Years ago, a friend told me we were destined to live in a litigious society. My response was, What does litigious mean? My friend (who didnt embarrass me for my ignorance) explained: Whatever you do, wherever you are, the legal community stands ready to sue you! In short, in our land of good and plenty, no one is safe from legal threat.

Weve come a long way from the 60s era of love and peace. It didnt take long in my early business career to learn that all the lawyer jokes in the world werent meant to be funny; instead, they were intended to put a little icing on an already caustic truism of everyday reality. In other words: The yellow light is on. Time for caution is upon us; hand shakes and good intentions be damned!

Against the Odds

So how do you run a business without running into the law? Those of us who entered business world many years ago didnt realize we would be so vulnerable. The thought of someone targeting us as an easy means to an end never crossed our minds. Even worse is the fact that the lawyer gets paid, win or lose. It doesnt sound fair, but we didnt make the laws; were just obligated to follow them.

The minute you decide to acquire a facility, be acquired, offer a product or service, or engage in anything that involves an exchange of value, you are locked into a contractual legal transaction. If you sign the dotted line without reading and fully understanding, guess what? You could be facing an embarrassing or catastrophic event. Whatever the outcome, its always costly, time-consuming and maddening. Industry is no place for the faint of heart.

When I first got into business, I made deals based on trust and a handshake. This may still be the protocol in some societies, but dont be fooled into thinking you live in such a place. We must live by the adage: A strong defense is a good offense. Having the best protection for you and your business should not be considered a luxury but an absolute necessity.

Insurance to cover every aspect of your business, including liability, fire, casualty, business interruption and health is just the beginning. Every niche business has specific insurance for increased protection. Whether its a car wash, convenience store, self-storage facility or gas station, insurance companies have coverage to protect all angles.

In car-washing, it took years for the insurance industry to understand and tailor products to our needs. Decades ago, owners went to the industry associations for help. Their banning together prompted insurance specialists to focus on protection for car washes. Now coverage has evolved to include other business segments as well.

Here are a few words of wisdom: Shop around, negotiate for the best rates, and read all the fine print before signing on the dotted line for any insurance policy.

Personally Speaking

In addition to insuring buildings and equipment, you need to protect your human assets. Whether you pay staff hourly or by salary, consider providing benefits. Dont overlook the possibility that paying for benefits may positively impact your business if youre able to retain employees longer and spend less on hiring and training.

My car wash employs 40 part-time and salaried workers. We compete against other companies where the core work force is hourly. Many of these companies offer benefits. This year, we searched far and wide for affordable health programs to stay competitive. The health-insurance issue will continue to make life difficult for small-business owners. Unless you already do, providing health benefits for staff is highly encouraged.

You also need a good lawyer. Find one who knows your line of work and can provide the best counsel. Covering yourself from the inevitable is not easy, but its an expensive proposition to ignore. If your business has daily traffic, consider extra precautions. Security cameras, signage and contracts are just the beginning. Customers need to know you wont be easy prey.

Of course, not everyone who comes to your site is looking for an opportunity to take advantage of you; but the truth is it only takes is one bad incident to hurt your business. Thats why digital cameras come in handy and can be your least expensive weapon against fraudulent claims. Should you be victimized at any time, take pictures and document everything. Also train your employees and hold them accountable for damage that occurs while theyre on the job.

If youre a car-wash operator, make sure every vehicle entering your property is checked stem to stern, and be on the alert for vehicles that have a reputation for being problematic. For example, certain models may have trim or certain operational behavior that could put you at risk for damage. Note and discuss anything that could be a potential issue with the driver. If a concern is raised and the customer wont sign a release, dont wash his vehicle.

Although some of this column has been tongue in cheek, I hope the gravity of living in a litigious society will change your thinking. Always watch your back. Moreover, secure your site so you, your employees and customers know youre observing and protecting all who enter. 

Fred Grauer is the president of Grauer Associates and executive vice president, investor market and conveyors, for Ryko Manufacturing Co., a car-wash-equipment manufacturer in Grimes, Iowa. He has made a lifelong career of designing, selling, building and operating car washes. He can be reached at [email protected]. 

This month, our roundtable of broker experts gathered to discuss the state of self-storage real estate in the Northeast. Lets hear what they have to say about their respective cities and regions. Our panel includes: Guy Blake, Upstate Commercial Group, Kingston, N.Y.; Linda Cinelli, LC Realty, North Branch, N.J.; Joe Mendola, NAI Norwood Group, Bedford, N.H.; and Chuck Shields, Beacon Commercial Real Estate, Conshohocken, Pa. My comments are in italics.

How are local self-storage lenders reacting to the so-called credit crunch?

Blake: Were seeing much tighter underwriting standards from the local lenders in Upstate New York and higher cap rates on the properties that are for sale.

Cinelli: Lenders are re-looking at many deals. Unless the facility is in a prime location with high occupancy, lenders look at the trailing 12 months of income and not the pro forma financials.

Mendola: The local New England lenders are being accommodating toward lending needs. They dont have the same loan-portfolio challenges of the larger national lenders. The whole sub-prime event has made everyone cautious, but good borrowers with strong signatures and well-thought-out projects have no problem.

Shields: Locally, our lenders seem to be following the patterns of most of the country in that interest rates still seem to be reasonable but lenders have tightened underwriting standards. Lenders have become more selective, require more detailed financials and look for more conservative pro formas. In many cases, they look for more equity in the deal.

The credit crunch is quite real and still has a long way to play out. While residential loans have been clobbered, commercial loans appear to be holding up well. However, a recession could negatively impact rents and occupancies. Given the loose underwriting of many recent commercial loans, theres certainly a possibility for the infection to spread. Luckily, self-storage has the lowest default rate of any real estate class, and most of the facilities we see are moderately leveraged.

CMBS lenders are becoming pickier about locations and total loan amounts. How is this affecting potential buyers?

Cinelli: Buyers are not as willing to accept a story about potential increases in rates and occupancy at the facilities theyre considering. Loan rates are higher; the buyers are looking at a minimum of 8 percent on their return before debt.

Mendola: Yes, CMBS lenders have the Wall Street affect to deal with. Even though the one-year T-bill is a full 100 basis points lower than it was six months ago, the credit spreads have widened to the point that the rate for leveraged deals is 75 to 100 basis points higher than it was last summer. Under leveraged deals of 60 percent to 70 percent seem to fare better than the 75 percent to 80 percent deals. These lenders do not seem to be in a real hurry to get their money back out on the street.

Shields: As the CMBS lenders change their attitudes, philosophies and standards about lending, the buyers attitudes also change. A lot of buyers are now looking to more class- A locations and facilities because they give them the best opportunity to get funding. On the other hand, there are a number of buyers who are eliminated. These buyers would look to acquire class-B and -C facilities, but now cant meet the lenders standards or they dont have the cash for deals that require additional equity.

You can be sure that any deal that is made by a CMBS lender today is getting big-time scrutiny. As Mendola says, the days of unlimited leverage are gone! Thus loan-to-value ratios are probably the most important thing lenders look at when underwriting today.

Given the unsettled investment markets, how are buyers and sellers reacting?

Blake: Buyers have reacted immediately and are looking for lower risk and higher cap rates than they were a year ago. Sellers, not surprisingly, seem hesitant to admit that the days of doing 8 cap on pro forma deals are over. At the moment, there seems to be a wider gap between buyers and sellers because buyers have adjusted to the changing market, but many sellers have not.

Cinelli: Many buyers are looking for self-storage projects to purchase, but the frenzy is over. The properties need to meet higher expectations than ever before. Sellers whove been in the business for a while are becoming disillusioned and are looking to get out of self-storage, finding that the business now is not exactly what they bargained for.

Mendola: In this unsettled market, sellers and buyers seem to be acting in a usual way when the market begins to turn. Sellers want the valuations of six to nine months ago and buyers want to buy at a value that is reflective of these uncertain financing markets.

Shields: Both buyers and sellers look at the economy and the financing market a little differently. The buyer sees the economy?especially the housing market, on which self-storage is so dependent?and wonder, if he bought or developed a facility, could he stabilize it? How long would it take, and could he keep it stabilized? The conditions for financing are a whole other set of concerns. Sellers find themselves with devalued properties, fewer buyers in the marketplace, and buyers with difficulty finding financing.

Buyers potential profit has been reduced by higher loan rates and low leverage, so they need more return from the property they are buying. Buyers are also figuring in more risk in the cap rates than in the past.

What impact have the credit problems had on cap rates in your area?

Blake: Cap rates are up easily 100 basis points except, perhaps, on large class-A facilities.

Cinelli: In past years, buyers were more inclined to buy at rates comparable to the lending rates because they were anticipating higher income based on the pro formas of the properties. Now buyers want a 1 percent to 3 percent return over lenders rates, depending on facility performance and cash-flow expectations.

Mendola: Cap rates are a function of mortgage constants and the relative competitive nature in each market. Overall, the cap rates are following the credit spreads of about 75 to 100 basis points higher than six months ago.

Shields: Major lenders are seeing cap rates between 7.75 and 9.5, with increases of about 50 to 75 basis points. This can be attributed to the higher cost of capital, the overall availability (or lack) of funds, and the tightening of underwriting standards. Were left to wonder to what extent these conditions will continue and how much it will affect cap rates going forward.

These comments from the Northeast about increasing cap rates are consistent with what we hear across the country. Just to show how much this means in terms of value (sale price), a one-point increase in the cap rate from say 7 percent to 8 percent reduces the value by 14.3 percent.

Many sellers have determined that now is a good time to sell for both market and personal reasons. Are they seeking reasonable pricing, and are there difficulties in finding qualified buyers at market prices?

Blake: Its never difficult to find buyers at market prices. The trouble were seeing in the upstate New York market is a lack of sellers willing to sell their properties at reasonable prices.

Cinelli: Sellers are still not realistic about market prices for their facilities. Only recently have we seen sellers start to listen to the market and what banks are saying about value. In our area, most buyers are serious and qualifying for loans is not an issue; qualifying properties is the problem.

Mendola: Sellers still want the highest value for their investment because they recognize that self-storage is getting more expensive and more difficult to build. Its like looking at a stock like Google when it was $745 per share. Now that Google is under $700, the investor still wants the higher price for the stock. This is the same condition for sellers of self-storage. Its difficult to get buyers to commit to properties where the price is higher than current market rates support. However, if the facility has high barriers to entry and is located in a growing area, it will still command the best price possible.

Shields: I tend to question how many real sellers are in the marketplace today. Some sellers are not ready for reality, to accept that values have dropped due to market conditions. Theyre waiting for buyers who will pay yesterdays prices and theyre willing to wait. I think theyll have a long one. There are still buyers who want to buy self-storage, but there are fewer who can pass the lending scrutiny. The buyers who are strong and qualified have good banking relationships and are willing to wait for properly priced locations, at which time they will react.

Sellers always want yesterdays price when markets are contracting; somehow the review mirror is easier to see than the windshield of the future. The reality is self-storage facility prices, even after a one-point adjustment in cap rates, are still at very near historically high values. Most commercial real estate cycles last in the range of three or four years, so its still a good time to consider selling.

The combination of any decline in revenues, because of overbuilding or a recession, plus an increase in cap rates can really impair values (a $1 drop in revenue reduces the value by $12.50.) The combination of declining revenue and increasing cap rates can be devastating to current values. If you think this cant happen, you werent in the business in the 1980s.

Michael L. McCune is the president of Argus Self Storage Sales Network, a real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com, a marketing medium for industry owners. For more information, call 800.55.STORE.

Gary Halbert, the guru of marketing and copywriting, taught me many lessons over the years. In this article, Im going to teach you the most profitable one, and show how it increases profit and occupancy immediately. It only works if you follow the steps.

Imagine for a moment that you and a friend both decide to open a new self-storage facility. And being the competitive friends that you are, you bet on who can first achieve 90 percent physical occupancy.

As youre planning your new site, you really get into this bet and want to knock the socks off your friend. You begin by making a list of items that will surely win you the crown. What goes on it?

When I present self-storage operators with this imaginary scenario, I usually hear the following answers:

• Good property location with high traffic counts 
• State-of-the-art construction and design 
• Top-notch security features 
• Attractive office features such as granite countertops, computers, snack stations, 24-hour kiosks, etc.
• A nice, fully functional website 
• Experienced and trustworthy managers 

All are good responses, but a major item is missing that will make or break any self-storage business. Curious? The one thing you should strive most for is

A Starving Crowd

In other words, you need people hungry to keep their home or office organized, who are starving for cleanliness or extra space in their lives and are willing to pay a fair price for it.

Yes, I know this principle is disarmingly simple. In fact, youre probably disappointed I just revealed something so boring and obvious. The truth is, though, while most operators consider this knowledge common sense, very few actually use the starving-crowd principle in their marketing efforts. The basics of the principle are:

• Identify starving crowds.
• Find access to them.
• Communicate your message in such a way that theyd feel foolish to use anybody but you to meet their needs/wants.

If you follow this simple formula with all marketing plans, youll have much bigger success than if you dont. But who are these starving crowds, and how do you reach them? Of course there are the regulars:

• Apartment dwellers 
• Realtors 
• Military personnel 
• Pharmaceutical reps 

All are great prospects and should be fully exploited, but your competition also knows about them and usually bombards this group with marketing ploys. So Im going to reveal a few more starving crowds that are often overlooked and teach you how to serve them.

1. Existing Tenants.

Your existing tenant base is a gold mine. You know these renters need storage and are willing to pay for it. You have their contact info and, hopefully, theyve received excellent service and trust you as their storage provider. What you might not know is they usually need more space than theyre currently renting. In addition, theyll purchase other products and services from you, and will gladly tell their friends about you when they need storage, too.

Any storage facility not sending well-written direct mail to existing clients is leaving money on the table. Right now, many of your existing tenants would rent another or bigger space if you gave them good reason. Also, some are storing belongings who would love the peace of mind tenant insurance provides. In addition, you probably have renters who are planning on moving and would gladly buy all of their packing supplies from your site if you offer a more affordable and convenient option. Finally, there are tenants who constantly trip over clutter at their friends home and would love to give you a referral. Put together a 12-month schedule to reach your existing tenant base and make sure to stay in constant contact with these people.

Before moving onto the next starving crowd, I must give you a warning about tenant-based marketing: Direct-mail letters must be very high quality and intelligently written. If youre lazy with your piece, youll end up annoying your customers rather than becoming a bigger resource.

2. New Movers.

Many operators focus only on people selling their homes and ignore those who have recently moved because they think its too late to sell them storage. This is big mistake. Think about it: When are people most obsessive about keeping their car clean? Right when they buy it. They wash it regularly; they dont eat on the go.

People take the most pride in belongings immediately after theyve forked over the cash to purchase them. So when someone moves into a new home, he wants to keep it clean and organized. What better time to get a storage unit?

Additionally, the current real estate and financial market is forcing many people to downsize homes. A study in July 2007 revealed 19 percent of movers downsized, leaving them with extra belongings that needed to be stored. Here are some more moving facts:

• Nothing triggers a wave of consumer spending like a move. Studies show spending can reach as much as 20 times higher than that of non-movers. (If youve moved recently, you probably know what I mean!) 
• There's probably no other point in our lives when we make so many spending decisions in such a compressed time period as we do two months before through two months after a move.
• The average person spends more than $7,300 within three months of a move.
• When it comes to brand loyalty, 67 percent say they couldn't care less when choosing new service providers in their new neighborhoods.
• Of movers, 4 percent plan a major home improvement after purchasing a new residence, creating an even stronger need for storage.
• Approximately 20 percent of U.S. households relocate every year.

Hopefully you see the golden opportunity with this starving crowd. As with tenant-based marketing, the quality of your direct mail piece is very important. Write to them in a persuasive, conversational tone and give them a good offer that caters to what we know about them.

Subscribe to a new-mover service that sends you a weekly list. Mail to these people immediately when you get their contact info and once more 30 days later to make a solid impression.

3. Neighbors of New Tenants.

Youve heard about keeping up with the Joneses, right? Nobody wants to admit it, but if your neighbor gets a new car, big-screen TV or other home improvement, most of us will want something equal or better.

Weve found the same to be true of storage. If everybody in a neighborhood has cluttered garages, yards and homes, we dont feel as pressured to keep our homes clean and organized. As soon as one of our neighbors cleans up and makes his home look the best on the block, two or three will almost certainly follow suit very soon. Ive lived in six cities in my life and watched this phenomenon transform several neighborhoods.

Human behavior is highly influenced by friends and neighbors. This has been true since the beginning of time and will probably continue forever. Use this to your advantage by marketing to the closest 25 to 50 of your new tenants neighbors. The list accuracy and letter you send are crucial. Regardless, this strategy is very inexpensive and highly effective once you get going.

While weve only covered a few starving groups here, dozens more exist in every market. Take an hour or two every week and ponder this principle. Youll begin to notice starving crowds all over the place and capitalize on this potential feeding frenzy. 

Derek M. Naylor is president of Storage Marketing Solutions, a full-service, results-oriented marketing and advertising agency dedicated to the self-storage industry. For a free subscription to his e-newsletter, call 800.941.4805; e-mail [email protected]; visit www.storagemarketingsolutions.com. 

I knew it was going to happen. It was Christmas Eve, and I went into the office to get caught up.

Something also told me wed be getting a call (or several) from a client facility, where thered be an anxious renter facing a lockout situation. It happens frequently: Someone forgets to pay rent, the manager eventually locks the delinquent unit, and then the tenant is desperate to retrieve Christmas presents out of storage.

People ask me, Why do you work on Christmas Eve? The answer is easy: Thats what the staff of a call center does. We answer the phones when our client stores are off on their holidays.

Holiday Rush

Holiday time is particularly troublesome. Theres always someone calling after the store is closed who cant get to the kids presents and is freaking out. Id freak out too if I couldnt get my holiday gifts out of hiding.

Unless were specifically directed to do otherwise, the policy at our call center is not to contact store managers after hours on holidays about past-due renters or non-emergency issues. Christmas Eve is when we break the rules.

On Christmas Eve 2006, one regional manger spent three hours traveling to and from his facility so a frantic tenant could get his kids presents. This past Christmas, my instincts were right on. I received a call from a lady in Michigan who couldnt access her unit. She had forgotten to pay rent and was locked out. We tracked down the manager on her cell phone to see if she could help.

We usually handle three or four similar calls on such holidays. And well track down the manager or regional manager if we can. Some will be peeved that were bothering them. Some will try their hardest to make sure the kids get their gifts.

Rule-Breakers

When do you break the rules in your sales efforts? We all have parameters in which to work. We all have policies and procedures. These are intended to keep business practices sensible and rational. But there may be times when it makes more sense to bend the rules and deal with the consequences later.

When you break a rule and the end result is good for your business and customers, then you become the hero. When the outcome is not so victorious, you could get written up and even disciplined. Hopefully, your employer is willing to cut you some slack when you break a rule for a good reason. Unfortunately, the odds are you wont win every time.

Do you give out the discount, even when youre told not to, because someone wants to pre-pay a rental for two years? Not much chance of getting in trouble over this one, right? But what about the cases that are less obvious? What about a situation in which youll gain customer confidence and not immediate revenue?

I suggest you look for opportunities to break some rules when the payoff makes sense. Of course, you need a good reason and more than just a fleeting hope that the long-term effect will benefit you, the customer and your business. Be careful about when and how you proceed, and evaluate rules as you go. You may discover some are unproductive; consider taking action to change or abandon them.

This practice will help you sell more, too. If customers see youre a rule-breaker for the right reasons, theyll want to do business with you. Theyll see that in a situation of choosing between following a policy or pleasing a customer, youll try to help the customer. If prospects and customers feel this way about you, youll rent more units and keep tenants longer.

In sum, never break rules that will break the bank. Find the ones that guarantee customer satisfaction and cultivate long-term relations. In the end, happy tenants stay longer, spend more and spread the word that serving customers is more that just a rule of thumb. 

Tron Jordheim is the director of PhoneSmart, an offsite sales force that helps storage owners rent to more people through its call center, secret-shopping service, sales-training and Internet-lead-generation services. Mr. Jordheim is also a member of the National Speakers Association. You can read what he is up to at www.selfstorageblog.com. For more information, e-mail [email protected]. 

In the business of self-storage, operators are like landlords who rent storage units instead of living space. What a tenant puts into his unit is not the operators concernunless those contents violate certain contractual limitations and conditions.

Self-storage owners are obligated to provide space that is reasonably safe, dry and suitable for the storage of property. They must not, however, covet any of the three Cs: care, custody or control. This should be spelled out explicitly in the rental contract.

Most self-storage agreements also contain specific prohibitions about storing property that is dangerous or toxic in nature. Whether tenants follow these guidelines is strictly their business unless theyre caught in the act of placing contractually prohibited items in the space. To help relieve business owners of this threat, the insurance industry has developed limited pollution-removal endorsements.

Although this article is not intended to be an exhaustive legal treatise on the subject of insurance coverage for pollution-related issues, it should serve as a primer to introduce the subject in generic terms and foster a better understanding of three key issues:

• Why coverage is limited 
• What coverage includes and excludes 
• Why it is highly recommended that you have coverage 

If you have unanswered questions after reading this article, consult your insurance agent or your attorney for further information and recommendations regarding risks faced in your day-to-day business operation. In fact, such a discussion is a good idea even if you dont have lingering questions.

Getting Started

If you examine the insurance policy covering your premises for property damage and liability matters, you will likely find a total pollution exclusion. This means the insurance carrier will not provide coverage for pollution-related claims.

The insurance industry has learned from years of experience that no premium amount can cover the risks to insurers when pollution is discovered at an insured site. Once a pollutant enters the soil or affects the water table in a particular area, effectively escaping any confinement to the insured premises itself, the cost of cleanup can be staggering, depending on the size of the area affected.

Many companies whose properties have been found to contain unregulated pollutants, even decades old, have gone out of business because of those costs; and many insurance companies whose policies have provided coverage for such risks have suffered a similar fate. Thats a key reason why the government established the Environmental Protection Agency (EPA) and the pollution Superfund, along with other remedies, to deal with catastrophic environmental damage. Its also why such a limited coverage endorsement was developed by the insurance industry.

Whats a Pollutant?

Lets examine a typical definition of pollution as included in a standard policy contract. Pollutants are usually defined in language such as the following: any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

How do pollutants get onto self-storage sites? There have been isolated incidents of tenants operating methamphetamine labs out of or storing the chemicals used in the production of such drugs in their units. Both the drugs and the raw materials are extremely toxic.

This is an extreme example of pollutants, but there are many more that are far more innocent. Tenants may store items such as paint or cleaning products in their spaces, posing an environmental hazard that would technically fit the definition of pollutants as spelled out in the insurance policy. Because a facility owner cant sufficiently police his tenants to prevent the storage of such items, limited pollution-removal coverage is essential for handling accidental spills.

What Is Included?

Without resorting to legalese, lets examine the coverage available under a typical limited pollution-removal endorsement:

• The coverage is limited"; it isn't all-encompassing and doesn't provide protection from every form of claim that could be made against the policy.
• The coverage applies to the removal and detoxification of pollution only.
• The endorsement modifies coverage according to "Part One, Property in the Select Custom Package" form, which pertains to property coverage and not liability coverage. All the other terms and conditions applicable to Part One of the Select Custom Package form are applicable.
• Further, the coverage usually extends to the affected storage unit only, not to surrounding areas, surface or ground water, or other facilities, and not to other storage units. The endorsement obligates the insurance carrier to pay up to the specified limit of insurance to remove pollutants or otherwise detoxify a storage unit, and only to the extent required by the authorities. Also, the endorsement requires timely reporting, which means you must report the pollutants to your insurance carrier as close in time to the discovery as possible.

Coverage is usually further limited by the Exclusions section of the endorsement, which may preclude payment under the policy for fines or penalties related to:

• Government directives concerning pollutant cleanup.
• The costs associated with extracting pollutants from, or replacing or restoring, contaminated groundwater or soil.
• Any claimed business-interruption losses due to limited access to the insured premises or adjacent premises due to pollutant cleanup.
• Damage to the insured premises other than the affected storage unit or the property of others resulting from the storage or removal of pollutants in a tenants storage unit.

Finally, coverage amounts are limited to those stated in the policy declarations page or on the endorsement itself, and can be described in two ways: per occurrence, which means each individual incident of pollution in a storage unit at the insured premises; and in the aggregate, which encompasses all individual incidents in any policy year. These policy limitations are contractual in nature. The insurance company is not bound to pay any more for covered losses or related expenses than the agreed-upon limitations.

Why Have an Endorsement?

A limited pollution-removal endorsement provides protection to your storage facility in case of a toxic event in any storage space. Even though coverage is often extremely limited, the endorsement also provides protection to your facility in the hope that early detection and cleanup of the immediate area of environmental exposure will prevent more serious environmental damage from occurring at your property.

This article is not intended to act as legal advice or to take the place of consultation with your insurance agent and attorney. Consultations with these professionals are critical to ensure your business has the appropriate insurance coverage and you have full understanding of the coverages and limitations of your policy. 

Michael Rice is manager of claims for Phoenix-based MiniCo Inc., which provides specialty programs for self-storage businesses including property and casualty insurance and tenant insurance programs. For more information, call 800.528.1056; visit www.minico.com. 

Its been some time since the self-storage industry has seen a large judgment against a facility owner. But the recent appellate decision in the case of Barshak v. American Equity Insurance Co. has jolted the industry to recognize the risks of a wrongful foreclosure sale of a tenants stored property. This case has some unique facts storage operators should consider and, of course, some expensive lessons for all to learn.

The Story

The case itself arose from an August 1997 storage lease in which Jackie Barshak rented a unit from Container Storage Inc. (CSI). Because she was leaving to spend a year abroad, she paid a full year of rent in advance and provided the name and address of a local contact as the party to whom any notices should be sent during her absence.

The First Flag: This wasnt a typical rental. Somewhere in the tenants file, this alternate contact information must have been placed. But when the unit went into default, CSI admittedly did not send the notices to the local contact.

The Lesson: When any unit is rented under special circumstances, its important to note those matters in the file. Further, where any alternate contact information is given, it should be used before the property is sold.

Due to non-payment, the unit was sold at auction in May 1998. When Barshak returned, she learned her property had been sold, and her local contact had not been notified. She sued the facility on multiple grounds including breach of contract, fraud, negligence and intentional infliction of emotional distress. She sought damages not only for the fair market value of her property but sentimental value, mental anguish and punitive damages. Barshak and CSI agreed to binding arbitration of their dispute.

The Second Flag: Assuming that CSIs rental agreement contained any legal defenses that would have protected the facility from the claims and damages asserted in Barshaks complaint, the case should have stayed in the courts. Instead, for whatever reason, the facility operator agreed to let an arbitrator hear the case. This is a dangerous decision when it comes to self-storage matters.

Essentially, arbitrators are not bound to make decisions based on the law. They are entitled to base decisions on equity or fairness. In this case, it was fairly certain?due to the admission by CSI that the company failed to notify Barshaks local contact of the default and pending sale?an arbitrator would find against the facility for some amount.

But whereas a judge and jury are bound by legal principles, arbitrators can still decide what is fair as compared to what might be legal. So even if there was a limitation-of-value provision in the rental agreement, or a release of liability provision, or even a provision that prohibited the storage of sentimental or emotional property, arbitrators are not bound to interpret those provisions the same way a court might. Further, binding arbitration gives little opportunity for appeal; whereas the court system allows a multitude of appellate opportunities that might have given CSI a method for reducing the amount of the award against it.

The Lesson: If you have a good rental agreement that contains protective language in favor of the facility, do not forego your right to have your case heard in court. That is not to say cases should not be settled if they can be, either through mediation or non-binding arbitration. But a facility operator should never forego the protection of the rights afforded him under the terms of a well-written lease agreement by resorting to arbitration.

The other lesson is to make certain youve recently reviewed your rental agreement, ensuring that it contains the proper exculpatory provisions to protect your facility in the case of a wrongful sale. Provisions such as value limitations can go a long way in capping the liability risk you may face if you hold an improper sale.

Judgment Day

As the story goes, the arbitrator found in favor of Barshak; CSI was negligent, had converted her property, and the tenant was harmed by the companys acts. The arbitrator awarded Barshak special damages of $1,141,936, property damages of $152,320 and general damages of $2,500,000, for a total judgment of $3,794,256! This is believed to be a record judgment against a self-storage operator for this type of case.

Since CSI had assigned its insurance rights to Barshak as part of the arbitration agreement, Barshak then pursued her claim against CSIs insurance company, American Equity Insurance Co. Since the facility had its commercial generalliability policy with American Equity only between July 15, 1998, and July 15, 1999, the company denied coverage for the loss occurring before the policy had started (May 1998).

Additionally, since this was not a sale-and-disposal policy, American Equity claimed this was not a covered loss under the policy. When Barshak sued the insurance company, the court granted summary judgment in favor of American Equity.

The Third Flag: The facility did not have the proper insurance to protect it against the risk of wrongful sale. Even if the policy had been in effect at the time of the sale, the policy did not cover the type of loss that arose from the foreclosure and sale of the stored property. Although more insurance companies now offer their self-storage customers sale-and-disposal coverage, this specialized product is not part of a typical comprehensive general-liability policy.

The Lesson: If youre in the self-storage business, you must have some type of sale-and-disposal coverage. Dont assume this coverage is part of a standard insurance package.

A special effort should be made to include sale-and-disposal as well as customer-goods legal liability protection as part of your insurance package. The amount of coverage is up to you; but without it, youre left to defend yourself in the case and are subject to the collection of any judgment against the business own assets, including the facility itself. Even though large claims are not common, they occasionally happen, and the decision to be uninsured is risky.

Again, this type of judgment is unusual and apparently arose as the result of a number of missteps along the way. The moral of the story has resonating value: Facility operators should take a step back and ask themselves, What would I have done? or maybe How are my managers trained to deal with this situation?

Certainly, the question should be asked, What does my lease say about storing sentimental or emotional items? or Does my insurance cover wrongful sales? By asking these questions, storage operators can better prepare themselves for the risks they face each time they lease a unit. Although this was an expensive lesson for this particular storage operator, what you can learn from this case will save you money in the future. 

Scott Zucker is a partner in the law firm of Weissmann & Zucker, P.C., in Atlanta. He specializes in business litigation with an emphasis on real estate, landlord-tenant and construction law. Mr. Zucker is a frequent lecturer at national conventions and is the author of Legal Topics in Self Storage: A Sourcebook for Owners and Managers. He is also a partner in the Self Storage Legal Network, subscription-based legal services for self-storage owners and managers. He can be reached at 404.364.4626 or [email protected]. 

As managers, were always focused on drawing customers to our business to rent units. We obsess about marketing strategies to lure potential customers to pick up the phone and call; we practice our phone skills to sound personable and trustworthy; and we go to great lengths to make visitors feel comfortable and safe at our site during their initial tour.

We work so hard to get the customer to sign a monthly agreement that too often we dont see beyond the sale to provide ongoing care for tenants. Once theyve signed on the dotted line, it doesnt mean you can sign off on providing professional services. In fact, youve only just begun.

Your goals should be to provide customers with the resources to make their stay with you as enjoyable as possible, giving them peace-of-mind that their belongings are safe and you are ready to care for their needs. You must also set the record straight that they are responsible for understanding laws regarding insurance and policies dealing with delinquencies. These discussions should be thoughtful, yet professional. Lets talk about them in detail.

Assurance and Insurance

The first step is to talk to tenants frankly about insuring their goods. In most states, we have what are called care, custody and control terms. This verbiage basically informs renters that operators are not charged with the care, custody and control of their possessions. In a simple sense, once they have placed their valuable belongings in your facility, they still have the responsibility of ensuring they are protected from possible damage or theft. Your part is to provide security at the building level. You can offer to sell a lock and provide video surveillance, but none of this promises complete safety.

Perhaps an analogy will help customers with this line of thinking. You can tell them that when a person moves into a new home or apartment, the furniture, clothes, tools, appliances, etc., are the owners responsibility, and it is his prerogative to insure them against potential damage. Thus, they buy homeowners or renters insurance to compensate them in the event of a loss. This is the same when renting space at a self-storage facility.

Many customers assume incorrectly that since they have put their possessions in a self-storage unit, the facility owner is responsible for protecting them. To some extent, this is true: You have an obligation to provide some security and a building that is constructed well enough to provide a safe environment, but you are not responsible for the contents of the unit. Convey this to your renters while offering them choices for acquiring insurance.

Many states have now passed regulations that allow self-storage operators to sell insurance to customers and actually receive some type of compensation for doing so without having a special license. Check state laws about what is and is not allowed. In either case, make the point to your customers that they are responsible for obtaining insurance on the contents of their units, not the facility.

Several companies offer specialized insurance. Just look through this magazine and youll find many of them, or visit the insurance section of the Inside Self-Storage Buyers Guide (found at www.insideselfstorage.com). Contact companies directly and learn how you can offer insurance directly to your customers. Potentially, you can also earn some type of commission should your customers buy the insurance.

For homeowners with adequate insurance, its possible their policy covers goods while in temporary storage. Encourage tenants to review their coverage or consult their insurance agent. You may lose a commission on selling insurance yourself, but youll gain consumer trust. It pays well in the long run.

Finally, some customers may wish to self insure their goods, which is fine; but you should request written assurance that they are willing to take this chance and you are not responsible for their units contents. Most self-storage leases or agreements address this important issue. Consult with your attorney and ensure you are on safe ground. It can save you a lot of aggravation and potentially keep you out of a major lawsuit.

Late-Fee Policies

Even though the topic of delinquency has negative connotations, its best to inform tenants beforehand of procedures so they wont plead ignorance or harbor resentment. Discuss upfront what may happen if they fail to pay rent on the obligated date. For example, many states allow the operator of a self-storage facility to charge late fees, to deny access to the goods until the rent payments are made current, to collect the overdue rent payments through an auction process, or other remedies should they become delinquent or late in their payments.

I like to inform renters in a subtle but firm way about our late policies. For example, a conversation like this can be simple but effective: Mr. Jones, please be aware that your next payment will be due on the first of the month, and although we have a grace period of five days, after that date, should you not make your appropriate payment, we are required to deny you access to your unit and you may be subject to the following penalties (late fees, etc). I am sure this will not happen but, in the event that it should, I just want to remind you that our policies are made by our corporate office and I am obligated to follow them as outlined.

Dont portray yourself as a bad guy, just a good person trying to help them steer clear of future difficulties. Its not your policy; its corporate. Should tenants not pay on time, you are obligated, regretfully, to assess the penalties. I always like to blame the corporate structure; no one ever gets to see them so they cannot identify them. 

We are no different than any other business; if you do not make payments on time, you will be subject to a late fee. No one ever questions the utility companies, the credit card companies, the mortgage companies, etc., so why should self-storage be segregated? Bottom line, if our customers do not pay us on time, we may not have the cash flow to pay our bills (including your payroll), so its important to convey this professionally and courteously to customers.

Before you enact any late fees or penalties, contact your attorney or state association to make sure you are in compliance with state and city laws. This applies to the sale of insurance as well.

Although discussions of insurance and late fees are not the most pleasant things we managers have to deal with, a little common sense, a good smile while you are going over these things with the customer, and a clear understanding of the laws will make the discussions much easier.

In the future, dont let your focus on tenants end with their signed rental agreement. Inform them of resources and rules, and youll gain their respect along with a monthly rental check. 

Mel Holsinger is the president of Tucson, Ariz.-based Professional Self Storage Management, which offers self-storage facility management, consulting and development services. He is also a frequent speaker at industry conferences and a regular contributor to Inside Self-Storage. For more information, call 520.319.2164; visit www.proselfstorage.com. 

We all know the business adage about how a level playing field allows for fair competition. Given 2007’s financial turmoil, the turf for self-storage real estate financing and property transactions is still level, but at a dramatically different point of balance than what many owners became accustomed to in recent years.

With this new game, we’re all confronted with the same difficult market conditions, so it’s not a question of whether anyone has an unfair advantage, but rather how each of us copes with the current environment. Thriving on this redefined field will require property owners to readjust their points of equilibrium and gain their balance as market shifts continue to redefine how we conduct real estate-related transactions.

New Rules of Engagement

Last year’s credit-market turmoil has led to new, much more conservative rules of engagement for storage owners. Become familiar with these redefined rules, because they’ll ultimately affect how you operate your business and plan future investment strategies.

Wall Street has redefined the “best practices” of underwriting commercial real estate by reverting to more conservative historical norms. Gone are the recent halcyon days of lending on projected cash flows, interest-only underwriting, high-leverage first-mortgage debt, and lax debt-service-coverage (DSC) standards. Going forward, the more conservative measurements of in-place rents and historical cash flow will reign supreme. Investors will also need higher levels of old-fashioned equity and bottom-line cash flow, as lenders will strictly adhere to 75 percent to 80 percent loan-to-value (LTV) standards and 1.2x DSC constraints.

The risk profile on debt capital has also changed, resulting in wider credit spreads by at least 100 basis points on average. Further, there’ll be a clear differentiation between short-term bridge loans and long-term permanent debt, as lenders will segregate these products using leverage, pricing and deal structure.

For self-storage owners, the overall math is pretty straightforward: More equity and more expensive debt equal a higher overall weighted cost of capital.

Tighter underwriting standards and more expensive capital will flow through the real estate markets and clearly affect deal dynamics and investor profiles through cap rates and internal rates of return (IRRs). A cap rate is the ratio of an asset’s cash flow to its value; it’s a proxy used by investors to quickly compare yields on different assets. IRR is an alternative method that measures the true annual earnings on an investment over time by accounting for the time value of money. While cap rates and IRRs are not directly correlated, investors deploy both analytical measures when considering whether to purchase, sell or finance self-storage properties.

On our new playing field, the rules of engagement offer the harsh reality that lenders no longer give credit for projected cash-flow improvements and higher values at reversion. This forces investors to derive values based on cash flow in place and to bridge any debt gaps with more precious equity. Given this new rule, it seems reasonable that cap rates will widen by an amount sufficient to generate the IRRs investors require, as lower LTV ratios and the end of cap-rate compression will make it harder for projected IRRs to be met.

It’s widely expected that cap rates will widen by at least 30, and perhaps as much as 100 basis points, depending on the asset’s quality, location and performance. Cap-rate increases will conversely contribute to a decline in commercial property values.

What seems to be lost in all of the translation is investors have forgotten about the continual increase in value of their storage assets during the last five to 10 years when stabilized cap rates were lucky to be below double digits. While the market turmoil has not reached the double-digit level, it’s important to note that the pricing offered on deals today should still be historically attractive to investors who have owned their assets for more than five years.

Winners and Losers on the Field

Now that we’ve identified some of the playing-field changes and the new rules of engagement, let’s consider how they’ll impact market participants.

On the lending side, the benefactors will be life companies and commercial banks. Any financial institution with a healthy balance sheet and traditional “portfolio” lending platform that is not reliant on the capital markets to execute a loan sale is in a position to take immediate advantage in today’s marketplace. This is not to say that conduits will stop lending to self-storage owners; but market uncertainty and execution risk of their lending platforms certainly put conduit products at a disadvantage compared to life companies and banks. Accordingly, conduit volume is expected to drop significantly in the near term.

On the investment side, highly leveraged investors with short-term debt positions maturing in the near term are also at a disadvantage. These investors may find their equity has evaporated and lenders are unwilling to refinance or extend their loans.

Investors hoping to capitalize on aggressive market conditions by fully leveraging transitional or lease-up assets to refinance and cash out in the short term may also find themselves in trouble, especially if these properties have not performed as expected. Borrowers will likely find that loan servicers?particularly those acting under obligation from a commercial mortgage-backed security execution?will not be willing to work out loans, and may choose instead to foreclose on a property to minimize losses for the trust.

On the flip side, these new market conditions could present strategic buying opportunities for well-positioned investors with strong equity positions and healthy balance sheets. Investors who have seasoned loans with large equity positions available for refinance may consider cashing out some of their equity to build cash reserves and be in position to capitalize on market opportunities.

Accordingly, investors with assets that are well-placed and who enjoy strong local or regional market share due to owning a portfolio within a specific market may still be able to achieve pricing near 2007’s peak levels. While the pool of buyers has certainly decreased, investors’ acquisition appetites for this type of portfolio product remain strong. We expect buyers using low leverage and all cash will become active in 2008.

Even though the playing field has become more challenging, there are still numerous options available for self-storage owners looking to finance, acquire or sell. The key is recognizing the new rules of engagement and keeping your balance. Proper technique will win higher scores in today’s game. 

Shawn Hill is a principal at Chicago-based The BSC Group, where he provides mortgage brokerage and financial consulting solutions to self-storage and other commercial real estate owners. He is a former senior vice president with Beacon Realty Capital. To reach him, call 773.517.8504; e-mail [email protected]. 

Minh Tran is the managing director of brokerage/east at Storage Investment Advisors and can be reached at 713.376.3107 or [email protected]. 

During 2007, operators learned they are prime targets for claims that would not have been brought against them five years ago. Increasing numbers of operators are being sued in court, or have claims against them through arbitration groups, Better Business Bureau mandatory arbitration, and even church-based arbitration/mediation groups. The legal year in review was capped off with a $3.79 million wrongful-sale award against a self-storage facility in California. Should this send a warning signal to other facility owners that the legal system is getting out of hand?

Nooperator can afford a judgment of $3 million against him, but there’s no need to panic. In fact, we need to calm ourselves to figure out the problem, break it down and find resolutions. The way I see it, we can break the legal landscape into six issues deserving serious consideration. Evaluate each, consult a lawyer if vulnerabilities exist, review the circumstances, and address exposures now, before it’s too late.

1. Wrongful Sales

The California case reminds us that, despite “fancy” lawsuits picking on all sorts of subjects, the strength of the industry is also its Achilles’ heel: the right to sell goods in storage. Most states have a statute granting the operator a lien on the stored property, meaning he has the right to sell an occupant’s goods if the tenant defaults for a certain period of time. Then why is it so many operators still get sued for this?

Let’s look at the California case. The person who stored and won the arbitration verdict told the facility she would be out of the country for a year and pre-paid her rent for that period. She also left local contact information. A clerical error indicated the occupant had fallen behind in rent and, in short, when the occupant returned to the country, her goods had been sold.

The tenant alleged hundreds of thousands of dollars worth of belongings were lost including emotionally important, irreplaceable or valuable property such as the only copy of her Master’s thesis, antiques, etc. What was somewhat shocking about this case was the award for her loss was $152,000; the arbitration award for emotional distress along with general damages added up to $3.79 million. How does a $152,000 claim end up in a $3.79 million verdict?

Except for in Texas, we do not normally see emotional distress and other general damage-type awards in self-storage situations. Usually if a verdict is granted in favor of the tenant, the award is for the actual cash value of the property wrongfully sold or disposed. In fact, most state statutes provide some sort of limit on damages.

So, what can you, as an operator, do to avoid being the next wrongful sale verdict?

• Before conducting the next lien sale at your facility, purchase a wrongful-sale-and-disposal insurance policy from a reputable self-storage insurance company. The $3 million verdict is the exception, not the rule, but every lien sale leaves you open to some exposure. You’ve invested heavily in your facility. Wrongful sale/disposal insurance protects that investment; yet it’s not expensive coverage and is definitely worth it.
• Include a value limitation for stored property in your rental agreement. A good, modern self-storage agreement provides a value limit and prohibits the storage of emotional, sentimental and irreplaceable property. I don’t know if a clause of this type was in the California rental agreement, but my guess is no.

Value-limitation clauses are regularly upheld by courts. While not appropriate for every self-storage relationship (for example, a $5,000 value limit would not fly with a half-million-dollar RV-storage contract), the average arrangement should have a cap/limit on in dollar value and in terms of storing “irreplaceable property at the facility.”

Have a well-documented lien-sale procedure including many opportunities for “gut checks” before the sale. Operators have often sold property at a lien sale and then wondered if a partial payment accepted at some point during the process, an occupant bankruptcy, restraining order, an occupant in the military etc., should have stopped the sale. Post lien sale, after the property is gone, is the wrong time to be asking these questions. A good lien sale plan/flow chart is essential.

Here’s what you need and why you need it:

The Questions. A good flow chart asks the hard questions you might, for whatever reason, overlook. I’ve seen cases in which software conversions have messed up payment history and the manager simply didn’t notice. Weekend managers may have accepted a “forbidden” partial payment the Saturday before a Monday sale and not updated the computer. Or a manager may not have double-checked the computer before the sale to see if a payment has been made.

Some of the key “gut check” questions include:

• Is there any chance you've applied a payment to the wrong unit?
• Does the occupant have other units that are current? Maybe a payment that came in was meant to be applied to the delinquent unit?
• Is it possible someone other than the occupant has property in the unit you're proposing to sell?
• Have there been any partial payments precluding the sale? as anyone checked the manager’s “inbox,” which may have received bankruptcy notices, restraining orders or other correspondence affecting the sale?

The Answers. The second reason to have a lien-sale checklist or flow chart is to show a court that even if you made a mistake, you didn’t act recklessly or vindictively. This can help you avoid punitive damages that are sometimes imposed by a court and becomes an excellent defense tool in a lawsuit.

What other strategies will keep you out of lien-sale disaster? One option for avoiding exposure is to forget the sale altogether. If you have any communication with the occupant and you’re getting close to the sale, do not be afraid to, as Jim Chiswell would say, “play Monty Hall and make a deal.”

A partial payment with a full settlement release from the occupant, in every instance, is better than proceeding to a sale. You get your space back for a paying occupant, and the current tenant loses any real claim against you because he still owns his property and signed a release to you. If you don’t have one already, have your attorney prepare a standard settlement release for a partial payment with move-out; keep it ready to be used anytime you make a deal.

Another choice is to evict a tenant, but this is not applicable in every state. Check with your state law or consult an attorney.

Finally, as always, don’t forget a mediation requirement. Facing an occupant in a non-adversarial manner (not in a binding arbitration, where everything depends on how one hearing goes) often eases tensions and leads to resolution. Sometimes settlements are not desirable; but mediation at least gives you an opportunity to size up your occupant and his claim and understand how your occupant feels before you find yourself in an arbitration hearing or court.

2. Military Status

If you haven’t asked a tenant if he’s involved with the military and, if so, how to reach him, including a commanding officer’s name and phone number, you’re setting yourself up for a Soldiers and Sailors Civil Relief Act (SSCRA) violation claim if you sell property while the renter is overseas in active duty. This happened to soldier Patrick Roegalin in 2007 at a St. Louis Public Storage location. Roegalin set up self-storage payments via auto debit from a checking account, but somehow, account information got corrupted and the auto withdrawals stopped. Roegalin returned from duty to find Public Storage had sold his stuff.

Whether Public Storage was right or wrong to sell the property is of little concern if one weighs it against the press and public-relations nightmare imposed on the business. The story was picked up by USA Today, other news sources and several morning national news shows. Average citizens were outraged, legislators got involved, and people even offered to pay the legal bills to sue Public Storage.

You don’t want to be in that situation. Make sure you understand your responsibilities under the SSCRA and, moreover, verify if tenants are in military service. Knowing your obligations of serving military personnel avoids legal wars on the home front.

3. Climate Control

Do you use the term, “climate control”? If so, how do you control the climate? You may control temperature and humidity, but you don’t control earth, wind and fire. Rethink your self-storage terminology for 2008. For example, if you provide heating or cooling, consider the term “temperature controlled.” If you control humidity, think about saying it’s “temperature- and humidity-controlled storage.”

Nevada has a statute on the books penalizing an operator’s failure to properly advertise what is meant by “climate control.” Once one state enacts a statute, it’s not long before many others follow suit. Several states are seeking to define what climate control means at a self-storage facility. Don’t forge ahead in 2008 without giving serious consideration to what you mean if you use the term. To be concise, add a clause to your rental agreement defining what you mean by temperature-controlled, air-cooled, heated, etc.

4. Security

In current times, we must be aware that self-storage facilities can be used to house materials planned for a terrorist plot. Or, rented units could be used by criminals for brewing methamphetamine, contaminating the unit and the soil, and cross-contaminating other occupant’s property. Worse, irresponsible actions could result in burning down the building or polluting the soil to a point where the facility would have to be considered an environmental hazard.

Perhaps we’re forgetting some of the lessons we learned from 9/11. Sometimes you just can’t beat having a good nosy manager. While that may not be the solution to every situation, let’s talk options.

Self-storage operators often stress concerns about asking for “too much” information from new tenants, stating applicants are rebelling against providing photocopies of driver’s licenses, Social Security numbers or credit cards. The fear is that along with collecting this info comes the management’s responsibility to safeguard and dispose of it properly. While the rise of identity theft has become a convenient reason for occupants to refuse providing personal information, you still need it. If applicants fail to comply, strongly consider sending them down the street to your competition, which hopefully will also require this information.

Operators must be ever vigilant to ward off any nefarious activity that could be occurring in their facilities. The Department of Homeland Security recommends being particularly wary of customers who exhibit any of the following:

• Insistence of paying cash, particularly large advance payments 
• Excessive concern about privacy 
• Visits to the storage unit at odd hours, particularly close to gate-closing time or late at night 
• Nervousness or evasiveness when approached by employees 
• A unit producing unusual fumes or liquid residues 

Also be on the lookout for unusual types of corrosion on the locks, handles, hinges or doors of your units, and unusual amounts of trash deposited in barrels or dumpsters at your facility. Red flags should go up if you find fertilizer bags, empty gas cans, unusual metal objects, or excessive amounts of boxes of decongestants or starter fluid, etc., that can be used to make methamphetamine.

Actually, consider any unusual trash as a red flag. For example, the 9/11 terrorists funded part of their operations by stealing luggage from airport baggage claims. The baggage was taken back to the terrorists’ apartments and valuables removed; the balance of the luggage would be disposed of in the apartments’ dumpsters. If you have any concerns, contact law enforcement immediately.

5. Sales Tax, Other Taxes and Eminent Domain

There is safety in numbers. Texas operators, particularly, have shown that having an active, financially healthy state association makes all the difference in communication with the state legislature, governor and judiciary. While this article was being written, it also appeared that Michigan operators may have temporarily stopped the imposition of sales tax on their occupants, a battle other states have lost.

It’s only a matter of time before most states try to impose sales tax on rents or additional taxes on self-storage activity. Ohio has imposed a commercial activity tax along with sales tax on rents, and other states are following. Even in Michigan, while sales tax may have been repealed on storage rents, the government is scurrying to reclaim the loss, perhaps by imposing other taxes on land ownership. Many older facilities are falling victim to eminent domain.

Many operators fail to align themselves with state associations because they think the organizations are too small, not effective, or they don’t want to share data with competitors. Additionally, they don’t want to reveal data about true ownership of the facility to have salespeople calling and peddling services and products.

Every state could—and should—have a strong self-storage association. There is no more effective voice in your state legislature than a group of facility owners who do business, pay taxes and employ people within the state. No national lobbying group, legislative watch or representative organization will represent your interests in front of your legislature better than your own state association comprised of self-storage owners/operators.

This doesn’t mean you have to serve as an officer; just join, pay your dues, lend a hand when asked, be involved when necessary. This way, if a state decides to impose a new tax or regulation (like Illinois did several times last year in various cities), your association will know about the problem early and have resources available to react quickly. Being involved in legislation at its inception is much more powerful than trying to knock something out of a bill on its second or third reading.

6. Employment-Law Issues

Employment-law issues, particularly class-action lawsuits for overtime by managers, continue to plague the industry. If you’re uncertain whether your employees are exempt from overtime, talk with your attorney and review the job descriptions. If your attorney concludes the employee may not be exempt, reach a settlement, get a written release and fix the problem on a going-forward basis. Every conference, meeting or webinar I attend always has at least 10 people who say, “Yes, I have recently been sued,” or “Oh boy! I have exposure and I am not covering myself.” Cover yourself and stand prepared.

So what about 2008? Well, I hate to say “I told you so,” but I have! Most everything suggested in this article has been in previous ISS issues, webinars and blogs in one form or another over the last five years. To get on the right track, consider 2008 as the “back to basics year.” Resolve to follow the “Six Legal Basics for 2008” to keep yourself out of trouble.

For more legal education, tune into ISS Legal Learning Webinars (see www.insideselfstorage.com/webinars for scheduling). If, after you have read this article, you think you may have exposure, get it straightened out, resolve the problem, and avoid having this issue carry over into the next new year. 

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

Jeffrey Greenberger practices with the law firm of Katz, Greenberger & Norton LLP in Cincinnati. He primarily represents owners and operators of commercial real estate, including self-storage. He is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. His website, www.selfstoragelegal.com, contains his legal opinions and insights into the self-storage industry, as well as an article archive. For more information, call 513.721.5151; e-mail [email protected]. 

Successful storage facilities have evolved to provide more than just space; they offer solutions to their customers need for storage under multiple circumstances. Twenty years ago, most facilities simply rented out space and maybe sold locks. Today, facilities sell services and products such as truck rental, packing materials, mailboxes, wine storage, tenant insurance and a variety of other specialized offerings.

Operators who have invested the time to understand the unique needs of their clients most often make insurance coverage available for goods in storage. After all, if its worth storing, its probably worth insuring!

If youre not a believer, consider this: Its 8:30 a.m. and youve just arrived at your facility to find 36 locks have been cut and all contents in the units burglarized. Those customers with insurance will be easily dealt with, but those without insurance will not and will most likely be very unhappy. Which calls would you prefer to make?

Although an insurance broker cannot likely provide any worthwhile advice on what packaging materials or locks will work best, he can provide guidance on how to make available insurance products to suit your customers needs. There are some customized insurance programs for self-storage, but not all insurance brokers have access to them or the expertise to explain or administer them effectively.

Understanding the Issues

Its unfortunate that so many facility operators are unaware of what insurance products are available and, as a result, storage customers may experience an unexpected financial loss (claim). This is the last scenario in which a storage operator wants to find himself. Its for this reason among others that content insurance was developed close to three decades ago.

In many cases, facilities have not offered a solution because they do not fully understand the issue. Many operators believe customers can easily obtain insurance protection through their home-insurance policies. Unfortunately, this is often not the case. The reality is only some companies offer insurance for contents in storage, with coverage ranging from very restrictive to very broad. Another common scenario is storage customers who are between residences and no longer have a home-insurance policy in place.

Customers who have homeowners insurance may find their coverage for goods in storage is limited. Restrictions commonly found on a homeowners policy may:

• Limit duration of coverage for goods in storage to 30 days.
• Reduce and restrict limit for the contents in storage.
• Restrict coverage, such as no coverage for losses arising from theft or water damage.
• Require an increased deductible.
• Offer no coverage available for contents stored off premises.

Unfortunately, facility operators are not alone when it comes to understanding the insurance issue, as many of their customers have not even considered it. Lets face it: Most often people only really pay attention to what is covered when things go wrong. This is usually because they have not read their policies, consulted with their insurance broker, or purchased insurance specific to their goods in storage. An informed storage operator with the help of an experienced broker will ultimately facilitate a good solution for customers.

Making the Offer

Storage operators should consult their lawyer when drafting their rental contract. Be sure to include a section pertaining to insurance and what responsibility is assumed by the facility. Having a lawyer review the rental agreement is critical, as you want to ensure your contract with your tenant is acceptable and legal. Each state has its own legal issues to be considered.

Assuming you have decided to offer a solution to your customers insurance needs, determine how this will be best accomplished. In my experience, its best to allow the customer to choose a limit that suits his individual requirements.

Choose an insurance broker with experience in the self-storage industry, one who has taken the time and investigated compliance issues with state and local laws. Tenant insurance is not just another added value but an opportunity to ensure you and your customers are protected following an unforeseen event or catastrophe. 

Tobias (Toby) Struewing is a commercial account executive for Cowan Insurance Brokers Ltd., a provider of insurance and risk management products and services for the Canadian market. For information, call 866.912.6926; e-mail [email protected]; visit www.cowangroup.ca.