Dear Waldmans: Most of my adult life I have worked in the self-storage business, and I presently manage a facility. Recently, I attended a management seminar hosted by several different speakers. I found the first speaker to have great concepts. In fact, he was so fascinating that I found myself anxious to get back to my facility to try some of his techniques.

The second speaker was a different story, though, as I quickly became bored with his presentation; he just could not outshine the first. Realizing it probably wouldn't be wise to leave before the third and final speaker had his say, I settled in for his story. I stayed, but then I was really confused. This guy was flamboyant and had recommendations that were totally opposite the first one, but very exciting.

After listening to the first speaker, I was absolutely positive about what steps I should follow in renting a unit. Whoops! Then the second one had me extremely bored, while the third had me going in a completely different direction. I was thoroughly confused. I found myself grabbing information, without being sure what to do with it. There were so many directions to choose from. How do I decide which method is best for my business?

--Stuck in New Orleans

Dear Stuck in New Orleans: Whether it's the purchase of a new vehicle, a new television or what to eat for supper, we have to make difficult decisions every day. While those decisions may cause stress in our lives, we're lucky to have so many choices. Confusion occurs when we worry about making the right choice. It is important to feel comfortable with your decision because you like it, not because someone else liked it. Never select something if you have doubts. Most likely, you will not be happy about your choice.

Seminars can be exciting and offer valuable tips. Just remember never to sacrifice a long-term image for short-term profit, because your external image is crucial to your company's success. When attending seminars, try to learn a little from each one. Educating ourselves through different resources is always valuable. There are no wrong ways, just different ways. The really winning way is to be open to learning new things. A lot of people won't even try to do something that is foreign to their already-established routine. If we take what we like from this one and that one, then we can establish our own new way. That's the excitement of seminars.

New trends and new ideas always jazz up your business. It makes the day-to-day operation of a facility new and exciting--new products, new technologies and new ways of doing the same things. Choices really make life less boring. Ask questions during and after the seminars, if possible. Participate and talk with the experts. You'll return to the office invigorated and surprised at how the day-to-day procedures look different. Finally, develop all you have learned into a creative successful new way of operating your business. Remember, we can learn something new every day. Just look and listen. The world is full of valuable choices.

A father-daughter team, Stanley and Jill Waldman are self-storage owners/operators and attorneys. In addition, Ms. Waldman holds a master's degree in labor and employment law from Georgetown University. Together they have co-authored a number of books on self-storage operations, including Getting Started in the Self-Storage Business, Self-Storage Business Management Forms, The Policy & Procedure Manual for the Self-Storage Business, Selling Your Self-Storage Business and The South Carolina Tools Manual for Self-Storage Operators. Comments and questions may be sent to: Ask The Waldmans, P.O. Box 21416, Charleston, SC 29413; or via their Web site: www.askthewaldmans.com. Editor's Note: Views and opinions on legal matters are those of the authors. Professional counsel should be obtained before any determination or positive action is taken.

By John Wilson

Phasing, as defined in terms of construction of self-storage projects, means delaying the start of one or more parts of a project beyond the earliest possible completion. When utilized properly, this technique can yield real benefits for the owner and developer alike.

Whenever a potential project is reviewed, the entire site that is expected to include self-storage construction should be master-planned; that is, the maximum development potential should be quantified so that the full potential income can be weighed against the likely costs. This plan should include all necessary elements, including entries, exits, office-apartment, easements and setbacks that cannot be used as building sites, drives, building areas (climate-control and non-climate-control) hallways and multistory buildings. Also, in most urban areas, a certain amount of land must be set aside for landscaping.

After this master plan is finalized, the economic-potential profile is compiled, taking into consideration expected rents, construction costs, interest on loans, operating expenses, leasing rates and other factors. If it is determined that the project should be pursued, the construction scheduling should begin. This planning should include a description of how the project construction will be phased. As stated above, there are reasons to delay certain elements of the project beyond the earliest possible completion. These reasons vary with the type of element to be delayed.

Capital Availability

It is often true that there is just not enough money to complete a project's potential from the outset. A first phase of construction that will allow the owners to develop cash flow and create confidence in both themselves and their site can be a necessary first step, especially if they are first-timers or new to a lender.

Climate-Control Buildings

These are usually larger buildings that are more expensive to build. They are often delayed because of uncertainty as to the demand for the higher rents.

Non-Climate-Control Buildings

These are usually delayed because they are the easiest to complete, and there is uncertainty as to the market desire for unit size.

Slow Leasing Rate

If there is good reason to believe that the project may lease up slowly, it is a good idea to simply delay having to pay interest on units that are waiting for customers. For example, every month that construction is delayed on a 6,000 square foot building that is not yet needed, you create a savings of about $1,200. On the other hand, that is only equivalent to the revenue for about a dozen units.

Office-Apartment

This is often considered an element to be delayed on marginally capitalized projects where maximum revenue in the shortest time is a requirement. It is true that a unit can temporarily be finished as an office and that the permanent office-apartment can be delayed, but this shows the project for just what it is: a marginal operation. If the market is a secondary one, or the demand is very high, this may be one way to start cheap; but if there is quality competition, then your project will have a hard time getting more than the low-dollar business.

Landscaping

If the project is not in an area where the landscaping must be done before a building-occupancy permit is issued, then landscaping may be delayed. In general, this has to do with curb appeal and, as in the case of the office-apartment, may harm the image of the project if delayed too long. Naturally, seasonal adjustments are not a problem.

Site Work and Fencing

In some areas, particularly secondary markets, the minimum sitework is often done. This is a big mistake. All areas to be fenced and paved (certainly those areas within 50 feet of the buildings or streets) should be completed before opening. If an area is to be left for future building, make sure that there is another access from the street besides the front gate and between the buildings for the sitework equipment. Regardless of the situation, hire a civil engineer, and make sure the site work is done right.

Boat and RV Storage

The role for this type of storage is often the reverse of the buildings. An area that is graveled or paved and easily accessible is ideal for renting for outdoor or covered storage. The problem is that while this type of storage produces less net income than buildings for the land area, the demand is very high and the spaces fill up quickly. Once filled, it takes time to get the customers to leave if there is not another space available to offer them nearby. It also is sometimes hard to move those rent-paying customers out and lose any income from the space until all the buildings are built and rented.

Signage and Other Advertising

These should not be considered as reasons for delaying. The relative cost is very small, and this is the image the customers have of your business.

Security Systems

Beyond the very necessary gate with its coding and controls, electronic systems, especially cameras, can be a matter of marketing image more than actual operating necessity. It is a matter of opinion how important these are when opening. Sometimes the more elaborate security items, such as fence alarms, motion sensors and door switches, have proven themselves to be more trouble than useful.

Phasing is a tool that should be used for most projects--at least to some degree--in order to offer flexibility to the market and minimize capital exposure. But like many financial tools, phasing requires serious thought and evaluation as to the extent it should be used and in what way.

John L. Wilson, P.E., is president of Wilson & Associates Inc., offering architectural and engineering services for self-storage projects nationwide. For more information, call (210) 495-5736; fax (210) 495-4746; e-mail [email protected].

It's no secret that a lot of thought needs to be given to breaking ground on a new self-storage construction project. And before one spade of dirt is turned, a wise developer will have completed a thorough feasibility study to determine just how realistic the project looks. But even the most detailed feasibility study will not guarantee success. Risk is part of every project, but fortunately, there are ways to ease the risk factor of constructing a new self-storage property. One way is phasing, the preplanned strategy to build or expand a facility one step at a time, where a developer builds a facility, watches business roll in and, if supply cannot fill demand, build additional units to keep up with that demand.

Taken at face value, phasing may seem more expensive, and it can be, but the operator who phases will have the valuable knowledge of tested waters with phase one and will have a better idea if more units are necessary to satisfy the market.

Moving to the Next Phase

The next step to determining if a facility would benefit from phasing is to look at demand. If the facility is full, the phone continually rings with perspective renters and price increases are being absorbed by the market, it may be time to expand. All indicators show that the facility can handle more occupancy. Now that you've been down this road before, building the next phase should be easier than starting from scratch in an untested market.

"Overall, it pays to build a project in phases if you've got any decent-sized project--by that I mean a project that's 50,000 or 60,000 square feet or above," says Neil Gaunce, a sales representative for Tacoma, Wash.-based Tech-Fast Metal Systems. "You can come in with a 30,000-square-foot first phase, then balance it out with a second or even a third phase."

Unit mix may provide the most difficult area of the new phase, but the facility's own rental-unit pattern is probably the best determining factor in this issue. Compare the average percentage of rented spaces in each size to the percentage of units built in those sizes. It should be easy to see which unit sizes are most in demand.

"Normally, I see variations in the second phase," says Gaunce. "The original plan usually lays out the unit mix for the whole project. But when we go into the second phase, we will see a change where you'll have a big demand for larger units or smaller units. And drawing on paper is easier to shift than in the field after the project's been built. It makes more sense to wait for the demand to tell you what you need, than it does to guess at what you're going to need. The client base doesn't always do what we want it to do."

The next step should be to examine how fast the facility's units are renting. Let's take, for example, a 40,000-square-foot facility with an average unit size of 100 square feet. A unit occupancy of 80 percent that has rented an average of 13 units per month over the past two years should be filled up in about six months.

For construction time, a good gauge is to figure a month and a half for every 10,000 square feet, plus one month for development. If you're not sure about committing to another building and are considering rearranging the current unit mix in the existing building, keep in mind that it takes as much work to do the latter, and if it entails moving and replacing doors, it can be expensive.

John Wilson, CEO for Houston-based American International Construction, says the time to put up the remaining phases hinges on work done in the initial construction phase.

"Sometimes people do all the dirt work and underground and not the building. Other times, people don't do anything. What you're phasing will be determined by the lead time on what you have to get done," says Wilson. "If all you have to do is finish the interior of a building, that takes about three weeks, so you can wait until the last minute. If it's a multi-building job and you have buildings that aren't developed completely, then it might take eight weeks. It all depends on what you've left for the phase work."

Be sure to do your homework on the competition around you and check with the local zoning department on the status of vacant pieces of land surrounding your target area. That blank piece of land on the corner could shape up to be your biggest competitor.

The Advantages and Disadvantages of Phasing

The concept of phasing is not new. In fact, it has been used successfully by all kinds of real-estate developments around the country. It is essentially "master planning" a project by determining the number, size and locations of add-on projects long before they will be built.

When separating one phase from another, it's basically where the developer chooses to draw the line. Knowing the advantages and disadvantages of phasing is a huge plus.

The Advantages

There are several advantages to phasing. At the forefront, phasing allows the developer the flexibility of already knowing his market and what the needs of the facility are. The earlier phase can serve as market research for the operator to understand what kind of unit mix is required for the next phase. If the operator gets more calls for a specific unit size not available in the first phase, he can add that or other sizes in the expansion.

"Most people start out with a fairly standard unit mix and as the demand and customer base grow, it will tell them what to build for the second phase," says Gaunce. "That way they're coming into the second phase with a more assured client base instead of guessing what it might be. It is formulating a business plan that has depth to it and some assurance that there is going to be some return on the investment."

Wilson says another option is to phase in climate control. "If you make 20 percent of the units climate controlled spaces in the initial phase, but don't know whether it should be 40 percent in the remaining phases, as you fill up the first phase, you can make a decision as to how much climate control you need in the second phase," says Wilson.

Another advantage of phasing is that it minimizes risk, initial capital and overall debt. By building in phases, an operator can avoid tying-up capital and paying interest on a large facility that at the time can only absorb 75 percent of its capacity. As for unit mix, why build a facility that may need adjustments at a later date, at extra costs?

A financial advantage of phasing can be seen in financial institutions that provide interim financing for development of self-storage facilities. They may view a phased project as a way to minimize risk, which sometimes can be the deciding factor in getting a loan.

In fact, some loan agreements can include provisions to provide financing during all phases of the project. Often, loans with phase financing include performance clauses, which give the developer the OK to continue with expansion as soon as certain details are met on the original or previous phase, such as a steady occupancy rate, among others. This type of financing--committing one or more phases of a project--will reduce risk and also makes financing and closing costs less expensive.

A big plus is that revenues created through a phasing project can be applied to future expansion. By way of example, the developer of a 20,000-square-foot initial phase of a 40,000-square-foot project--with later plans to add four, 5,000-square-foot phases--can keep debts low and use the money generated from the existing property directly on the next phase.

"If the developer builds the whole project (at one time), they're starting out with it 100 percent empty, and it's obvious that it is going to take some time to fill up," says Gaunce. "But they are also paying interest on that money the entire time. What they are doing (by phasing) is being smart investors by using their money and limiting the interest payments on the whole project until they actually need that additional space. They're working the program like it should be worked, as a financial investment, rather than dumping money in it and hoping it fills up."

The Disadvantages

As good as phasing a facility can be, like anything, there is a downside. Mainly, the disadvantage lies in the inescapable fixed costs that sit with the initial phase until the others are built. The costs are broken down into categories such as office/apartment, security/access-control systems, business start-up and some site-development costs.

An example would be an office/apartment that costs $60,000 and adds $2 gross building square footage to a 30,000-square-foot-project. Conversely, the same $60,000 office/apartment adds only 80 cents to the gross building square-footage rate of a 75,000-square-foot project. It requires 30,000 to 35,000 net-leasable-square feet to afford the development cost of the office/apartment in most markets.

Combined with the high overhead needed for the initial start-up stage, the break-even occupancy requirement will be high. Most likely, it won't be until the next phase is completed and leasing begins that the fixed costs will begin to spread over both phases.

And there are times when construction costs will also be more expensive when phasing buildings later than during the initial construction time period.

"A disadvantage is sometimes you have to pay for a premium for the additional cost of the second phase and you run into a situation where you're bringing in crews for a second time," says Gaunce. "A lot of times you're paying more for labor and you may pay a little more in freight for oddball shipping quantities."

Conclusion

Self-storage development should be rooted in detailed market research. Market demands for storage space and unit sizes should be studied, along with the square-footage requirements needed to carry the up-front fixed costs. Also, don't use the extra units in hopes of pulling the accounting ledgers into the black. Make sure the initial phase will be stable on its own before moving onto any other phases.

Sometimes developers hold off on building the office/apartment or installing the security systems until a later phase. It's a choice that has to be made by the developer, but should never jeopardize the first phase or give an advantage to any competition in the area.

Phasing in the self-storage industry has many advantages. It can lessen risk, up-front capital and debt requirements, and is accepted by most financial institutions. Like anything though, it has to be properly planned and executed before the advantages are earned.

Tips on Phasing Whether you've been down the self-storage road before or are a first-time developer, any phasing or expansion project needs to be carefully researched. You can't eliminate the risk completely, but being prepared through solid research and knowing all of your options can only make life easier in the long run. Conduct a thorough feasibility study. Check out how the competitors are doing. Are they close to or fully occupied? What are their most popular unit sizes? Does your initial phase make enough income to stand on its own? Jaime Lindau, sales manager for Tracte Building Systems, says the break-even point for the initial phase is generally 80 percent occupied. "Normally, a bank wants it 70 percent occupied before they're going to let go of some money to build the next phase," he says. "So in reality, when an operator pulls the trigger on the second phase, they haven't made money yet." Is your financing secured to embark on another phase, expansion? Have you considered RV and boat storage as a viable option if the market demands such a service? If you've run out of contiguous property space, consider a satellite operation--one in which you build an additional phase on property down the road, but still manage it from the original office. If you're trying to cut a few corners on an overextended budget, you might try to phase security systems or climate control in at a later time when finances become a little less tangled. Keep in mind, though, you'll save a bundle if you at least install the wiring and duct work during the construction process. Build as much of the future phases as possible in the initial phase. "We recommend people do all the underground work for the whole project because then you don't have to bring in the big bulldozers anymore," says Lindau. "We've had a number of people who build one building to start, but put two slabs in. Then the next time, they build another building and put two more slabs in again. That way, they kind of hop-skip themselves."

D. Carlos Kaslow

Self-storage operators know the importance of a well-drafted rental agreement. This knowledge is either the result of direct experience or from the legions of lawyers who repeat this axiom at every opportunity. However, the importance of the rental agreement should not be underestimated simply because its importance has become an industry cliché.

Articles on rental agreements usually examine contractual provisions designed to protect storage operators from claims of loss or damage to stored property or those required by state self-storage lien laws. In this article, we will examine three provisions that deal with problems confronted by every self-storage operator.

Prohibiting the Storage of Hazardous Materials

First, let's consider hazardous materials. There is a greater potential for a major uninsured loss from a tenant leaving a large quantity of hazardous materials in a storage unit than any other occurrence. Under current federal and state law, self-storage operators are responsible for the cost of legally disposing of hazardous materials discovered on the premises. There have been numerous reports of storage operators who have discovered spaces containing hazardous materials costing $25,000 to $50,000 to legally remove. Six-figure cleanups are rare, but there are one or two events reported each year. One of the largest incidents occurred in the San Francisco Bay Area, where the storage operator incurred cleanup costs exceeding $250,000. The Environmental Protection Agency recently sent the Self Storage Association an advisory concerning individuals who are dumping hazardous materials at self-storage facilities in the Southwest.

A rental agreement provision cannot stop a tenant from dumping toxic chemicals at your facility. However, banks, insurance companies, and building and zoning authorities are now insisting that self-storage rental agreements contain a provision prohibiting the storage of toxic substances. This provision prohibiting the storage of hazardous material does not have to be five pages long. A paragraph along the following lines should be understandable to customers and satisfy the concerns of interested third parties:

HAZARDOUS OR TOXIC MATERIALS PROHIBITED: Tenant is strictly prohibited from storing or using materials in the storage space or on the facility classified as hazardous or toxic under any local, state or federal law or regulation, and from engaging in any activity which produces such materials. Tenant's obligation of indemnity as set forth below specifically include any cost, expenses, fines or penalties imposed against the Landlord arising out of the storage or use of any hazardous or toxic material by Tenant, Tenant's agents, employees, invitees or guests. Landlord may enter the storage space at any time to remove and dispose of prohibited items.

The provision not only prohibits customers from storing or using hazardous materials, but also requires them to indemnify the storage operator for any cost incurred in their removal. Such a provision will not stop the toxic material dumper or drug-lab operator from bringing toxic substances onto your premises, but it may cause your honest customers to be more selective as to the property they store.

Controlling Tenant Access

Simply prohibiting your customers from storing toxic materials on the premises is obviously not enough to prevent your storage facility from being used as a toxic-chemical dump site. Preventing customers from bringing hazardous materials onto your facility is the real goal. Here again the rental agreement can help. Limiting customer access rights to hours when site personnel are at the facility can reduce the likelihood of hazardous materials being dumped there. Consider the following provision:

TENANT ACCESS: Tenant's access to the premises may be conditioned in any manner deemed reasonably necessary by Landlord to maintain order on the premises. Such measures may include, but are not limited to, limiting hours of operations, requiring verification of Tenant's identity and inspecting vehicles that enter the premises.

This provision gives the storage operator a broad right to control customer entry on the storage facility. It specifically permits the storage operator to:

• Regulate hours when entry is permitted;
• Require any person who comes onto the premises to identify himself;
• Inspect any vehicle that enters the premises; and
• Create new regulations, as needed.

Each of these rights is important in today's operating environment. Few facilities in urban areas permit unlimited 24-hour access to the facility. Technological advances in gate-access control have made controlling access far easier than in the past. The right to verify and inspect vehicles is primarily designed to deter persons from renting who may not want the storage operator to know who they are and what they are bringing onto the premises. These rights should be used judiciously. However, site personnel should exercise these rights whenever they see suspicious activity or a covered truck or other vehicles that could contain hazardous materials entering the premises. Remember, the concept of self-storage does not prevent the storage facility operator from controlling his property. A credible threat of inspection can deter a toxic dumper from choosing your facility a dump site.

It's the Tenant's Lock

The last rental agreement provision we will consider deals with locks. At most storage facilities, the tenant is responsible for locking his or her unit. This duty creates two potential problems for the storage operator: tenants often use low-quality locks to secure their storage units, and even worse, they frequently don't lock the storage unit. A "Locks" paragraph can help with both these problems.

LOCKS: Tenant shall provide, at Tenant's expense, a lock that Tenant deems sufficient to secure the storage space. Landlord may, but is not required to, secure any storage space that is found unlocked.

This provision places the responsibility for determining the type of lock to be used solely upon the tenant. Most storage facility managers encourage their customers to use quality locks, but leave the final selection to the customer. This provision is designed to prevent later claims that the facility operator may have some responsibility for lock selection.

The second sentence gives the facility operator the right, but not the responsibility, to secure any space that is found without a lock. What should storage operators do when a rented space is discovered without a lock? The best course of action is to secure the space and contact the customer. Some storage operators are reluctant to do this because of the fear that they assume care, custody and control over the storage space and therefore greater liability if they secure the space. While there is a possibility that securing a storage unit with a company lock may increase the facility's exposure to a lawsuit for loss or damage to the stored property, we believe it is a risk that is usually worth taking.

A California case, Sackett v. Public Storage Management (222 Cal. App.3d 1088), examined this very issue. The court held that a storage operator who secures an unlocked space incurs no additional liability by taking a step that primarily benefits the tenant. Whenever a space is found unsecured, the storage operator should always notify the customer by telephone and in writing.

Storage operators who are reluctant to have direct access to a customer's storage unit may want to secure the storage unit with a lock and mail the keys to the tenant's last known address. If the keys are returned by the post office, the sealed mailer is held in the office until the tenant returns. This approach allows the storage operator to secure an unlocked storage unit without having access to it once the keys are mailed to the tenant. It should also eliminate any contention that the storage operator has taken control over the tenant's space.

Controlling Your Self-Storage Facility

The rental agreement should state the scope of the tenant's and the storage operator's rights and responsibilities in the use of the storage facility. Each of the three provisions is designed to give the storage operator more control over his property. They limit tenant's-use rights and permit owner action but are consistent with the basic landlord/tenant relationship. Placing reasonable restrictions on customers' use of the facility has become a critical element of premises management given the vulnerability that storage operators have to dumping of hazardous materials and failure of some customers to act responsibly. These three provisions have proven to be useful in providing storage operators with some protection from the occasional malicious or irresponsible tenant.

D. Carlos Kaslow is editor of The Self Storage Legal Review, a bimonthly newsletter on legal issues pertaining to the self-storage industry. For more information or to obtain a subscription, contact Mr. Kaslow at 2203 Los Angeles Ave., Berkeley, CA 94707; (510) 528-0630.

Abstract: Why do businesses and organizations keep records? We will discover that requirements from government, protection from litigation and sound business practice are just a few reasons that records are not a choice but a requirement. In a sea of paper and computer data, which documents represent business records? All records are documents, but not all documents are records. If this is true, then how do you tell the difference between the two, and what does that mean to your business?

Record keeping is a requirement for all businesses. Whether we like it or not, all of us are required to keep records. Generally, there are three reasons to keep business records: litigation avoidance, regulatory adherence and sound business practice. Let's look at each separately.

Litigation Avoidance

Records are commonly described as the "results" of business transactions. The word "results" implies completion and serves as the evidence documenting what happened during the transaction. Records must have integrity to ensure that the information accurately reflects the transaction and is unchangeable. We use records in courts of law and require expert opinions that attest to their integrity. Once accepted by the court, they can also be used as evidence.

Regulatory Adherence

Government requires all businesses to maintain records. There are thousands of federal, state, and local codes and statutes that require record keeping. This is indeed a complex problem. Not only is there a myriad of requirements, but these are complex and confusing, and few businesses understand their record-keeping responsibilities.

Sound Business Practice

In their acceptance rules, organizations such as the American Institute of Certified Public Accountants and the International Standards Organization requires record-keeping standards and practices that are designed both as audit trails and internal controls. These result in records as well.

Needless to say, the complexity of these requirements makes record keeping very difficult even for the smallest organization. Many companies give up and "throw in the towel" by keeping everything, sometimes forever. It is estimated that there are more than one billion cartons of inactive records in this country alone. Probably less than half are in formal records-management programs or in commercial-records centers. Many are simply put out of sight and thus out of mind. Perhaps you have some in your own self-storage facility, locked behind closed doors.

Documents or Records: What's the Difference?

All records are documents, but not all documents are records. Which is which, and how does one know the difference? This is a very perplexing question. Documents today take many different forms. We consider voice mail and e-mail documents. Certainly Microsoft Word or Corel's WordPerfect files, as well as spreadsheets from programs such as Lotus or Excel, are documents. There are even such things as compound or complex documents such as a Word document with an Excel spreadsheet imbedded within it. Are these documents, as well? The answer: yes. Regardless of form, shape, size or media, all are documents. But are they records? The problem goes on and on. What do I keep and how do I keep it to protect myself from liability in litigation, appease the regulators and my accountant?

To top it off, documents are considered the "Currency of the Business Enterprise." Documents act as the primary means of exchange within business systems. This has always been defined as exchange of information, but today's documents cannot only exchange information but also the work process. They carry value to a business not only as records, but also as important information assets that can be reused and shared in work groups.

Records are commonly segregated according to their life cycle. Typically, we classify them into active, semi-active and inactive. These three stages of the records' life represent different uses and importance.

Active Records. During the business process, there are certain events that document the completion of parts of a transaction within the work process. These records are commonly kept near the employee that uses or creates the record, usually in file cabinets, electronic media storage or at ready access to complete a transaction.

Semi-Active Records. These records have reached completion, but are maintained close by for easy reference. They are usually held in file rooms or in secretarial workstations for quick review immediately after the completion of a transaction, and are usually stored for up to a year or so afterward.

Inactive Records. These are records that have minimal practical use on a day-to-day basis but must be maintained for compliance issues. They are usually boxed and stored away from the high-cost office floor space, and are very often poorly indexed and improperly packaged. They carry little importance until they are needed to prove something to a court or a regulator. Then they become absolutely essential.

Records Retention Schedules

In order to maintain order in any records-management program, a company or organization must construct a retention schedule. This is done by grouping records into homogeneous types called records series. Optimum records-management programs assign a life cycle and a destruction date to each record series, along with a citation to the appropriate regulatory code or statute that requires the maintenance of that record. Retention scheduling is complex and precise. Professionals create these in the records-management business usually with the certified records manager (CRM) certification. Both the corporate legal council and the internal auditor must approve the corporate records retention schedules to insure maximum compliance.

Disposition

All records have a life cycle that ends in disposition. This means either destruction or migration to another media. If the record is destroyed, a certificate of destruction is required to document the destruction. Destruction is usually done by the commercial records center and validated by date, time, method and corporate approval. This certificate is used to validate the destruction in accordance with the retention schedule. This is proof that the record no longer exists and was destroyed in line with the retention schedule guidelines.

Record Growth

Records are everywhere, and they continue to grow at an annual rate of 15 percent to 22 percent, compounded annually. Destruction rarely exceeds growth. Commercial records centers can expect to run out of space periodically--just from existing clients. Although this continues the growth of storage revenue, it also requires additional capital investment for shelving and space. Those of us in the industry must plan for this inevitability.

Regular columnist Cary F. McGovern is a certified records manager and owner of File Managers Inc., a records-management consulting firm that also provides outsourcing services, file-room management and litigation support services for the legal industry. For more information about records management, contact Mr. McGovern at File Managers Inc., P.O. Box 1178, Abita Springs, LA 70420; phone (504) 871-0092; fax (504) 893-1751; e-mail [email protected]; Web: www.fileman.com.

By David Wilhite

What do you think is the most common natural disaster occurring in the United States today? Judging by the popularity of such recent blockbuster films as Twister, Volcano and Dante's Peak, one might easily guess that 200-plus mile-per-hour tornadoes (complete with flying cows) and the volcanic destruction of Los Angeles are normal, everyday occurrences. Despite what Hollywood would lead you to believe, however, the truth is that the vast majority of all natural disasters--more than 90 percent--that occur in the United States today are flood-related.

Floods are more than 25 times as likely to occur in high-risk areas than fire. Yet, of the estimated 10 to 12 million business owners who should have flood insurance, approximately 7 to 9 million are not covered. Unfortunately, far too many self-storage facility owners fall into this group. For example, there was a major flood in New York last year that resulted in 1,298 flood claims totaling nearly $1.5 million in damages, but only 92 of the claims were actually covered. Part of the reason for this situation is that many people don't find out that their insurance doesn't cover flooding until it's too late. But what's even more surprising is that many business owners, including those who have personally sustained flood-induced losses, choose to go without flood insurance, perhaps in the belief that flooding is a once-in-a-lifetime occurrence that only strikes high-risk areas. Nothing could be further from the truth.

The National Flood Insurance Program (NFIP) divides risk areas into three basic groups: low, medium and high. Less than one-third of all reported flood claims come from high-risk areas, and more than one quarter come from low-risk areas. That's why most business insurance experts strongly recommend that you secure flood insurance, even those in low-risk areas. Remember, your facility doesn't have to be located near a river or a lake to be at risk; heavy storms, winter run-off and local drainage problems can cause just as much destruction as local waterways overrun by spring rains.

The good news about flood insurance is that you can get affordable coverage, even if your facility is located within the boundaries of a flood plain. The National Flood Insurance Program and its Write Your Own (WYO) servicing companies guarantee coverage for anyone living in a high-risk area, regardless of location. Flood insurance averages about $300 per year for businesses (and just $150 per year on average for homeowners), and a special low-cost Preferred Risk Policy is available for those businesses located in less-hazardous areas. Keep in mind, however, that while you can purchase flood insurance at any time, there is a 30-day waiting period from the date of your application before coverage goes into effect. You can't just call your agent when the rain begins to fall to put coverage in place.

The maximum amount of flood coverage currently available through the National Flood Insurance Program is $250,000. Depending on the area where you live, though, it may not be necessary to purchase flood insurance at maximum amounts. If you are located outside a designated high-risk area, you can purchase partial coverage and receive an ACV (actual cash value) payout for damages up to the purchase amount. However, if you have a lot of equity in your buildings and property, you may want to consider purchasing Excess Flood Protection, which is available up to twice the regular limit. This extra protection may be very prudent given today's inflation and excessive construction costs.

Last, but not least, don't wait until disaster strikes your business. Assuming you have or are planning to get flood insurance for your self-storage facility, now is a good time to take preventive action to minimize your flood-risk exposures and reduce damage claims. The following checklist will help you get started:

Pre-Storm Considerations

• Establish an action plan for monitoring storm activity, preparing for flood conditions and implementing emergency-salvage operations.
• Know the history of the area in which you live to better anticipate flooding potential.
• Document the interior and exterior of your facility and valuables with a camcorder or Polaroids to aid in the event of a claim.

Flood Watch Precautions

• Monitor weather reports through the National Weather Service.
• Ensure all doors, etc. are tightly secured.
• Check conditions of flood doors, gates, walls, dikes, berms, etc.
• Test all sump pumps for proper operation.
• Shut off gas and electrical service immediately upon detecting flood conditions.
• Back up all vital computer files and records and store in a secure location.
• Relocate valuable possessions to safe elevations.
• Stay calm if disaster threatens. Be prepared to evacuate the area immediately.

Post-Flood Activities

• Begin cleaning and drying salvage activities immediately, giving priority to your most valuable property and possessions.
• Remove flood debris and drain all standing water as soon as possible.
• Dehumidify damp areas as thoroughly as conditions allow.
• Return fire protection systems to full operation as soon as possible.
• Carry valid identification, along with proof of residency and your business license.
• Drive carefully through debris-strewn areas and those with standing water.
• Contact your insurance claims representative immediately for adjusting and related services.

Remember, there is a 30-day waiting period from the date of your application for flood insurance, so don't wait; one low annual premium can protect you and your self-storage facility.

David Wilhite is the marketing manager of Universal Insurance Facilities Inc. Universal offers a complete package of coverages specifically designed to meet the needs of the self-storage industry, including loss of income, employee dishonesty, comprehensive business liability, hazardous-contents removal and customer storage. For more information, contact Universal at Box 5400, Scottsdale, AZ 85261-9957; phone (800) 844-2101; fax (602) 970-6240; Web: www.vpico.com/universal.

The following is the first part of a two-part article, reprinted from A.G. Edwards' Tax Saver, a special guide to the new tax law.

The Taxpayer Relief Act of 1997 provides investors valuable tax breaks and introduces new ways to save for the future. But getting the greatest benefit from these opportunities will require careful planning for investment decisions today and in the future. This article offers ideas to help you get started.

Tax Reform '97: Relief for Investors, Families Through Life's Stages

Investors and families are winners under the new Taxpayer Relief Act of 1997, which President Clinton signed into law Aug. 5, 1997. The much-anticipated legislation, which some call a "landmark" compromise between the Clinton administration and congressional Democrats and Republicans, proposes to eliminate the nation's deficit for the first time in at least three decades and provide long-overdue relief to taxpayers. The centerpiece of the reform package--a net $94 billion tax cut over the next five years--delivers the first substantial tax breaks American taxpayers have seen in 16 years.

Although the tax bills endured months of debate and trade-offs from Congress and the White House, the resulting legislation reflects a fundamental goal embraced by lawmakers from all sides: to provide tax relief to families, investors and others through many of life's stages. The new law provides significant tax cuts for investors and offers new incentives for saving for college, retirement and other future needs. It eases the tax burden for taxpayers with children as well as for individuals paying for college. And it can help families pass on to future generations more of the wealth they've built throughout their lifetime.

Of course, the legislation also includes measures to raise revenue, including a tobacco tax increase from 24 cents in the year 2000 to 39 cents after 2001. It also imposes new $12 arrival and departure fees for international airline travel.

As with all newly enacted legislation, details will be slow to surface and interpretations may vary. You'll want to check with your tax advisor or investment professional during the next few months to discern the implications of this complex legislation.

Nonetheless, given the wide scope of the reform package, like many investors, you may be wondering, "How does the new law affect me?" Here's a look at some of the key provisions of the new tax law as we know them now and their implications for investors.

Capital Gains Tax Cuts

For many taxpayers, the new law reduces the top tax rate for capital gains (i.e., profits from the sale of securities or other assets) from 28 percent to 20 percent. It also extends the holding period to qualify for long-term capital gains from one year to 18 months and creates a new mid-term capital gains tax rate of 28 percent for assets held more than one year, but not more than 18 months. The lower 20 percent capital gains tax rate provides investors in the 31 percent, 36 percent and 39.6 percent marginal tax brackets even greater capital gains tax savings than before, and it provides investors in the 28 percent marginal tax bracket a tax break that they have not enjoyed for many years. The new law also gives taxpayers in the 15 percent marginal tax bracket a special capital gains tax rate of 10 percent for assets held for 18 months or longer.

HIGHLIGHTS OF THE TAXPAYER RELIEF ACT OF 1997 Capital gains tax rate cut to 20 percent or lower, depending on holding period and tax bracket. Short-against-the-box strategy retained, but limited in duration. Tax credits for children and for higher-education expenses introduced. Tax-advantaged education savings accounts created. Features and accessibility of regular IRAs expanded. New Roth IRA Plus created. Fifteen percent excise tax repealed for both annual and death distributions. Equivalent exemption for estates increased from $600,000 to $1 million over 10 years. Annual gift exclusion limit indexed for inflation in $1,100 increments. Limited estate tax relief for qualifying family farms and small businesses.

The new rates are generally effective for sales after May 6, 1997, and apply to net long-term capital gains reported by individuals, estates and trusts, although some transition rules apply. The taxation of short-term capital gains (i.e. profits from sale of assets held for one year or less) will not change. Short-term capital gains will continue to be taxed at ordinary income tax rates.

The table on page 62 provides details on these provisions. In general, five different rates may apply, depending on the taxpayer's marginal tax bracket, how long the investment was held and when it was sold.

Effective in 2001, an 18 percent capital gains tax rate will apply to investments purchased after 2000 and held for more than five years. To receive the benefit of the lower rate for assets purchased before 2001, an investor may elect to treat such securities as if they were sold on Jan. 12, 2001, and purchased the following day. This "mark-to-market" gain is taxed at the applicable capital gains tax rate, but all future appreciation will be taxed when the assets are sold at the 18 percent capital gains tax rate (or 8 percent for taxpayers in the 15 percent marginal tax bracket), provided the assets are held for at least five more years.

A New Wrinkle to "Short-Against-the-Box" Strategy. As a short-term tax-deferral and hedging strategy, selling "short-against-the-box" survived the tax law changes--but with limitations. When selling short-against-the-box, you borrow shares of a security you want to sell while keeping the shares you already own. (You are then both "long" and "short" in the position.) By doing so, you can lock in capital gains but defer recognizing the gains for tax purposes until you "close" the short position in the future. Previously, you could remain in this short-against-the-box position indefinitely.

The new law requires that you close the short position by Jan. 30 of the calendar year, following the year in which you entered the transaction. You can close the short position either by delivering the shares of the security you already own or buying additional shares in the open market. The new legislation further requires that you remain "at risk" on that particular security for a 60-day period following the date you close the short position. After this 60-day period, you can enter into another short-against-the-box sale on the same security if that strategy meets your investment objectives.

Assume, for example, you enter into a short-against-the-box position for ABC security on Oct. 1, 1997. You are now required to close the position no later than Jan. 30, 1998. After you close the position on Jan. 30, 1998, you may not enter into another short-against-the-box transaction for ABC security for the next 60 days. Thus you could again enter into a short-against-the-box position for ABC security on April 1, 1998. That short position could remain open until Jan. 30, 1999, when the position must then be closed.

Short-against-the-box positions currently open may be grandfathered, although the details are sketchy at this time. Talk with your tax advisor about your particular situation.

Exclusion for Profits From Home Sales. The new tax law provides home sellers valuable additional capital gains tax relief. For home sales after May 6, 1997, married couples filing joint returns can exclude for tax up to $500,000 in profits from the sale of their principal residence (single taxpayers can exclude up to $250,000). For the vast majority of homeowners, this exclusion will mean tax-free profits on home sales, as they will no longer be required to purchase another home of at least equal value to avoid taxes.

Moreover, as long as the taxpayers have occupied a home as their primary residence for at least two years, they could use this exclusion each time they sell their home. This provision replaces the once-in-a-lifetime exclusion previously available only to home sellers aged 55 or older as well as the capital gains rollover provision previously available to those purchasing a replacement home.

Therefore, under the new law, taxpayers will no longer be able to defer capital gains taxes on profits from the sale of a principal residence that exceed the new exclusion limits, even if they are buying a home of equal or greater value.

Investment Strategy. As an investor, you could enjoy substantial savings from the new capital gains tax rates, regardless of your tax bracket. And if you're like many investors with gains in your portfolio from the long-term bull market, the rate cut is welcome news.

Realize, however, that tax consequences, although a consideration, should not be the sole basis for your investment decisions. First, look at the investment's underlying fundamentals and your investment goals. If your holdings are still in line with your needs, selling based solely on the new capital gains tax rates probably does not make sense.

If, on the other hand, your stock reaches your target price and you decide it's best to reposition those assets, the lower capital gains tax rate you'll pay is certainly a bonus. Remember, however, you will still lose up to one-fifth of your profits to taxes, despite the rate cut.

In addition, to take full advantage of the lower capital gains tax rates, you might consider adding to your portfolio more growth investments that pay little or no dividends (that is, if you don't need current income from your investments). Remember, dividends and short-term gains are taxed at higher ordinary income rates. Or, if your investments warrant, extend your investment holding period on existing investments to longer than 18 months to capture the new 20 percent (or lower) long-term capital gains tax rate.

If you plan to sell short-against-the-box as a way to defer recognizing capital gains from one year to the next, you still can. As long as you deliver the shares you already own to close your position by the following Jan. 30, you will have deferred your gain.

New Tax Credit for Children

In 1998, individuals whose adjusted gross income (AGI) does not exceed $75,000 and married couples whose AGI does not exceed $110,000 will be eligible for a tax credit of $400 for each dependent child younger than age 17. The tax credit will be reduced by $50 for each $1,000 by which the taxpayer's modified AGI exceeds the $75,000 (for individuals) and $110,000 (for married couples) thresholds. This tax credit increases to $500 per child beginning in 1999.

Investment Strategy. The new child tax credit gives many families the opportunity to hold onto money they would otherwise pay the IRS in taxes each year. Remember, tax credits, unlike tax deductions, offset your tax liability dollar for dollar. That is, you deduct your tax credits after you calculate your tax bill, whereas deductions serve to reduce your taxable income. If you're in the 28 percent tax bracket, for example, it takes a $5,357 deduction to reduce your tax bill by $1,500.

If you qualify for this new tax credit, the credit represents extra money available for investment or other uses. For instance, you might earmark this amount for college expenses. (See the second part of this article next month for a discussion about new tax-favored education investment accounts.) Or if you have not already contributed the maximum $2,000 per year, you could make an additional contribution to your regular individual retirement account (IRA) or another retirement savings vehicle. Regardless, your best strategy is to put this "found money" to work toward your future goals.

A.G. Edwards is a St. Louis-based investment firm. For more information on A.G. Edwards, contact Justin Gioia at 1 North Jefferson, St. Louis, MO 63103; phone (314) 955-3235; Web: www.agedwards.com.

Editor's Note: This information is based on reliable sources; however, the accuracy of the information is not guaranteed. Specific tax questions should be directed to your tax advisor.

By Cecile Blaine

When Jeff Silesky and Pat Reilly discovered that the Brodie/Dorhmann Building on 15th Avenue in Seattle was for sale, the two-story, 62,000-square-foot structure with 200 feet of frontage spoke to them. "Self-storage," it screamed. A few months and $2 million later, the gigantic warehouse that housed restaurant supply equipment for years was transformed into Magnolia Bridge Self Storage, a 1,000-unit, three-story, climate-controlled self-storage facility less than two miles from downtown Seattle and 300 feet from its nearest competitor.

Renovation Like Childbirth

Silesky, a principal with Seattle real-estate investment services Davis & Silesky, and Reilly, vice president of Seattle-based Urban Self Storage, shook hands on a deal to renovate the warehouse. They hired local Calderwood Construction to handle the project, which Silesky compares to the physical pain of having a baby.

"It's almost like childbirth," he says. "We've forgotten about all the pain, because we are done with the project. But believe me, it was a tremendous undertaking."

While this was the first self-storage project for Davis and Silesky, Urban Self Storage already had 13 facilities and 675,000 square feet of storage property under its belt. Despite their combined experience, both knew that there would be a lack of predictability in such a conversion. But the rewards were far too appealing not to gamble on.

"This type of project has the highest risk, because you don't really know what you are getting yourself into," says Reilly. "On a conversion like this, there is a lot of risk."

Treasure Hunt for Funds

One of the first challenges was getting construction financing, due to the fact that neither partner had ownership rights to the building. They had entered into a lease with the option to purchase, an agreement that was crucial to the deal. "We wouldn't have done this deal unless we had an option to purchase it," says Silesky. "The way our agreements are done has to be based on the building and warehouse before we made all the changes. What we were not willing to do was pay the owners for the upside that we've created. So, it will not be appraised in any way as a storage facility or with any improvements that went into that building for that purpose."

Finally, after a lengthy search, a company called InterWest agreed to fund the project. "It was a tremendous challenge to get a lender here to agree to this kind of financing and understand the kind of value we are trying to create," Silesky continues. "The legal and political negotiations we went through to get the deal off the ground were extraordinary."

However, the rewards of the project made it worthwhile. The chance to develop such a large facility, with nearly a third of the units accessible from street level and a built-in docking area, was an attractive business venture they would not pass up--especially one with a daily traffic count of 45,000 to 50,000.

"The physical characteristics of the building lend themselves ideally to storage because of the ease of which people can load and unload, and with the number of docks both in the front of the building and dock-high loading to the second floor, which you access from the back of the building."

What's Up Dock?

What had been a small dock set up exclusively for semi-tractor trailers is now a dock with varying heights to accommodate four different kinds of vehicles: cars, pick-up trucks, low-dock trucks and high-dock trucks, such as semis. "It was very small," Reilly remembers. "It was built to accommodate one or two semis at a time. It was way too high for a rental truck, of course. We had to do some major site work to actually raise the parking lot to a different level. We had to change the configuration."

Set in rainy Seattle, the renovated facility's docking area is covered and offers a staging area with handcarts. Larger units are positioned closer to the dock, with smaller ones further away. "We wanted to make it so that they were never further than about 30 feet from the units," says Reilly.

Fifteen-foot ceilings on the first floor lent themselves to tall units whose walls go all the way up to the ceiling. Those, in particular, appeal to the commercial tenants. "So, they offer the commercial tenant the ability to store shelving and all kinds of things that wouldn't fit in a traditional self-storage facility," Reilly continues.

Transforming a two-story building into a three-story building was no small feat either, but in the process, the developers created an extra 286 units or 21,000 square feet. "The real master stroke of this whole deal was pouring an additional floor on top of what was the second floor of the building," says Silesky.

The engineering challenges involved in the addition were formidable because of the weight they'd be adding to the foundation of the building. One way they were able to add structural quality to the third floor was by using pan decking, but it was still touch and go at times, says Silesky. "There were moments when we were holding our breath with the city engineering department and our engineers to make sure we could pull it off," he says.

Another element of the renovation was re-roofing the building and making it strong enough structurally to handle an earthquake. That involved punching a hole through the top of the roof and jacking it up a couple of inches in order to install a parapet. As a result of that work, the cost of development rose significantly. Silesky says, "We spent a whole lot more than what we thought we'd have to spend because of seismic considerations and fire separations."

"People are worried about earthquakes in our part of the country," he continues. "So, there was some need to do some reinforcement of the building."

The Seattle warehouse had a cargo elevator before it was renovated, but that wasn't going to be adequate to accommodate all the customers. To combat the problem, the developers added a second elevator, this one a 5,500-pound Dover passenger/cargo elevator that stands 10-feet high. "That's one thing we are really proud of," says Reilly. "When people bring in couches and stuff, it's no problem."

Safety in the City

Considering the huge number of first-floor units that Magnolia offers in an urban setting, the facility needed a top-notch security system. "We sat down and designed a state-of-the-art security system and decided which vendors were going to provide what components," says Reilly. Silesky and Reilly combined a number of components to create the facility's custom system: Wham's individual door alarms and access key pads; Security Link's motion detectors, burglar alarms, glass breaks and fire system monitors; and other miscellaneous vendors.

The result is an office that, according to Reilly, looks a little like the Starship Enterprise. A 32-inch color monitor hangs from the ceiling with diagrams indicating which units are open and which are closed and secured. Five other monitors reflect the activity on the loading docks and other strategic locations. "People get a tremendous sense of security when they walk in there, which is critical, particularly for an urban facility and the kinds of things people store," says Silesky, who adds, "They pay more for this."

One of the biggest challenges of the renovation project, says Silesky, was getting all the contractors--construction, security, metal providers and others--to communicate effectively with each other. "It's very important to get all three of those people matched up, because everybody's measurements are dependent on the next guy," he notes. "It is like putting together a jigsaw puzzle in three different parts of the world and bringing it together in one place. You are doing a lot of schucking and jiving to make it fit properly."

By Aug. 1, 1997, Magnolia Self Storage opened part of its facility, bringing in revenue while construction continued. In the first 30 days, 12 percent of the facility's units leased up. By the end of November, construction was finished and all three floors were opened to customers. By the beginning of February, the occupancy rate had reached nearly 40 percent. Magnolia Bridge Self Storage is a member of Washington Self Storage Association as well as the Self Storage Association.

Silesky and Reilly had to have a great deal of faith in their project in order to renovate a warehouse just 300 feet from his nearest competitor and charge some of the highest rents in town. But they seemed to know that this side of the Magnolia Bridge was paved with success.

"One of the things that we feel confident is that, in terms of the market share, we don't have to wait for the spill-over from another facility," says Reilly. "Given the attractiveness that we have to offer, we can get the center of pie."

By Jim Killoran

The following is excerpted from Self-Storage Startup, a manual for the development of self-storage properties. For order information, contact LeManx Information Products, P.O. Box 542, Shelton, WA 98584; (800) 764-1909.

While there are at least five different pricing strategies that are considered to be commonplace, I like to believe that there are about as many variations to these five styles as there are self-storage owners and managers. To give you some background, I will define each of the five briefly, and then explain, in depth, the variation that I find most successful.

Follow the Competition

Unless your project was the very first one ever built, or you have the only facility within a hundred miles, following the competition is likely how your rates were established in the beginning. This is certainly an acceptable starting point, and after all, your customers are going to do the same thing that you did: call your competitors and compare rates.

Price Penetration

The definition of this strategy is simple: Be the lowest price facility. You target the price-conscious customer (who in my opinion is not the best-value customer). You are also setting the stage, whether intentionally or not, for a price war. As you will learn later, this is a war with a guaranteed result: Everybody loses.

Aggressive Lease-up

As the name implies, this strategy is employed by new facilities just getting underway, or by facilities that have just completed a major expansion. Using this strategy in the former situation is justified if done properly. However, I am opposed to its use in the latter situation because it undermines the goodwill that you have with your current customers. We will discuss better alternatives.

Skimming

Also known as market skimming or skimming the cream, the theory behind this strategy is pricing your product such that you attract a clientele that is less price conscious (and perhaps more service conscious). This customer is less likely to be a problem tenant, thereby reducing delinquencies and the associated management headaches. While it may seem to be more difficult to fill your facility with such customers--after all, there are only so many of them to go around--the most successful operations have done just that.

ROI (Return on Investment)

Sometimes called cost-coverage, this technique involves determining your costs of operation, adding to that the rate of return that you feel you need to make on your self-storage investment to be a big success, and then setting your rate schedules accordingly. Without a doubt, this is the most ridiculous (if not bizarre) pricing strategy. Nowhere in the formula do you find market-driven factors like supply, demand or competition.

You may be able to dazzle some lenders or partners by proposing this method as it neatly covers all of your costs and shows a profit to boot. But the world of reality will not be impressed by this handiwork. Unfortunately, the saying, "If you build it, they will come," does not apply to the self-storage industry.

So which should you use?

I haven't coined any cute buzz-words or catchy phrases to identify the method that works best, but this is what has been working successfully at our facility:

First, just to be clear, nothing further needs to be said about the return-on-investment strategy.

We absolutely do not agree with price-penetration. If you actively seek to attract customers via cheap prices, what you will get are cheap customers. Our experience has shown that this group of customers will have a higher percentage of delinquencies, abandonments and unjustified complaints than the group of customers who are not as concerned with price as they are with service and amenities. Remembering that your goal is maximum profits, an impressive occupancy rate pales quickly when compared to a bottom line that is suffering dismally from delinquencies and abandonments or from a price war. (We'll talk later on how you can thwart most price-war attempts by competitors before they start.)

Let me just interject a few words at this point about the aggressive lease-up strategy as it applies to a brand-new facility. If you have little or no competition, or if your competitor's facilities are full, your lease-up pricing strategy need not contain much in the way of real discounts, freebies or giveaways (whether real or perceived), only that the customer base knows that you exist and are open for business.

If you do have competition to overcome, then your grand-opening offers should be more real than perceived. But the point to take note of here is that your "regular rate" schedule can remain intact during your lease-up period, giving you the flexibility to use it as soon as possible. For example, as the popular sizes begin to reach a comfortable occupancy rate, your lease-up specials for those sizes can quickly be terminated.

Don't Follow, Lead

While it is true that our rate schedule was initially developed directly from what our competition was charging, I've learned, over time, that this should only be a guideline. In fact, I now firmly believe that if you set your rates the same as your competitor's, you are doing them a big favor.

I'll explain. Occasionally I spend some time driving by or, if possible, through our competitor's facilities. In the world of business there is nothing like having first-hand knowledge of what you are up against. While driving through a particular facility, I became appalled at the deteriorated condition that it had fallen into. Huge pot holes in the unpaved driveways, several obviously un-rentable units (the doors were either missing, or so badly damaged from being backed into that they were inoperable), garbage strewn about-- and they no longer offered on-site management. The office was now permanently closed and had been replaced with a trailer parked at the front gate, complete with a "caretaker" and his four junk cars that will never see a highway again. As I sat there looking at this disgusting mess, which at one time had been a respectable facility, it dawned on me that they were charging the same as us and getting customers.

It was now obvious that we could easily support higher rates by simply comparing all the amenities that we had to offer to facilities that did not. And it was an easy sale.

That was a big lesson, and one that has contributed substantially to our bottom line ever since. Customers will pay more if they get more, and the "more" can be in many forms: service, cleanliness, friendless, security, attractiveness, and so on. It can even be a perception of "more." For example, if a facility radiates a feeling of security, whether or not it actually is more secure than the facility down the street, it will become, in the mind of the customer, the more secure facility. Perception is not everything of course, but it goes a long way toward making sales.

So, to sum up this discussion of pricing strategies, I believe that the one that will do the most justice to your bottom line is a variation of skimming, although I dislike that name. I much prefer to put it this way: If you offer a clean, secure, well-managed facility, and you couple the delivery of quality service with good salesmanship, you will attract and keep the best customers in your market area, and they will gladly pay top prices to have it.

Rental Rates

In order to establish the optimum rental rates, we need to first examine occupancy rates. Consider the following question:

What is the goal of the facility?

If you're an owner, ask that question to your manager. If you're a manager, ask it to the owner. If you're an owner/operator, then you need to ask yourself. If the answer is "To be 100 percent occupied," then you're all in trouble. You may as well put out the closed sign, lock the door and go home, because you have all missed the point of being in business.

The correct answer is: To maximize income.

So what's wrong with 100 percent occupancy? Several things. Put aside for the moment the fact that being fully occupied is the wrong objective, and that it is not the reason that you built your facility. Let's examine what happens when you achieve an occupancy rate of 100 percent, or even 95 percent: The phone rings. It's a potential customer inquiring about the rate and availability of a storage space. You politely respond that you currently have nothing available. You might even offer to put his/her name on your waiting list.

Look what you've done. You've sent the prospect to your competitor. And not just for now, but likely for any future storage needs as well. You might say, "Well, I had no choice. There are no units available!" In a moment, you'll learn how to correct this situation by correctly pricing your product.

To state this in another way, suppose that you call on your favorite widget store because you need widgets, but the widget store is out of widgets. So you try again in a few days and still no widgets. How long before you throw up your hands and seek out another supplier of widgets? Not long, I'd say. It should be noted that our society is a bit impatient in these matters.

Incidentally, I have been a victim of this very scenario. Some years back when we were enjoying full occupancy, kicking back with our feet on the desk, all smiles because we were "doin' well," it was brought to our attention that the word around town was "Don't bother to call them, they're always full." The lesson we learned from that was: raise our rates or expand. We did both.

There is the potential of another problem with full occupancy, and that is manager complacency. The manager's job becomes considerably easier without having to fuss with renting units and marketing and all that. That statement probably just put me in bad favor with some of the managers reading this, but I believe that I can redeem myself when I suggest owners instill a manager's incentive program.

Jim Killoran is the owner of LeManx Information Products. Based in Shelton, Wash., LeManx specializes in providing information to the self-storage industry. Mr. Killoran is also the author of Self Storage Success and Self Storage Startup. In addition, he has been in the self-storage business for 15 years and is co-owner of Freeway Mini Storage in Shelton, Wash. For more information, call (800) 764-1909 or write to LeManx Information Products, P.O. Box 542, Shelton, WA 98584-0542.

By Cecile Blaine

Self-storage facility developers used to ask themselves when it made financial sense to offer climate control. Today, they ask themselves when doesn't it make sense to have the amenity. In this article, we'll take a look at recent trends and changes in climate control.

Upscale, multilevel facilities, urban and Southern facilities have brought climate control to the forefront of amenities that are becoming status quo for self-storage. While the percentage of facilities that are 100 percent climate-controlled is still quite small, many predict that a majority of facilities around the country will soon have a portion of units that are heated, cooled or ventilated.

We normally associate climate control with air conditioning, but it also includes heating, humidifying, de-humidifying and other types of climate modification. It's probably no surprise that the 1997-98 Self Storage Almanac estimates that the Southeast has the highest percentage of climate-controlled facilities--approximately 21.6 percent--compared with other areas of the country. But many self-storage developers and gurus predict that trend is quickly changing.

There are, of course, facilities in which climate control would not be financially feasible, especially those that store vehicles, automobiles, RVs and boats, for example. Being able to offer climate control, on the other hand, enables a facility owner to capture a broader market share than ever, offering an edge over the competition and therefore boosting a facility's profits. It can make the difference between a customer choosing one facility over another. Also, it can help draw commercial tenants, who typically stay longer than their residential counterparts.

William Smith Jr., director of sales and marketing with Ruffin Building Systems in Oak Grove, La., says about 30 percent of the facilities he recently designed have climate control, compared to less than 5 percent in 1987.

Smith says controlling humidity is the key to climate control in a facility. "When the humidity gets up around 90 percent, things start to go bad," he says. "And when you get down to 20 percent, things start to dry out and break."

So, it makes sense that climate control is more popular among Smith's customers that are closer to the Gulf of Mexico, where both the humidity and the average income are higher than inland. "Believe it or not, we have more climate control along the Gulf Coast in Alabama and Florida" due to the humidity and strong economy, he explains. "Down there, it's a more sophisticated customer base and they have better stuff to store--stereos, electronics, photos and files."

The Amsdell Companies, a Cleveland, Ohio-based self-storage management company that currently manages 96 facilities with 52,000 units, held three grand openings in January and three in February of this year. While President Todd Amsdell says approximately 10 percent of their current holdings are climate controlled, between 40 percent and 60 percent of the units in new facilities are climate controlled. It's no surprise that the six facilities that recently held grand openings are all located in Florida, but Amsdell says even the facilities that are on the drawing board for North Carolina and New England have between 40 percent and 80 percent climate-controlled units.

"We are moving climate control into areas that we have never had climate-control storage facilities in the past," he says. "Actually, last year we built a new building on an existing facility in Cranford, N.J., and we made that 100 percent air-conditioned."

In terms of the physical equipment needed, Larry Jenkins, business development manager with Trachte Building Systems of Sun Prairie, Wisc., says you can generally assume that a facility will need one ton of compressor power for each 1,000 square feet of climate-controlled space.

Retrofit

For many development companies, retrofitting is the answer. For example, Amsdell recently retrofitted a project in North Canton, Ohio, with 100 percent climate control.

Geography plays a part in which facilities are retrofitted, says Amsdell, but it is more often a factor of the market. "Florida is really a prime candidate for climate control, but we are also retrofitting some of our buildings in San Bernardino, Calif.," he points out, adding that only about 5 percent of the building will have climate control.

"Temperature is not really a problem out in Southern California for the people's goods," says Amsdell. "You can get some extreme heat, but the buildings are pretty well ventilated and they have a different way of attacking that problem. So, it's more of a comfort and a perceived value."

Some developers are building facilities with phased climate control in mind. In addition to having moveable partitions to stay flexible in terms of unit mix, Amsdell says they are now including other features in their new construction that will enable them to go to climate control more easily in the future: insulated doors, more interior hallways, doors with better seals and roofs that will accommodate the physical unit outside with a higher pitch to accommodate the ductwork inside.

"There are little things you can do in the beginning that make it a lot easier," says Amsdell.

Cost has to be one of the biggest deterrents to retrofitting. But what Amsdell and other developers are doing prepares the building and lowers the cost of construction--in the case of conversion. At some point, there are diminishing returns to converting a large space, explains Amsdell.

"You don't want to build a 100,000-square-foot facility and put 10,000 square feet of climate control and then have all 90,000 square feet ready to roll to be converted to climate control some day, because it is going to be too costly to carry that extra weight in the future," he says. "You might build a 100,000-squarefoot storage center and initially put up 20,000 and allow for an additional 10,000 at a later date. And I think that would be reasonable."

Payback of Climate Control

The revenue raised by climate control must justify the cost of installing it or retrofitting. Just how much of an increase in rent can a developer or operator expect from climate control? Some estimate that rents can withstand up to a 15 percent increase, but the answer is much more complex that a simple figure.

When the amenity is already established in a particular market, then the facility is simply offering what everyone else already has, Amsdell points out. Bringing climate control into a market where it hasn't been offered usually means being able to ask higher rents.

"If you are moving into a market that doesn't have climate control, you might have a better chance of having a better ratio," after educating the customer, he adds.

"It is the same thing we experienced when we brought the self-storage product to the market and taught people about all the different ways they could use it."

Adding the amenity enables developers and facility operators to charge a premium for their units. "We have always perceived ourselves as industry leaders by bringing things like high-tech security, customer service and climate control into the market to be the leader in the market," explains Amsdell. "And with those things, it also means we can be the price leader. We feel that way we attract the best clients."

"You are able to attract a whole different kind of tenant that wouldn't rent from you under any circumstances until you have climate control," he says.

Climate One

Climate control has become so much a part of the self-storage that one builder recently created its own customized HVAC system. Trachte Building Systems and Trane, a national manufacturer of HVAC systems, recently announced plans to sell and install Climate One.

"We felt that there was a need for an industry standard for climate control," says Jenkins. "In terms of being an industry standard--whether it is a clear-cut or directional--it was so easy to plan and implement that people could feel secure that it would operate and accomplish its objective and be profitable."

Climate One's target temperature range is between 50 degrees and 78 degrees Fahrenheit, according to Jenkins, with 78 degrees being the optimal point for most customers. "That will cover the vast majority of situations," he points out. "We don't want it to get too warm."

Climate One is still relatively new and while Trachte has received commitments for the system, it hadn't been installed at the time of this interview. Jenkins says one of the appeals of the system is the fact that it is designed with long hallways and lots of small units in mind. The mechanical part of the HVAC system will be compact and basically out of sight. Ductwork will go into the ceiling, rather than the hallways, allowing the hallways to be standard height. "We have been able to keep standard heights, which also keeps your building cost down," Jenkins says.

Another attraction Trachte offers developers is a cost analysis to figure out what their operating costs are and which energy source will provide the most financially feasible option. "They do a cost analysis of the three energy sources--electric, gas and heat pump," says Jenkins. "Heat pumps work well in more moderate climates."

Working with Trane offers other advantages to developers, including a five-year warranty on parts, compared with one-to-three-year warranties elsewhere, says Jenkins.

When all is said and done, whether facilities are located in Alaska or Florida, they are new or old, multistory or single story, it is likely that the future will bring climate control to their doors.