In the case of Hospital Corp. of America and Subsidiaries v. Commissioner , 109 TC (1997), the tax court concluded property qualifying as tangible personal property under former investment tax credit (ITC) rules would also qualify in the same manner for the purposes of tax depreciation. This was a major victory for taxpayers. Practitioners can now look to former ITC rules when determining whether a property is depreciated as real property with a 39-year recovery period, or personal property with a five- to 15-year recovery period.If you own a self-storage facility, a recent tax court decision now provides a proven method to add money to your bottom line. You do this by using cost-segregation techniques--that is, segregating the various building costs into separate categories as defined by the IRS--to accelerate depreciation. This IRS decision also allows you to claim catch-up depreciation. This is the amount you could have claimed in prior years, all the way back to 1987, over a subsequent 4-year period. Since self-storage construction costs are heavily weighed toward site work, it is an ideal candidate for cost segregation.

Essentially, a cost-segregation analysis allows an owner to depreciate certain types of building components and improvements over a shorter depreciation recovery period than the typical 39 years generally used for self-storage facilities. For instance, most site work (paving, curbing, fencing, lighting, retaining walls, storm drainage and other utilities) can now be depreciated over 15 years. Many systems, such as closed-circuit television, controlled access gates, computerized locking or alarm, can be depreciated over five to seven years.

You're probably wondering, "Why hasn't my accountant told me about this?" First, the concept of cost-segregation is a relatively new one. Second, it requires an engineering skill set and expertise most accounting firms don't have have in-house, such as being able to read construction drawings, and knowing construction systems, cost estimating and how various types of IRS asset classifications relate to existing construction and use. A cost-segregation study does not replace the accountant's role in determining taxes or preparing tax documents and forms. It provides information to the accountant so the proper IRS forms may be prepared and the correct, allowable depreciation calculated.

Tax Savings

The tax savings for self-storage can be significant, since a much higher percentage of construction costs are site-work-related as compared to the construction costs for other types of buildings. If you look at a typical 50,000-square-foot, single-story facility, the depreciable basis will be the cost of site work improvements and the buildings; land is excluded and is not depreciable.

For the purposes of this example, let's assume the direct and indirect costs total $30 per square foot for a depreciable basis of $1.5 million. If a minimum of 30 percent of the depreciable basis is recategorized to recovery periods of shorter lives, which is commonly achieved through cost segregation, it would provide the owner a net-present-value tax benefit of $67,000 over 15 years, using a discount rate of 8 percent and a tax rate of 38 percent. To realize a $67,000 increase in net operating income, a self-storage facility that rents a 10-by-10 for $75 per month would have to raise rents 24 percent. And document processing with the IRS is not complicated. There is no amended tax-return refiling required--just a straightforward form prepared by your accountant.

A Successful Study

A successful cost-segregation study requires professional integration of engineering, architectural, accounting and tax skills. The IRS requires an engineering-based approach be employed to identify and reclassify construction costs into applicable segregated categories. A review of contractor and subcontractor payment requisitions to identify the items qualifying for reclassification into the shorter-lived asset categories is generally not enough to satisfy the IRS. A successful cost-segregation study requires:

• A detailed analysis of the direct and indirect construction, improvement and renovation costs.
• An examination of available drawings, blueprints and specifications (if available).
• A physical inspection to observe and identify component utililization.
• An expert's understanding of specific building, mechanical and electrical systems, as well as the processes characteristic of certain types of assets.
• A detailed knowledge of the tax code as it applies to the cost-segregation process.
• The analytical abilities and organizational skills to conduct the necessary economic and financial analysis.

Is Your Property a Candidate?

If you can answer "yes" to the following questions, a cost-segregation study will save you money:

1. Did you construct or acquire, renovate or improve the property after 1986, or is it currently under construction or in the planning stage?

2. Have you owned or do you expect to own the property for at least seven years?

3. Does the property have a positive EBT (earnings before taxes)? Or could additional depreciation help reduce current tax liabilities?

4. Is the value of the property at least $1 million?

Whether you acquired a facility after 1986, are planning to buy a facility or are embarking on a building program, cost segregation should be part of your self-storage strategy to increase cash flow, revenue and profitability. Once you understand cost segregation, there is no reason not to take advantage of it.

Mark de Stefanis is vice president of the tax engineering division of Inspection & Valuation International Inc., headquartered in White Plains, N.Y., and with branch offices in Dallas, Los Angeles, Miami and Washington. For more information, contact IVI at 914.694.1900; visit www.ivi-intl.com.

For More Info

To read more about cost-segregation studies and how they can save you money, visit the following websites and links:

• www.anchin.com/costseg.html
• http://sanjose.bcentral.com/sanjose/stories/1998/08/10/focus8.html
• www.naiop.org/development/summer01/article7.htm
• www.costsegregation.net/css_study.shtml
• www.bvs-inc.com/articles/capital_cost_segregation_analysi.htm
• www.costseg.com

When a potential customer walks into your facility, are you really offering him all you can? Maybe your operation is clean. The manager is organized and professional. Perhaps you even sell locks or packing supplies. Unfortunately, it's a drive-thru world where customers demand more. Ancillary services that go beyond boxes and bubblewrap are an integral part of new-world success. "Sometimes, when you have a customer who's never used self-storage before, he wants you to help him figure out what he needs," says Dean Nichols, owner of Dean Nichols & Associates, which manages 10 facilities in the state of Washington. The stores offer a variety of ancillary services including truck rental, mailboxes, locks and packing materials. "With having it all in one spot--you don't have to send customers down to the hardware store for a lock. If they need boxes, you've got them there."

Call it one-stop shopping. And it's not a new concept. Retail stores such as Wal-Mart and Kmart now stock groceries as well as toys, clothes and sporting goods. As the pace of life continues to speed up, people are looking for shortcuts. That's where ancillary products come in. Offering packing supplies, mailboxes and truck rental along with storage units gives a self-storage facility a leg-up on the competition, adds money to the bottom line and provides convenience to the customer.

Locks, Boxes and Bubblewrap

Most storage owners already recognize the benefits of stocking locks and packing supplies. "It's becoming increasingly more important with storage facilities," says Kenneth Van Slyke, president of Nationwide Box Inc. The Houston-based company sells everything from packing supplies to security products. "You see a lot of the big guys doing it, like Public Storage and Shurgard. They spend a lot of resources to try and grow this part of their business. They know it's a perfect fit."

Chateau Products Inc. began 11 years ago with locks. Now the Englewood, Fla.-based company has more than 400 products, all aimed at the self-storage market. Increased traffic and the lure of profits have encouraged more self-storage operators to set up shop. "People are realizing it's a natural thing to do," says Nancy Martin, vice president of sales and marketing. "You have this space with a window front. It has curb appeal, and people are driving by it all the time. It's a store, and it should be treated like a store."

Like a store, there's an opportunity to make a fair amount of profit. The majority of retail items can be marked up 100 percent. "You can pretty much double your money. There's a good retail markup on these items, and it's not a huge investment to start," Van Slyke says.

In fact, outfitting an attractive retail area is minimal. "You could set up a real nice looking store for a couple thousand dollars," Martin says. "At our company, we have a policy where if you don't sell it, we'll take it back. If you can work out something like that with your vendor, that's fantastic."

It can also be done on a smaller scale. "You can start off small with just a few box sizes, a few rolls of tape, maybe some packing paper and see what blossoms from there," Van Slyke says.

Almost any size store can have ancillary products, says Ed Hainrihar, vice president of U-Store-It, headquartered in Middleburg Heights, Ohio. "Even if you have to designate a physical unit that's close by, turn that into a display area. Every self-storage operation should have ancillary supplies. The amount of money you spend is minimal and the customer is right there."

Marketing the Merchandise

Just like self-storage, retail items need to be marketed. Too often, these easy-sell items are regulated to a small section of wall space or clutter the sales counter. To ensure the success of such ancillary products, customers must be attracted to them. "Some people can't see putting the extra effort into having the retail area. But if you don't show it, you can't sell it," says Scott Harris, owner of Movin' On Storage Centers and president of Pittsburgh-based Dana Management Group Inc.

Movin' On Storage Centers boasts more than 1,000 square feet of retail space. "As self-storage grows and progresses, we have to realize we are a retail-oriented business, and we have to address it as such," Harris says.

U-Store-It has found so much success with moving and packing supplies the company is overhauling its retail areas. "The greater the store, the greater the income," Hainrihar says. "We know there's an opportunity to offer a greater degree of service to a customer and make more income for the store as well."

The goal is to entice customers into the facility who normally wouldn't visit. Adding the phrase "packing supplies" to your website, window banners, Yellow Pages ad and all company mailings will draw more people to your door. "You can increase your product line to help solve more of your customer's problems. It prevents them from going down the street to another storage facility that may be selling boxes," says Van Slyke.

Self-storage operators can also use ancillaries as promotional items. For example, give every customer who tours the facility a few free boxes. Once the customer comes through the door, the opportunity to sell a storage unit increases. "I have people who come in just for the packing supplies, not realizing we are a storage facility," says Roni Chandler, manager of Movin' On Storage Center in Charleston, W.Va.

Closing the Deal

But how do you determine what will--and won't--sell? "There are certain items that definitely move faster than others," says Van Slyke. While locks remain best sellers, boxes, packing paper and tape are gaining ground. Stocking the three standard sizes of boxes--small, medium and large--is a good bet. "You need to at least carry those," Van Slyke says. "All these boxes require tape, so you need to sell that. Nobody should be leaving with 50 bucks worth of boxes and no tape."

Next to locks, boxes are the easiest products to sell. "It used to be you could only find boxes at the back of grocery stores and liquor stores. They don't necessarily give out boxes anymore," Martin points out. "Boxes are still the No. 1 thing people need when they move. It's very important from a liability and service standpoint for a storage operator to make sure he has something to offer the customer to protect his goods while they're being stored."

Location can be a huge factor in determining which items will fly off the shelves. "Look at who your customers are and the surrounding area, and look to see what's already available," Martin says. "If there's a college nearby, you're going to have a lot of students moving out for the summer and putting their things in storage. They'll need boxes for computer equipment. If you're in an upscale area, you'll need dish boxes, things to protect dishes and glassware. The basic items like sofa covers, newsprint and tape will always sell. If you rent trucks, make sure you have a lock that will fit on the rental truck."

While choosing what to stock seems like commonsense, many facility owners make the wrong decision simply because they don't evaluate their customer base. "You want to make sure you're focusing on what your customers will need," Hainrihar says. "The reason the lock is such a big seller is because everyone needs one. You want to pick items every customer can use."

Keeping the shelves and pegs full is another key to maintaining an active retail area. "The more people see, the more they tend to buy," says Van Slyke. "Fill up your racks. Never let people see an empty hook. Customers want to see everything full and dust-free."

Managers should keep track of which products sell best. "There's some great software available now where you can actually keep the inventory in the computer and watch for the bestsellers," Martin says.

Leasing Trucks

Next to locks and packing supplies, truck rental is the most popular ancillary item. Not only is it a huge customer convenience, it can also add a few more coins to your coffer. "Everyone is moving into and out of self-storage in a truck," says Kirk Nash, president and CEO of On The Move Inc. in Boerne, Texas. "The question is, is it a Ryder, U-Haul, Penske or Cousin Bill's pickup? They're looking for a pickup when they come to get space. If a customer can go to a self-storage facility that has trucks or one that doesn't, they'll probably go to the one that has them."

There are a few ways self-storage operators can jump into truck rental: leasing or buying a truck from a dealer, or becoming a dealer for a truck leasing company. Each has its advantages and disadvantages. Leasing or purchasing a truck allows the self-storage operator to have total autonomy when it comes to who rents it and at what cost. However, leasing a truck requires a hefty monthly payment, whereas becoming a dealer involves little or no financial obligation. Yet, self-storage operators who become truck-rental dealers are subject to the rental company's policies, including pricing and limitations on truck availability.

On The Move currently leases 3,000 trucks, 80 percent of which belong to self-storage operators. The total cost to lease a truck is about $850 a month. The four-year lease includes liability and comp and collision insurance. All trucks also come with 12 furniture pads, a hand truck, rental forms and truck-condition reports. "We put it all together. You can get a truck anywhere--getting the truck is not tricky. The tricky part is getting the insurance so you can hand the keys to any licensed driver 21 and older. By providing the insurance, rental forms and backup material, we put operators in the local truck-rental market," says Nash.

On The Move also offers unlimited mileage and guarantees its leases. "Anytime during the first year, if doesn't work for them for any reason, they can turn the truck back in and we tear up the lease. They don't have to even give me a reason," Nash says.

The amount of profit a self-storage operator makes is directly correlated to how much effort is expended in renting the trucks. "We have self-storage operators out there with numerous trucks that are netting $1,500 a month per truck. Then there are other folks who are just breaking even on the vehicle," Nash says.

Nichols has found leasing trucks to be quite profitable. "It's almost a surefire hook when someone calls and we tell him we can offer the use of our truck for free," he says. The trucks are always used during a new lease-up. "As a facility becomes more mature, what we do is give the truck away less and rent it more. And it brings us at least one tenant a month we wouldn't otherwise get. If it brings us five tenants we wouldn't otherwise get, it certainly pays for itself," he adds.

A truck also serves as a moving billboard. "We use it as a marketing tool as much as a revenue source," Nichols says. "When it's out in the neighborhoods, it serves as an advertisement. People see the truck and we get some name familiarity."

Self-storage operators not interested in signing a lease agreement can still offer their customers truck rentals by becoming a dealer with a national truck-leasing company. The biggest advantage is there are no out-of-pocket expenses. Self-storage operators only need to provide the space to store the trucks and a dedicated phone line to take reservations. "We take care of the expenses for everything," says Jennifer Sullivan, director of public relations for Budget Car & Truck Rental. The Lisle, Ill., company acquired Ryder TRS in 1998. "We take care of the cost of the truck, truck maintenance and insurance. We supply all the equipment--tow dollies, hand trucks, blankets. We supply the contract and computer system. We'll also deliver reservations to them and give them a free Yellow Pages listing."

In turn, self-storage operators make a commission on every truck rented. "It has been a great source of ancillary income," says Harris, who offers Ryder, U-Haul and Penske truck rentals at three facilities. While some of the facilities only net a few hundred dollars each month, Harris does have one site that garnered $150,000 in its first year. "It helps edge out the competition and it helps bring clients to your facility. When they rent the truck, that's one more customer to whom you can market."

In fact, U-Haul's research shows 23 percent of all customers who rent a truck from a self-storage will also rent a unit. "There's a synergy between moving and storage," says Dennis O'Connor, director of storage operations for U-Haul International Inc. in Phoenix.

You've Got Mail

Mailboxes are another ancillary product popping up in self-storage. Some owners are already experimenting with the concept and finding great results. "It's a good service to offer our customers," says Nichols, who has mailboxes at several facilities.

Salsbury Industries, a Los Angeles company that manufactures mailboxes, is fielding more requests from self-storage operators, says Ricardo Alva, the company's outside-sales manager. "The great thing about getting these boxes is it's a one-time charge," Alva says. Mailboxes run about $500 for a bank of 30 and roughly $400 for a bank of 10 larger compartments. "If they have a bank of 30 boxes and rent them for $15 each, that's $450 profit per month," Alva says. "If the cost of the unit was about $500, in a little more than a month, it will have made back the cost of that unit. From there on out, it's just profit."

Pricing the service will depend on the facility's location and what the competition may be charging. However, not every location can be considered a good one for mailboxes. "Most storage facilities would not lend themselves well to private postal boxes because they're too off the beaten path," Harris says. "If you're in an urban environment where you have a lot of drive-by traffic, people would notice the service and might have a tendency to use it more. Most of my boxes are being used by current tenants."

In addition to small business owners, facilities near marinas and colleges are ideal for mailbox services. Although it's too new a venture for Harris to declare it a success, he says the minimal start-up cost makes it worth the gamble. "They'll pay for themselves a lot sooner than the storage facility will."

Salsbury publishes a manual for business owners interested in providing mailbox services. "Owning and Operating a Successful Private Postal Center" includes information on start-up costs, marketing, sample rental rates, configurations and contracts. The manual also has the actual form business owners need to submit to the post office. "That's really the first start for anyone considering doing this type of business," Alva says. The manual costs $25 and can be obtained via www.mailboxes.com or 800.725.7287.

Managing Time

One reason many self-storage owners have shied away from ancillary products is the fear they will take up too much of the manager's time. "Unless you're overwhelmed with customers, I don't know how ancillary products would be too much for one manager," says Chandler of Movin' On Storage.

And as the industry continues to evolve, managers are expected to be more than just a facility caretaker. "It is now more of a sales aspect. With the focus more on ancillary sales, you're going to have to ask your manager to sell. We look for people like that, and we also tell them this is part of the job," Hainrihar says.

It's also important to make selling ancillary products as simple as possible, says Chateau's Martin. That includes ordering, stocking and pricing items. Clear price tags and product descriptions will cut down on the number of questions customers ask. An easy reorder system is also a must. Use a reorder tag with the product number on the back of the hook. "That way, all the manager has to do is pull the reorder tag off the hook and pick up the phone to order," Martin says.

Mailboxes require even less of the manager's time. "It's a pretty self-sufficient service. All they're doing is receiving mail, sorting it out and putting it in the box. There's not too much maintenance involved," Alva says. In fact, the entire process should take less than 30 minutes a day.

While packing supplies sell themselves and mailboxes need little upkeep, truck rental does require more time and energy from a manager. Movin' On Storage Centers averages a ratio of 7-to-1 calls a day for truck rentals vs. storage units. "You're tracking a much heavier call volume for truck rentals," Harris says. Generally, a single manager can handle a truck-rental operation generating up to $125,000 to $150,000 in annual revenue, Harris says. "Anything over that, you really need to consider bringing on more people."

Although truck rental requires more of the manager's time, every truck-rental call is an opportunity to sell storage. "That's what the owners have to realize. Yes, managers are taking time to answer the phone, but that's a call coming into the facility," Harris says. "Granted their first reason for calling was for truck rental, but everybody who needs a truck is probably going to need boxes. And people doing self moves may also need storage."

The key to having any kind of successful ancillary product is getting the manager on board. "If not, they're not going to answer the phone and they're not going to go the extra mile," Harris says. "Some people will work hard if they know they're going to have X number of dollars at the end of the week. Other people are going to ask, 'What's in it for me?' Those are the people you have a hard time with when bringing in the truck rentals and other ancillaries. If you're bringing in more boxes or truck rentals into an existing facility, you do need to compensate that manager for additional work."

Compensation could come in the form of a higher salary, bonuses or other incentives. "If you compensate your managers, they don't think of it as extra work. But they need to view it as the total-pay package," Harris says.

Juggling mailboxes, packing supplies and truck rentals with renting units and keeping a facility running smoothly is by no means an easy task. However, the extra effort could lead to big payoffs in the long run. Ancillary products add profit, create customer convenience and help your facility stand out from the competitors. "It's a matter of helping the customer as much as you can," Van Slyke says. "If you offer everything they need under one roof, that's going to build a valuable trust."

If you don't offer units for $9.95 at your facility, you should.

Forget how you're going to offer them for the moment and just think about the concept. How many more people could you get to visit your facility if you had units that rented for just $9.95? What size unit could you rent for that price? Obviously, a very small one.

Since we know the key to renting units is to get people to call and visit a facility, a low price point will help make this happen. Owners who have adopted this marketing concept have been able to design very interesting Yellow Pages ads. Think of a headline in the storage section of the phonebook that reads, "Units Starting as Low as $9.95 per Month." The ability to use this price in your advertising is one key reason for offering it, but we're getting a little ahead of ourselves. Let's first consider some of the other issues.

Where Do You Get Them?

Before you rent the units, you've got to have them available, which means you're either going to have to buy or build them. Building these units can be fairly expensive. It would take you a while to recoup your losses charging a whopping $9.95 per month. Instead, buy the units used. Where do you get them? Some owners have found them by going around to the local schools and buying discarded lockers.

Approach the school and ask for the building-maintenance or physical-plant manager. Tell him you are looking to pick up some old lockers but don't have very much money. In most cases, he will be prepared to discard them without getting a dime, so you're in good shape if you offer him any money at all. You don't have to buy a lot of them, but you can't have just one. This looks like you're obviously playing a game. Instead, have at least 20 units available at the $9.95 price. One suggestion is to make sure you always have one unit available to show people. That way, when people come in to inquire, you can prove the $9.95 offer is for real.

The Upsell

Let's be honest: The $9.95 unit is, for the most part, a gimmick. The vast majority of people who visit based on the $9.95 pricing will see the unit and say, "No way. I can't fit anything in there." (Though I've heard from owners there are many happy customers hiding--er, I mean storing--some interesting things from their wives and husbands in these small "units.") Your answer will be, "We do have a lot of them rented, as you can see. Would you like to see some of our slightly larger units?" This will make it possible for you to show--and maybe rent--them a 5-by-5.

Maximizing Your Effectiveness

I'd like to give you some ways to use the $9.95 units to build traffic. First, mention them in all of your print advertising--not just your Yellow Pages ad, but in any fliers, postcards and other promotions. If you are the only facility in town that offers a $9.95 unit, highlight this fact in your ads as well.

Mention these units on your answering-machine or voicemail message. Say something like "Hi, and thanks for calling ABC Self Storage, the only facility in town with units starting as low as $9.95 per month..." Also mention your $9.95 units in any conversation you have with a prospect over the phone. You don't want it to become the lynchpin of your sales pitch, but you should mention it--especially if it's a unique selling point (USP) in your market.

You can also combine your $9.95 unit pricing with another USP (or two or three) to create a powerful sales message in any form. In the marketing business, we call this technique "piling on." Make your offer attractive enough on its own and then add more benefits to make it irresistible. Here's an example of how it might work over the phone:

Manager: Hi, thanks for calling Fred's Self Storage. How may I help you?

Customer: I'm looking for a 10-by-10 unit. How much do you charge for it over there?

Manager: Well, let me grab my price list ... It's around here somewhere (stalling) ... By the way, are you calling around?

Customer: Yup! I sure am.

Manager: Well, no matter who you rent from, make sure that they've got (insert your primary USPs). Also make sure they can rent units as low as $9.95.

Customer: You've got units at $9.95? Are you serious?

Manager: We do. But it sounds like you know what size unit you want. Can I ask what you'll be storing to make sure you're pricing the right unit size?

At this point, you've engaged the potential renter, got him opening up to you, and there is a strong probability he will visit your facility. Is it strictly because of the low-price units? Not in this case, but in some cases it will be. Remember, the $9.95 unit is just another weapon of your marketing arsenal.

Economics

If you think about it, your revenue per square foot per month will probably be higher on the $9.95 units than any of the others you offer. Demand for these units won't be overwhelming, but I have heard of facilities that have as many as 60 lockers, 57 of which are rented. Consider putting these lockers in or very near the office. You'd be surprised how many people who rent these lockers will also buy packing and shipping supplies and boxes from you. The total revenue these renters generate is much more than the price of the units.

Although the $9.95 unit pricing is admittedly a gimmick, it is an effective one. I have two signs posted in my office these days. One of them reads, "Measurement eliminates argument." The other one reads, "Upsell everything." By using $9.95 units, you can measurably increase the number of calls you turn into visits. I'm also willing to wager you can upsell a substantial number of prospects to larger units once they visit.

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

Clarification on Manager Monitoring

Last month, in his column titled "Monitoring Managers' Phone Performance," Fred Gleeck wrote, "I'm not a lawyer, nor do I play one on TV. I do know you need to inform your employees they are being monitored on the phone. Make them sign a consent form that agrees to the monitoring." Several managers interpeted this to mean it is illegal to tape-record them on the phone without their consent. This is not true.

According to D. Carlos Kaslow, legal counsel to the Self Storage Association ("Is It Legal to Record? Employee Privacy vs. Employer Rights," The Self Storage Legal Review, 1994), an employee has no legal protection from an employer who wishes to conduct mystery shopping of his self-storage facility via the telephone. While intercepting personal calls is illegal, federal law does allow employers to monitor their employees' business calls, providing they have a legitimate business purpose for doing so. Similarly, companies that provide mystery shopping and other evaluative services are not breaking any laws or violating self-storage managers' rights.

If you are a self-storage manager, be aware every call you make could be monitored and assessed by your employer or a service he has hired. The best way to avoid negative consequences is to make every call professional and courteous.

Last month, I ventured into the never-neverland of marketing viewpoints and tried to show how perception of a product--not the actual physical offering--is the arena of marketers. I showed how media can create a label or symbol that has value independent of any product. I also established that a product is the means to a customer's end, and effective selling focuses on those user goals. That presupposes you know what those goals are, otherwise you have no basis on which to found an appeal.

Determining Value

If I said you must talk the customer's language to communicate with him, you would probably agree. If I said you had to think like the customer to influence him, you would probably agree. If I said you should price your services consistent with the prospect's view of their value, you would probably agree. After all, if the prospect's notion of value is below your price, he won't buy. Now you know I'm leading you down the garden path, so you are likely to be hesitant about agreeing to much more. But at least we can agree you must know something about value to properly price your services.

So let's move to a simple example of value determination. Imagine a hot summer's day. Dad has been mowing the lawn. He's hot and thirsty and takes a break. There on the kitchen table, his thoughtful wife has set out five identical glasses of ice water. He exclaims, "I'd give a million dollars for one of those!" He gratefully chugs the first, thanks his wife, and more slowly drinks the second. He feels much better. He walks away from the rest. But he wasn't alone in mowing the lawn. Right afterward, his son comes in hot and sweaty. He notices the remaining three glasses. Like his dad, he eagerly drinks the first, then leisurely consumes the next. He thanks his mom and walks away leaving the last glass untouched.

Following our dictum of pricing according to value, how would you proceed to price the glasses of water? Is this example realistic or surprising? It characterizes the dilemma of pricing. The value of a product to any one customer is not easily knowable in any quantitative way, yet we agree value is the only basis on which to effectively set prices.

Further, value bounces all over--even for the same customer. It is the customer's situation that determines value. The cost of the product has nothing to do with it. And the value will vary as the customer's situation changes. In our example above, four of the five identical glasses of water had different values at different times to the dad and the son. To each, the first glass had great value, the second had some value and the third, well, it had a common value--zero.

The critical item here is the father and son would have been willing to pay varying sums depending on their situation. What's a poor marketer to do? Well, sometimes he just chickens out and uses cost to determine pricing because it is knowable and convenient. Or he checks out the competition and follows its lead. Neither is a very valid method.

Real-Life Application

Let's apply this to the self-storage world. An owner believes there may be a demand for a package of self-storage units for a prosperous family. A wife has been on her husband's case, imploring him to get his big toys out of the garage. Also, she has some lovely heirlooms she doesn't want sharing space with the ATVs and snowmobiles. She wants her own unit. And the kids? They have their stuff, too, and think it would be neat to have their own unit.

OK, Mr. Operator, how do you price the package? You say, "That's easy--just add them up!" But the husband is paying the bills, and each of those units is worth progressively less to him. He won't pay the same for each. The units may be identical, but they're not worth the same. Now you're thinking: "But those units all cost me the same, and I can't charge different rates for the same unit! Besides, my accounting software doesn't work that way, and it wouldn't be fair to other tenants paying regular price."

Now take a look at airlines. On any given flight, there are between 10 and 15 seat prices in play. Hotels are the same way. On any given night, there will be a wide range of prices being charged. They understand if they want to sell multiple seats or rooms, they must recognize the difference in value successive units have to the same buyer. This may sound like basic discounting, and with large purchases, you'd be right--bargaining power does come into play. But when you're talking about families or small groups, each successive unit is actually worth less. If you want to sell those additional units, you must acknowledge this fact in your pricing.

Is this sort of thing really needed for the self-storage industry? I only report the hows and whys of marketing practices. Why anyone would believe this industry is exempt from the factors and forces that shape every other competitive market, I don't know.

Trial and Error?

There is one caveat. We have used analogies to illustrate the principles, and the illustrations may seem simplistic--like the glasses of ice water. I'm trying to establish the concept. It's a little like looking at a football-team playbook vs. watching the execution of plays in a game. On paper, the plays look clear and simple; but in real time, they look like a mess of guys running in all directions. It takes a skilled eye to detect the order. The same is true with marketing strategy. We are trying to set up the marketing playbook. This is not guessing or random trial and error. There is good reason to believe this approach will work.

Harley Rolfe is a semi-retired marketing specialist whose career includes executive-level marketing positions with General Electric and AT&T. He also owned lodging and office facilities for more than 20 years. Mr. Rolfe holds a bachelor's degree in economics from Wabash College and a master's degree in business administration from the University of Indiana. He can be reached at his home in Nampa, Idaho, at 208.463.9039. Further information can also be found in Mr. Rolfe's book, Hard-Nosed Marketing for Self-Storage.

Until now, the underlying profitability of records storage has little surfaced or been presented in a comprehensive cash-flow model. Moreover, the financial advantage of codeveloping records storage with self-storage needs to be made clear. The purpose of this article is to provide general insight, via cash-flow models, into the profitability of records storage when added to self-storage.

First, the Concept

Records storage--more aptly called "records management," as it involves indexing, retrieval and a plethora of other services--is an out-of-site, out-of-mind business, the potential for which is little known. Started in the 1940s, it has become a mature industry with several professional organizations: PRISM International (formerly the Association of Commercial Records Centers), the Association of Records Managers and Administrators, and the Institute of Certified Records Managers, which provides certification. These organizations collect very little by way of operating statistics worldwide; however, the most interesting rule of thumb is existing customers of commercial records businesses increase their storage by 15 percent to 20 percent annually.

Why is records storage used? The average file cabinet holds about eight boxes worth of files. The same cabinet consumes about 9 square feet of floor space. If you are paying $15 per square foot annually for office space, these eight boxes cost you $135 per year to store or $16.88 per box per year. The average cost to store a box in a commercial records center is $3.75 per year. This translates into a monthly box average of 31 cents for storage, plus 15 cents in service fees (indexing, retrieval, etc.).

Building a Cash-Flow Model

A typical facility can generate 1,000 to 3,000 new boxes for storage each month. One industry expert claims that with an aggressive marketing plan, well-trained salesperson, diligent and consultative sales method, and managed sales cycle, the results can be 100,000 cubic feet of storage within as little as two years (one storage box equals 1.2 cubic feet).

Although this fast track is possible, the cash-flow model in this article assumes a conservative 1,000 new boxes monthly. Typical expenses have been included to arrive at net operating income. Exhibit A demonstrates projections for a 63,000-square-foot self-storage facility combined with a 110-by-110-foot records center. (Note: For the sake of brevity, this article makes several assumptions not shown here. A full statement of assumptions, including construction costs, loan parameters, income and expenses, is available upon request at www.mrfeasibility.com.)

Good News and Bad News

The bad news is it can take two to three years for a stand-alone records-storage facility to become profitable. At the end of year two, the stand-alone facility in Exhibit B has a negative cash flow of $41,641. However, the good news is if the same records-storage facility is a part of a self-storage project, it shares some of the operating expenses. The self-storage operation provides enough cash flow for both during the initial two years, while the records storage is gaining air speed, so to speak. See Exhibit C.

The Impact of Records Storage

Below is the income stream from our same exhibit, with and without records storage. A hypothetical sale is established in year five to measure the full potential of the project. The initial investment for the land and start-up is $500,000. In the records-storage cash-flow model, the construction costs for the building and racks have been added to the construction loan.

Without records storage

With records storage

Immense Profitability

In the above example, there is more than a $2.5 million increase in profit to the bottom line, which is surprising. A lot is due to the fact that existing customers stored additional boxes at a growth rate of 15 percent to 20 percent. This gives the industry a unique self-generating annuity. Special attention is called to the increased cash flow in years three to five. Notice the permanent loan has been brought online at the beginning of year three in the records-storage case. Often, a records-storage facility will not efficiently support a permanent loan until this time.

Two Big Impact Factors

A big impact on the bottom line comes from loan proceeds (the permanent loan coming online). Also, the downstream sale is very significant. Both these factors pivot on establishing market value, first at the end of year three, and then at the end of year five.

With commercial real estate, market value is most generally determined by a capitalization rate. The exhibit model uses a 10 percent cap rate; however, it should be observed that records storage is more of a business venture than a real estate investment and involves much more intensive management. Although there are several ways of valuing small-business ventures--for example, a simple way is to multiply earnings by three to five--such earnings are before interest and taxes. When there are assets such as real property or inventory, they are added to the value. The end result of such valuation is often less than using a cap rate. When records storage is added to a self-storage project, there is a tendency for a lender to establish market value with a cap rate for lending purposes. This is of great advantage to the developer. It changes the profitability outlook completely.

Some Critical Observations

In Exhibits B and C, loan payments do not occur until month 13 of operation. This occurs because interest reserve is used to make loan payments. Interest reserve is the loan's capacity to make its own payments for the first few months of rent-up. (These payments are added to the principal balance of the loan.) The interest reserve is the total amount of all the loan payments that can be added to the principal balance. This ceiling is negotiated with your banker and is best acquired when the loan package includes a monthly map of interest-reserve use during rent-up. The efficient use of interest reserve is critical to the positive cash flow of the project. See Exhibit D.

Focusing Your Loan Package

If you are going to create a loan package, the examples cited in this article point to the importance of three key points:

1) Have a monthly financial map showing the need for a specific interest-reserve amount. (This will keep your cash flow positive for the first two years.)

2) Be prepared to show why it is important to bring permanent financing online at a later time. (Generally, the records-storage project will not support a viable permanent loan until somewhat later than self-storage.)

3) Be sure your financial package shows the lender the "before and after" impact of adding records storage to your facility. You'll stand a better chance of the lender using a cap rate to establish value for your loans.

Jim Oakley is a pioneer and national authority in computer-modeled feasibility. His methodology was taught at Arizona State University and its Center for Executive Development. He has addressed major national organizations including the National Association of Corporate Estate Executives and the National Association of Real Estate Educators. His articles have appeared in Inside Self-Storage, Professional Builder and Lodging magazines. Mr. Oakley consults from Prescott, Ariz. For more information, call 928.778.3654; visit www.mrfeasibility.com.

People say location is everything--especially in real estate. The developers of Price Self Storage in San Diego couldn't agree more. Price Self Storage West L.A. LLC, a partnership between Price Self Storage and Calabasas, Calif.-based Ezralow Co., happened upon a choice piece of property in west Los Angeles. The site, just half a mile south of the Santa Monica Freeway, even had a building that could be easily converted to self-storage. And it's not in an industrial area, but smack in the middle of a retail corridor.

Retail neighbors--Albertson's grocery store, Rite-Aid drugstore, and fast-food giants Taco Bell and McDonald's--offered Price Self Storage an ideal marketing opportunity. "We thought it was unique to be able to get a location like this where so many customers frequent every week to buy their groceries," says William Hamilton, company president. Because the facility is located on a main street--La Brea Avenue--roughly 70,000 cars cruise by the facility every day.

Considered the biggest drive-in self-storage facility in California, Price Self Storage opened its very large doors in November. The two-story building encompasses 390,000 square feet on 6 acres. But it's not just its size that sets Price Self Storage apart from its competitors. The developers capitalized on the facility's distinctive features to create a truly innovative self-storage center. The facility was once used as a distribution center for Thrifty stores. The expansive layout enabled the developers to go beyond the typical self-storage design. "When tenants enter the building for the first time, its kind of awe-inspiring," says Hamilton.

The building's entryway and roomy corridors allow passenger cars and moving trucks alike to easily navigate among the facility's 2,250 units. Because the building was originally designed to be a distribution center, the second floor was already built and engineered for truck use. "That was one of the reasons we were able to make the facility a drive-in. It had a large clearance between the first and second floor, and extremely strong floor-load ratios that made it just a natural to adapt," Hamilton says.

Price Self Storage didn't stop with design. The facility also has a number of amenities to entice customers. The units, ranging in size from 5-by-5s to 12-by-30s, have individually alarmed doors. Surveillance systems ensure safety for tenants and their belongings. Ancillary products, including moving and packing supplies, free use of a moving truck complete with a driver, and a full U-Haul dealership, up the customer convenience factor.

Hamilton, a former executive of Price Club, adapted many of the quality and value concepts employed by the warehouse business to his self-storage ventures. "All the things we learned about value and convenience we adapted to our storage," he says. "We want to be convenient. We want to have value. We have to have the cleanest facility in the nation. We charge very fair rates. We provide services."

The company's motto of value and convenience resonates through all nine of its self-storage facilities in California. Hamilton assures it's a concept that will only grow as Price Self Storage continues to develop and open new facilities. "We try and differentiate ourselves by merchandising our buildings differently, having large driveways, and really focusing on what the customer wants, which is value."

For more information, call 858.485.5900; visit www.priceselfstorage.com. 

Architectural services for Price Self Storage were provided by Valli Architectural Group. For more information, call 949.349.1777; e-mail [email protected].

This month's travels take us to the Northwest. The group we interviewed seems to be seeing a decrease in the effects of the recession, confirming the self-storage industry has once again eluded the fate that befalls other types of real estate. Let's hear what the local experts have to say about their respective cities and regions. Our Northwest brokers are: Richard Arnold, Arnold Forcum & Associates, Portland, Ore.; Kent Curtis, Thanksgiving Property Group, Provo, Utah; Larry Hayes, Hayes & Associates, Missoula, Mont.; and Marc Neumann, Wallace Properties, Bellevue, Wash. I will add some comments on the national market in contrast.

1. Have you seen the impact of a recession in your area?

Arnold: It is most noticeable in the region as overbuilding in high-tech office, flex and warehouse space. There has been some slowdown in demand for self-storage space, but no letup in demand by investors to purchase the product.

Curtis: Yes, vacancies in the A, B and C marketplaces have increased significantly. Rates have dropped as a result, and deals are harder to find. Other categories, however, such as land sales, have seen no impact. Occupancy in storage units has not been affected, nor have prices.

Hayes: Montana is one of seven states not officially in recession, according to a recent newspaper article. The real estate market here is still very good.

Neumann: The recession has had a definite impact in Washington. State unemployment has risen to approximately 5 percent. The failure of the dot-com companies and the slowdown in world trade has affected many of our major businesses: Boeing, Microsoft, Weyerhaeuser, etc. We have a glut of office space that is not leased (vacancy at approximately 20 percent). Real estate investors are more cautious. We have lots of tire-kickers, but fewer bona fide buyers. I see the local real estate investment market turning around midyear.

McCune: The latest on the national scene is that vacancies are up a little; but the good news is with other types of real estate in the tank, investors are really excited about self storage's consistent performance and good cash flow.

2. Are investors still interested in self-storage and, if so, what kind of investors are they?

Arnold: As I mentioned above, there seems to be no letup in demand for self-storage product, with significant pressure coming from those investors who have funds with accommodators and are trying to defer gain on a previously sold investment.

Curtis: No change has occurred in the type of investor looking at storage. In my experience, investors who prefer stocks still prefer them, and investors who prefer land still prefer land. One change has been in the small to medium apartment market, where deals are harder to find. This market has seen an increase in interest since the recession began, indicating a change in preference for investors.

Hayes: Yes, there are still investors here in Montana. They are mostly cherry-pickers looking for good returns.

Neumann: Investors I talk to are still very interested in self-storage, which is still perceived to be an excellent investment vehicle. I think more people have become interested in real estate since the stock market hit the skids.

McCune: Our Northwest group is finding it is part of America--that is, there are buyers but not many "greater fools."

3. Are the local banks continuing to make loans in your area? Are the falling rates having any impact on the buyers?

Arnold: My own experience tells me the banks are interested in accommodating their customers and like the idea of the rent flow-through each month.

Curtis: Banks are loaning with much more care than in the past. They are more tentative, and loan-to-value rates have decreased. I lost a deal recently because of an overcautious bank. Falling rates have impacted buyers, as a spread on loaned money increases.

Hayes: Banks here are still making loans, but not at screaming rates.

Neumann: Local lenders who like self-storage are continuing to make loans, but they are more stringent in their qualification of borrowers. Money is still available for self-storage at 70 percent loan-to-value and debt coverage of 1.20 percent. Rates are 8 percent to 8.5 percent, with 25-year amortization. Investors are cautious. Rates have some impact, but not as much as you would think.

McCune: The recession is making bankers do a better job of underwriting, but also making them appreciate the cash flow, as Arnold points out. This is a very good combination for the industry because when the underwriting gets "sloppy," overbuilding happens.

4. Are you seeing any signs of overbuilding? Is it a big deal in your respective area?

Arnold: I spoke with one of the larger developers and managers of self-storage in the region. I was told self-storage is overbuilt. Vancouver, in particular, is significantly overbuilt, and some small cities in Oregon are overbuilt.

Curtis: Overbuilding is a problem in the southern part of the valley. This has impacted rates and vacancies more than any other factor. New facilities outpace the population growth, lowering occupancy in the short run. In the long run, I see the problem eliminated, as cities disallow new developments.

Hayes: We have seen some overbuilding in Montana. It is getting to be a big deal here.

Neumann: There are many signs of overbuilding, especially on the west side of the state. Many owners of new projects are struggling to reach pro forma occupancy of 85 percent to 90 percent. This is especially true in areas around greater Seattle.

McCune: See question 3.

5. Are there many conversions (e.g., a warehouse to self-storage) in your area? If so, are people concerned this could add too much space?

Arnold: Conversions are not a factor in the Oregon/Washington/Vancouver area.

Curtis: There are no conversions that I know of here in Utah.

Hayes: There are very few conversions in Montana.

Neumann: We are not experiencing at lot of conversions of warehouse and office buildings to self-storage use. If office vacancy continues to stay at 20 percent for an extended time, this could change.

McCune: Conversions are a regional thing for the most part and highly dependent on high land prices.

6. Which, if any, REITs are active in purchasing self-storage properties in your area?

Arnold: I believe the REITs are still selectively active in the region, but as in other parts of the country, they are a modest factor.

Curtis: There are no REITs purchasing here in Utah of which I know.

Hayes: There are no REITs actively purchasing in Montana.

Neumann: REIT developers and investors are not active in our market at this time. I believe they consider this area overbuilt--land costs are too high or opportunities are better elsewhere.

McCune: The REITs continue to spend a lot of energy on development. The returns on storage work better for their overhead when they build new storage facilities rather than buying existing ones.

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

For most of us, travel is a business necessity. This month's column is your survival guide, filled with inside tricks and tips that will save you precious time, money and sanity.

Split-City Ticketing

As a business traveler, I often book airline reservations with minimal advance notice. Travel urgency can result in unfriendly flight schedules and exorbitant pricing. Seasoned travelers quickly learn they can improve their options by flying to an interim, less populated, city and continue on to their final destination from there. By using two round-trip tickets to complete one trip, you will dramatically reduce your airline costs.

Here's an example: A few years ago, flying to Salt Lake City from California was expensive. However, one airline was pushing its new route to Reno, Nev. I bought one round-trip ticket from Burbank, Calif., to Reno and another from Reno to Salt Lake City. This meant I had a stopover, but I was expecting that anyway. Not counting the money I lost in the Reno-airport slot machines, I saved about 40 percent.

Drive a Little, Save a Lot

Flying between major airports typically involves a premium price tag. However, using a secondary airport located a few miles away can result in significant savings. For example, La Guardia is near JFK airport in New York and Burbank is near Los Angeles International Airport. These lesser airports offer bargain ticket prices and very convenient parking. Driving from a smaller airport to your final destination can certainly be cheaper than flying direct.

Discounters

I could never imagine a restaurant that charged different meal prices based on when you made your reservation, yet this is what airlines do every day. This is called "profit yielding," and it means the price of your ticket bears little resemblance to the actual costs associated with filling your particular seat. This has led to a secondary market for excess airline seats.

Several companies prepurchase seat options and consolidate otherwise wasted seating to provide discounted fares. Check out these websites for fantastic savings:

• www.cheaptics.com
• www.expedia.com
• www.onetravel.com
• www.travel.priceline.com   
• www.travelocity.com

Often these tickets are not available until a few days before flight time. For the last-minute business traveler, this can be a blessing. In fact, the less advance notice you have, the deeper the discount.

The Travel Pass

Several U.S. airlines offer amazingly discounted travel passes. Each leg of any trip will cost about $100 between any U.S. cities. The catch is both your citizenship passport and location of purchase must be outside the U.S. and Canada.

Bump Resistant

When buying airline tickets online, you are rarely given a seat assignment. If you arrive at the ticket counter without a seat assignment for an overbooked flight, you will be the first person bumped off that plane and forced to take a later flight--which may be several hours or even a full day later. Once you purchase your online ticket, call the airline immediately to arrange your seat assignment.

Know the Weather

Before you travel, visit www.weather.com to discover the climate you should encounter at your destination. Arrival is not when you want to discover you should have packed a jacket or raincoat. You can also be more prepared for potential weather-based delays and cancellations by checking weather conditions at points of departure, layover and arrival.

Getting Around

Midnight is not the time to receive driving directions about an unfamiliar road. Before you fly, visit www.mapquest.com and print out complete driving directions for each leg of your route. Consider printing area maps so you can quickly find alternate paths just in case an expected highway off-ramp is under construction.

Symphony at 30,000 Feet

Noise-canceling headphones eliminate most of the low-frequency drone emanating from the airplane's engines and air conditioning. Movies and music will sound clearer and, at only $50, it is a great investment in your travel comfort.

Pack for Security

In 1988, a Toshiba radio filled with explosives brought down Pan Am 103. On Sept. 11, terrorists used box cutters to control those fateful flights. Airport security is now searching for everything and anything that can pose a threat. Nail clippers and key-chain knives are banned on all U.S. flights and will be confiscated at the security counter. Closed carry-on boxes are likely to be opened and searched. Pack smart and be prepared to bear all to the security staff. Bring books and a sense of humor to survive the long lines.

Before your flight, call the airline or find your airport on the web to learn the specific security restrictions and time allocations required at each airport in your itinerary. To expedite your passage through security, use a sturdy laptop bag with all accessories in the bag's clear or mesh holders. To dissuade theft, select a bag devoid of any company logo that could imply the contents are valuable.

Mile-High Computing

Business-class airline seats typically include power outlets for your convenience. These outlets were not designed for today's cutting-edge, power-hungry laptops. If you draw too much energy, the outlet will temporarily shut down. If this happens to you, charge your laptop with the computer turned off or operate your computer with the battery removed to reduce the system's power demands.

If you travel often, consider buying a modem saver/line tester. This simple device can save you the cost and hassle of replacing a modem damaged by a badly behaving phone line. There are several models at igo.com starting at less than $40. Likewise, a power strip can be a lifesaver if your hotel or conference room does not offer enough electrical outlets. It can also double as a small extension cord.

STSN's site (www.stsn.com) will help you find one of the 500 hotels that offer its high-speed Internet service. This broadband connection is always on, and typically costs only $10 per day. If your hotel does not offer Internet access, consider subscribing to www.netzero.com before you travel. NetZero provides 10 hours of dial-up Internet access per month in return for displaying periodic advertisements. Here are some popular hotels offering online access:

Business Hotels
Doubletree
800.222.TREE; www.doubletree.com

Four Seasons
800.819.5053; www.fourseasons.com

Hilton
800.774.1500; www.hilton.com

Hyatt
800.633.7313; www.hyatt.com

Radisson
800.333.3333; www.radisson.com

Red Lion
800.RED.LION; www.redlion.com

Marriott
800.321.2211; www.marriott.com

Economy Hotels
Best Western
800.780.7234; www.bestwestern.com

Days Inn
800.325.2525; www.daysinn.com

Econolodge
800.55.ECONO; www.econolodge.com

Holiday Inn
800.HOLIDAY; www.holiday-inn.com

Motel 6
800.4.MOTEL.6; www.motel6.com

Travelers rarely describe their airline experiences as pleasurable. With meal service and convenient routings being phased out, you must be savvy and resourceful. A little research before your trip will save you hundreds of dollars and countless inconveniences.

Plan ahead, pack light and inform your staff that they can watch your flight in real-time at www.flytecomm.com. And don't forget that a day filled with cabs, airports, long lines and a rent-a-car might be better spent relaxing on the train. Amtrak offers frequent schedules, low fares and plenty of legroom. Who knows? Maybe thinking about all the money you are saving might make your trip a pleasure after all.

Doug Carner is the vice president of marketing for QuikStor Security & Software, a Sherman Oaks, Calif.-based company specializing in security, software and management for the self-storage industry. For more information, call 800.321.1987; e-mail [email protected]; visit www.quikstor.com.

Imagine a scenario where a facility owner makes a call, haggles a bit over a contract, signs some paperwork and someone pays him $25,000 a year--for virtually nothing. In its simplified form, this is what happens all over the country for facility owners with cellular towers on their properties.

The marriage of self-storage facilities and cell towers is growing in popularity, says Joe Niemczyk of Tucson, Ariz.-based Executive Self Storage Associates Inc. "I think self- storage is made for this kind of thing," he says. The arrangement is along the lines of what many rental-truck companies developed with self-storage facilities. "It's a different product, but it's very similar in the respect that you're creating a new revenue center at a location that already has the zoning to do so," Niemczyk says.

But an owner has to do his homework before he makes plans to gear up for improvements or envisions that much-awaited trip to Hawaii. It is a delicate relationship between cell carriers and the properties they seek, and it can and does fall apart in any of the stages of negotiation and approval.

First, contact has to be made. Once the carrier and facility owner are talking and after it is determined a tower will work well on the storage site, the tricky negotiation process begins. After that, the storage owner is almost out of the picture. The cell carrier handles the approval process through the appropriate municipality, and oversees the installation and maintenance of the tower and its equipment. "If you're negotiating this right, the property owner should be incurring no cost whatsoever," says Marv Meier, leasing director at Seattle-based Shurgard Storage Inc. A well-worked contract will have the carriers cover everything down to electricity and applicable tower taxes, he says.

Afterward, all a facility owner does is sit back and watch the money roll in for the life of the contract, which is measured in decades, not months. "It's the type of situation where they do the legwork involved," says Bryce Grefe, vice president of Storage Investment Management Inc. in North Weymouth, Mass. "You can go out to whatever number of cell-phone companies there are and probably give them your latitude and longitude, and struggle through all the decision-making people and possibly do a deal. This is kind of painless for us. It allows us the time to focus on our real business--and that's self-storage."

The Basics

Cell towers come in all shapes and sizes, depending largely on the region. Carriers still use traditional models--four-sided steel structures as high as 300 feet--where they have the space and need a strong signal, but as cellular technology changes, so do the towers. The trend is toward monopoles as high as 150 feet, but even those are shrinking. Some rooftop models are as short as 10 feet. Zoning laws may also require stealth techniques, such as dressing up poles to pass as palm or pine trees.

Cellular carriers have coverage grids that can be likened to a sprinkler system, with overlapping circles of coverage. They look for strategically-located commercial property in those circles, or search rings, where they can place their towers and fill in the gaps. Storage facilities are sought after because they're often far from anything that causes signal interference. "We want to ensure it's in a location where we don't have to worry about anything happening there, whether that's through an inordinate amount of foot traffic or car traffic," says Ritch Blasi, director of media relations for AT&T Wireless.

Traditionally, the carriers contact businesses directly to start negotiations. Lately, though, aggressive self-storage owners have turned the tables by seeking out carriers. The process can be surprisingly simple, some say. "All you've got to do is call up any cellular company, talk to their commercial-leasing department, and tell them you have a self-storage location and would be interested in a tower," Niemczyk says. "They're always interested in putting up new towers. Cell coverage is spotty in some areas, obviously." Some cell carriers deal with third parties for their site selection and tower installation. In that case, the carrier may pass along appropriate contact information.

Niemczyk primarily deals with AT&T Wireless and Verizon Communications. There are about 12 or 15 towers throughout Executive's storage network, Niemczyk says, and some facilities have more than one. "I have two properties in Utah that have two towers--for competing companies on the same project," he says. "The companies don't care because they're competing with each other. If I can put five on one property, I'd do it." Meier says facility owners have to realize carriers get calls all the time from all sorts of businesses. One company, Meier says, has a voice-messaging service that asks callers to leave their contact information--including their property's latitude and longitude, if they have it--which essentially takes the ball out of the facility owner's hands.

"It's pretty difficult to drive that process," Meier says. Ultimately, he explains, radio-frequency engineers are the ones who determine where towers are placed, based on RF-propagation maps. "What you can do, though, is make sure they know about your site," Meier continues. "If they've got 10 sites that all offer an equal benefit, and three of them are with landlords who are more familiar with the process, and you know you can get a deal done quickly, they're going to head toward those sites more than the other ones."

Suggestions

Cell companies or their representation clearly know what they're doing, and they've become more aggressive and frugal given the telecommunications capital crunch over the last 18 months. They'll start with a favorable figure--for them--and see if the owner will bite. "The consultants who represent the carriers are frequently compensated by keeping the rent low," Meier says. "If they can get it below a certain threshold, they will receive a bonus or a percentage of that savings. There are all sorts of reasons why they're far from working in your best interest."

A facility owner who doesn't know what he's doing could run into problems. So what is he to do to protect himself in the negotiation process? Meier suggests the following:

1. Involve an attorney, but try finding one skilled in dealing with the specific issues at play. Those unfamiliar with the subject could either scare off the carrier or not tap into the potential of the agreement. "If I were a property owner, I would want an attorney to review it, even if I had a skilled business person who was familiar with the wireless industry," Meier says.

2. Get a site-management company for representation, such as SpectraSite Communications Inc. (www.spectrasite.com) or AAT Communications Corp. (www.aatcommunications.com). "There are people out there who present themselves as experts, who present themselves as knowing what the carriers will and won't do, and represent themselves as working in your interest," Meier says. The challenge lies in the fact that a facility owner may not get the best service from a site-management company if he's not a huge property owner. Also, cell carriers often want to negotiate directly with the decision maker, e.g., the facility owner.

3. Generate exposure. Some companies list facilities in reports that are accessed by carriers as they look for properties. Get on those lists and get noticed by carriers when they come calling. Contacting cell carriers directly may prove futile--since they receive calls from all kinds of businesses all the time--but establishing a dialogue is a good thing, because you let carriers know you speak their language and understand their needs, Meier says. "If they think you're familiar with and open to that concept, they may keep an eye out for your facility if it falls into a search ring."

Negotiation

Since cellular carriers handle so much--if not all--of the approval, installation and continual maintenance of their towers, it is vitally important self-storage owners work out the cut they want when they have the most input: at contract negotiation. Owners who aren't prepared to work a deal could leave money on the table.

"As I'm out here talking to independent operators, I'm realizing it really is a specialized field," says Sunil Dewan, vice president at Shurgard, "and I find that a lot of operators--and they are negotiating directly with these companies--don't realize what is involved." Through its Preferred Partners program, Shurgard provides independent facility owners the experience they may require at the negotiating table. "For us, it's a big enough business that we have three full-time people devoted to this who have built relationships with cell-tower companies across the country," Dewan continues.

Meier is one of those full-timers. "We spend a ton of time on this particular revenue stream for Shurgard," he says. The necessity is a result of volume. Shurgard has more than 200 leases across the country--roughly half of its properties have a wireless lease.

How much facilities get depends on cellular demand in a particular region. While Shurgard's properties have leases that pay between $1,000 and $4,000 a month from cellular carriers, others sites it purchased had existing leases of $500 a month or less. "For one property we purchased in Texas, I believe the rent is $300 a month for 25 years," Meier says. "The market there is probably closer to $1,500 a month."

Scott Harden, president of National Self Storage Management Inc. in Tucson, advises against taking the first offer, as is the case with negotiations of any type. "The cell-tower guy will come in and say, 'I'll give you 500 bucks a month.' You're sitting there saying, 'That's a great deal. I'll take it.' In essence, you probably could have gotten double that, but you didn't know better."

Meier has seen other snags in existing contracts besides the cost of the lease, including a carrier's first right of refusal on purchases, 50-year flat-rate terms and perpetual easements. He also says carriers rarely want rent adjustments and wish to absolve themselves from as much responsibility as possible when it comes to access to the tower and equipment.

Cellular providers want long-term contracts--anywhere from five to 20 years, often with options of five or 10 years. "But if you're not negotiating any escalator clauses or any option, you're stuck with something that's paying the same amount month in and month out," Harden warns, "and they're getting a tremendous benefit from it."

Rents for units increase periodically, so why wouldn't the rent go up for the cell tower? Some may choose to have the rent reworked at the end of each option period, but Harden says a facility should hope to get 3 percent more in tower rent per year.

Pitfalls

Yes, there are catches. But with careful planning or clauses in the contract, their effects can be minimized or avoided altogether. Anyone considering making major changes to their property in the next decade or so, such as redeveloping, selling or changing land use, will want to think long and hard about whether they want a cell tower on their property. While a long-term contract can pay well, it is quite difficult to change since the carrier has the reins.

"People who wouldn't want this are people who are just not sure what their long-term plans are for the property," Meier says. "Anything can be done with the right amount of funds, but you'd sure hate for a little cell lease to get in the way of a substantial redevelopment."

For some, a negotiation buster is the fact that cellular carriers need 24-hour access to their equipment. This may prove to be a problem for facilities that have off-site management or that lock down the building during nonbusiness hours.

"If you have a store, for instance, that's all enclosed, and it's shut down and no one's there, that may pose an obstacle," Niemczyk says. Even this can be worked around. Meier says some facilities have installed a gate to the property to which only the carrier has access. The carrier should be expected to pick up the cost of gate installation, of course.

If a cell company has a unit where equipment is stored, it will likely need electricity. While the installation expense is covered by the renter, the electricity may have to be absorbed by the facility--again, depending on whether it was worked out in the contract.

At one of Grefe's facilities--an eight-story self-storage conversion off Interstate 93 in the heart of Boston--the building actually serves as the cell tower. There are communication antennae mounted to the side of the building and a GPS-type system on the roof, Grefe says. There's a rooftop egress point for cabling to the unit where the equipment is stored.

"We negotiated a deal with them that included a small unit--it's like a 5-by-10," Grefe says. "Inside the unit, they've got their own battery backup. We had to bring power into the unit so they can power the equipment and keep it online." He pays for the electricity to the unit, but Grefe gets $18,000 annually from the carrier.

Realty Investment Co. Inc., based in Silver Spring, Md., recently acquired an old warehouse for conversion to self-storage. The building, which already has two cell towers on it, is set to open this month. Brian Harrigan, Realty Investment's director of acquisitions, says the agreements for AT&T Wireless and VoiceStream Wireless are $2,000 a month, which translates to almost $50,000 a year. "I don't know if we got a good deal or a bad deal," Harrigan says. He had nothing to do with the contracts since they were already in place, but he says he'd definitely consider cell towers for his other three properties. "It's almost free money."

The Federal Trade Commission recently reported that identity theft is one of the largest areas of concern it hears expressed by Americans. The issue of identity theft is a double-edged sword for the self-storage industry. On one side, we can become victims if a customer uses the identity of another person to rent a unit. It is very difficult to ward off this prospect. Good business procedures and aggressive management are our best defenses. The other edge of the sword is that we are a repository for our customer's personal information. Data such as home addresses, business addresses, telephone numbers, Social Security numbers, copies of driver's licenses as well as credit-card data are all within our custody.

Have you established a comprehensive privacy policy that includes responsible information-handling practices? Do you adhere to responsible practices, such as proper document disposal (shredding)? Do you conduct regular staff training, new-employee orientations and spot checks on proper information care and security?

If you have not made your information-handling practices a priority for your store, now is the time to start. A written and enforced policy is critical to illustrate you are being prudent as a business owner in the care and custody of customers' personal information. Several sources for assistance include the Identity Theft Resource Center in San Diego (www.idtheftcenter.org) or the federal government's central website for information about identity theft (www.consumer.gov/idtheft) .

I would also like to recommend a new book that will provide insights from the perspective of a criminal. In The Art of the Steal (ISBN 0-7679-0683-7, Broadway Books), Frank W. Abagnale, a self-described former con artist and recognized expert in fraud prevention, estimates that "businesses lose an unprecedented $400 billion a year from fraud of one sort or another." This book will help you realize how vigilant we need to be as business people to not become victims or unintentional contributors to this problem.

The Right Slogan

I was in Illinois several weeks ago and had the opportunity to meet a local banker whose bank has come up with a marketing campaign I truly admire. As we are all aware, many banks in this country have been and will continue to be acquired. These transactions can be difficult and, many times, customers suffer as they are confronted with more than a simple name change. W. Gerard Huiskamp, president of Blackhawk State Bank in Milan, Ill., has recognized this in his own community and is using it to the bank's advantage. The message to its customers is a simple one: The bank is "Not For Sale." Employees of the bank know their market area and their customers, and they have a laser focus on being the place "Where banking is still plain and simple!"

Have you committed to such a focus in your own advertising? Are all of your marketing and customer-service efforts directed to fulfilling that goal? I urge you to reflect on what you are or are not doing to make your marketing message focused and consistent. Blackhawk State Bank can be a model to all of us. Congratulations, Mr. Huiskamp and your team, for your example.

Would You Like a Coke, Sir?

As a new Charlottesville, Va.-area resident, I have had the opportunity to visit many of the local merchants. One of those is a branch of Grand Home Furnishings, which started in business as a piano company in 1910 in Roanoke, Va. Owned by the same local family since 1945, the company has expanded to 16 locations in Virginia and Tennessee. When they opened their Lynchburg, Va., store in 1953, they established the tradition of offering a frosty Coca-Cola to every customer entering the store. That tradition continues to this day using the classic Coke mini bottles. Everyone, young and old, can be seen walking through the store carrying a Coke.

During my first visit, I must say I was surprised to see a furniture store encouraging people to drink a bottle of pop that obviously poses a hazard to its thousands of dollars of inventory on display around the store. It was during my second visit I realized the brilliant marketing strategy this simple tradition represented. As long as they have a drink in hand, customers tend to stay longer--until their beverage has been consumed. It also contributes to the friendly, homey atmosphere the management works to create, and places the store and its salespeople in the positive psychological position of having given you something for nothing.

When I explained to Bruce Lowery, one of the store's sales managers, about my observation, he smiled and asked if I wanted another Coke. The grand greeter at the entrance who welcomes every customer with the offer of a free soda is also quick to point out bottles should be returned to the rack near the front of the store.

This experience made me wonder if we are doing enough to keep our prospects in the office and on the property as we demonstrate a rental unit. Maybe a small refrigerator with a supply of bottled water or the offer of a cup of coffee would help each of us create a more positive environment for our sales presentation and the actual rental process. Think about it.

Jim Chiswell is the president of Chiswell & Associates. Since 1990, his firm has provided feasibility studies, acquisition due diligence and customized manager training for the self-storage industry. In addition to contributing regularly to Inside Self-Storage, Mr. Chiswell is a frequent speaker at Inside Self-Storage Expos and various national and state association meetings. He can be reached via his company's website at www.selfstorageconsulting.com or at the Virginia corporate office at 434.589.4446; write 6 Slice Road, Lake Monticello, VA 22963.