a plan that works for everyone.

Compensation founded on storage revenue is fairly straightforwardwith a couple of caveats. Typically, a new salesperson gets commissions based on a percentage of first-year revenue, perhaps 40 percent to 50 percent of gross. Since you dont want to pay your staff until you have revenue in your hands, heres how it works:

A new account signs a contract, but his boxes might come in over a 90-day period from the date of the signing. The sales rep should be compensated based on the total volume at the end of the 90 days, but his payment should be spread across the next 12 months. This means he gets equal payments during contract months three through 14. For example, if he brings in a 1,000-box account at 35 cents per box, thats $350 per month, or $4,200 per year. Multiply that by a 40 percent commission and you get $1,680, or $140 per month.

Compensation based on service revenue is quite different. Generally, records centers dont pay salespeople for retrievals, re-files, pick-ups or deliveries; they pay based on the ancillary services sold by the rep at the beginning of the contract. These might include box repackaging, file-level indexing, record-name clarification, strategic retention services and others.

Compensation can range from 20 percent to 50 percent of the net profit on each service, which should be set and documented in your Services Guidebook. For example, re-boxing might carry as much as a 75 percent margin, which means the salespersons commission could be substantial.

Lets look at a sample scenario: Your repackaging service is priced at $8 per box ($5 per unit for time and labor plus $3 for the box itself). Depending on your resources, your actual cost might only be $2.50 per box, giving you a $5.50 margin. If your salesperson gets a 40 percent commission, he earns $2.20 per box. This compensation should be awarded only after payment is collected from the client. I suggest paying these commissions once a month.

Keep in mind that services vary greatly from one records center to another, and they all require the resources of people, processes, technology and management. For this reason, carefully determine the scope of your offering and make sure your salespeople understand it. You dont want staff selling a service you cannot or will not support.

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

For more than 25 years, Preferred Technology Inc., also known as PTI Integrated Systems, has provided the self-storage industry with a full range of security and access-control products and services. And like the industry, PTI has experienced tremendous growth and made a name for itself in a very competitive marketplace.

Now, PTI steps into the future with a new 35,000-square-foot corporate office in Scottsdale, Ariz. The companys hard-working staff of almost 60 is enjoying the new surroundings and showing increased efficiency, higher productivity, and a new pride in the forward mobility of the business.

Lance Comstock, owner and CEO, says the facility marks a new era for the company, allowing for a better flow of ideas, a highly streamlined system of manufacturing and production, and an increased quality of already famed customer service. PTI has been built on providing excellent products backed by superior service, Comstock says. This move is a natural progression for us. Were looking at a bright future full of new marketplaces, technological advances and an expansion of our capabilities. But most important, this will give us the opportunity to take the very best care of those people who have been integral to our success over the last two decades.

An Inspiring Environment

The new offices have a unique architectural style that is functional and futuristic. The main building houses the companys six departments: administration, business development, engineering, production, shipping and technical support. It offers specially designed space for training, a fully equipped multimedia conference center, and a 15,000-square-foot manufacturing and shipping area.

The caboodle is protected by the full gamut of PTI systems, including DVRs, keypads, card readers, plasma screens and the very best in access control. The end result is a complete presentation venue with nearly 200 access and alarm points.

The new engineering area provides an environment that spawns creativity, says Dan Vincent, vice president and chief engineer. Combined with a high-tech engineering lab and high-speed networking, this gives us the opportunity to quickly develop and test new products and ideas in a variety of environments and configurations. Our new production and test areas enable us to build and test more product at one time than has ever been possible. Its an incredible work setting.

Over the last few years, we really outgrew our old space. Moving into this new building has allowed us to increase staff and offer even better service than before, says Lee Barker, who captains the technical-support department and has seen the company go through many changes over the years. State-of-the-art products and high-end customer service are the ingrained culture at PTI.

The plush new offices make workflow a breeze, according to Mark Burnham, manager of self-storage business development. This industry moves very quickly, and our teams need the very latest in tools to provide the best service for our clients, he says. These offices are some of the best appointed Ive ever seen. Its going to be a great future at PTI.

Click here to view picture .

New Products to Boot

In addition to the new facility, the company has launched a new series of products for the self-storage and commercial-security markets. Two years and more than $2.5 million have been invested in creating the Falcon XT, Intellex, Quantum and Storlogix lines. PTI engineers experienced long days and late nights during the development of this new hardware, which features highly advanced, unique capabilities backed by an easy-to-use software interface.

With our expected expansion into the commercial world and the success were already having, the extra space at our new facility will be necessary for additional technical support, engineering and sales. The new headquarters has also turned out to be a fantastic place to bring customers for presentations and training, says Tom Lewellen, head of the new commercial business-development division. Hes been diligent with the launch of the companys latest products and services.

Possibly the busiest person at PTI is COO Justen Ferguson, who has been a major force in the companys continuing growth. Hes excited to be a part of this challenging move forward.

The new facility has allowed us to continue our rapid growth in the self-storage industry and abroad. Weve increased our already superior customer service by offering free product training and demonstrations. We now have the space to show side-by-side comparisons of different products and help customers chose the equipment that will best fit their specific needs.

Our goal is to meet the ever-changing needs of our clients with the best possible products and services. This move is another step in our constant endeavor to give customers the results they expect.

PTI welcomes everyone to visit the new offices at 9160 E. Bahia Drive in Scottsdale, Ariz. To arrange for a special tour of the facility, call 408.991.1259; visit www.ptisecurity.com.

Preparing a loan-request package for refinancing is a lot like mapping. As a borrower, its your job to lay out the information so your lender can comprehend your request; navigate your financial and operating history; understand how far you want to go with your financing; and quickly get from point A (your request) to point B (the loan disbursement). Only then can he can make a decision about the best loan product for your property.

Preparing a financing road map is among the most critical aspects of your self-storage business and long-term profitability, as the type of loan you obtain will have a direct impact on your bottom line for many years. When seeking to refinance your property, take the time to create a complete, accurate and compelling loan request.

Get Informed and Target Lenders

Despite recent doom-and-gloom headlines, its still a great time to seek refinancing. Rates for longer-term, fixed-rate loan products remain attractive; and property values have generally appreciated, even for properties that have not experienced increased income. In recent years, self-storage owners have found themselves in the drivers seat as the lending community embraced the opportunity to lend on storage sites. That being said, be careful which lender you choose, as many still do not fully comprehend the industry and its unique attributes.

Generally, owners seeking refinancing want to lock into fixed-rate loans. This philosophy diverges from that of the past five years during which many owners were more comfortable with floating-rate terms. At the time of this writing, the Prime rate is 6.5 percent, up from 4 percent just one year ago. It is widely expected that the Federal Reserve will continue to increase the Federal Funds rate by at least 25 basis-point intervals, which will have a corresponding effect on Prime-rate increases. The LIBOR (London Inter Bank Offer Rate) rate will also continue to rise at about the same interval.

Prime and LIBOR are used as indices for short-term rates. Treasury yields are primarily used for longer-term, fixed-rate loans and have continued to remain steady. Long-term rates have barely risen from the 40-year lows recorded in 2003. Today, you can lock in a loan for three, five, seven or 10 years at rates lower than a short-term adjustable-rate loan. Unless youre in a construction loan or still in lease-up, theres little reason to remain on a floating-rate debt instrument. But remember, the interest rate is merely one loan term.

Your refinancing roadmap begins with targeting appropriate lenders. Following initial conversations and research, narrow your list to the few who truly understand your property and the industry, are serious about competing for your business, and will work with you to fine-tune the loan terms. The obvious first choice is to select your current lender or others with whom you have conducted business. Typically, they will offer the most aggressive deals because of your proven track record.

However, you may want to expand your horizons to other lenders or hire a professional who is adept at minimizing interest rates and can negotiate the best overall loan. Some borrowers seek the services of a mortgage broker to arrange their financing. A broker works with a property owner to develop a financing-request package and market it to various lenders. Such positioning allows the owner to maximize marketing and minimize effort in finding lending sources.

Its important to note that very few lenders market directly to the self-storage industry. Banks, conduits and credit companies generally obtain a high percentage of their loan volume through mortgage brokers. Often, the cost of financing is the same whether you work through a broker or go directly to the lending source. Mortgage bankers have the advantage of knowing which lenders actively and aggressively lend to the industry as well as their current programs and terms.

To map out a well-constructed loan-request package, organize your financing information into seven categories:

• Summary of loan request
• Property information
• Property location/neighborhood/ demographics
• Borrower/principal information
• On-site/off-site management information
• Operating history
• Market and competition

This is your maps starting point, where you launch the general route for the lender so he is inclined to read further into the package. Define the type of loan and terms you desire. If you are seeking to maximize the loan, be careful not to be overly aggressive or unrealistic. Include the following information in your summary:

• Property name and address
• Ownership/management information
• Reason for refinancing
• Loan amount desired
• Fixed or variable rate
• Length of term and amortization
• Amount of existing debt
• Current annual operating income
• Occupancy highlights

Now that youre on your way, the property-information section will give the lender a better sense of where the site is located and its size, building structures, security features and amenities. Dont be shyif this is the best facility in the market, let the lender know it. If he isnt personally familiar with the property, provide him with ample physical characteristics so he can visualize the asset. At a minimum, this section should include:

• Property address
• Gross and net square footage
• Year(s) built and year(s) renovated
• Total number of units (nonclimate, climate, parking, other)
• Construction attributes (masonry, metal, type of drives, i.e. asphalt vs. concrete)
• Security attributes (fencing, gate access, cameras, door alarms, etc.)
• On-site management office and apartment information
• Signage
• Zoning
• Unique facility attributes
• Site photos

In this section, you need to map out the neighborhood and demographics for the lender. Provide detailed descriptions of the area surrounding the property, as well as local and regional characteristics. Include maps and demographic information. You should also address land use and the ability for new competition to arise in your market. Include the following:

• Facility clientele
• Housing types
• Customer/area income levels
• Percentage of the surrounding area with nonresidential uses
• Information on local commercial businesses, military bases, colleges, etc.

Before you take any trip, you want to be assured your vehicle is trustworthy and will get you safely to your destination. Financing companies also need a level of trust when making lending decisions. They want to be certain that if they lend you money, youll hold up your end of the deal and make the agreed-upon payments in a timely manner. A lenders comfort level is derived from your financial wherewithal and creditworthiness as well as your operating experience.

Even if youre seeking a non-recourse loan (which uses only the property as loan collateral), the lender will closely review your financial strength. As a general guideline, most lenders like to see a net worth of the ownership that is at least equal to the amount of requested debt, and you should have at least enough liquidity to equal one years debt payments.

Typically, the lender will examine all principals who have a 20 percent or larger interest in the property. Include a resume of each principal that specifically highlights his real estate holdings and experience. If you are a first-time owner, consider hiring a third-party management firm. You can essentially use the firms experience and expertise to impress the lender, which should increase your likelihood of financing success.

In addition to including individual financial statements in the package, inform the lender if there have been past credit issues, as he will run credit checks. Credit issues that are not disclosed up front can leave a bad taste in the lenders mouth and keep your deal from closing. However, there have been many successful deals in which the borrower openly disclosed credit problems.

In short, this section should include:

• Ownership structure and principals
• Financial statements for all principals who have greater than 20 percent ownership (hold off on tax returns)
• General real estate ownership and management experience
• Self-storage ownership experience
• Any credit issues

In this section, map out your ability to run the business effectively. Highlight your management experience, including information regarding the training and background of your managers as well as an overview of management and accounting software, advertising and marketing campaigns, public-service campaigns, etc. Describe your customers satisfaction, the length of time customers remain with your facility, repeat customers, the distance people travel to rent from you, etc.

If you are self-managed, much of this section will be redundant with the ownership information previously discussed. However, if you use a third-party management company, highlight its capabilities and credentials. In this section, include:

• Name, web address and resume of the management firm
• Management fee structure
• Propertys web address
• Names and resumes of the site managers

As lenders navigate your loan-request package, they will typically spend the most time in this landmark section. You want to demonstrate the property has the historic and future operating ability to sustain the requested loan, so this section should include:

• Year-end financial results for the past two years
• Trailing 12 months of income and expenses (presented monthly)
• Occupancy statistics for the past 24 months
• Pro-forma income and expense statements for the next 12 months
• Current summary of gross potential income report
• Current tax bill

If you simply want to get a general sense of the kind of loan your property will support without creating a comprehensive loan request, compile and submit the first three items on the list. With this minimal information, most lenders or mortgage brokers can provide a solid idea of general loan amounts. If that is not sufficient for you, submit a complete loan package.

The lender will size the loan to a minimum debt-service coverage and maximum loan-to-value coverage. Both requirements will be affected by the propertys operating results. You should explain any nonrecurring income or expense items, as the lender will disregard them in his analysis. The lender will also exclude all non-cash entries, such as depreciation and amortization.

After making adjustments to your cash flow, each lender will determine a sustainable income amount, but understand that no two lenders will derive the same figure. A mortgage banker can help you maximize the loan by anticipating the adjustments the lender is likely to make.

Market and Competition

A lender will want to know how your property sizes up to local competition, typically defined as facilities within a three-to five-mile radius. You should be able to demonstrate the comparative position of your prices and occupancy level with these facilities.

The lender needs to be comfortable with sustained occupancy and market saturation of available units in comparison to demand. He will want to see what the competition is charging for select unit sizes on climate-and non-climate-controlled spaces, and you may need to shop your competition to get this information. Since all facilities are unique, youll want to comment on variations. For example, one property may have low occupancy because of temporary road construction, while another may have lower rates and occupancy because it is in lease-up.

Reaching Your Destination

By mapping out an informative and organized loan-request package, youll increase the likelihood of a timely lender response and, more important, allow the lender to provide an aggressive quoteexactly the destination you want to reach. With a well-prepared road map of information, the lender will not need subsequent due diligence that could change or jeopardize the loan. So map carefully, and enjoy a successful journey.

Neal Gussis is a principal at Beacon Realty Capital Inc., a mortgage banking-firm that arranges financing for all types of commercial real estate and secures financing for self-storage owners nationwide. For more information, call 312.207.8240; visit www.beaconrealtycapital.com.

Getting a deal done in todays market requires savvy and creativity. In this article, were going to look at how deals are put together. Well talk about team-building, partnerships and financing.

Ready, Set, Go

A deal can begin in any number of ways. Maybe youll find a site you believe is ripe for development or stumble across the opportunity to become a partner. What set your most recent deal into motion? A dream? A desire to achieve business or personal goals? An attempt to keep up with a growing market? Chance? The best deals start with an idea, evolve into a plan, are packaged by a team, and then formed and measured. Where are you on this continuum?

Forming a strong deal is really about team-building. Even if youre the sole owner, youll still need a team to get your project moving in the right direction. So identify the support you need early in the planning stage. First, determine what you bring to the table. Do you have experience, equity, both? Next youve got to bring on professionals who have expertise where you dont, perhaps investors, managers, engineers, architects, contractors, consultants or lenders.

Finally, you need a clear understanding of who is responsible for what. For example, you might hire a consultant to verify your instincts on the viability of a new project or the accuracy in reporting of an existing store. For new construction, your relationship with contractors, engineers and architects should be well-defined to maintain your overall vision of the project.

Equity Partnerships and Joint Ventures

More joint ventures and complex partnerships are being seen in self-storage as the industry gains recognition from other business sectors and investors. Not everyone agrees on what makes a good partnership, but specifically outlining your goals and objectives can be critical to the viability of this type of marriage.

In an equity partnership, a group of investors (limited partners) funds the initial equity while relying on a managing partner (or partners) to develop the market, manage the property and provide appropriate returns. In a joint venture, a contractor might team up with a developer to build a project.

Every deal is different, and what makes it successful will vary, even among parties with equal interest. For example, investors with 1031 Exchanges may be looking to park money in a self-storage property for a specified return. Other investors will want some management responsibility. What makes the association work depends on the aims of the partners. Define those in the beginning and measure them along the way.

Protecting Your Interests

Once you understand how to make your deal fly, its time to set the wheels in motion. Youll want to work with a lawyer, who will represent your interests in the partnership agreement and set up the best entity to accomplish your goals. Ask him to help you define profit-and-loss sharing, equity positions, decision-making and an exit strategy.

Make sure youre protected if your partner or investor wants to leave. Partnerships are formed and dissolved all the time. Anticipate potential deal-changing scenarios, such as tragedy, death, sickness, difference of opinion, future sale, the next deal, etc., and what to do in a time of necessary transition.

Its a good idea to have a lawyer review your individual, specific interests. Also take your concept to your accountant and make sure he can implement the proper controls in the partnership agreement. Keep in mind a complex agreement could demand additional bookkeeping processes, reporting and expenses.

Funding the Deal

The self-storage industry is fortunate to have many financing options. Several reputable companies specialize in providing capital specifically to storage owners. Theres great advantage in working with professionals who understand the businessyou have a lot on your plate when forming a deal, and you shouldnt have to educate your lender about the industry.

Your lender is part of your team. To ensure he can meet the requirements of your deal, provide him with as much information about your project and partnership as you can, and ask specific questions. Who needs to sign guarantees? What collateral is required? What is the standard equity injection? What expenses (hard and soft costs) will the lender finance in a loan package? What happens when you choose to refinance in a few years? What about financing expansion phases?

At your initial meeting with the lender, determine what outlay of capital will be required on the deal. Most lenders want you to have the cash reserves or income stream to float a new project during lease-up. If youve already brought in a lot of capital, ask if you can borrow against your existing equity or the equity in another property to fund lease-up expenses. If youre buying an existing store, the required funds may impact the terms of any partnership agreement that exists.

Financing for your project may come in an all-in-one construction-permanent loan or in a couple of phases. A new project requires construction financing that allows you to breathe during lease-up. After the project is up and running, you may decide its time to lock in your permanent loan.

Depending on the goals of your business, the size of the loan, and your facilitys cash flow, a variety of options are available. For permanent loans, theres usually a relationship between the flexibility of the terms, the interest rate and the availability of growing equity. When searching for permanent financing, have some well-defined needs in mind when you sit down with your lender. Discuss specific goals, and find out if he can tailor a loan to your particular needs.

The Ahhhh Factor

Putting together a deal from start to finish can be exhilarating and stressful. It takes time, effort and creativity. On new construction, even breaking ground can be a seemingly endless process. For an acquisition, finding the right investors and developing confidence in the accuracy of a facilitys reported income and feasibility can be equally hectic.

But when you assemble a professional team and a sound plan, good things happen. Once your facility is fully operational and hitting projections, you know your effort has been worthwhile. And before regrouping your team to do it all over again, youll be able to give the universal sigh of accomplishment: Ahhhh...

Benjamin Burkhart is a Southeast self-storage specialist for Wells Fargo Financials Self Storage Group, which offers custom-tailored loans to self-storage owners and developers, including construction, permanent and acquisition financing. Mr. Burkhart works to provide refinancing as well as loans for new projects and acquisitions. He can be reached at 804.598.9440; e-mail [email protected].

Due to Hurricane Wilma, the Inside Self-Storage Expo scheduled to take place Oct. 26-29 at the Hyatt Regency Hotel in Miami, Fla., has been postponed. As of Oct. 24, the hotel was without power and guest services. The show will be rescheduled for sometime in the next 45 to 60 days.

Inside Self-Storage is sorry for this unfortunate turn of events, but the staff hopes they can count on attendee, speaker and exhibitor participation in the new event dates. Most airlines will provide a full refund on the cost of flights if cancelled within seven days of the original departure date. Travelers should check with their individual airlines for details on their policy related to natural disaster.

Shurgard Storage Centers Inc., which has been warding off an unsolicited takeover bid from Public Storage Inc., now says it will consider strategic options including joint ventures or a sale of the company. On Aug. 1, Public Storage offered $2.4 billion for the company. A month later, it claimed it would raise that bid if Shurgard would disclose information regarding its business. According to Public Storage, the combined companies could cut administrative and advertising expenses. But Shurgard, whose takeover defenses would make a hostile acquisition difficult, said it was not for sale and refused to discuss a deal.

Now Shurgard has hired Citigroup Global Markets and Banc of America Securities as financial advisers. It said in a written statement that it has spent considerable time listening to shareholders and now feels its a good opportunity to explore the options available to the company. For more information, visit http://investorrelations.shurgard.com.

As of Oct. 1, the Texas Mini Storage Association changed its name to the Texas Self Storage Association (TSSA). It also adopted a new domain name for its website, www.txssa.org, and a new logo.

In addition, the association released the results of a market survey it completed with Self Storage Data Services Inc., the first independently compiled study on 25 major Texas markets and rural areas. The survey is available to members for $100 and nonmembers for $200. It includes:

• The total number of existing facilities, with locations plotted on a color-coded map.
• The number of self-storage units and net rentable square feet for each market.
• Average monthly rental rates on ground-level units and the premium for climate-controlled space.
• The financial impact of physical vacancy and concessions/discounts on revenue.
• Economic occupancy for each market.
• The ratios of households per unit and square feet per capita.

For more information, call 888.259.4902; e-mail [email protected].

Salt Lake City-based Extra Space Storage Inc., a real estate investment trust specializing in self-storage, filed with regulators to periodically sell up to $800 million in common and preferred stock, depositary shares, warrants and rights. In a registration statement with the U.S. Securities and Exchange Commission, the company said it will use the proceeds from the offering for general corporate purposes: to develop and buy additional properties, expand and improve existing properties, and repay debt. For more information, visit www.extraspace.com.