When the economy weakens it’s not uncommon to see a rise in lawsuits filed against self-storage owners and operators. This is not a coincidence. In tough times, people look for other ways to make money and are much less forgiving of the small losses they would have not previously fussed about. Additionally, with the increasing number of foreclosures and evictions, people are losing their homeowners or renters insurance, which would otherwise pay for some of these claims. Also, many self-storage owners and operators are cutting back on employees, deferring or making “temporary” repairs to facilities and equipment, such as alarms and gates, which normally provide some deterrent to theft.

Safeguard Your Business

While there is not much we can do to turn the economy around quickly, you can protect yourself. It may seem like bad timing, but this is the most important time to review and update your rental agreement to provide legal safeguards to fend off or minimize these types of claims. There are six areas you should review in your rental agreements to ensure these provisions are well-written, solid and apply to all your existing occupants.

1. Valuation limit. Have a valuation limit in your agreement and, if appropriate, a limitation of liability clause. A limitation on value requires that the occupant agrees there is a maximum value to the stored property in the storage unit. You are not, by this clause, necessarily agreeing to provide insurance or be responsible for that amount of value or even agreeing there is a value. Rather, if there is a claim later you will know the maximum dollar figure the occupant can claim against you.

This goes hand-in-hand, in some states where permissible, with a limitation on liability. The limitation of liability figure may even be lower than the value limit. While you may say the value limit is $2,500 or $5,000, in many states you can say you will only be liable in the event of a loss for up to $1,000, as an example.

In some states a liability limitation may not be an enforceable provision, but a value limit is always enforceable, if properly written. Remember, for a claim to be valid and result in a potential judgment against you several things must be present:

• There has to be a loss.
• You have to have done something negligent, willful or intentional to have caused the loss.
• Damages must have occurred. Those damages must be demonstrated in a trial. If the value limit and the liability limit are set low enough it will often not be worth the occupant’s time, energy or money to bring a claim.

2. Military status. You are setting yourself up for a lawsuit if you do not ask in your rental agreement whether the occupant or any member of his/her family is in the military and, if so, to list additional contact information, including the commanding officer’s name and phone number. If you are not familiar with the terms of the Servicemembers Civil Relief Act (SCRA), and you are conducting lien sales, you are risking an unnecessary lawsuit. SCRA imposes upon you duties to act in a certain manner that may be different than with a normal occupant if you know your occupant or a family member is in the military and serving overseas.

The SCRA is a notice statute; you have to have notice of military service. If you have never asked this question, you have missed your opportunity to be on notice of military service. If you think it is better not to ask and keep your head in the sand, it will not be a good defense if an action is brought against you. The simple solution is to ask about military status and deal with it if need be.

3. Charges and fees. List your actual charges and fees.While the statute in your state may permit charges such as a late fee, non-sufficient fund fee, overlock fee, certified mail fee and so on, contractually you need to list actual charges, or notice of the charges the occupant could incur.

This is simple in New York where you must itemize all the mandatory and optional charges. In other states you should still list these charges. Do not give a judge the opportunity to say you are not entitled to a charge or, worse, that you sold but you should not have sold.

Also make sure you have a default clause. Obviously, a major default issue is non-payment of rent, but there are other grounds under which you would want to terminate the rental agreement.

As a matter of fact, your rental agreement probably lists, in various places, other prohibited activities, such as working on automobiles, manufacturing, living in the unit or housing animals. While these are defaults, you should have a clause that the judge can easily review to determine the operator had the right to terminate a rental agreement.

Further, the default clause should be followed by a remedies clause. While overlocking and eventually selling, if necessary, in the event of a non-payment default is allowed by statute, what other remedies do you have if a tenant is constantly leaving garbage around the facility? Can you overlock and sell for bad behavior?

4. Liability clause. Make sure your release of liability clause is strong and covers all events in which you want to be released. It should cover loss or damage to property from any source or cause. In some states you may not be able to disclaim liability for your negligence; this is a discussion to have with your attorney. Make sure you are also getting a release of liability for injury. Sometimes the claims brought are not so much about damage to the stored property, but a slip and fall, or a finger caught in the door spring. Most release of liability clauses do not cover personal injury.

5. Mediation clause. A mediation clause gives both parties the opportunity to meet and hear each person’s side of the story with a neutral third party before litigation starts. If you do not mediate and are sued, you will need an attorney, end up doing discovery, filing other pleadings and generally running up attorney fees.

After you have paid the attorney you will be letting a judge, who knows very little or nothing about the world of self-storage, or worse a jury, make a decision about whether you owe money to the occupant for something that was not your original responsibility.

6. Vehicle storage. Are you storing vehicles? Are you sure you're not? Many operators many not know there are motorcycles or ATVs stored in their units. In indoor/enclosed storage, if you are not asking up front if the occupant intends to store a vehicle in a unit, you are making a huge mistake. There is a lot of additional information you need to store vehicles, including title, registration, lien holder information and insurance. If there is a loss, you will be hard pressed to prove there was not a vehicle in the unit. Moreover, without the title, it’s a long cumbersome process to conduct a lien sale successfully.

While times are tight, one of the best investments you can make is to review your rental agreement with your attorney. It can substantially reduce your risk of frivolous litigation and, in the event of litigation, cap the amount of the claim. It will also help ready you to move to the next level of your operations when the economy improves.

This article is for the purpose of providing general legal insight into the self-storage field and should not be substituted for the advice of your own attorney.

Jeffrey J. Greenberger is a partner with the law firm of Katz Greenberger & Norton LLP in Cincinnati, and is licensed to practice in Kentucky and Ohio. Mr. Greenberger’s practice focuses primarily on representing the owners and operators of commercial real estate, including self-storage owners and operators. To reach him, call 513.721.5151; visit www.selfstoragelegal.com.

Self-storage brokers in the Southwestern United States explore the impact of the current economic recession on self-storage customers, buyers and sellers. Below, this month's panel discusses current lending practices and whether self-storage is recession-proof. The panel includes:

• Dale C. Eisenman, CCIM, of Midcoast Properties Inc., Hilton Head Island, S.C.
• W. Frost Weaver of Weaver Realty Group in Jacksonville, Fla.
• Bill Barnhill, CCIM, Stuart LaGroue and Shannon Barnhill Barnes of Omega Properties Inc., Mobile, Ala.
• Grady Riggs of Long and Foster Real Estate, North Bethesda, Md. 

What has been your experience with the current lending practices of both local banks and the larger regional or national banks?

Barnhill: Local banks are the best source for financing in the current climate. Their feasibility and underwriting are more stringent with a lower loan to value (LTV) and higher debt-coverage rates. Banks want owners with a solid track record, and the larger banks are typically only interested in solid performing properties.

Eisenman: Lenders fall into two basic categories: recourse and non-recourse. For non-recourse loans the properties have to be stabilized (not in rent up), income-producing facilities. Typically, portfolio lenders such as life insurance companies who keep the loans and take the risk are making non-recourse loans with 60 to 70 percent LTV ratios with conservative underwriting standards. Recourse lenders such as community and regional banks are making recourse loans to borrowers with good credit, substantial net worth and cash flowing properties at up to 80 percent LTV. 

All lenders are discounting future projections and focusing on the most recent actual performance. Generally the tolerance for risk is small among all lenders; they all want good loans. Stated another way: If you don’t need the money you can probably qualify for the loan!

Riggs: National and regional banks are not lending aggressively and their terms are difficult to meet for most buyers. However, what I have found in many rural communities is that local banks are willing to work with buyers, particularly if they are familiar with the business. Though they may have tighter guidelines than before, they are still more flexible and aggressive than most large banks.

Additionally, there is a little known government program that is often overlooked. The USDA Business and Industry guaranteed loan program is targeted at rural communities with populations less than 50,000 and may offer alternative financing up to $10 million for new buyers.

Weaver:  My current experience is that most financing is through regional or local community banks that have a current banking relationship with the potential buyer.  However, there appears to be some funding available through national contacts. An example of a current loan quote I have recently reviewed was a 6.8 percent fixed for five years, based on 67 percent LTV. For a three-year fixed product, the rate was slightly below 6 percent with the LTV up to 70 percent. 

There is controversy about self-storage being a recession-proof business. What is your experience as to changes in rental rate, concessions, overall occupancies and turnovers?
 
Barnes: Recession-proof is not the best way to describe self-storage; I would classify it more as recession-resistant. Self-storage has not been as widely affected by past recessions as the retail sector has been. Overall, rental rates have decreased some while rental concessions have increased. This is due to the economy as well as overbuilding in some markets. Though some facilities might be able to sustain their occupancy by increasing concessions, the financial occupancy has declined somewhat.

Eisenman: Occupancies have softened in some areas by as much as 15 percent, but most are seeing a reduction of around 5 percent. While self-storage is performing better than other commercial real estate segments, it reflects the overall weakness in the housing market and general economy. While the days of being recession-proof may be over (if they ever existed), it still appears self-storage is weathering this “perfect economic storm” without the damage other real estate and businesses are experiencing.

Riggs: There is a consensus that we now know: Self-storage is not recession-proof.  While we can expect occupancy rates to track the economy to some degree, what was not anticipated is the impact of lending completely shutting down. So even if we have motivated sellers and qualified buyers, the hoops these buyers must jump through and the LTV requirements have proven to be prohibitive.  Move-outs and late payments are on the rise making 2008’s net operating income (NOI) and values plunge. Rental rates are stable, but concessions are common, which is not what a new lender wants to see.

Many small communities are one or two industry towns, so it doesn’t take much to change the game. In Virginia and Maryland, new facilities and expansions that were planned are now on hold or some newly acquired vacant properties are back on the market. What’s interesting is that vehicle storage is doing well and is increasing in many areas.

Weaver: Recent experience would indicate that self-storage is not recession-proof. The downturn in the housing market has had a definite negative impact on self-storage facilities, especially in the smaller cities. For urban, well-located, established properties, there has been some drop in the occupancy of 5 percent to 10 percent. There is a definite indication that some renters are seeking to move out of their storage units to eliminate costs. I have not noticed a decrease in rental rates in North Florida, but owners are definitely being more creative in their concessions.
 

 
What do buyers in today’s market look like?

Eisenman: Buyers of self-storage fall into many categories now just as they have in the past. Those who are in the industry probably see the future in self-storage as brighter than those outside and may be more inclined to try to acquire more properties during this economic slowdown.

LaGroue: The landscape for purchasing self-storage properties has drastically changed over the last year and a half. There are three potential buyers in today’s market: institutional buyers focusing on limited areas of the Florida panhandle; individual investors looking for a deal; and newcomers that are still looking to enter the self-storage business. While these three different types of buyers have varying goals, they are all faced with the reality that cap rates are trending upward around 9 percent and it’s becoming more difficult to obtain favorable financing.

Regardless of the type of buyer, we’ll see the gap between sellers’ expectations and what buyers are willing to pay shrink. In our markets, we’ve also encountered some investors who are looking for “deals” contact local banks to inquire about distressed properties or properties on the verge of being distressed in hopes of entering a market at a discount.

Riggs: I still continue to receive many inquiries on my self-storage listings, so I can only assume there is still strong interest in this asset class. But the offers we’re now seeing are from bargain hunters and “bottom feeders” offering wacky terms. I feel there is a level of angst with average buyers not knowing what’s going to happen next in this economy and fearing that they may be buying too soon.

It appears that these buyers are waiting to hear the “bell” ring and the town crier say we’ve hit bottom. Once this happens, they will make their move. I have heard of several direct buys in Washington D.C., and other major MSAs not hitting the radar. This is not surprising because this region has a history of low turnovers. 

Weaver: My experience is most potential buyers would be considered investors seeking value-added purchase opportunities. There is a noticeable wider gap between current asking prices and initial offers. Buyers are testing the owners' true motivation, which can make the negotiations lengthier in attempting to find common ground. The good news is that there are viable buyers in the marketplace. They are definitely being more selective and analyzing the property operations more thoroughly.

 
Are owners in your market starting to deal with expiring loans on their facilities? How are they handling this situation in light of the current lending market?

Barnhill: Some self-storage owners in our areas are beginning to deal with loan maturations on their properties. Owners with properties that are well occupied and performing usually are capable of obtaining local bank financing with debt-coverage ratios of 1.35 to 1.50 with rates in the 6.75 percent range. Owners whose properties have low occupancy rates such as in the 40 percent to 50 percent range and negative cash flow would have difficulty obtaining a good loan. In those cases, banks would be depending more on the financial statement of the owner.

Eisenman: A more pressing issue may be servicing existing debt by those whose cash flows are stagnant, declining or not yet stabilized. It will be interesting to see if lenders work with self-storage operators through loan restructuring to get through this difficult period. Lenders have plenty to occupy their attention with the housing crisis, bankruptcies, credit issues, Wall Street challenges and auto industry difficulties. Self-storage will be just a small segment of that matrix and may have the best prospects of weathering the storm.

Weaver: I do not have any recent experience with any owners that are attempting to refinance expiring loans. However, if these properties are well positioned in the marketplace, my assumption is that financing is available based on the criteria discussed earlier in this article. Lenders are still looking for solid performing properties with stabilized occupancies.

Citigroup Inc. will get $25 billion after it reached an agreement with the U.S. government Friday that gives the government as much as a 36 percent equity stake in the struggling bank.

It is the third rescue attempt for Citigroup in the past five months. It's contingent on private investors agreeing to a similar swap.

The U.S. government and other private investors will convert some of their preferred stock in Citi to common shares. Citi will then offer to exchange up to $27.5 billion of its existing preferred stock held by private investors at a conversion price of $3.25 per share, a 32 percent premium over Thursday's closing price of $2.46. The government will match up to $25 billion of preferred stock it currently owns for conversion at the same price.
 
Source:  Associated Press,  Citigroup Reaches Aid Deal With Government

A bill that will enforce a tax on recreational vehicles stored in Virginia self-storage facilities was approved by both houses of the General Assembly this week. If signed by Gov. Timothy M. Kaine, the measure will be effective July 1, and vehicles parked in self-storage as of Jan. 1, 2010, will be subject to the tax. Self-storage owners in the state will have to provide the names and addresses of out-of-state vehicle owners.
 
The sponsor of House Bill 2289, Del. Ben Cline, R-Rockbridge County, pushed for the measure because out-of-state RV owners are currently storing them tax-free, while Virginia residents pay taxes on their toys. Commissioners of revenue are unable to enter storage lots and units, which are private property, to gather the necessary info to tax vehicles owned by out-of-state residents.

Source: NewsAdvance.com (Lynchburg, Va., News-Advance), Bill passes that would tax RVs in self-storage sites

MJ Partners Self Storage Group of Chicago sold a 50 percent interest in the newly built Elmhurst Self Storage in Elmhurst, Ill. The transaction values the facility at $8.2 million, or about $100 per square foot, through an investment by a local private family that is new to the self-storage industry. Developed by Storage Options of Palatine, Ill., the site will be rebranded as Metro Self Storage. It consists of three stories with 81,525 square feet and 823 interior storage units, and is fully climate-controlled. For more information, e-mail [email protected].

 

The U.S. economy shrank more than anticipated in the fourth quarter, recent government data shows, as exports plunged and consumers cut spending by the most in more than 28 years.

According to the U.S. Commerce Department, gross domestic product, which measures the total output of goods and services within U.S. borders, fell at an annual rate of 6.2 percent in the October-December quarter, the deepest slide since the first quarter of 1982.

The goverment estimated the drop in fourth-quarter GDP at 3.8 percent. The weaker GDP estimate reflected downward revisions to inventories and exports by the department.

Source:  Reuters,  U.S. Economy Shrank at 6.4 Percent Rate in Fourth Quarter

The stage has been set for some investors to capitalize on a once-in-a-lifetime opportunity while others feel the pain of having made poor investment decisions, falling victim to predictable errors such as “excessive optimism or overconfidence.”

Over the last several years we’ve seen the accelerated awareness and acceptance of an industry that, until recently, was referred to as the “stepchild” of real estate asset classes due to its lack of transparency and standardization. In recent years, investors, lenders, appraisers and consultants all made decisions to invest in self-storage believing their respective facilities could capture a disproportionate share of a market’s self-storage demand.

This frenzy of investment was augmented by several sources of low-cost capital made available to many borrowers with little or no self-storage experience. The dearth of information helped to create an “imperfect” marketplace where knowledgeable investors took advantage of less informed ones who came to this market with unrealistic yield expectations.

Act I: The Problem

It’s not the self-storage market that’s the problem for many of today’s investors; it’s the “deal” that some investors made. Many who acquired facilities within the past few years paid the highest prices in the history of the industry, and did so having given little or no consideration to the differentiation in risk between types of facilities and locations.

Soon, many of these investors will face loans that are coming due on facilities they overpaid for and over financed. Given the tighter underwriting standards of today’s capital markets, it means these investors will most likely be required to put additional equity (hard dollars) into the deal. Some will be forced to sell, creating more opportunity for others.

Act II: The Opportunities

Sports fans have a saying, “Let the game come to you.” That’s exactly what many astute self-storage investors have been doing ... waiting. Now, the market is coming to them and we will all see them stepping up to the plate.

Those who have been in real estate for a while may recall the origins of national hotel chains, such as the Hilton and Sheraton, began during the stock market crash and depression of the 1930s, when entrepreneurs took advantage of financially distressed hotels.

Experienced self-storage investors, who understand market fundamentals are strong and who have been waiting for the market to come to them now have an opportunity to expand their holdings by acquiring facilities from financially strapped investors.

Act III: The Conflict

When the markets were stronger and values were increasing rapidly, no one noticed or cared that appraisers and lenders often used class-A cap rates to value class-B and -C facilities. Unfortunately, this sting of confusion will be felt by many in the current clime:

• Tax assessors who use sales of superior quality facilities (those achieving the highest rents in central business districts) to derive the assessed values of facilities with functional obsolescence located on secondary streets in the suburbs.
• Facilities being underinsured because appraisers based their values on inferior quality construction of single-story frame structures to value high-rise masonry structures.
• Owners whose facilities are undervalued by lenders using sales of inferior facilities with higher risk, not reflective of the subject’s high-barriers-to-entry and superior quality of construction.
• Appraisers using the expense comparables derived from sales of investment-grade facilities in major cities (which have much higher expense ratios) to value an owner/operated facility in the suburbs or even rural locations.
• A consultant who determines a proposed project is feasible because he assumes that all facilities are created equally.

For these and a host of other reasons, all other real estate sectors have recognized the need to classify properties by type and location. For instance, many are familiar with office buildings ranked as class A, B or C, or the difference between luxury, standard and economy lodging facilities. There is no confusion about the difference in value of a regional shopping mall and a neighborhood center. Nor would anyone would expect a garden-office complex to be comparable to a high-rise office located in the heart of the city. For the same reason, why should an investor in self-storage think all self-storage facilities perform in a comparable manner and reflect the same risk?

The quality of construction, location, accessibility, visibility, the level of professional management and many other attributes differentiate self-storage facilities and have a direct bearing on the risks they face. The following definitions are offered as a guide in hopes the self-storage industry recognizes the importance of classification and standardization of terminology.

Class-A facilities. Class-A properties feature excellent locations and access that attracts tenants willing to pay rent in the upper percentile of the market. The facilities must be of superior construction and finish, relatively new or competitive with new facilities, and provide professional onsite and offsite management. These are typically located in markets with high barriers-to-entry. They are characterized by above-average maintenance and security systems.

Class-B facilities. Facilities with average locations, access and visibility earn a class-B distinction. These sites and the rents they collect compete at the low end of class-A facilities and above the class-C facilities. They receive average-to-good maintenance and have a full-time onsite manger and competent offsite management. The quality of construction and security systems ranges from average to good.

Class-C facilities. These sites generally have secondary (less desirable) locations relative to the tenants’ needs. Often they have poor access and limited visibility. They are typically older facilities with growing functional and/or economic obsolescence. They achieve rents at the bottom of the range in the market, are often owned and operated by individuals, and may not have an onsite manager. The quality of construction and maintenance ranges from fair to average. Often these facilities have minimal or no security and receive below average maintenance.

Epilogue

Since the industry has not developed its own standard for classifying facilities, and given the new underwriting standards and the stricter due diligence going forward, we can expect lenders will develop their own classifications.

The need for standardization of terms within the industry is obvious and long overdue. It is particularly important at this stage of the industry’s maturity that lenders, investors, appraisers and analysts understand that not all self-storage facilities face the same risks, even within the same market.

The industry’s current overall strength is weakened only by the few investors, appraisers and lenders who did not or chose not to acknowledge the differences in risk that are directly attributed to differences in the quality and location of facilities.

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

Facebook, an online social-networking website, is asking its 175 million members for input as it revamps its terms of use agreement.

Founder and CEO Mark Zuckerberg made the announcement following a backlash over controversial changes to Facebook's policies last week.

"The purpose of Facebook is to make the world more open and transparent by giving people the power to share information," Zuckerberg said in a conference call with reporters. "We really took last week as a strong signal about how people cared about Facebook and wanted to be involved in helping to govern it."

Facebook members will be allowed to comment on any proposed changes to a set of "Facebook Principles" and a separate "Statement of Rights and Responsibilities," both issued Thursday. Virtual Town Halls will enable users to give feedback until March 29. In addition, the company may put any subsequent changes up for vote that will be binding if more than 30 percent of active registered members cast a ballot.

Source:  USA Today.com,  Facebook Seeks User Input on Policies

 

Centershift Inc., a provider of facility-management software for the self-storage industry, has hired Rare Method, an integrated marketing agency, to rebrand its image and family of products. Rare Method will work with Centershift to rebrand its new software applications, Store Advantage and Store Enterprise, develop an online presence, and execute traditional advertising campaigns.
 
Centershift’s management software provides self-storage operators with access to numerous information sources, centrally locating all corporate data onto a single Web-based host.
 
Rare Method offers services such as strategy development, creative production, technology development, media planning and management, as well as campaign analytics, reporting and optimization.
 
Source: Yahoo! Finance, Rare Method Interactive Wins Centershift Account