Bolsa Chica Self Storage of Westminster, Calif., hired Larry and Becky Lyon as the new management team. The couple joined Bolsa Chica Self Storage in September after managing another facility in Springfield, Mo., for 11 years. For more information, www.bolsachicaselfstorage.com.

Security Self Storage sold its facility in Fairfield, Calif., to Storage Mart for $4.04 million. The nine-building, 63,250-square-foot storage facility was built in 1985 and has 544 storage units. Storage Mart will operate under the same management. David Buurma with NAI BT Commercial represented the seller. Peter Ingersoll with Sperry Van Ness represented the buyer. For more information, www.storage-mart.com.

Life has changed from the days when you could walk into your lender’s office with an appraisal in hand and get a loan. In today’s lending environment, it's the lender who decides the appraiser and you, the property owner, are often left out of the whole valuation process.

Your first knowledge of the appraiser’s estimate of value comes when the lender tells you how much it is willing to loan. But it doesn’t have to be that way. There are several steps you can take to become part of the process and assure there are no unpleasant surprises when the appraisal report ends up on the lender’s desk.

Finding Value

It's the appraiser’s job to express an opinion as to the value of your facility. This is where you come into the picture—by working with the appraiser to assure he receives the historical operating performance data and any other evidence from the marketplace that supports his conclusions.

You should care about receiving a properly supported appraisal and not just the right estimate of market value, because your loan proceeds are often based upon more than just the market value. Often it is the appraiser’s estimate of future net operating income (NOI) that limits loan proceeds. An appraiser could prepare a report resulting in a value conclusion to meet the lenders loan-to-value (LTV) ratio, but fails to meet the lender’s required debt-service coverage ratio (DSCR).

Step 1: Prepare for the Appraiser

Your best opportunity to receive a proper appraisal is to meet with the appraiser in person at the beginning of the process. You’ll need to bring every bit of information pertaining to your property (deeds, tax bills, income and expense statements, etc.), and spend time going over the data with the lender.

Reproducing the same documents for the appraiser seems redundant and a waste of time. However, going over many of the same documents with the appraiser can pay big dividends. This is your best opportunity to make sure the appraiser understands and appreciates your asset and how it is performing.

When the appraiser calls to schedule the inspection, ask which documents he needs in addition to what the lender has already provided. Be sure to have copies of everything you provided the lender just in case the information wasn’t passed. For instance, you may have just had a successful real estate tax appeal and next year’s real estate taxes will be lower. This could be easily missed by the appraiser.

Due to the nature of appraising, scheduling a specific time of day to make the inspection is often impossible so plan to be available all day. Let the appraiser know you have rental surveys or other data to share and he will make an extra effort to be on time.

Tip: Everyone’s time is limited, but taking time to meet with the appraiser at the onset of the appraisal process can save you time and money. Bear in mind, it is not your job to convince the appraiser what your facility is worth—don’t even try. However, it is your job to see the appraiser has all the necessary information regarding the subject. (For more on this, see the list below.)

You would be wise as well to ensure the appraiser also has every possible bit of evidence from the market, which will lead to a better value conclusion—one that is well supported by facts and not just opinions. Here is a partial list of documents your appraiser might request:

• Unit-mix report
• Itemized income and expense statements
• Subject sale history
• Current tax bill(s)
• Site plan
• Legal description or title report
• List of recent capital improvement

Step 2: Prepare for the Property Inspection

The appraiser will determine the quality of construction, current condition and competitive position in the market. The appraiser will look for items of deferred maintenance, such as buildings in need of paint, broken or damaged doors, cracks in the pavement, etc.

Regardless if a building needs a fresh coat of paint, the overall appearance says volumes about tenant appeal and what kind of owner you are. Just as body language says more than words, trash littering the property, dirty vacant units or bathrooms, overloaded trash bins, burned out hallway lights and fences in need of repair all say a lot about the kind of operation you’re running.

The appraiser will compare your facility to your competitors, so take this opportunity to explain how it differs from the competition. For example, point out that all your units have ground-level access, or your closest competitor is only 80 percent occupied because it has too many small units, is harder to access from the busy street or driveways are too narrow for rental trucks. This isn’t putting down the competition, it’s stating facts that might not be so obvious to the appraiser.

Remember, you live with your facility day in and day out, 365 days a year. The appraiser has only a short time to learn everything about it and determine how it will perform in the future.

Step 3: Discuss the Competition

The appraiser will survey the competition to establish market rental rates, assess the level of concessions or discounts offered and determine the level of physical occupancy in the neighborhood. This all has a bearing on the level of tenant demand, so share your knowledge as to which facilities are most competitive and why.

Tip: Give your appraiser a list of competing facilities. This is your opportunity to point out who your real competition is so the appraiser doesn’t use the mismanaged 30-year-old facility down the street to estimate rental rates and physical occupancy levels.

If there is a new facility in your neighborhood, don’t be afraid to point it out. Better you point it out and explain your opinion of its potential impact than the appraiser reaching his own conclusions without the benefit of your input.

Step 4: Discuss the Financials

It’s important to go over the operating statements with the appraiser. Make sure he understands each line item. Point out expenses that may not be a normal reoccurring operating expense, or one that is not typical of other self-storage facilities. Perhaps you chose to “expense” the recently installed new roof on a small building instead of capitalizing it. You need to let the appraiser know or he might assume your maintenance budget runs higher than it actually does.

Also, you may need to point out differences in management styles. For instance, perhaps you offer a discount to fill vacancies on a particular size of units to fill them. Otherwise the appraiser may assume the level of rent you are collecting is the best you can do.

You also need too address the issue of existing tenants paying below current market rental levels. Perhaps you have not pushed rental increases to existing tenants as much as you should. Point this out. That additional income is referred to as “hidden NOI” because it drops directly to the net operating income line on the financial statement.

Tip: If you know you will be applying for a loan in the next few months, start increasing the rent to existing tenants paying below market rates now so you don’t have to deal with the issue later.

Make sure the appraiser understands that, nationwide, currently more than 65 percent of all facilities offer potential tenants some form of concession or discount. It has become a way of life for this industry. The appraiser should not become alarmed when learning the competition offers concessions.

Instead, take the time to explain how you use concessions or discounts to drive revenue and occupancy. Remind the appraiser that discounts result in renting a unit you may not otherwise have filled, and to a tenant who typically stays longer than intended.

Step 5: Share Your Knowledge of Current Market Conditions

The appraisal process involves the use of historical data, including sales. The expansion and contraction of mortgage capital impacts value and, in the case of self-storage, that means there have been fewer sales. For that reason, the appraiser may need to explore other neighborhoods or markets to find evidence of investment parameters such as the price per square foot of net rentable area and cap rates.

Tip: If you have the opportunity to review the appraisal, make sure the sales used were recent and from comparable markets reflective of the level of demand found in the facility’s neighborhood.

The self-storage industry will soon start to transition from a weakened market to an improving one, and reliance upon older sale prices could cause the appraised value to trail (or lag) the market. For this reason, it is a good idea to provide the appraiser with some current listings if possible.

Part of your job is to make sure the appraiser understands how well self-storage is performing despite all the bad news in today’s economy. If you are like most owners, your net income has either slightly declined or not at all. Make sure the appraiser knows self-storage values have not declined like the many other types of real estate because most facilities are performing well.

Let the appraiser know self-storage cap rates have not increased as expected because most facilities are still performing at or above the owner’s expectations. Listing prices have not declined as anticipated because of continued good facility performance.

Look for Discrepancies

You can choose not to be a part of the appraisal process and, perhaps, you will get lucky. But remember, luck is no accident; it is the result of diligence. The appraiser’s task is to measure and mirror the expectations of informed market participants. You can help assure that happens by providing your insights and a sense of your market’s current conditions.

Ask the appraiser to call you when the report is finished, but before it’s submitted to the loan organization to see if there are any major discrepancies between the facility’s actual operating income and expenses and the conclusions reached by the appraiser.

Remember, the appraiser cannot discuss conclusions, but if there were big differences, this would be the time for the appraiser to understand why and to be prepared to support his conclusions with market evidence.

Charles Ray Wilson is the founder Self Storage Data Services Inc., an independent research firm that maintains the nation’s largest database of self-storage operating statistics. Mr. Wilson is an internationally recognized leader in providing independent research on the self-storage industry. For more information, visit www.ssdata.net.

Choosing a lender is a vital part of any successful self-storage financing transaction, but in today’s environment, it may seem like lenders are choosing you rather than the other way around. How can you be prepared?

Even in an uncertain lending market like the one we are experiencing now, property owners still have a need for financing—whether it is new financing, a revolving line of credit, structured financing to recapitalize property investment, or a refinancing of an existing loan to more favorable terms. With vast changes in the financing environment during the past 16 months, particularly with the near-extinction of commercial mortgage-backed securities (CMBS) financing alternatives, the challenge for storage owners is to find the best lender to help them accomplish their financing goals.

Undoubtedly, we are in a lender’s market and the ability to achieve your financing goals is controlled by lending sources. While a borrower may have an idea of what he needs regarding financing, he must be flexible with his expectations relative to terms and loan proceeds in order for the transaction to actually work.

Do Your Homework

Before choosing a lender, determine in which real estate asset classes the potential lending institution specializes, how many self-storage financing transactions it has completed, and if it currently has money allocated for storage property. Because self-storage is not considered one of the four major food groups (office, multi-family, retail and industrial), some lenders are not familiar with underwriting a storage loan, may think storage lending is riskier than other property types and avoids self-storage transactions altogether.

Plenty of lenders, however, have been financing self-storage properties for years. In addition, you will likely find other lending sources interested in entering the self-storage market because of the positive press the industry has received during the current economic downturn. The low default rate on storage loans is an enticing statistic for lenders seeking commercial real estate transactions in today’s volatile environment.

Finding a lending source is just the first step. Next, you need to find one with available capital. Due to the credit crunch, finding a financing source with money to lend has become a serious issue for property owners. It is a classic supply-and-demand conundrum. While the need for financing is still strong, there has been a reduction in the supply of loans (due in large part to the sidelining of most conduit funding sources), along with a corresponding increase in the cost of obtaining bank financing. When this equation will return to a better sense of equilibrium is anyone’s guess.

Local, regional and national banks, life insurance companies and traditional lenders are currently receiving more self-storage loan requests than they have available money to lend. To ensure they select borrowers with the best ability to meet a loan’s requirements, these lending institutions have become more conservative in the past year with their storage program parameters and underwriting criteria.

Establish Relationships

Today, it seems lenders are interviewing property owners more than the other way around, which was the perceived modus operandi in recent years when debt capital was more plentiful. Because of this relatively new dynamic, your relationships with lenders are critical to achieving your borrowing goals.

A lender familiar with a borrower, financials and self-storage properties, and has the ability to meet loan requirements is more likely to believe in the validity of your financing request. Lenders are not only “investing” in the property, but in the borrower as well. It is incumbent upon you to build these relationships to support your financing requests.

Loan size is another factor in choosing the right lender. A storage property owner who needs financing between $1 million and $10 million would likely have the best prospects with a local or regional bank; while an owner requiring $10 million or more might start with a national bank or life insurance company.

Borrowers must recognize that regardless of the loan request size, lenders view each transaction differently. For example, a local bank will have different loan requirements than a life insurance company. Much of this is due to the lender’s threshold of exposure and risk.

Another byproduct of the credit crunch is lenders are more closely adhering to their minimum and maximum loan amounts. There is some room for flexibility on the minimum, however, and it usually comes under the condition of the property owner providing future business to the lender. In general, lenders look at self-storage properties in early stages of lease-up phases as more risky investments.

Big, Small, Local, Regional, National

For transactions that are local in nature, a local bank is likely the right financing source, especially for smaller loans and/or construction loans. The bank will finance based on personal relationships and is more apt to want to personally inspect a property. As a borrower, you may receive more favorable terms and flexibility.

Many local banks now require a borrower to place a minimum of 10 percent of the loan amount into deposit accounts at the bank. As more scrutiny is placed on the banking industry, depositors are paying more attention to the strength and viability of their banks. If any red flags appear and there is a moderate to aggressive run on the deposits of banks, insolvency becomes an issue. This is not in the underlying fundamentals of a bank’s assets, but rather the cash-to-loan ratio becomes unbalanced and exceeds the fluctuations that can be managed by using the overnight Fed window.

Nervousness on the part of depositors also can be a self-fulfilling prophecy as the run on deposits is the very thing that sends a bank into insolvency, not the bank’s performance. The deposit-account requirement is a tool that banks use to build in an additional delta in the deposits to loan ratio.

For larger, single-property loans and loans supporting multiple properties on a regional or national basis, regional and national banks and life insurance companies are the best options. Among other risk factors, these lenders concentrate on loan-to-value (LTV) and debt-coverage ratios. The higher the LTV ratio, the stricter the rest of the loan terms. However, LTV ratios have been trending downward recently. You will see more banks doing transactions that are either full recourse or feature some alternative source of credit enhancement such as a letter of credit.

In today’s economic environment, it is important to stay abreast of who is and is not lending. And once you find a source with available capital, you then must drill down to their specific lending requirements and criteria. With this information and proper expectations, you can better focus your search for realistic financing sources that can successfully support your transaction. Be sure to do your research and consult with a capital markets consultant if necessary to obtain the best information and options for your needs.

Jessica Mandel is an associate director in the Houston office of HFF (Holliday Fenoglio Fowler LP). She can be reached at 713.376.2216; [email protected].

Ryan Howse, Nate Hunterton and Richard Howard of Las Vegas-based Self Storage Advisory Group brokered the sale of two StorageOne facilities. Public Storage bought both properties during their initial lease-up. The two sites, sold separately, add 156,030 net rentable square feet to the company’s existing portfolio in Las Vegas. The combined price for acquisitions was $10.5 million. For more information, visit, www.cbre.com/ssag.  

Bill Alter of Rein & Grossoehme Commercial Real Estate negotiated the sale of two Texas self-storage properties consisting of 1,562 units and 149,000 square feet. The properties, in Corpus Christi and Austin, operated under the name Central Self Storage.  The combined sales price was $9.8 million. Both properties were owned by entities controlled by an investor in Mill Valley, Calif., and purchased by E.B.S. Inc. They will be re-branded American Self Storage. For more information, visit [email protected].

Alyssa Quill was appointed vice president for Investment Real Estate Management. She will be responsible for the strategic and operational leadership of the company’s self-storage property-management business. Quill most recently served as vice president of operations for Extra Space Storage. Jay Hoke was promoted to a new executive vice president position with the brokerage and development division. For more informatin, visit www.irellc.com.  

Self-storage retailer Safestore posted a double-digit percentage revenue rise this year to Oct. 31, but said it will slow its expansion plans in light of the current economic uncertainty. Safestore, which operates in the U.K. and Paris, said turnover climbed by 11.3 percent from the previous year to £82.7m. However, overall occupancy declined by 6.7 percent to 2.7m square feet. Safestore managed to offset this by lifting the average rental rate by 11.2 percent per square foot to £24.05. For more information, visit http://www.safestore.co.uk/home/home.aspx.

Lista International Corp. unveiled its advanced workbenches designed to meet the specific needs of packing and shipping applications. The Nexus System Workbenches are available in a variety of lengths and depths, as well as work surfaces, including butcher block, plastic laminate, pressed wood, galvanized and stainless steel. They can be configured with cabinet pedestals and/or legs. Modular drawer storage can be used for paperwork, small supplies and files. Benches can also be configured with shelves with full-height, vertical shelf dividers, offering custom, slotted storage for corrugated or other bulk materials such as cardboard pieces. The workbenches can hold rolls of paper, bubble wrap and other long items.  Info: www.listaintl.com