Owned by a family with 124 years of business operation under its belt, Grand Central Self Storage LLC has achieved a milestone with the construction of Michigans first wine-storage facility. The Wine Cellar of Michigan in Ferndale, just north of Detroit, is the states only licensed self-storage opportunity for wine enthusiasts, including collectors, investors, merchants and restaurateurs.

The specially designed repository offers individual wine-storage units at economical rates. This frees clients from concerns of space, environment and security often associated with having to construct their own dedicated home or business storage for their collections of wine.

Grand Central Self Storage and the Wine Cellar of Michigan are part of Leonard Bros. Cos., a group of fifth-generation, privately held enterprises, all family owned and operated. In 1880, Samuel A. Leonard founded Leonard Bros. Moving & Storage in Detroit. Now the companys business activities include selfstorage, wine storage, data/records management, storage and retrieval, electronic records imaging and real estate.

Self-storage for wine enthusiasts is a new concept previously unavailable in Michigan, says David W. Leonard, the facilitys managing partner. He saw profitable wine storage while visiting facilities in Florida and North Carolina. After researching the market and applicable governmental regulations, we committed our existing self-storage organization to introducing this service to our state.

The facility is in a community of upscale condominiums that have little or no room for storage. Leonard spoke with wine merchants and restaurant owners in the area, who told him there was a significant increase in acquisition of quality wines by customers but no facility available for owners to store their collections. With his entrepreneurial spirit, Leonard set out to correct the deficit.

It took nine months to get the appropriate permits from the stringent Michigan Liquor Control Commission to open the 1,000-square-foot custom space in a clear span, climate-controlled, insulated vault. Double-insulated walls and two temperature-control units maintain the interior ambience at 55 degrees and 75 percent humidity with no natural light. Although the vault is windowless, motion-activated fluorescent lighting provides clear illumination for patrons. Backup-generator systems ensure these conditions are maintained even during emergency power interruptions.

Individual units are available for lease for terms as short as six months at rates as low as $12 per month, or about $1.50 a case. There are 43 separate, secure lockers ranging in capacity from eight to 54 cases. Horizontal case or rack storage may be readily accommodated. Space is set aside for bulk storage of large wine quantities often acquired by businesses.

Wine storage addresses a need in various market segments for example, baby boomers, who are expected to drive continued growth in American wine appreciation and consumption. Wine acquisition is also driven by special circumstances, such as the historic quality anticipated in the 2003 vintage. This should generate increased buying and storage activity among wine connoisseurs.

Educating the public about wine storage is our biggest challenge, Leonard says. Although he saw facilities in Florida and California with 100 percent occupancy and waiting lists for vacancies, Michigan residents are unfamiliar with the concept. The company is getting the message out through a marketing campaign using press releases, newspaper exposure and seminars at wine auctions and other wine-related functions.

Our mission is to provide oenophiles a safe, secure and attractive facility that is useful and desirable for storing fine wines in exceptional conditions, Leonard says. For more information, call 248.542.5600, or visit www.grandcentral.biz.

Construction Corner is a Q&A column committed to answering reader-submitted questions regarding construction and development. Inquiries may be sent to [email protected].

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Q: I will be installing a new keypad-access system at my facility here in Louisiana. Are there are any steps I should take to protectmy newkeypad system from lightning?
Kevin in Harvey, La.

A: Yes! There are a few things that should be done regardless of which system you are installing. Grounding is probably the main thing you need to consider. Use a grounding rod close to the keypad stand or gate motor, and use either a solid No. 12 wire or stranded No. 10 wires between the keypad and ground rod. Higher-end keypads actually have a terminal for ground or shock that can be used. There are devices that go at the keypads and at the controller in office to protect both sides of the system. Ask your security vendor about these devices.

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Q: Our facility is in an industrial area, and we have had problems with vandals stealing our exterior cameras. We have tried the larger housings for the visual deterrent and the smaller bullet cameras for a more covert monitoring system. Nothing is working; they are using ropes to lasso them off the wall. Do you have any suggestions?
Jade in Oakland, Calif.

A: A relatively new technology in housings is called no-grip housings. They are small, vandal-resistant, dome cameras with tapered edges. There is no way for a vandal to easily lasso or grab onto them. If mounted at a height of 12 feet or higher, these cameras will be safe from all but the most determined thieves.

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Tony Gardner is a licensed contractor and installation manager for QuikStor, a provider of self-storage security and software since 1987. For more information, visit www.quikstor.com.

This is our annual legal issue, but I have chosen not to address that here. In light of recent changes to the steel market, which impact professionals across the spectrum of the self-storage industry, I thought it better to share with you a letter from one of our respected industry vendors. This is an issue of which we should all be aware. Please feel free to submit questions or comments to the magazine.

Best regards,

Teri L. Lanza
Editorial Director
[email protected]

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Dear Industry Professionals:

I am writing to keep you up-to-date in the significant and rapid changes unfolding in the steel market. As you have already seen, we builders have had to announce various price increases as a result of sudden swells in the price of steel. We project that steel prices will continue to rise to record highs over the next few quarters. Many of you have commented that this is counter-intuitive, based on the fact that steel tariffs have been removed on the importation of foreign steel. While this may seem true on the surface, the following will provide you a brief overview as to what is fueling the price increases:

1. The value of the U.S. dollar vs. the euro and major Asian currencies has fallen far below the value of the tariffs. Foreign steel producers are not interested in selling steel in the United States, because when they convert their revenue back to their home currency, they make less money than when they sell the steel in Europe or Asia. The opposite is true for U.S. producers. They have a strong economic incentive to export their steel out of the States rather than selling it here.

2. China is consuming, by some estimates, more than 20 percent of the worlds steel supply. This may not be a long-term issue, but it will impact world supply for at least the next year or two. Chinas strong demand is driving steel prices upward on a global basis.

3. A coke shortage is impacting domestic mills ability to continue production at current levels. Consequently, some are citing force majeure on part of their order books and curtailing some production. The mills have already hit us with a surcharge on existing orders and are telling us to expect more beginning in April. Many of them are running at more than 90 percent capacity and not accepting orders right now.

4. Steel production is an energy-intensive industry, and the cost of energy has gone up significantly.

5. Fueled by strong housing demand, appliance producers are consuming large quantities of similar gauges of steel used in the construction industry.

6. Automotive demand in the United States still remains quite strong on a historical basis.

These reasons combined have created the perfect storm that will continue to press steel prices upwarddramatically. On top of all of this is an additional cost all companies that ship over the road are forced to bear due to changes in trucking regulations. With the reduced hours truckers are allowed to drive under federal regulations, transportation companies cannot turn their trucks around as often and are passing along the resulting increases.

While I dont want to sound alarmist, I do want to keep you informed of situations that impact all of us. We expect to have to pass along monthly price increases at least through the first half of 2004. As soon as we are able to provide additional guidance on those increases, we will.

Rick Dodge
Rib Roof Metal Systems Inc.

This does not mean larger spaces should rent for equal or less money than smaller ones. Its just that rent for self-storage space, unlike that for most commercial space, is not tied to a formula that makes the actual number of square feet critically important to calculating the monthly rent. We raise this issue because there are legal implications to how the size of a storage space is advertised.

A typical self-storage facility has between 400 and 600 spaces. Units may range in size from 5-by-5 feet to 20-by-40 feet. An effective way to communicate the varying sizes available to customers is by advertising the space dimensions. However, this is just a shorthand way of describing a space that may fit a customers particular needs. Ultimately, tenants rent a unit they believe can hold all of their property. It does not really matter to the customer or storage operator that the space is actually 10-by-10 or 9-by-11.5 feet if it will hold the customers property and the price is right.

So whats the legal problem? Spaces are frequently advertised and rented as if the size were exact. Rental agreements frequently have a line for unit size that is filled in with the space dimensions at the time of rental. While the size of the space is listed as exact in the advertising materials and on the rental agreement, actual measurements are seldom so certain. Variations of six or more inches in width and depth are not uncommon. These variations can lead to lawsuits instigated by entrepreneurial lawyers.

For example, Shurgard is involved in a class-action lawsuit relating to this issue (Gary Drake v. Shurgard Storage Centers Inc. et al., Case No. 02CC00152). According to Shurgards annual report, the complaint alleges the company misrepresented the size of its storage units. The plaintiff seeks classaction status, as well as damages, injunctive relief and declaratory relief against the company. The suit claims Shurgard violated California law relating to consumer protection, unfair competition, fraud and deceit, and negligent misrepresentation. Shurgard denies these allegations and believes it will ultimately prevail at trial. However, if the judge grants the plaintiff class-action status, the suit will be a cause for concern.

The Shurgard suit does raise an interesting legal question: Is a self-storage tenant who rents a 10-by-10 unit entitled to a space of exactly that size and not a few inches less in width and depth? The discrepancy may make no difference in terms of the volume of property that can be stored. However, it can be argued a space that is actually 95 square feet should rent for $95 per month, not the $100 dollars actually charged for the advertised 100 square feet. A $5 per month difference per space doesnt seem like much, but it quickly adds up to significant damages for a facility with 600 units. What is interesting about self-storage units is space height is as important in determining volume as width and depth, but few storage operators ever advertise this dimension.

To avoid this problem, self-storage operators may want to give some thought to how they advertise their storage spaces and how units are described in the rental agreement. First, they need to know the actual size of their units. If all spaces are the advertised size or larger, there is no problem. If there are variations in measurement, a few modifications in advertising and the rental agreement can help you avoid disputes.

1. Make it clear in your advertising that space sizes are approximate and for purposes of comparison only.
2. Do not state the size of the space in the rental agreement. The customer is renting a space that fits his storage needs, and the size is not necessary to the transaction. The only description necessary is the space designation, such as its number. If you cannot resist putting dimension information, state approximate size.
3. Consider a provision in the facility rules and regulations that states, SPACE SIZE: Advertised space sizes are approximate and for comparison purposes only. Spaces may be smaller or larger than advertised. Spaces are not rented by the square foot, and rent is not based on square-foot measurements.

The problem faced by Shurgard in the Drake suit is rare. In the past 20 years, only a few customers and government entities have ever raised the issue of space-size advertising or rental-agreement representation. However, it may be wise to take some measures to diffuse the problem before it arises.

D. Carlos Kaslow is an attorney in Berkeley, Calif., and is the founding partner of the Self Storage Legal Network and author of The Self Storage Legal Review, a bimonthly newsletter covering self-storage legal issues. He is also general counsel for the national Self Storage Association. For more information, visit www.selfstorage.org.

Self-storage is perfect for cost-segregation techniques, since as much as 30 percent of the costs can be classified to accelerated recovery periods. For instance, instead of 39 years, site improvements can be recovered in 15 years. By accelerating the recovery period, the owners benefit is a function of deferment of taxes.

Relatively new and implemented only by some of the most sophisticated developers/owners, cost segregation is often looked at by ownership as a competitive advantage. Basically, it is an excellent method for the deferment of taxes. You can pay your taxes years later while using the saved money to increase your investment returns. For example, a costsegregation study on a typical 45,000-square-foot facility could double the after-tax cash flow in the year 2003, depending when the facility was placed in service.

Rulings

The 1997 landmark case of The Hospital Corp. of America vs. the Commissioner opened the door to accelerated depreciation techniques. Later, in 2003, the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) was enacted to stimulate the economy. The act expanded the bonus depreciation from 30 percent to 50 percent for new assets acquired after May 5, 2003.

In short, this provision allows a one-time deduction of 50 percent of the cost of MACRS (Modified Accelerated Cost Recovery System) property with a class life of 20 years or less. For example, if you spend $100,000 on land improvements, you can deduct $50,000 of the cost immediately and depreciate the remaining balance over the normal recovery period. In addition to the bonus depreciation, the Section 179 expensing election increased from $25,000 to $100,000.

Regardless of Section 179 and bonus depreciation, self-storage owners should not overlook the benefits of segregating various building costs into separate categories as defined by the IRS. Instead of depreciating an entire self-storage complex over 39 years, the new blended rate of depreciation provides a reduced recovery period. But the court decision goes even further by allowing you to claim catch-up depreciation. This is the depreciation you could have claimed in prior years, had cost segregation been permitted, all the way back to 1987.

The Study

A successful cost-segregation study requires:

1. A detailed analysis of a facilitys direct and indirect construction costs.
2. An examination of drawings and specifications (if available).
3. An inspection to observe and identify component utilization.
4. An experts understanding of specific building, mechanical and electrical systems.
5. A detailed knowledge of the tax code as it applies to the cost-segregation process.
6. The analytical abilities and organizational skills to conduct the economic and financial analysis.

Why is self-storage such an ideal candidate for cost segregation? Because of the vast amount of site work required vs. the overall cost of building improvements when compared to other structures. Site work (asphalt paving, sidewalks, storm-water drainage, curbing, fencing, security lighting, underground utilities, etc.) was specifically identified by the IRS as a separate asset category with a reduced life compared to the actual building or buildings (15 years vs. 39 years). Furthermore, there are other systems that can be depreciated over five- to seven-year periods, such as CCTV security, controlled-access gates, computerized locking or alarm systems, etc.

Like most people, you are probably wondering, Why hasnt my accountant told me about this? The answer is, the process was only permitted about three years ago, and it has taken time for firms to develop the skill sets necessary to conduct such studies. These resources include engineering expertise and cost estimating, two disciplines most accounting firms do not have internally.

Firms typically look to the engineering profession to complete the study with all the property reclassifications. The accountant takes the study and its detailed support, recalculates the depreciation, and prepares Form 3115, Change in Accounting Method, which is an automatic change-approval process. The engineering-based study does not replace the accountants role in determining or preparing your tax-return information. However, it does provide your accountant the correct depreciation figures so the IRS forms are completed in line with allowable practices. This whole process is akin to the accountant working with an appraiser in determining the land component on a nonresidential real estate transaction.

The tax savings for self-storage facilities are usually significant, since a much higher percentage of their construction costs are sitework related than in other types of buildings. Lets look at a typical 50,000-square-foot, single-story facility. The depreciable basis includes the direct and indirect costs associated with the building, site work and personality. (The basis excludes land, as it is not depreciable.) For the purposes of this example, lets say the direct and indirect costs are $28 per square foot for a depreciable basis of $1.4 million.

In my experience, 30 percent of the depreciable basis can be re-categorized to shorter recovery periods (15 years, seven years and five years) instead of all of it being depreciated over 39 years. This reclassification tax, affected at 45 percent and discounted at 6 percent, yields the taxpayer an NPV (net present value) tax benefit of $75,000 over 15 years. That is an extra $75,000 of real, bottom-line money in the owners pocket.

Once cost segregation is understood by owners and, most important, their accountants, the question is: How could you not do it? Whether you acquired a facility after 1986, are planning to buy a facility, or embarking on a building program, cost segregation and the bonus depreciation available under the JJGTRRA should be part of your self-storage strategy to increase cash flow and reduce ongoing expenses.

Kathleen Humen is the director of tax compliance for Construction Cost Recovery Inc., headquartered in White Plains, N.Y. The firm specializes in such services as cost segregation with a focus on self-storage. Ms. Humen can be reached at 914.694.3800. For more information, visit www.ccrtaxaudit.com.

He cant tell you how much the fix is going to cost, but he is certain it will be expensive. He also cant tell you what process will be involved in trying to address your problem. Instead, he will try a few things, and then make decisions about additional steps to take. He throws about several technical terms, but as you have limited computer experience, its almost impossible to understand what he is trying to explain to you.

When you finally leave the store, you hope you have left your computer in the hands of a skilled professional who knows what hes doing and intends to charge a reasonable amount for his work; but you are far from convinced everything will turn out that way. Unfortunately, all too often, this kind of situation also exists in an attorney/client relationship. You place your dilemma in what you hope will be competent hands, even without a clear understanding of the problem or the potential solutions.

The Right Lawyer for You

To start, how do you select the right attorney for your particular requirements? Whether you are looking for a lawyer, doctor or someone to fix a problem at your house, it goes without saying that you will probably get the best results when you work with someone who has specific experience in your area of need. Think about it: The best allergist in the world can probably do little to fix the torn ligaments in your knee.

When confronted by a lawsuit, you will first want to consider whether a legal claim against you might be covered by any liability insurance you have in effect. When in doubt, its always safest to give written notice to any insurers who might provide coverage or protection, and provide them copies of any pleadings that may be served or forwarded to you.

If your problem is one against which you are insured, the insurer will generally assume the obligation to select legal counsel to defend you. Insurance companies, which tend to be sophisticated consumers of legal services, are acutely aware of the need to retain counsel who can deliver quality services at a reasonable price. Therefore, it is extremely likely you will be defended by an attorney with considerable experience in the type of claim presented.

For example, if the claim is a sale-and-disposal issue, any lawyer retained for you by an insurance company is likely to be familiar with the applicable statutory and case law, and probably will have handled many similar issues in the past. Even if your claim or problem is not one for which your insurance provides protection, a specialty insurer may still be a good source of information about skilled attorneys who routinely practice in the area of concern.

Another good source of information can be a trade group or association. Many states have associations that serve the interests of their members, often by providing forms, proposed lease documents, checklists, handbooks or guide books, and even publications or articles addressing legal issues. These kinds of groups can often serve as an introduction to lawyers with a background particularly suited to your needs.

Finally, your friends (and even your competitors) in the selfstorage community can be a good source of information. You and the facility across town may compete fiercely for customers, but you are likely to share similar legal problems and challenges. Informal contacts and discussions may lead you to an attorney who has previously done a good job in responding to the kind of issue you now face.

Fee Agreements and Understandings

Whether in the context of business planning, litigation, criminal defense or any other legal issue, once you have identified an appropriate lawyer or law firm to assist you, how do you develop the best possible relationship? How do you gain confidence that you are working with a skilled attorney who is charging reasonably for his services?

Too often, experienced business people feel awkward and uncomfortable requesting specific information about costs, benefits and alternatives to a proposed course of legal action. An owner who would request multiple competitive bids for a construction project and extensively analyze the scope of the planned construction before making any decisions somehow ends up in a relationship with a law firm in which the scope of representation is poorly articulated, the alternatives are not discussed, and the ultimate price tag is a complete unknown.

Your relationship with a lawyer is always going to be based, in significant measure, on your confidence in that persons skills, judgment and ethical conduct. However, you have every right to understand exactly what you are going to receive and what you will be expected to pay. For many types of legal engagements, it will not be possible to identify upfront each and every step that may need to be taken. But you have the right to know the manner in which you will be charged for services, the lawyers best understanding and estimate of the steps that will likely be necessary, and the risks of success and failure associated with the proposed course of action.

No client should ever feel his legal issues have been simply abandoned to a lawyer. The best and most successful relationships are built on open communication, consultation and joint decision-making. Trust and confidence result when a lawyer and client work together toward a specific goal. To this end, most states have adopted rules of professional conduct that address the obligations owed by a lawyer to his clients. These generally require that a lawyer keep his client reasonably informed about the status of his case and clearly communicates the basis of the rate or fee he plans to charge, preferably in writing, at the outset of the representation.

When entering a relationship with a law firm, insist on a clear understanding of what the lawyer plans to do and how he plans to charge for the work. Make sure you are regularly updated about the progress of the work being done and consulted about evolving issues of strategy. Use your attorney as a tool or resource, but remain involved in the process from start to finish.

In the legal world, iron-clad guarantees are hard to come by. Select an appropriate attorney with substantial and specific experience with the issues confronting you. Once you have openly discussed compensation and executed an appropriate fee agreement, you will be well on the way to achieving the one thing that should be guaranteed in the lawyer/client relationship: a high level of confidence that you have a good lawyer working as a true member of your team.

Joshua T. Kutchin is a director with Fanning, Harper & Martinson, P.C., in Dallas. A graduate of the University of Texas School of Law in Austin, Texas, Mr. Kutchin specializes in litigation in the areas of bad faith, commercial, construction, and general, premises and products liability. For more information, call 214.369.1300 or e-mail [email protected].

I recently needed to rent a storage unit and visited a few of the facilities close to my house. I walked into the first place and asked the manager what she had available. All she had were a couple of 10-by-10s. When I got to another facility down the road, I got essentially the same answer. This is ridiculous!

If youre spending any money at all on advertising and want to maximize your profits, being occupied to the point of having nothing to offer new customers is no way to run your storage business. In this article, Id like to show you the right way to set your prices and control your occupancy rates. If you dont always have units of varying sizes available, youre throwing away the advertising dollars it took to get a prospect to call or visit you.

Fear and Numbers

Over the years, Ive asked owners why they felt compelled to keep their facilities virtually full. Their indirect answer was: fear. It makes them comfortable to have their facilities 100 percent occupied. But this is a false sense of security.

Profit maximizationif that is your goal is achieved by getting the maximum dollars for each unit you have to rent. It also means always having a unit to rent to someone who walks through your door. Its a balancing act, but it is achievable.

As you run your business, youve got to consider current and future profit potential. Under pricing units is nonsensical from either standpoint. By underpricing your units, you make less money than you could in the present moment. You will also attract competitors, and that will have long-term negative impact on your business and profits.

It is also possible your prices have been set too high. If your occupancy rate for any particular unit size is less than 75 percent, chances are your prices are too high. Pricing your units should be a logical, not emotional decision. Ask the typical storage owner how he sets his prices and youll generally find its not based on any formula, but rather a seat of the pants approach. Successful businesses are not run this way. Your storage business shouldnt be either.

Each Unit Size as a Business

To set your prices correctly, look at each of your individual unit sizes as a separate business. Also, set a range in which you want to keep your occupancy rates. I suggest between 92 percent and 95 percent.

As soon as your occupancy rate for any unit size hits 95 percent, youll want to raise your price. How much? Thats where this exercise becomes more of an art than a science.

If you feel demand for those units is very strong, raise the price by 10 percent. If demand is only relatively strong, raise the price by 5 percent. When you can, increase the price to the next logical price break. For example, if you are renting a unit for $50, it would logically increase to $55.

When you have less than 20 or 30 units of a specific size, your occupancy will be severely affected by losing just a couple of tenants. If you have only 10 units of a particular size, each one is worth 10 percentage points, so you have to be very careful how you price these units. Err on the conservative side in this case; and by conservative, I mean its better to have these units 100 percent occupied than have an empty unit. But make sure you increase prices to market value when one does come available.

Does it matter what other facilities in your market area are charging? No, not a bit. Your only criteria for raising or lowering your prices should be the demand for a particular unit size within your own facility.

How often should you be changing your prices? Daily, if necessary. Set up a spread sheet to determine when a particular unit size is at 95 percent occupancy. When this threshold is reached, raise the price. If your occupancy on a given size is less than 80 percent, you need to lower your price.

Occasionally, some pricing anomalies will occur. Ive seen situations in which a 5-by-10 unit has been in such strong demand that its cost approaches the price of a larger unit. So what? Let your occupancy determine your price. If a smaller unit ends up costing more than a larger one, so be it. Again, let logic, not emotion, determine your pricing.

Changing Pricing

When you alter your prices, you have to consider new and existing tenants. How often can you raise prices for existing customers? Most operators raise them once a year. That may be enough. I know of other operators who consistently raise prices every 90 to 120 days.

When you increase prices to your existing clients, dont immediately jack them up to your current market rates. Instead, ease them up slowly so as not to have too many people move out and push your occupancy rates below 90 percent. If a price increase is tolerablealbeit annoyingpeople will generally pay it.

The relevant question will always be: What are your tenants other options? If they still need storage, they must look for other facilities in the area. If the increase you present is minimal, chances are they wont move. It will be too much hassle. Again, consider your occupancy rates within a particular unit size before raising prices.

Youre probably wondering how you can justify different prices to renters of the same unit size who talk to each other. Think about it when you fly with an airline, there may be 20 or 30 different prices paid for the same type of seat. Occasionally, a tenant will complain another customer is paying less than he is. If your occupancy rate for that unit size is low, you may want to consider a price reduction. If the occupancy rate is high, stick to your ground.

Waiting List

I was recently put on a waiting list at one facility I visited. The manager claimed he would call me when my unit size became available. Its been close to three weeks and I have not received a call. Maybe he still doesnt have that size available, or maybe he forgot about me. Either way, when people want to rent storage, they want it now. Few, if any, will wait more than a week or 10 days.

You say everyone in your area has a waiting list? Then none of the operators are running their businesses sensibly. Theyre all losing out on potential profits and inviting competition.

Just Getting Started

How do you set your prices if you are just opening a facility? First, visit your competition and see what they are charging. If youve got some unique features your competitors dont have, charge a little bit more than they do.

Your goal is to get your facility to the low 90 percent range in overall occupancy as quickly and profitably as possible. Do this by charging a fair price to fill up the units. An average facility will take anywhere from 18 to 24 months to fill. Many mangers will low-ball prices when they first open to get a facility occupied. Although this may get your facility filled faster, it will hurt your profitability.

A Word on Collateral

If you buy into my concept of adjusting your rental rates based on market forces, you wont want to keep any literature at your facility that includes printed prices. Instead, print your unit sizes and leave a blank line to fill in the pricing based on demand.

For walk-in customers, it is inexpensive and convenient to print business cards that list all of your unit sizes and provide your name and number. Include a line on the card that says pricing changes, and the price they are quoted at the time of their visit may not be the same when they actually rent a unit.

If the goal of your storage facility is the maximization of profit, you need to understand pricing as it relates to occupancy. If you run your facility at or close to 100 percent, expect to generate competitors. Although it may make you feel good to have all of your units filled, it will kill you. I have never seen an investor want to build where all of the facilities are less than 100 percent occupied. If you properly manage and control your occupancy rates, youll make more money and keep your competitors at bay.

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

There are three advantages to the operator in adding this type of provision. The first is its acts as a deterrent to the tenant instituting litigation, as you have essentially made shallow the deep pocket. Second, you will encourage more tenants to purchase insurance on their goods. Third, you may reduce your property-insurance premiums. Here is an example of how this type of provision might read:

Lessee agrees not to store property with a total value in excess of $5,000 without the prior written permission of the Lessor. If such written permission is not obtained, the value of property shall be deemed not to exceed $5,000. By this Agreement, Lessor is generally not liable for the loss of Lessees property. In the event any competent court of law adjudicates Lessor liable for any loss, for any reason, Lessee agrees that Lessors liability shall not exceed $5,000. This provision shall not constitute an admission that Lessees property has any value whatsoever. The Premises is not appropriate for storage of irreplaceable property such as books, writings, objects which have an unknown immediate resale market value, or objects which have a special or emotional value to Lessee, and Lessee agrees not to store such types of property in the leased premises. Lessee agrees, at his/her sole expense, to maintain insurance on all property stored in the space with actual cash value coverage against all perils, without exception. Lessees failure to maintain such insurance shall be a Default under this Agreement, and Lessee shall assume all risk of loss or damage that would have been covered by such insurance.

What kind of protection does this provision provide? First, it limits the dollar value of the stored property. How many times have you conducted a lien sale and had difficulty collecting $50 for the entire contents of the unit? That is because a lot of what is stored may have been expensive to buy, but once it is used or old, it not worth much any more (we will discuss actual cash value below).

In your customers minds, the stored property is priceless. I could spend the rest of this column quoting from newspaper stories and lawsuits over the last few years that vilify self-storage operators for expensive, if not priceless, items that were stored, then lost, damaged or stolen. Normally, the occurrence is through no fault of the operator, who refuses to pay the tenant the cost of the property, and the matter is tried in the court of public opinion.

I am a staunch advocate of keeping the dollar value in your leases as low as possible, sometimes as low as $2,500. Anyone who would store more than $5,000 or $10,000 (actual cash value) of property in a 10-by-10 space should be asked whether self-storage is the right option at the outset. In addition, you will note the above provision contains language prohibiting the storage of irreplaceable items that have an unknown resale market value or objects with special or emotional value. The operator should stop anyone who wants to store irreplaceable property.

Again, there are many stories in newspapers about storage facilities that sold off personal property in a lien sale, or about items that did not belong in storagewedding presents, grandmas wedding dress, baby books, photo albums, and the likeand were damaged by fire, flood, mold, etc. The most notable example of this arose more than a year ago when a storage facility properly conducted a lien sale, but ended up selling the personal papers of Malcolm X. While the sale was justified and proper, the publicity was all bad.

One legal/insurance concept you need to understand is that of replacement cost vs. actual cash value. If your facility is liable for damage, or a tenant sues you for damage, loss, or destruction of property, you should know from a negotiating position what the highest value is you will have to pay. Your maximum exposure is actual cash value, which is the depreciated cost of an item over the years of its use. Conversely, your customer will think he should start with replacement cost.

For example, your tenant purchased a bed two years ago for $1,500. It would cost him $1,600 to replace it today; but the value of the used bed is only $750. Only insurance companies offer replacement-cost coverage. Storage operators are not obligated to pay a tenant the cost to replace the item, even if he is liable for the damage. He only pays actual cash value. Therefore, when a tenant presents you a list of items that were destroyed, lost or damaged in his unit, you must always begin by explaining you are not liable for the loss; and even if you are, the amount for which you are responsible is the depreciated value of the itemthe actual cash valuenot the replacement cost.

Determining actual cash value can be tricky. Most states allow the owner of the property to testify its value, but require him to bring in an expert witness, such as an insurance adjuster. However, it is not that hard to come up with a round figure based on garage-sale rates, for example, to show what the actual cash value of the property would be. It is certainly appropriate to ask for copies of receipts and, if they are not available, to ask the age and condition of the items stored.

If a couch gets moldy or a stereo is ruined by a roof leak, and the item is 10 years old, it has decreased substantially in valueunless it was some sort of antique. Often, when you explain this to a tenant, he will back off a damage claim. However, you can not always avoid the folks who will claim the item has sentimental value. Hopefully, the provision suggested above, or one similar to it, will help you diffuse the argument.

Imagine the type of deposition your attorney can take on your behalf if this matter ends up in litigation. He will ask the tenant if he did, in fact:

1. Understand the lease.
2. Sign the provision.
3. Understand the provision.
4. Violate the provision by storing items of greater value than agreed.

I preach the theory of creating barriers of entry to litigation, or what I call hurdles. The more hurdles you throw between yourself and a tenant, the harder it is going to be for him to bring litigation or bad publicity against you and your facility. The above-suggested provision does exactly that. A limitation on the value and types of property a tenant can store is one of the first and best hurdles to litigation.

If You Are at Fault

There will be times when you are liable for a tenants lossfor example, when a manager or employee backs a truck into a building, causing damage to stored contents, or when the wrong unit is sold at lien sale. Even so, with the use of a limiting provision, you will not be liable for an unlimited amount of money.

Most of the time, an operator should not be liable for losses due to circumstances outside his control, such as fire, flood, earthquake, theft, etc. But if a tenant views you as a bottomless pocket of money, what does he have to lose by suing you? If you have limited your exposure to $2,500, the suit will be a lot less attractive to the tenant and any attorney who might take the case on a contingency fee.

As an added benefit, a dollar-value limitation discourages what I like to call puffery in a property-damage or loss claim. Without a provision to protect you, when there is loss or damage, a tenant can often invent items stored or conveniently restate their value. One of my favorite cases involved a carved, wood mask. It was set on its side, on top of a couch in a storage unit. It somehow fell from its precarious perch and was broken. The original claim, as described to the facility manager, was damage to a piece of art with a value of approximately $500. When the claim was denied and a lawsuit filed, it was suddenly a priceless, original woodcarving with a replacement value of $10,000!

In the discovery phase of the case, we determined the woodcarving had most likely been made in China and purchased on Ebay for $55. Had the storage owner had a limitation provision in his lease, we could have asked the tenant questions, such as: Why was an irreplaceable piece of art with a value practically impossible to determine stored in a self-storage facility when this was prohibited? Why was the tenant storing something with a value of approximately $10,000 when the limitation on the premises was $2,500? This is why I call this type of lease clause a barrier to litigation.

Insurance

The second consideration for having a value limitation is to help convince your tenants to purchase self-storage insurance. There are those of you in states that may allow a forced-placed type insurance policy, and there are those of you who require insurance and add it to the rent. However, I understand that to be the minority position among the operators in the country; most operators hope their tenants buy insurance on their own.

If you are explaining your lease and value limitation to a tenant, and he requests you raise the limit because he will be storing more valuable property in the space, you can have him sign an addendum to allow the increase in value. However, for you to vary from your standard limit, the tenant should do one of three things:

1. Provide proof of insurance.
2. Purchase insurance through the program at your facility.
3. Name you as an additional noticed or insured party on his policy.

The addendum (a sample of which is included at the end of this article) provides that in the event the insurance lapses, the value limitation automatically resets to the limit stated in the lease. This allows the operator to easily deal with the objections he receives from people who want to store an item such as a boat, car, RV or other valuable property. The tenant may say, I cannot agree my car is only worth $2,500. Your response would be, Very well, we have an addendum to deal with these situations. All that it required is your signature. We will amend the amount, and you will provide proof of insurance for the amount of the item being stored.

If the tenant objects to the addendum and insurance requirement, you should let him walk. Many operators, especially those that set low value limitations in their leases, report they have much greater participation with voluntary purchase of self-storage insurance, for two reasons:

1. With this type of provision, people have a better understanding that the landlord is generally not going to be liable in the event their property is lost, stolen or damaged in the selfstorage facility.
2. Many people feel their stored property is worth more than the value limitations and, therefore, agree to purchase the insurance.

Risk Management

The third advantage of a limitation provision is an operators own risk-management issues. Imagine knowing the exact amount of liability for damage you would suffer in the event of fire, landslide, earthquake, arson, etc. Now that you have thought about it, imagine how your property-liability insurance provider would look at it.

Some owners have reported that providing this provision to their insurance agents has resulted in a reduction in their premiums because the underwriters are able to look at the overall risk and set a lower value on it. Other owners are able to reduce their overall coverage because of the limitation of value. Another result is that with fewer claims, your experience rating may improve with your insurance carrier.

I hope this article demonstrates that a short provision in your lease placing a limitation on the value and type of items appropriate to store in a facility will eliminate many frivolous lawsuits. This provision will also help your tenants understand the nature of the relationship between you, as the operator, and themselves, as customers and parties responsible for insuring against loss. It will hopefully increase your percentage of tenants who opt into their own or your insurance program, and decrease your property insurance rates.

Jeffrey Greenberger practices with the law firm of Katz Greenberger & Norton LLP in Cincinnati, which primarily represents owners and operators of commercial real estate, including selfstorage. Mr. Greenberger is licensed to practice in the states of Ohio and Kentucky, and is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. He is a regular contributor to Inside Self-Storage magazine and the tradeshows it sponsors. For more information, call 513.721.5151.

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I recall mentioning to a friend in this business, a Southern California operator, that I was thinking of taking up golf. This guy was a well-known golfer, having previously won the California amateur title. He looked at me closely and said, Well, before you try to play a round on the course, I think you ought to take a few lessonsspend a lot of time on the practice tee.

Sure, I said, how much time?

Until you begin to get an idea what youre trying to accomplish out there.

Bingothats also how you should read or draft any sort of agreement, including your self-storage contract. What was the person who wrote it trying to accomplish? Did some provisions wind up in the contract because the business lost an argument with someone, then went back to its lawyer and said something like, Look, put something in here so we dont lose that one again? Thats often exactly what happens, which is good thinking. On the other hand, are some provisions there because they were copied, with little or no thought, from another agreement? This might be inappropriate or downright erroneous.

Over the years, Ive seen a lot of self-storage contract provisions that could only be called goofyespecially if read with this question in mind: What was the operator trying to accomplish there? Following are a few of my favorite goofy contract stipulations.

Tenant hereby releases all claims for loss or damage against Owner, except for loss or damage caused by the negligence of Owner, or Owners employees or agents.

Huh? What other sorts of claims are likely to be raised? Hardly anythats what sort. Nearly all claims against an operator are going to be based on negligence of some kind. This operator might as well have added my favorite e-mail notation, lol (laugh out loud), at the end of that section. There is a caveat, though. In some states, a release for negligence is unenforceable in certain circumstances. In states where it is enforceable, it is incredibly funnyto read, that is.

Tenant hereby grants Owner an automobile storage and repairmans lien for all unpaid rent or other charges incurred at Tenants request.

Whoaa what? This one popped up in California a number of years ago. Upon inquiry, the operator explained he had adapted that section from his auto-repair contract. Well, yes... and is this an auto repair business or a self-storage business? The operator responded, Whats the difference? Well, how much time do you have?

In the event of any lawsuit arising out of this agreement, the prevailing party shall recover its costs, including attorneys fees, from the losing party.

Wait a minutewhos better able to pay an attorneyyou or your average customer? This is a more subtle but frequent goof. Some states (California being one) have a statutory provision that provides that any attorneys-fee clause will be interpreted to award fees to the winner.

In such states, you should not have any attorneys- fee clause in your agreement. In other states, a one way attorneys-fee clause is enforceablethat is, you can provide that you recover your fees regardless if you win. In either case, the above clause is a mistake. After all, generosity has its limits, eh?

In the event of any breach of this agreement by Tenant, Owner may declare this agreement null and void, and proceed to file an action in court to recover any and all sums due Owner under this agreement.

This is a really thoughtless goof. The tenants response will most likely be, Does null and void mean we never had a deal? Does that mean no release of liability, no lien rights, no late fees and no rent? File an action in court? Oh, please.

Tenant agrees that the value of all property stored shall not be deemed to exceed the value of $1,000

(followed a little later by) Tenant will store the following property:

_____________________________________.

Value:__________________.

This is a real one-two laugher. Does the term blank check have any meaning for this operator?

Conclusion

The tendency to let your eyes glaze over when reading a standard form contract, especially your own, is strong. However, you can resist that tendency by reading with a couple of critical questions in mind: What am I trying to accomplish with this item? Does the provision potentially hurt me more than it helps?

Learning to analytically read a standard form contract has another benefit: It can offer endless entertainment in the form of goofy provisions! The next time youre stuck for reading material, give it a try.

Joseph D. Joiner has been giving self-storage operators legal advice for more than 25 years. A real estate and business lawyer doing litigation and transactional work, he practices in California and New Mexico. He and D. Carlos Kaslow are co-authors of the Rental Agreement Handbook, sold through the Self Storage Association (SSA). He is also is a partner with Kaslow and Scott Zucker in the Self Storage Legal Network, a subscription consulting service for members of the SSA. For more information, visit www.selfstorage.org.

New Years resolutions are now comfortably behind us. Theyve not only been forgotten, but we have forgiven ourselves for not following through. Unfortunately, I am going to give you a resolution that must be kept. You must become proactive in reviewing and protesting your real estate tax assessment when it arrives.

Times have changed, and real estate taxes are becoming not only one of the largest expenses, but also one of the most volatile and subjective. Your diligence and effort in pursuing real estate tax adjustments can be rewarded not only by saving you money, but it may increase the value of your property. Lets take a look at what is different about todays tax environment.

The Need for Tax Revenues

First in importance, all of the local governments that rely on real estate taxes are essentially broke. The lack of funds from the federal government, the reductions of revenues from other taxes, and continued spending combine to put the pressure on real estate taxes. Most states dont have the Terminator to solve their tax problems, so they raise taxes!

Political Bias

In some states, there is a legal bias in the way real estate taxes are levied between commercial and residential properties. In my own state, Colorado, the percentage of real estate taxes that can come from residential property taxes is limited to 45 percent. The result is, of course, that commercial taxes are going through the roof.

Theres no mystery herepoliticians realize homeowners vote and businesses dont! Even though states may not have actual laws to create a disproportionate legal framework that discriminates against commercial properties, there is certainly an influence that can be affected by vote-seeking politicians to protect the residential tax-payer. The result is usually to over evaluate commercial properties, especially the ones that dont watch and protest their assessments. If the politicians understand this bias, so do their tax-administration employees!

Tax Appraisers

While recognizing the subtle political bias, tax appraisers are becoming more professional and well-informed. In the not-so-distant past, this was not generally the case (for reasons we all know). I was recently called by a taxing-authority appraiser in a small rural town about self-storage valuation; and the caller was very knowledgeable about the industry.

Not only are appraisers more knowledgeable, the procedures are vastly improved. Reassessments are regularly scheduled, comparable sales are updated, and the files are complete. All of this means your propertys value increases wont be forgotten, new sales comps wont be overlooked, and the facility will be regularly revalued.

The Self-Storage Experience

In years past, self-storage was not well understood, and most appraisers thought it was a transitional applicationbasically land with a temporary use. Because of the success of our industry and its newly acquired respectability, no one is naive about the profitability of self-storage. These days, when I meet people and tell them I am in this business, almost all of them say, Those [facilities] are really cash cows.

Prices have risen dramatically over the last few years. Cash flows have increased and cap rates have declined. Thus, real estate taxes have increased in a parallel fashion.

So What Can We Do?

Step 1: Look at your tax assessment critically. Just because it is the same as last year doesnt mean it is right. Remember how thorough you were in last years evaluations!

Step 2: Create an estimate of what your property is worth. For guidance, refer to my past article titled Do-It-Yourself Valuation, Inside Self- Storage, July 2003. (This can be found at www.insideselfstorage.com and www.selfstorage.com/argus/articles.) The process outlined will provide only an estimate, but it will tell you if you are in the ballpark.

Step 3: Get information on comparable sales in your area. Compare those sales to your estimate of value and assessment. If the numbers dont line up, you need to check with a local appraiser who specializes in tax protests. They often work on a contingency basis, meaning they get paid only if you win a reduction. Other appraisers work on an hourly basis. You need professional help in this protest because there is a language and set of rules with which you are unlikely to be familiar.

The Rewards

The only reasons to get involved in a tax reviewand possibly a protestare to get peace of mind or to save money and increase value. While the satisfaction you get from knowing you are fairly taxed is kind of a weak motivator, think how you would feel if you found out you had been overcharged for the last 10 years.

Perhaps a story will help illustrate how money can be saved. I recently reviewed a property for sale that was materially impacted by erroneous real estate tax assessments. I have changed the numbers somewhat to protect the owners privacy, but the relative magnitudes and relationships are in line with a real situation.

Three years ago, the property had a net operating income (NOI) of $150,000 and a value of $1.5 million. The property taxes were $18,000. The property taxes went up to $30,000, and the NOI went down to $65,000, with a resulting value of about $650,000. Assuming the value was right to begin, the tax rate was originally about 1.2 percent of the value and is now 5 percent. If the taxes were lowered to the previous percentage, not only would the owner save $12,000 a year, but the value of the property would increase $120,000.

This value of a property is important, not only when an owner is selling, but when refinancing is an option. Lenders just do not respond when an owner says his taxes are going to come down; the only number they believe is the assessment. Thus, by not getting control of the tax assessment, this owner would lose as much as $120,000 in a sale and $90,000 in a refinance.

Obviously, the stakes are high, and the deck is somewhat stacked against owners. The only thing you can do to protect yourself is be diligent in pursuing the correct information and protesting when you find a discrepancy.

Michael L. McCune has been actively involved in commercial real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In January 1994, he created the Argus Self Storage Real Estate Network, now the nations largest network of independent commercial real estate brokers dedicated to the buying and selling of self-storage facilities. For more information, call 800.55.STORE or visit www.selfstorage.com.