THE SELF-STORAGE INDUSTRY HAS UNDERGONE A SERIES of tremendous changes over the past two decades, evolving from a core group of small, mom-and-pop facilities to a large, powerful organization of professional business people. The rapid growth of the industry has further created a variety of challenging new issues, many of which are just now being addressed.

When the self-storage industry was young, so were its buildings. Facility owners had secure new roofs that did not leak, factory-fresh doors and a much lower incidence of crime than today. These circumstances were very attractive to insurance companies, several of which developed products specifically for the industry. Specialty insurers provided better coverage than what was generally available at the time, and many offered significantly reduced premiums for substantial savings.

During the '80s, when self-storage was reaching a new level of activity, so were its insurance exposures. Due to various challenges the nation was experiencing at the time--primarily the recession--building maintenance and repair were deferred in many facilities, increasing the potential for damage to customers' stored goods. In addition, the criminal element discovered self-storage facilities were ideal places to conduct its activities. These developments caused insurance claims to increase dramatically in certain areas, and helped give rise to certain specialized insurance coverages, such as customers' goods legal liability, to help facility owners protect themselves adequately.

Customers' goods legal liability is an important coverage unique to the industry. The basic premise of self-storage is owners act as a landlords, not warehousemen; they never take possession of their tenant's goods. They are not responsible for those goods since they are simply renting space. However, there are certain situations that can create legal liability on your part for damage to your customers' goods. For example, by providing a building to store goods, you represent protection against the elements. If a customer's goods are damaged by water, for example, he may feel you were somehow negligent in honoring that representation.

If you are found legally liable for damage to a tenant's goods, your customers' goods legal liability coverage will probably pay the claim. Just as important, it provides defense costs even if a claim is found to be groundless, false or fraudulent. It also includes coverage for damage done to customers' goods stored in the open, should you be found legally liable for that damage. This coverage is not normally available in the standard insurance market and cannot normally be added to the standard business-owner's package policy. It is coverage available through specialty markets for self-storage insurance.

These days, most facility owners have their deferred maintenance schedules under control. This new emphasis on routine maintenance is helping to contain losses in the area of customers' goods. Aside from a complete re-roofing of your facility, there are many new products available for sealing aging roofs. There are also companies that sell maintenance products, such as unit-door threshold seals, that provide cost-effective alternatives to more expensive repairs. And facility operators have kept busy implementing new ideas of their own to help contain losses, such as providing pallets in each storage locker. The pallets keep customers' belongings a few inches off the floor, helping to keep them dry in the event of surface-water accumulation.

Security is also a major concern, and a tremendous number of vendors are in the business of providing various types of security equipment. A growing number of facilities are equipped with door alarms, computer- controlled entry gates and high-tech surveillance equipment. These products, accompanied by a good resident manager, help control crime.

Sad to say, the days are long gone when an operator can rent a unit to new customer and turn his back on his tenant's activities. Many operators routinely photograph customers, and some even obtain their fingerprints. This may seem drastic, but it has become a necessary practice in some areas. Some operators argue this type of intrusion will chase off customers; however, if it is done in a manner that expresses concern for their property, very few honest people will mind the extra care taken for their security. The customer it does chase off just might be a criminal, and revenue saved from a criminal is really money in the bank.

New construction and proper maintenance of buildings, combined with hands-on management and attention to security are creating safer and more secure places for customers to store their goods. This is good news for those who wish to keep insurance costs at an affordable level.

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

SELF-STORAGE IS SOMETIMES TREATED LIKE THE RED-HEADED STEPCHILD OF THE BUSINESS WORLD. The public image created by unfortunate past events and circumstances makes a manager's job more challenging. It becomes our responsibility to educate the public and dispel the belief self-storage is not a viable and legitimate business.

The days are gone when a self-storage facility was little more than a barn or metal shed in a field. Properties operating for the long haul are now beautifully designed, many with living quarters for the managers. They are professionally landscaped and operated. They represent a substantial investment of capital and add to the economy of the communities in which they reside.

It comes down to a problem of image. Many people who would not think of dumping trash, defacing buildings or otherwise making some sort of mess at their doctor's or lawyer's office don't seem to have a problem doing those things (and worse) at a storage facility. How many times have we heard, "But it's only a storage place"?

In the past, self-storage has, on occasion, been used to store and manufacture illegal drugs. It has been used as a dumping ground for toxic-waste materials, junk cars and other trash. Theft rings and drug dealers found self-storage a cheap and easy way to ply their trades. These are some of the reasons people have a poor opinion of self-storage. But that was then. This is now. Many of you have heard the expression, "You never get a second chance to make a good first impression," so let's see what we can do to create that good first image.

Project Your Image

The first thing you want to do is make sure your site is as clean as it can be. If you have a new property, you have little maintenance, so clean, clean, clean is the key. If your property has been established for several years, you contend with ongoing maintenance such as painting, door repair, concrete repair, blacktop patching, lawn and landscape maintenance and, of course, cleaning. This is an ongoing task, but one that pays off in dividends later. Over the years, I have had many people rent at my facility when they could have saved a few dollars by renting down the street. They rented from me because my facility was much cleaner than my competition.

Your office should be neat and orderly. When a prospective renter walks into your office, it should look well-run and maintained. Your uniform--or whatever clothing you wear--should be neat and clean, as well as your own personal appearance. Last but not least, conduct yourself in a professional way--no off-color jokes, no outbursts of temper, no rude or sarcastic remarks. Be friendly, courteous and helpful. Be professional!

Protect Your Image

Earlier I said, "That was then. This is now." These days, we have more modern equipment to protect our image. We have surveillance cameras, computer-controlled access gates and resident managers. Most facilities require photo I.D. All self-storage facilities should require positive identification. I have found over the years that verifying mailing addresses bolsters security by letting you know within a few days if an address is legitimate. The new computer software available is a very powerful tool in helping to manage your site as well as protect your image.

In addition to using the aforementioned tools, you also want to post the rules of your facility where they can be plainly seen. Make it a point to show renters the postings as you escort them around your site. Show them the security cameras and let them know all activity on the site is being recorded for their safety and the well-being of the site. Hopefully, this will deter anyone who may have had plans to conduct any illegal activities on your site, or encourage him to rent elsewhere.

Regular checks throughout the day to make sure no one has left trash laying around will help ensure other people won't throw trash as well. If someone sees trash, they have a tendency to think it's OK for them to throw theirs also. If you see a tenant breaking the rules of the property, don't be afraid to politely but firmly remind him of his transgression. If you let him get away with it once, he'll make it a habit.

Perpetuate Your Image

Remember, most of the people you rent to have never used self-storage before, so it's your job as a professional property manager to teach them the correct way to use storage and respect you and your property. The more time you take with a new customer in the beginning, the happier he'll be and, hopefully, less likely to vacate.

Provide customers a level of comfort and security by letting them know the site they have chosen to store their belongings is being run by a professional property manager who is proud of his chosen profession. Once they see the positive image you project, they may well become long-term customers. More important, they will recommend family and friends to become customers, too.

Terry and Barbara Walters are resident managers for Premier Self Storage of Cheektowaga, N.Y. They have more than a decade of experience in the self-storage industry and can be reached for questions or comments at 716.893.3900; e-mail [email protected].

CONDUCTING UNIT INVENTORIES AT MOST SELF-STORAGE STORES HAS ALWAYS BEEN A PAPER-AND-PEN TASK FOR MANAGERS. But now the entire process has been automated with the introduction of the LockCheck^TM system by CheckMate Technology Corp., headed by self-storage industry veteran Jim Chiswell.

"We have combined state-of-the-art bar-code data-collection technology with the convenience of a hand-held personal data assistant (PDA) to fully automate this vital but time-consuming management task of determining the status of each rental unit. The LockCheck system is the result of more than a year of development and testing, but it is the management tool I have been envisioning for years," Chiswell explains.

LockCheck is designed to benefit owners and managers. From the manager's perspective, it is a system any employee can successfully implement. Once the bar-code labels have been placed on the individual units and the database created in the office computer, the PDA allows an employee to simply scan the bar code on the unit door, quickly scan the status sheet and proceed to the next unit. The data can be collected as quickly as a person can walk or ride in a golf cart. Owners are attracted to the LockCheck system because once the PDA has been "hot-synced" with the office computer, a permanent internal-date and time-stamp function proves the data was collected by the staff.

Symbol Palm Unit	Apply Bar Code Label
Scan the Bar Code	| PDA in Cradle

Chiswell selected the symbol-enhanced PDA for data collection because of its reputation for performance and reliability. LockCheck's proprietary software is at the heart of the collection and reporting system. All the necessary software is loaded from a single disk. The docking station/cradle is attached to the office computer using an available serial port. (The cradle also charges the unit's batteries when not in use.)

In addition to the LockCheck software, the device also contains all of the traditional PDA operating-system functionality, such as a to-do list, contact information, calendar, etc. There are literally hundreds of other programs that can be installed onto the PDA to professionalize the day-to-day management of self-storage stores.

Chiswell reports a major development in the rollout of the new product. "The LockCheck system was designed to provide a standalone application, but many owners and managers were asking for a link with their office software programs. I am very excited HI-Tech Smart Systems has already created a software interface for its popular RentPlus^® program."

RentPlus uses the LockCheck data collected by an employee and compares it to a rental unit's status within the management program. It then creates an "Exception Report" for the manager's follow-up. For example, if unit 306 did not have a lock on it when the LockCheck data was collected, but RentPlus shows the unit is rented, the unit will be identified on the report and the manager can resolve the conflict. The integration of the two programs further automates the procedures. For information about the RentPlus/LockCheck interface, visit www.hitechsoftware.com.

The LockCheck system comes complete with the PDA, a slip case to hold the device on a belt, a hot-sync cradle, all necessary cables, LockCheck software and PDA operating system, complete installation and operating instructions, and the necessary quantity of metal bar-code labels. For more information, call 434.589.4446 or visit www.lockcheck.com.

WHILE IT IS TRADITIONAL TO CONSIDER RESOLUTIONS AND EXPLORE AVENUES OF PERSONAL ENRICHMENT around the turn of the new year, I generally find I'm too distracted or worn out by the festivities and chaos of the holidays to focus at that time. But after the decorations come down, the leftovers are gone and the bank account begins to recover, I take a deep breath and remind myself to count my blessings, redefine my goals and basically regroup.

It isn't always a simple process. Assessing accomplishments always carries the risk they will come up short. As you evaluate your personal and self-storage universe this year, use something other than the quantitative scale. You're going to read a lot in this issue about how to determine the value of your business--at least in terms of the real estate market. Some of you may read through these pages and think, "I'm not doing nearly as well as I thought. I have a lot of work to do!" Just remember there's more to any business venture than what you see on paper.

Let me share an anecdote. Just a few short weeks ago, I received an e-mail from a distressed self-storage tenant in Naples, Fla. She wanted insight as to how items could have been stolen from her unit when she had an untampered cylinder lock on the door and a passcode to enter the gate. She said according to records, her unit had been entered five times without anyone using a code. When she explained to the owner's brother--acting manager--that she keeps her key with her at all times, he nastily retorted, "Well, do you sleep with your key?" When she reminded him of her status as a victimized customer, he said, "Oh, isn't that just too bad?" and walked off in a huff.

I don't care what the occupancy of this facility is, nor about its operating expenses, net operating income, etc. With an attitude like that representing the business, the facility, quite frankly, is worthless--to the owner, and certainly to any potential buyer. You cannot calculate the human factor into an appraisal. There is no line item for quality service. But I guarantee, it will affect your bottom line.

On another note, Inside Self-Storage its hosting is annual Las Vegas Expo this month, Feb. 24-26. This show grows exponentially each year, and this time around, it is bolstered by many new features and events. See the summary in "Inside Events" for more details. After you're done with post-holiday regrouping, you may be ready for some new knowledge, novel products or just a plain old good time.

See you on the show floor,

Teri L. Lanza
Editorial Director
[email protected]

Let's assume you have identified a self-storage facility for acquisition. You have negotiated and agreed on the purchase and sale agreement, including price and terms based on information provided by the seller and his representative or broker. At this point, there are several areas you should investigate to assess your potential purchase: financial, physical, legal and environmental.

Financial Audit

The financial audit should confirm computer-generated operating statements and reports produced by the facility with the actual performance of the property. Some owners feel they can achieve high valuations based on a single occupancy report or monthly summary. Later, it is generally discovered that the actual collected revenues are substantially less than the gross potential income reflected in the occupancy report--due, in part, to rental concessions, delinquencies, and unrentable or company units--or the owner had listed abnormally high prepaid-rent income. The financial audit helps you find a true and reasonably accurate portrayal of the facility's operating history, regardless what reports may demonstrate.

Initially, the financial audit is a tool used to derive the prorations to be awarded to the buyer or seller for various items. These items include prepaid rent, delinquent tenants, taxes, insurance, etc. For example, there is no substitution for rolling up your sleeves and methodically and meticulously auditing the rent roll for prepaid rent for which you, the buyer, should be credited at close of escrow. Here's a case in point: In the recent sale of an approximately $4 million, mixed-use storage/retail facility, the professional management company indicated prepaid rents were approximately $2,000 and would be credited to the buyer at close of escrow. After further audit of the rent roll on a tenant-by-tenant basis, the buyer found the management company had underestimated prepaid rents by nearly $15,000.

It is critical you tie the operating statements with the general ledger and bank deposits. Checking these three items against each other will probably generate many questions and give you a very clear idea how the property was previously owned and managed. Many investors hire an outside auditing company in addition to their own independent audit to catch any items they may have missed.

By looking at the bank deposits, you can obtain the most accurate portrayal of the property's cash flow over any given period, regardless of what any given computer-generated report may tell you. By looking at operating statements, you can see how new tenants were handled at the beginnning, middle and end of their contracts. For example, were they given free rent or discounts? How were late payments handled? Were any lien sales necessary? Finally, by looking at the general ledger, you can get a good idea of recurring expenses, such as advertising, management, utilities, taxes, insurance, repairs/maintenance, etc., as well as flag any abnormal expenses. This may also give you an idea whether the previous owner took steps toward preventative care of the facility in the event questions arise from the physical inspection.

Physical Inspection

The second aspect of the due-diligence process relates to the physical condition of the property. Typically, every buyer conducts his own investigation of the property, beginning with the exterior walk-through. This includes, but is not limited to, surveying the condition of the the buildings, signage, roofs, HVAC system, walls, stucco, paint, doors, asphalt/concrete, drainage, landscaping, gates and cameras.

The interior will be inspected, including the condition of the office, restrooms, managers unit (if applicable), floors, ceilings (looking for potential roof leaks), roll-up doors, partitions, sprinklers, lighting and security systems. From this investigation, you can create a punch list of items that may be capital improvements or deferred maintenance.

Most lenders and/or institutional investors require a third party to conduct a physical audit of the premises in addition to your independent investigation. This is not only very prudent, it lends legitimacy to your concerns if the seller has not provided the necessary care the facility deserves.

The audit ties the physical attributes of the facility with the operational side of the business, so it's important to make sure the personal-property items outlined in the purchase and sale agreement are on site and operational. You don't want to find, at close of escrow, that the previous owner has taken all the office equipment, for example. Also make sure inventory such as golf carts, security systems, computers, desks and other large items are on site and in working order.

One of the final steps to the physical audit is to walk the facility, rent roll in hand, and conduct a lock check to make sure unrented units are, in fact, ready to lease. A lock check also will demonstrate how the previous owner handled delinquent tenants, whether it be overlocking or some other form of notice. Many buyers will also take a sample of the rental contract to see how the owner conducts his lien-notification process. This is another way to see how the property was previously managed.

Legal/Title

Compliance of the facility to all zoning and city ordinances is critical. In most cases, you can obtain--and lenders often require--the equivalent of a zone-compliance letter. This letter is usually pretty innocuous and vague, but it provides you a reasonable idea what is permissible or not permissible in the zone on which the property resides. In some instances, depending on the local planning department, it may provide a more specific explanation of the property and its compliance or any violation as it relates to local zoning or code requirements.

A certificate of occupancy (CO) or its equivalent is invaluable and, in most cases, required by lenders. The CO indicates the facility, in its construction phase, has met the requirements of a city's building and safety department and is ready for occupancy and business.

In areas such as California, it may be necessary to provide a Natural Hazard Disclosure Report, which can be obtained from your escrow officer or broker for approximately $70 to $100 (actually, anyone can order this report). It includes information regarding the property as it relates to earthquake, flood or fire-hazard zones.

Most transactions are fairly straightforward with respect to title issues. One of the most important items required in due diligence is the ALTA survey. Title insurers issuing the supplemental ALTA title-insurance policy also require the survey. An ALTA survey should, with reasonable accuracy, lay out your building in relationship to any easements, dedications, points of note (i.e., ingress/egress, culverts, utility boxes, etc.), structures such as block perimeter walls and fences, monument signs and flag poles. If there is an encroachment by the seller's improvements on a neighbor's parcel or vice versa, or if an improvement encroaches on an easement, further legal advice should be sought immediately.

Environmental Audit

I cannot stress enough importance on this item. Every prudent lender and owner who has acquired a self-storage facility has required an environmental audit from a third party. Degrees of these audits vary, but the liability and expense involved with mitigating an environmentally tainted building or site far exceed the expense to perform an environmental assessment.

Environmental cleanliness is critical to lenders and institutions. Some local lenders may require a lesser audit, as they may be more familiar with the risk profiles on a local basis. National lenders unfamiliar with a specific market and its risk profiles may require a more extensive appraisal. Nonetheless, even if you purchase a facility on an "all cash" basis, an environmental audit should be part of your due-diligence process.

Conclusion

This article provides a broad-brush approach to due diligence, but each property and transaction is unique. Every buyer should conduct and rely on his own investigation to satisfy himself with any and all items relating to the property in question. There is a lot to consider when acquiring a storage facility. Many investors rely on third-party reports to double-check their findings, whether they be financial, physical, legal or environmental. But there is no substitute for taking the time, effort and care to perform due diligence in house. It will make the transition from buyer to operator much smoother.

Matthew T. Pipkin is a senior vice president with Lee & Associates, Newport Beach, Inc. He has been responsible for the recent sale of more than 500,000 buildable square feet of entitled self-storage land, and the sale or escrow of more than 2 million square feet of existing self-storage facilities. For more information, call 949.724.1000; visit www.lee-associates.com.

If you are the owner or developer of a self-storage facility, you can rent air. How much can you rent? How high is the sky? The two fundamental differences between self-storage and commercial records management are renting cubic vs. square footage and changing the storage agreement to a permanent contract. This article discusses these two dynamics.

Over the past few years, I have mused with the thought, "Whose idea was it to build the first two-story building?" Think about it--they doubled their floor space without acquiring more land. What a novel idea it must have been at the time.

The means of production in the Industrial Age was "land, labor and capital," all of which are finite. In his masterpiece The Post Capitalist Society, management scientist Peter Drucker implies that in the current and future business environment, the means of production is "knowledge," which is infinite. So, in this age of infinite knowledge and finite resources, we need to develop new business models that create and enhance wealth in our business investments.

Creating Wealth in Self-Storage

How can we create wealth in self-storage without the components of land, labor and capital? Actually, the answer is right in front of our eyes. You already have land, labor and capital invested in your business (or soon will, if you are a developer). My musing about the two-story building gives us our first clue:

Clue # 1--Renting Air. If I currently rent square footage, perhaps a 10-by-10 unit, how can I rent cubic footage of 10-by-10-by-8 for more money? In the commercial records-management industry, we rent air or storage by the cubic foot each and every day. There is a caveat to this, though, and it is actually very simple: The higher your ceiling, the more cubes per square you have to rent.

Clue # 2--Permanent Lease. Changing the typical self-storage contract from 30 days to a permanent lease is the norm in commercial records management. The contract has a term of one year; however, the retrieval and permanent-retrieval fees are a disincentive to change. The contract has a price escalator and an evergreen clause as part of its standard terms and conditions.

Clue # 3--Simple Operations. The implementation of very simple methods for operations and sales are essential. It should include only business processes with basic steps that ensure any self-storage manager can follow them.

Clue # 4--Replicable Training. Automated training using multimedia allows managers and staff to quickly understand and reinforce the operations methods.

Clue # 5--Minimal Capital. The primary goal is the infusion of capital only when off-set by specific revenue. Each capital dollar becomes an annuity investment, an investment that keeps on giving forever.

A Different Perspective

Although traditional records management remains a business opportunity of major proportions in the United States and Europe, nontraditional records management has become a new application of an old business. What's new here is not the concept but its application. What is needed is a new perspective. So, how is nontraditional records management different and why is now the right time to take advantage of it?

Those of you who simply want to enhance revenue in existing or new properties may want to consider this simplified method because it has low cost and risk while yielding high return on investment. You do not have to compete with the traditional provider of records-management services such as Iron Mountain. You apply the methods they use but in a very different way.

Here's a typical scenario: I am a lawyer or accountant. I start my business with no records. After a year or two, I have a couple dozen boxes of records and no place for them in my office. I bring them home and put them in my basement or garage. A year or so later, my wife tells me to get this stuff out of here. I look around for a place to put it. I remember the self-storage facility conveniently located on the way to my office. I rent a 10-by-10 unit and stick my stuff in there.

You are the first choice for records storage for most small businesses today. You give them the key to the unit and charge them rent on a month-to-month basis. What is wrong with this picture? With 40 million boxes in self-storage in the United States alone, you are the primary target for all commercial records centers because they easily can get records out of your facility with no penalty. You can change that today. You can take away their opportunity for new business, maximize your storage revenue and change the focus to permanent storage. This is not hard to do if you follow just a few simple steps.

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