The most common misconception regarding the cap rate is it’s the number by which you multiply net operating income to arrive at property value. Many owners believe a “10 cap” means you multiply the income by 10. This is not the case. In fact, this misunderstanding results in a calculation that is actually the opposite of what a cap rate does. Using cap rates involves dividing, not multiplying. Lower cap rates mean higher values and vice versa.

Think of it this way: A property generates gross annual income of $200,000 and has annual operating expenses of $100,000. The net operating income (gross income minus operating expenses) is $100,000. This is the amount of cash flow generated by the property in the current year. This amount is fixed—it will not change. The buyer of the property will receive this amount for his investment. The accompanying chart shows how much a property that generates $100,000 of net operating income is worth at a variety of cap rates.

Self-storage properties are purchased for their cash flow. The more income a property generates, the higher its value. Buyers looking for an 8 percent return on their investment pay more for a fixed cash flow than those looking for a 10 percent return. As buyers often compete with each other to buy a given site, the buyer willing to accept the lowest return on investment will pay the most for the property. This type of buyer establishes the environment in which all purchasers must compete.

Factors exist outside of self-storage—and outside of real estate entirely—that affect cap rates. These factors consist of the availability of alternative investments and the risk/return available on them. These external factors are now in an alignment that has created the lowest cap rates in the history of our industry.

Bill Alter is a real estate broker. For 17 years, he has been a facility sales specialist with the firm of Rein & Grossoehme Commercial Real Estate in Phoenix. For more information, call 602.315.0771.

To have an effective sales program, you must actively prospect for new business. This can be done in a number of ways. It might be through creating a list of potential customers, building relationships with key influencers, or maybe pursuing referrals through your current customer base. These are just a few examples of ways you can prospect and make your selfstorage operation more profitable.

Our industry is in a time of transition, and we must become more sales-oriented in our approach to doing business. Many self-storage operators are faced with stiff competition, and the customer has many choices when selecting a location. One way of overcoming this is through prospecting.

Customer Log

Keep an active log of customers who call or visit your facility with interest in renting a unit. It is imperative every customer interaction be documented on this log with a name, phone number, appointment time and comments of what was discussed. This is an excellent opportunity to not only track appointments, but have a system for following- up and prospecting for new business.

For example, if Sally calls but is not ready to commit to an appointment and wants to discuss the information with her husband, offer to send her a brochure about your store. This will give her ample information about your features and benefits, but will also allow you to follow up in a couple of days to answer any questions she may have.

Even though you have already discussed your unique features with her over the phone, the mailing will reinforce the key points. You can also personalize the brochure with a hand-written note thanking Sally for her call and saying you look forward to speaking with her again. She is now expecting your call, which will provide an opportunity to set an appointment. It is critical all of this information be documented in a customer log to ensure the consistent followup necessary to be effective.

Key Influencers

Another way of prospecting for new business is through your key influencersin other words, those key businesses or individuals that will refer the most customers to your facility. Again, it is important to have a system in place to actively call on these people. This will help develop a long-term relationship that is needed to create a steady stream of referrals to the store.

For instance, a self-storage manager or company representative might develop a marketing plan to make sales calls every month. This will strengthen the relationship with these key contacts. If done properly and with consistency, it will create a strong demand for your self-storage space.

It is imperative to document in the marketing plan every key influencer contacted, the date, referrals planned and actual referrals made. This will give vital information on how the plan is working and the results of your efforts. It will help tremendously in knowing where to focus your time and money, based on the results being tracked and measured over a period of time. If you devote the resources to develop an effective prospecting approach, you will become more successful and profitable in your business.

Existing Customers

Another effective means of prospecting is through your existing customer base, particularly through an effective referral program. Once a catchy program is designed, it is critical to reinforce the program at the most optimal timesfor example, when a customer moves in. If the referral program is made part of the move-in process, it will develop the consistency needed so every customer is introduced to the program and know of its benefits.

Customers like incentives, such as money or gift certificates, as a reward for newcustomer referrals. The referral might be for a friend, co-worker, family member or someone else in need of storage. It will make the program even more effective if the person being referred is also given some sort of an incentive. This will give him more motivation to come to your store.

Another time to reinforce the referral program is when you do something nice for an existing customer. It might be letting him use a moving dolly for a few hours or taking him a soft drink in the middle of his move. The customer will appreciate the kindness, which allows the opportunity to ask for a referral. When a customer experiences this type of service and knows you really care, he will be more open to providing referral information.

The average self-storage operator converts approximately one-third of his callers to renters. If a prospect physically visits the store, more than 90 percent of the time, he will rent a unit. To be successful, we must have a method for prospecting and setting appointments. To develop a prospecting program, you must begin by researching the training resources available and spend the time and money necessary.

If you can create more customer visits to your store through prospecting, you will rent more units. This will improve the demand for self-storage space, helping to gain more rentals and raise rates on a continual basis. Prospecting will ultimately lead to stronger occupancies and higher profits.

Brad North is founder of Advantage Business Consulting, which specializes in on-site sales, marketing, feasibility and operational training for the self-storage industry. He has produced two live videos and a workbook titled Maximizing Your Sales and Marketing Program, which can help managers improve their sales and marketing efforts. He most recently launched A TelePro, a mysteryshopping service that assists in educating, evaluating and improving the phone-sales performance of self-storage professionals. For more information, call 513.229.0400; visit www.advantagebusinessconsulting.com.

But think about it. You are about to invest hundreds of thousands or millions of dollars, and you must make sure you are getting what you pay for. Take a moment to logically consider the process. A buyer must carefully draft a sales agreement, review the documentation, conduct a site visit, consult the lending institution, and enlist the help of professionals to properly perform due diligence.

Sales Agreement

It all starts with the sales agreement, in which the buyer must outline the documentation needed to properly determine the value and suitability of the purchase. The sales agreement should also outline the time frames in which this process will take place. It is highly recommended that a list of necessary documents be included in the agreement (see accompanying sidebar).

This will give the seller notice upfront that you are going to be thorough in your due diligence. It also gives them time to start gathering the information. If a knowledgeable self-storage broker represents the seller, this information should be prepared and ready for delivery soon after an agreement is signed.

Time Frames

It is important to establish time frames at the beginning of the due-diligence process. Most agreements allow for a period of 30 to 60 days from the time all documents are given to the buyer. It is important to have the time start after all documents have been delivered. This gives the seller incentive to produce the documents in a timely fashion and prevents the buyer from receiving all of the paperwork in a piecemeal manner.

The delivery of the due-diligence materials should be documented with a letter from the seller to the buyer. It should be acknowledged by both parties, defining the exact time frame, from the beginning to the final date. During this time, a deposit will be tendered and placed in the brokers or attorneys escrow account. This deposit is typically fully refundable during the due diligence period. It only becomes nonrefundable once the process is complete and the buyer is satisfied with the information.

Necessary Documents

Lets start with the revenue side of the financial documents. Most self-storage facilities are run with the assistance of a software program designed specifically for the industry. If that is the case with the facility being purchased, financial reports are fairly easy to generate. If the seller is using a manual accounting system, the information may take a bit longer to accumulate.

The first report needed is a summary of all the unit types, how many there are of each, how many are rented, and what revenue is generated from those rentals on a monthly basis. This report is called the potential revenue or rental-activity report on the more popular software programs.

A buyer also needs a complete rent roll, including tenant names (or a note that the unit is vacant), with unit numbers, sizes, actual rent, account balance (to show rent owed or prepaid rent), deposit amount, and date of last rent increase. An explanation of any rent specials is necessary to determine actual rent collected. A list of delinquent tenants with an accounts-aging report should accompany the rent roll. Many software programs will produce a monthly managementsummary report, which can be helpful to validate the revenue stream.

Profit-and-loss statements from the sellers accountant or internally generated from the management computer are needed for the past two years and the year-to-date for current operations. The revenue numbers should match those shown in the management-summary report.

Your lending institution will require certain documentation about the property. It is a good idea to get a list of documents it requires upfront so you can include them in your due-diligence request in the sales agreement. First and foremost are the past three years of tax returns on the property. If a sole proprietor owns the property, the Schedule C portion of the return is all you need. If the ownership entity is a partnership, corporation or limited-liability company (LLC), the returns for that entity is sufficient.

A note about tax returns: Small businesses are afforded a myriad of deductions relating to their business operations, but not all of these deductions are considered when valuing a self-storage facility. For example, take auto-related expenses. Although fully deductible as business-related expenses, they are not typically deemed necessary for the operation of a facility and not taken into consideration in the determination of net operating income.

To confirm the expense numbers provided by the tax returns and profit-and-loss statements, a buyer can look at the invoices for operating expenses, tax bills, insurance binders, service contracts and employment contracts. It is typical for a buyer to request backup documentation on a few expenses if any discrepancies are uncovered. From the profit-and-loss statements and tax returns, a buyer should be able to validate the net operating income represented in the offering memorandum provided by the broker and/or seller.

Professional Reports

There are several documents that can be provided by the seller that may assist the buyer in saving some money and time in preparation for the closing. One of these would be the title-insurance policy issued when the property was last transferred. This policy will give the buyers attorney or title company a head start in researching the chain of title and should reduce the cost of the new policy. The same can be said for the fire- and liability-insurance policies. A buyer will need a new binder on the day of settlement; providing the insurance agent a past policy aids him in providing a bid.

Two other areas of great potential savings are environmental studies and ALTA (American Land Title Association) surveys. A phase-one environmental study can cost $1,500 to $2,500 and takes up to 60 days to complete. If the seller can provide a past report, most lenders will use it if it is less than two years old, or they will only require an update letter (which is much less expensive) if it is more than two years old. There are also environmental insurance policies available if lack of time to get a phase-one study is an issue.

ALTA surveys are typically required when obtaining institutional or conduit financing. These surveys are very detailed and provide a lender and buyer with assurances that the property description is correct and there are no discrepancies in the boundaries. ALTA surveys range in cost from $2,500 to $6,000, depending on the size and complexity of the property. Most local banks will not require an ALTA survey, and most buyers are satisfied with a legal description or standard survey.

Physical Inspections

During the due-diligence process, a day is scheduled for the buyer to conduct an on-site inspection of the physical property and any on-site books and records not provided with the copied materials. A buyer may hire an engineer or property-inspection service to assist in the process of looking at all the improvements and their ability to sustain the cash-flow stream over time.

This assessment will also help determine what your reserve for capital improvements should be. Typical inspections will include the roofs, gates, all vacant unit doors, office space, apartment, blacktop, fencing, structure of the buildings, company units, utility rooms, HVAC systems, plumbing, electrical systems, storm-water-management systems, and any other improvements on the property. On-site inspections will also include inspection of a sample number of leases. The seller does not customarily provide copies of all the tenant leases. Instead, the buyer is afforded the opportunity to inspect the leases during the due-diligence period. Typically, the buyer will randomly pull 3 percent to 5 percent of the leases and make sure they match the information on the rent roll.

Professional Assistance

If this due-diligence process seems a little overwhelming, you can and should enlist the help of professionals. First and foremost is your self-storage broker. Part of his job is to guide you through this process. Second, your attorney can review any documents, provide the title policy, and work with the other sides counsel to bring the transaction to a close. The title-insurance company can provide a good and marketable title. The escrow company can facilitate the closing. Environmental engineers can perform a phase-one study and other continuing services if any issues arise. Surveyors and civil engineers can do the required surveys. Accountants can assist in the review of the financial statements and verify the cash-flow projections. Finally, the insurance agent can make sure the property is insured to cover any general risk and those risks specific to the selfstorage industry. Professional help can save you considerable time to get the process done right the first time. You will find it is money well spent.

Summary

Taking the time and effort to perform a thorough due-diligence study on a self-storage acquisition is critical to a successful term of ownership. Any issues that may hinder a sale should be discovered early in the process, giving the parties time to work out an agreeable solution. The information you acquire and discover will prove invaluable in the smooth transition and operation of the property. Due diligence is the key to ensuring you are going to be pleased with the acquisition once closing occurs.

John H. Gilliland is president of Investment Real Estate LLC and Investment Real Estate Management LLC, which provide brokerage and management services to self-storage owners throughout the mid-Atlantic and Northeast states. Gilliland is also a member of the board of directors of the national Self Storage Association and president of the Pennsylvania Self Storage Association. For more information, visit www.investmentrealestatellc.com.

Ron Raboud has always been an avid outdoorsman. When he came across a charity fulfilling outdoor-adventure wishes for ill and dying children, it seemed natural for him to get involved.

Raboud, president of The Rabco Corp., an Ocoee, Fla.-based supplier of pre-engineered metal buildings, discovered Hunt of a Lifetime in a magazine article. The Pennsylvania-based nonprofit was started in 1999 by Tina Pattison, whose 18-year-old stepson, Matthew, had terminal cancer.

Matthews dream was to go on a moose-hunting adventure. Because the Pattisons were unable to afford such a trip, they turned to nonprofit organizations that grant wishes to terminally ill children. At the time, these organizations Make-A-Wish includedwere under attack by animal-rights groups and would no longer sponsor hunting trips.

But the Pattisons would not give up on Matthews dream. They began the search for other sponsors, calling sportsmens organizations and outfitters. Soon several sponsors came forward, including an outfitter, to provide Matthew and his father an all-expense paid moose hunt. Pattison then founded Hunt of a Lifetime to fulfill the hunting and fishing wishes of other terminally ill children. The benefit is open to boys or girls ages 12 to 21. The trips are paid through donations of money and services.

Raboud contacted the organization and offered to accompany a boy or girl on a deer, wild boar or bear hunt. About a year ago, he received a call from Pattison. She had a 21-year-old young man with spina bifida, Heath Loveless, who wanted to go on a bear hunt in British Columbia. After six months of planning, Raboud and his crew, which included his own 15-year-old son, Bryan, and one of Bryans friends, set out to make Loveless dream come true. The young mans youth minister, Rev. Stacy Reed, also accompanied the hunters.

Outfitter Dave Wabnegger of Otter Lake Guide Outfitters in Keremeos, British Columbia, guided the 10-day hunting trip. Because Loveless is confined to a wheelchair, the group traveled by truck until it found an area populated by bears. They then descended into the wooden area for the hunt, where Loveless harvested a black bear.

For Raboud, the hunt was successful on many levels. Ive been involved in outdoor activities all my life. At some point, I tended to take it for granted, became almost complacent in the enjoyment of it, he says. The trip reinvigorated me for the outdoors because of seeing the enthusiasm and excitement this young guy had. Everything was a new experience for himseeing snow, riding in an airplane, catching trout. It was pretty fulfilling.

He believes the trip also gave his son a different perspective on life. I could see at the beginning of the trip there was a little uneasiness being around a physically challenged person, he recalls. Ten days later, it was almost like the wheelchair didnt exist. They were catering to him in the beginning and picking on him like a brother in the end.

The experience was so rewarding, Raboud will lead another youth, who has leukemia, on a bear-hunting trip this May. Not only was Loveless a great kid, the trip was exciting; and it was nice for me for the experience it gave my son, he says. For more information on Hunt for a Lifetime, visit www.huntofalifetime.org.

Self-storage and car-washing are two of the fastest-growing business opportunities todayopportunities that are still within the reach of most investors.

In the past few years, the incentive for professionals to start their own companies has been overwhelming. I experienced this firsthand a few months ago when my company hosted a car-wash investment seminar. The response was staggering. More than 40 people from a multi state area participated in the class. I was amazed at the backgrounds and professions of the participants. We had everyone from captains of industry to doctors. After that presentation, I took the seminar to other areas of the country. The demand for these tutorials was also high and drew people of similar walks of life.

At the beginning of every seminar, I ask two questions: Why are you here? and What do you want to leave with? Participants almost always ask me why they should consider the car-wash business. They also want to know what the initial investment would be and what kind of return on that investment they could expect. There are some obvious standard answers to these inquiries, but the more specific responses are as difficult and as varied as the people inquiring.

I tell participants to ask themselves some questions. What are their needs, resources, goals and objectives? I tell them to take an inventory of the opportunities that exist and create a realistic plan that can and will be executed. Once those questions have been answered, participants want to know how they can get into the car-wash business.

Types of Car Washes

There are basically three forms of professional car-washing: the self-serve car wash (commonly referred to as the 25-cent wash); the in-bay automatic car wash; and the conveyorized full-serve or exterior-only tunnel wash. All three require significantly different investments and have varied site requirements. As a result, they each have different levels and barriers to entry. Interestingly enough, they all are very close when you look at the criteria of return on investment, or return on assets or cash.

The most requested form of car wash is the self-serve wash, because many investors see it as being the least expensive option. Typically, a self-serve car wash will consist of four or more bays, an in-bay automatic car wash, and a number of vended items, such as self-serve vacuums and other car-care products. Generally, selfserve car washes are considered nonimpulse or planned purchases; they are, therefore, typically located on nonprimary sites. Ingress and egress are the some of the key location factors, as well as permitted use, utilities, demographics, competition and a host of other factors.

For most communities, self-serve car washes are a welcome addition to their retail base. Motorists are always looking for a place to care for their vehicles, and with more people living in communities that frown on washing in driveways, the environmental benefits of a professional car wash are extremely attractive.

As a potential developer of a car wash, you will need to think of yourself as a real estate developer. You will also need to be sure the carwash business creates enough profit to pay all the costs associated with the site. That site will need to generate a return on investment sufficient enough to support the value of the land. Simply put, do the numbers work? Is the car wash the highest and best use of the land?

Like death and taxes, landespecially permitted retail sitesis a sure thing. It will become scarcer and more valuable. The availability of small, single-purpose sites at reasonable investment costs are hard to find. What should you do when faced with the predicament of larger than required site? Like any successful developer, you will need to look for alternative profit opportunities or automotive businesses that work well with a self-serve car wash.

One industry that offers good business synergy is self-storage. There is a general rule of thumb that says the deeper you go on a site, the less value it has for prime retail. Even if this is true, you will still need to generate a return. What a perfect place for self-storage units! Organize your business with a car wash in the front and self-storage units in the rear.

From what Ive read, the investment on a typical self-storage facility is about the same as a self-serve car wash, approximately $350,000, with net profits before taxes of about $89,000. A four-bay self-service car wash without an in-bay automatic, depending on the part of the country, has approximately the same cost and profit picture. Both businesses do well in areas of apartments, cater to customers of a similar age, have a population base that is mobile, require minimal labor and are well suited to less-than-primary retail sites.

So erase those self-doubts. The timing and opportunity exists, and car-washing and storage may be just the right combination to provide the highest and best use for your site.

Fred Grauer is the vice president of corporate accounts for Mark VII, a car-wash equipment manufacturer located in Arvada, Colo. He has made a life-long career of designing, selling, building and operating car washes. He can be reached at [email protected].

Providing a management software solution for multifacility owners

With a focus on supporting the needs of multifacility owners, Centershift Inc. was the first company in the self-storage industry to provide a centralized, web-based, rental-management and point-of-sale software solution. Software vendors that provide their solutions via the web are referred to as application service providers (ASPs) and, as other industries have found, they can provide many distinct advantages over traditional software solutions, including:

• Web-based integration to websites, vendors and partners
• Centralized security and backup
• Lower start-up costs
• Access to state-of-the-art data-center capabilities
• Faster and centralized enhancements and upgrades

Since its inception in late 2001, Centershift has leveraged the ASP model, providing leadership to the self-storage industry through innovation and new market standards. Centershift realized years ago that with the growth of the self-storage industryand, more specifically, individual self-storage companiesa robust, centralized, enterprise-class software solution was needed, states Bill Hoban, president and CEO. Centershifts STORE solution was specifically developed to support the requirements of the multifacility self-storage company.

Multifacility Requirements

If you are a multifacility self-storage owner or executive, you are constantly faced with choices that have a significant impact on your company and its success. Having timely and accurate information in todays competitive environment is critical to making insightful and successful business decisions.

When reviewing the needs of multifacility self-storage companies, we consistently hear a similar set of issues and problems that face them on a daily basis, says Terry Bagley, senior vice president of sales and marketing. These issues include obtaining timely, consolidated financial and operational reports; maintaining the financial integrity of the system; providing fraud protection and detection; enhancing credit-card and ACH (checking account) processing; reducing the close-of-day process; improving how software enhancements and updates are performed; doing away with manual letter processing; and providing automated rental-rate changes, as well as forecasting, trending, demand and competitive analysis.

Growth in Customers and Facilities

In the past two years, Centershift has experienced constant growth in terms of its customer base and the number of facilities supported by its STORE application. More significantly, the company will more than double the number of facilities that use STORE in the next three months, confirming the self-storage industrys acceptance and support of the centralized, webbased model.

Centershift has continually proven its leadership, innovation and vision to the self-storage community by introducing these industry firsts and solutions:

• Proven web-based, thin-client technology
• Consolidated, real-time, multisite reporting (financial, operational and marketing)
• Strong financial audit, control and security capabilities
• Internet-based credit-card and ACH processing
• Business-to-consumer e-commerce integration with websites (online creditcard payments, account management, unit availability, rates, reservations and rentals)
• Real-time business-to-business e-commerce integration with call centers and tenant-insurance providers
• Centralized mail processing for tenant correspondence
• Automated, centralized rental rate and yield management, forecasting, trending, demand and competitive analysis
• Real-time call-center integration
• Online support and documentation
• Web-based training
• Fully integrated company and facility website creation and hosting

In the Future?

Centershift constantly seeks ways to provide innovative features that will benefit customers current and future requirements. James Hafen, chief technical officer, recently provided some insight to the companys future plans, addressing Centershifts efforts in the area of rent and yield management.

Centershift will continue to enhance its customers management and analysis capabilities by providing tools that allow them to unleash the power of an enterprise-class database. Today, this allows our customers to use their own data to easily put together models that forecast the impact of rental-rate changes using historical attrition data, and review-trend and demand data. They can also track competitive information and automate rental-rate changes. In the future, we will continue to tap into the database to provide more information and automation power to customers.

In addition to rent and yield management, Centershift is developing and/or planning for the future in the following areas:

• Customer-demographic integration
• Tenant credit-scoring integration
• Collection-agency integration
• Certified-letter mail processing
• GSM (mobile phone) wirelessremote access
• Point-of-sale kiosk integration

With continued focus on innovation using self-storage experience and technology expertise, Centershift will continue to provide multifacility owners the right solution to make informed decisions and keep ahead of competition. For more information, visit www.centershift.com or call 877.927.4438.

One area of operations in which self-storage managers are often quick to throw in the towel is the collection of bad debt. Collecting delinquencies can be an additional source of revenue, but most operators throw up their hands and say, I am just happy to have my space back. However, just making a tenant think you actually collect your delinquencies, even if you do not, will help operations in several ways. There are also some things you can do in advance to ensure you have a chance of collecting your bad debt.

At the outset, let me be clear that I do not advocate keeping delinquent tenants in hopes of collecting the rent over taking all efforts to get the tenant out of the premises as quickly as possible. These two concepts are actually congruous. You should do everything you can to be rid of a nonpaying tenant to minimize your damages, even if this course of action means relinquishing some past-due rent. A lien sale is the last thing you want to do if you cant avoid it in any way.

That being said, many operators offer to forgive all past rent and charges due in exchange for the tenant removing his stored property. Operators also sometimes discover abandoned spaces and do nothing to pursue the tenant for the balance after he vacates. Others do not try to collect the balance on a unit after application of sale proceeds. It seems the main reason operators do not pursue collections is they see each delinquency as a small amount, not worthy of expending additional resources. In many cases, if they did a few things differently, they would have enough information to make it worth trying to collect the debt.

At the end of each year, look at the bottom line of your bad-debt expense or write-off. If that amount is more than a few thousand dollars, that should tell you two things: 1) you are missing out on a source of revenue, and 2) you are not doing the right things at the inception of tenancy to let customers know you are tough about collecting unpaid rent.

This column serves two purposes. First, it is a discussion of how to increase your collection revenues. It is also establishing the mindset of your tenants regarding your willingness to collect delinquent or unpaid rent and charges.

Affect Credit

One of the most significant things you can do from an active collection and mindset perspective is join one of the credit bureaus. This will allow you to report delinquencies to the bureau and, hopefully, affect a tenants credit in the event he leaves you with a delinquency.

There have been many changes to the Fair Credit Reporting Act and Fair Debt Collection Practices Act over the last several years that make it much harder for you to be an active member of a credit bureau. However, several services have been created to act as your intermediary with the credit bureau so you are not the active reporting entitythe service is the intermediary. While there is a fee for the service, sometimes there can be no stronger statement on the wall of your facility than a sign that reads, We report all delinquencies to the XYZ Credit Bureau. (You may want to use this sign even if you do not actually report to the credit bureau.) If you use an agency to collect your bad debt, make certain it is reporting debts to the credit bureaus for you. If it isnt, you should consider another agency.

The most certain way to get and keep a delinquency on someones credit report is to file a lawsuit against that person and obtain a judgment. The credit bureaus pull this information directly from the court records; therefore, you are not the reporting entity and do not have all of the various reporting requirements. Yes, you might spend $35 to $50 to file a small-claims complaint; however, nothing is more likely to get you paid by a stubborn tenant than a notation on his credit report. The next time he goes to make a large purchase or obtain other credit, he will be denied until your debt is paid.

Information Gathering

To have a chance of a successful lawsuit, you need to get good information up front from your tenant. When the tenant signs the lease is what I call the honeymoon period. This is the time to ask questions and record information about your new tenant.

Above and beyond obtaining the standard name, address and Social Security number, ask for a few other things, such as all work phone numbers. That will give you another way to reach your tenant in the event you need him during the tenancy. It will also give you a place to look to garnish or attach wages in the event you have to sue him for delinquency.

You should also ask for next-of-kin or emergency-contact information. Often, we rent to people who are in housing flux. Six or nine months from now, when the tenant is delinquent in his rent, it is nice to be able to call his contact, find out where he is, and explain you are about to sell his property because rent has not been paid. You may or may not get paid or find out where your tenant is; but it is better than having nowhere to begin in your collection search.

If your state permits, make a copy the tenants photo identification. I cannot tell you how many times a tenant has provided a false name or identificationnormally his siblings or childsto avoid detection for all prior bad deeds in the event you run any sort of credit or criminal report. If you are not collecting a copy of identification, you are giving away the shop.

It is helpful to have a copy of a tenants ID to declare a default if you later realize you have been given false information. If the ID is legitimate, it is also useful to have it for a street address and height and weight statistics, in case you need them. If your state is one that still places Social Security numbers on photo identification, make sure the number given to you on the lease matches the one on the ID. Use common senseif the person trying to rent from you appears to be 40 to 50 years old, and the ID birth date is in the 1980s, you probably have false identification. You may never have to use this information, but if a person becomes delinquent, it is useful.

Next, make a habit of photocopying all payments you receive from your tenants, except for automatic debit/credit-card payments. Set a requirement in your office to do this in February and August of each year. This allows you to keep track of where your tenants are banking, and you may even capture a new address off the checks. Further, if and when the tenant defaults, you know what bank to contact for garnishment, if you choose to obtain a judgment.

Dont be shy about asking for information, such as where the tenant banks, as part of your lease/application process. Many tenants pay with cash or money order but do have bank accounts. You need to know where those are if you later want to enforce a judgment. You will feel more confident spending the money to file a lawsuit if you know where a tenant works and banks.

Many tenants pay with a credit card, or you require an automatic charge to a credit or debit card. You should actually see the credit card you will be charging. While you do not want to copy the card, you should note from what bank/financial institution the credit card is issued. Some are national providers, and you may not be able to figure out from the card where the tenant banks; but if you know who issued the card, you can often subpoena the credit-card company and ask for its records on your tenant as part of your discovery or debt-collection process.

Be Tough on Time

Maintain tight deadlines. One of the most common mistakes I see is a facility allowing tenants to be 30 or 45 days delinquent before doing anything to collect, overlock or terminate the tenancy. Most states have selfstorage statutes that prevent you from exercising remedies until a tenant is 45 or 60 days late. However, those statutes do not say you cannot do anything until 45 or 60 daysthey say you cannot start the lien-certification process until that time.

Most self-storage facilities make phone calls after a tenant is a few days late. Most even overlock or deactivate a gate code. Even still, your calls and letters have to get as much attention as possible. For example, they will be more effective if you say, I would hate for this delinquency to become a judgment and have to garnish you at XYZ Co., your place of employment, or attach your accounts at XYZ Bank. If the tenant knows you know where he works or banks, it is an extremely powerful tool to get your debt paid.

Tenant Tracking

Do not let tenants slip away from you. U.S. Postal Service forwarding orders are good for one year from the date they are filed. If you are not sending something to your tenants at least once a year with the words Address Service Requested on the outside of the envelope, you are missing a valuable way of keeping track of your tenants. For about $1, you will get a little yellow mailing label on a post card advising you of any forwarding address that has been filed by tenants to whom you send mail.

All marketing advice tells you not to lose communication with your tenants or communicate with them only when you raise rents. Here is another great reason to spend the money at least once a year to send a newsletter or some sort of update to your tenants: to keep track of where they have gone before it costs you more money to skip-trace them.

Some operators send record updates to their tenants. The letter reads something like, We are updating our files or upgrading our database. Would you be so kind as to make sure we have all of your current information? They either print the current information on file or provide blanks to fill, asking for name, a current address, current employer, expiration dates of credit cards used for auto pay, and banking location.

Some managers even offer entry to a drawing for a $50 or $100 gift certificate to a local restaurant in exchange for a returned card. You would think no one would bother to reply to these inquiries; but if you wave gift certificates under tenants noses, the replies come in droves. Some operators report response rates as high as 75 percent.

If a tenant is not using a debit card, credit card or checking account to automatically pay his rent, do not be afraid to ask if he would now like the option. After tenants have rented for a while, they learn to trust the self-storage concept and your facility. They become more willing to opt for automatic funds withdrawal. The best way to avoid a delinquency problem is to be automatically entitled to collect as much rent as possible up front.

Other Safety Measures

You should include language in your lease that allows youat the time of application, during tenancy, and even after tenancy for a period of timeto pull consumer credit reports and criminal records for your tenants. This is a simple paragraph that can be placed in your rental agreement or on a separate addendum, such as:

I hereby authorize XYZ Self-Storage to obtain consumer reports, and any other information it deems necessary, for the purpose of evaluating my application. I understand that such information may include, but is not limited to, credit history, civil and criminal information, records of arrest, rental history, employment/salary details, vehicle records, licensing records, and/or any other necessary information. I understand that subsequent consumer reports may be obtained and utilized under this authorization in connection with an update, renewal, extension or collection with respect or in connection with the rental or lease of a residence for which application was made.

While you may not currently pull credit or criminal reports on your tenants, some day you may choose to. In the meantime, it is nice to know you have a release on file to allow you to pull credit histories or criminal records if you find it necessary. For the small fee of a credit report, you will be able to tell whether a tenant is falling behind on all of his bills or simply ignoring your fees.

This information is valuable in your negotiations with your tenant. If he is 60, 90 or 120 days behind on his mortgage and credit cards, your approach might be, Please just come get your stuff out and we will forgive the debt because you are hopelessly uncollectible. However, if all the tenants other obligations are current, it adds a lot of ammunition to your telephone calls to say, It appears you are current with your other credit grantors. Why are you disinterested in paying our bill? We hope to avoid taking judgment or action against you, such as garnishing your wages at XYZ Co. or attaching your bank account at XYZ Bank.

In collections, victory is as much about your mindset as the activities you undertake to collect debts. Keeping close track of your tenantstheir personal, professional and banking informationand using that information when you speak to them about their delinquencies, gives you a strong upper hand in negotiations to get the rent paid.

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 self-storage. 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, Mr. Greenberger can be contacted at Katz Greenberger & Norton LLP, 105 E. Fourth St., Suite 400, Cincinnati, OH 45202, or by calling 513.721.5151.

Over the past couple of years, I have seen more and more self-storage facilities trying to get on the retail bus. Operators and managers realize retail supplies are an important part of their businesses for a number of obvious reasons.

First, the sale of retail product is a relatively easy way to increase revenue. Next, since most of their competitors are in the retail business, operators dont want to be left behind. Finally, retail can enhance the image of a facility if the store area is properly merchandised. It is exciting to see operators becoming aware of the retail side of their businesses. However, to maximize retail dollars, an implementation plan is necessary.

Merchandising involves more than providing retail products. Operators and managers need to promote supplies as they would other services. This activity should become a routine part of a self-storage facilitys marketing plan. It can be as simple as creatively displaying various products, asking a tenant a few questions regarding his packaging needs, and hanging promotional fliers around the property. The techniques described below can easily be instituted.

Self-storage customers look to the facility manager as their moving and storage expert. We all can agree a manager is expected to know what size unit works best for a customer, how to properly store valuables without damage, and how to resolve any problem that might occur. However, customers should also be able to count on the manager to know what lock provides the greatest level of security, how many boxes are needed when moving out of a two-bedroom apartment, and if antistatic foam is the best way to protect a computer when packing it. The managers opinion can go a long way. Customers trust and listen to what he has to say.

Recently, a manager told me he always keeps a disk, brass and laminated padlock on his mobile cart. He then demonstrates the benefits of each lock when he takes customers to their storage units for the first time. When I asked about his success rate of selling locks, he said it was about 95 percent. Since he spoke so highly of his most expensive lock, which is the disk, almost all of his customers purchased this one.

Another manager asks each customer a couple of leading questions so she can be prepared to recommend at least one retail product. For example, if she learns a customer has a lot of china, she will show him the boxes that can be used to properly pack plates, bowls and glasses. Once the customer is sold on the box, she recommends partition kits and foam pouches. Other items such as tape and bubblewrap are then easily sold because she now is a trustful advisor. This manager has found most of her tenants spend an average of $50 or more on supplies.

Items that usually sell well for facilities are moving kits, which are pre-packed with various sizes of boxes, rolls of bubble-wrap, tape and a marker. Many facilities merchandise these kits by displaying them against the wall with the rest of their boxes. However, one manager showed initiative and took out every item in the kit, assembled all of the boxes, and put a sign above them that read, You can get all of this for only $39.99. As a result, sales increased threefold!

Make retailing profitable by developing and instituting different techniques to promote and sell various products. Remember, people are visual, and a few adjustments to your layout can completely change sales numbers. If customers see something that looks attractive and are able to understand its usefulness, the probability that they will purchase is greater. Increasing retail sales isnt difficult. However, planning, training and creativityand managers who see themselves as self-storage expertsare all essential.

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

It is an age-old question among real estate investors: Where do I put my money? The self-storage industry has only recently been invited into this competition for comparison with stately shopping centers, glass and chrome office buildings, amenity-rich apartment complexes, not to mention grand hotels of the rich and famous. In the past, ours was just the lowly business of garish garage doors attached to tin buildings, catering to the guy with snow tires and a leaky boat to store.

However, over time, the demand for our product and the resultant cash flow has attracted lenders and investors. The self-storage industry even earned a special report in PriceWaterhouseCoopers Korpacz Real Estate Investor Survey in 2003.

Like any beauty contest, the great battle of real estate types has some subjective and quantitative measurements that help us make the choiceor at least understand the differences. But as we explore this comparison, I will attempt to leave out contrasts that are aesthetically or emotionally driven, because these characteristics are usually decided in the eye of the beholder rather than by some quantifiable measurement.

That being said, I acknowledge that there may be some significant emotional value attached to owning the grandest hotel in town that loses just a little money vs. the meager self-storage facility that makes money hand over fist. The following analysis will look at several aspects of the real estate investing decision to which we can apply objective standards in our evaluation.

We will review strip shopping centers, suburban office buildings, flex R&D projects, warehouse buildings and apartments.

Just a word of caution before we proceed: We are only considering relatively successful, well-conceived and well executed projects. General rules do not apply to sub-par projectsthats why they are often called workouts.

Investment Return

The Holy Grail of investments is their potential return. Sophisticated investors understand value is based not only on current cash flow of a property, but its future value when sold (residual value). Obviously, the returns in both categories must be measured against the actual investment made in the property.

The best measure of total returns is the overall capitalization rate (OCR) being applied to properties recently sold in the marketplace. This number reflects the total annual return expected by the buyer when purchasing a property. The OCR encompasses the expected current return and the residual. The numbers presented in the accompanying chart are from the first-quarter 2003 Korpacz Real Estate Investor Survey and represent national averages.

A higher OCR generally means a property type is perceived to be more risky, thus demanding higher returns in the marketplace. As we can see by the relative OCRs, self-storage has some very credible company in the real estate business. While apartments seem to be more attractive to buyers, their OCRs may be an aberration, mainly caused by the relative lack of sellers. OCRs have generally gone down over the last year, but the relativity appears to be similar, although there are no definitive reports.

The result of this comparison is most other property types dont materially yield more per dollar of investment than selfstorage. Thus, we will have to look at other characteristics to see which category leaps to the front of our battle!

Obviously, every return comes with a risk, and many experienced people in the market will tell you all the risk is discounted in the price. As you can see in the OCR for hotels, there appears to be some higher level of risk indicated. However, we will explore the generic risks (those that are not site-specific) and let you see how those of the self-storage industry stack up against other real estate and determine if they are indeed reflected in the price or cap rate.

Strip Shopping Centers

The local strip center was once considered the gold-standard investment, almost immune from risk. An anchor grocery tenant with a long-term lease, good credit, and the ability to draw clients to other tenants who paid good rents was a great investment. Then, along came the large discount markets and Wal-Mart Super Centers.

About 1,300 supermarkets closed in 2002. Wal-Mart is clearly becoming the largest grocer in America. A Wal-Mart Super Center in a neighborhood will cause a real problem for a nearby strip center, even if the anchor grocer survives. Traffic will go down, and the Wal-Mart outlet may have competitors for the stripcenter tenants, i.e., barbers, banks, optometrists and even McDonalds. If this mega-store phenomenon continues, some anchors may be in serious trouble; and the owner of a strip center with a closed anchor is in big trouble! That is risk spelled with a capital R.

Suburban Office

Though office-market occupancies across the country continue to deteriorate, there is still a demand for office buildings at nice cap rates. However, the real issue is that a typical multitenant office building has a very high turnover cost; commissions and tenant-finish costs often amortize out at $5 per foot per year. This means lots of continuing capital costs and low gross margins.

With jobs a problem and an overbuilt market, the overall national vacancy rates are peaking at 20 percentall this while rental rates have plunged. For example, rates in Denver have dropped from about $25 per square foot to $16 per square foot in roughly 18 months. When expenses are considered, that means net rents dropped almost 50 percent, plus occupancies dropped 20 percent. This isnt the first time this cycle has been seen in the office market during the last couple of decades.

Flex R&D

This real estate type has a history about as long as that of self-storage. An early success generated a lot of supply in the small-tech manufacturing and distribution business. As that market grew weaker, excess supply overcame much of it. The market has improved marginally because this space can compete with traditional office space at cost. However, the configuration lacks many of the amenities users seek. In some respects, this is a product type that is still looking for a defined market. Many leases are short (five years or less), rent concessions are high, and there is still a lot of product around.

Warehouses

As witnessed by the lower OCR, investors think warehouses are less risky businesses than most real estate types. While vacancies have increased, the industrial leased investments remain strong, with long leases and good-credit tenants.

The long-term risk is obsolescence, as warehouses have grown larger and higher, are of different dimensions, and have varying amenities in recent years. Warehouses are very similar to self-storage in that the demand is not directly related to people occupancy, but rather depends on storing stuff. There has been some concern that because of improved, just in time, computerized inventory controls, the need for warehousing might decline substantially.

Hotels

The OCR on hotels indicates investors compensate for risk by demanding a higher return. This seems warranted, as 2002 recorded the lowest occupancy in over 30 years. The economic slowdown has caused businesses to reduce travel costs significantly. While much of these savings are related to the economic cycle, there is also a fundamental cost-cutting mentality in much of American business.

Combined with more travel hassle, the outlook is difficult for the industry. In addition, the net operating income of hotels is usually lower in relation to the total revenues, giving the properties a lower operating leverage. Allowances must be made for frequent replacement of furniture, fixtures and equipment, which can create quite large capital investments.

Apartments

Apparently, investors believe the risks on apartments are manageable and the future bright, if they are willing to accept an OCR of 8.14. Although occupancies are down to low levels and many markets are overbuilt, there remains optimism that apartments will retain value. It is interesting to note low interest rates may have actually hurt the apartment business, as many renters have now become buyers of homes. The math, of course, works if the buyer needs an 8.14 percent return, and a renter can get a house for 5.5 percent plus a tax deduction.

Apartments also mature very fast, so there is a lot of obsolescence in older units that cannot now compete for the higher rental rates and occupancies. Large projects of recent vintage appear to compete for higher rents based on size, amenities and marketing efficiency. Additionally, apartments require large capital infusions to remain competitive (carpeting, paint, appliances, pools).

Self-Storage

Self-storage is not a business without some consequential risks. However, there are many benefits when compared to other real estate types. The business is subject to economic cycles, albeit less than the general economy.

Self-storage has low continuing capital costs. In fact, most appraisers suggest the reserves are only about 25 percent of those required for office and apartments. I believe they are even less. Self-storage operating costs as a percent of revenue are quite modest when compared to hotels, apartments or office projects in general.

The demand for the product is not tied to a growth rate in population but rather to peoples growing wealth in material possessions. Additionally, there is strong evidence that many customers are still learning to use the product and the learning curve will continue to increase the total growth for some time. Rental rates have shown overall growth (even if modest) in recent years, despite a building boom in self-storage.

Zoning planners continue to look at self-storage as an unwanted but minimally necessary and somewhat limiting competitor. This is also related to the fact there may be no sales tax on self-storage to encourage their approval.

So where are all the risks? The major risk is, of course, overbuilding. While this is a universal risk in all types of real estate, there are some particular elements that make the situation more critical in self-storage:

The nominal dollars are not large, and lenders are less cautious, particularly if the borrower has a little experience and some net worth. Many lenders have little or no experience in self-storage, making their judgments questionable in any event.

1. Many projects get built without valid feasibility studies that take a critical look at the underlying demand.
2. There is a mistaken perception that experience is not very important in developing self-storage projects.
3. New projects tend to be much larger than in the past.
4. The industry statistics currently being used are the product of highly speculative surveys.

Will growth offset these overbuilding issues? Lets just see how significant a little overbuilding can be in a market. Well use a hypothetical market area by way of example. Lets say a market contains six self-storage properties, each with an average of 50,000 square feet and an occupancy rate of 88 percent. While total square footage is 300,000, total actual demand is only 264,000. Now lets say a new, 85,000-square-foot property enters the market. The actual demand of the market does not change, but now there are 385,000 square feet of storage. This means the average occupancy rate declines to 69 percent.

In this example, if the demand grew at 5 percent per year, it would take 5.5 years for the demand to return to the previous 88 percent occupancy. During this time, there would be considerable pressure on rental rates, particularly in the less-competitive facilities. If the demand were only growing at 3 percent, it would take 8.5 years to get back to the previous average occupancy.

Summary

Self-storage is a maturing real estate property type, and comparisons can be made with other properties. According to our little study, the returns for strip centers, suburban offices, flex R&D and selfstorage are about equal, indicating the investment community perceives the risks to be about the same as well. They seem to think apartments are a lot less risky, and warehouses somewhat less.

Although the relative risks are hard to quantify, the major risk in self-storage overbuildingis one over which the industry could take some modest control. Overbuilding can ultimately be moderated by having well-informed lenders, using and developing industrywide, reliable statistics, and requiring statistically relevant feasibility studies for new projects. To date, there has been little demonstrated resolve on the part of the industry to control this overbuilding, and all owners will suffer the consequences.

However, no one will really know what the risks are until the battle is over and we see the long-term results of our investments. Thus, as you review the risks outlined here, you will develop a notion of the relative risks and rewards and an opinion about them. The relationship between risk and reward in real estate investing is often one that is computed in the stomach rather than the brain! Good luck.

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; visit www.selfstorage.com.

Although the company is just over a year old, Crossco Lift is rapidly developing as a major provider of vertical reciprocating conveyors (VRCs) designed specifically for self-storage applications. Established in 2002, the La Verne, Calif.-based company serves clients throughout the United States including Alaska and Hawaii.

VRCs are free-standing lifts that dont need special architectural requirements such as major electrical, concrete shaftways or concrete footing. Since VRCs do not allow passengers to ride with the loads, their cost can be considerably less than those of a passenger liftan important consideration when designing a new facility or converting a multlevel structure into storage.

We are a new name with many years of lift experience behind us, says Gregg Cross, president. Cross and David Smart, Crosscos general manager, have known each other for more than 10 years. Cross has been an owner/operator of construction businesses since the early 70s. Smarts experience includes 250 new and retrofit lift installations in U.S. facilities. His years in sales and management in the vertical-lift industry makes him an expert in the needs of self-storage and building manufacturers.

Before starting this company, we did a bit more research than what we might have done if we started it 20 years ago, Cross says. The partners researched the needs of storage owners and the capabilities of lift-manufacturing companies before selecting one that would produce the product they wanted to offer the industry. We made some modifications and design changes, and developed a superior product.

Although every job site is different, Smart adds, installation of a Crossco VRC lift can save 55 percent to 75 percent over the cost of a passenger lift. In addition to new installs, Smart has several years experience with conversions. Architects and owners built a lot of facilities in the late 70s and early 80s, with no thought to installing lifts, he says. These older storage companies are forced to remodel and retrofit their buildings to stay viable as large competitors, such as Storage USA and Public Storage, move in with new, multilevel facilities.

As part of its staff, Crossco employs two engineers to handle customers specifications and needs. Each project is evaluated, taking into account the facilitys square-footage, distance from the farthest unit to the lift, number of units, what competitors are offering, and what type of customer the facility is trying to attract.

A Superior Product

Crossco lifts are designed and engineered exclusively for the self-storage industry. The lifts are manufactured from standard steel fabricated into a selfsupporting rigid structure comprised of a back frame with integral uprights. The back frame, which contains the power unit, is trussed and cross-braced for strain relief and resistance to twist. The lifting platform and back guard are fabricated of steel plate and welded to the structural-steel arms of the lifting carriage.

Safety features include a system that is mounted on the lifting-platform carriage. Spring-loaded cams with case-hardened teeth ensure the lift is held if the lifting chains slacken for any reason. All moving parts are encased or guarded. A fail-safe, solenoid-operated valve prevents the platform from falling or lowering in the event of power failure.

The Future

Cross and Smart are not content to rest on their current success; the partners plan to expand internationally. We know a product of this nature is not available in some countries. People from Australia, Canada, England and Europe, for example, come to the United States to research products, Smart says.

Due to land prices and the rising demand for more storage by the general public, many more facilities are being built as two- and three-story structures, Cross says. This increase in demand and need for multilevel construction ensures Crossco will continue to develop new clients and expand.

Crosscos marketing program consists of print advertising and exhibiting the product at industry- related tradeshows throughout the country. Although we are a new company in the selfstorage community, our name is rapidly becoming known, Cross says. The foundation for all his business practices is a simple philosophyhe treats people the way he wants to be treated, with highly personalized service delivering a superior product.

We offer excellent service and our lead time is very good. If we schedule a delivery date, we stand by it, Cross says. We are becoming known throughout the industry for offering our clients the quality and service they deserve, Smart confirms. For more information, call 800.819.5438; visit www.crosscolift.com.