Coachella (Calif.) Self Storage will host a business mixer for the local chamber of commerce on April 16 at 5:30. The cost to attend is $3 for chamber members and $7 for non-members.
 
Coachella Self Storage is one of two self-storage members of the chamber. AAA Storage is the other; its manager, Elsa Reyes, is also a chamber director.

This article should be a cost-effective wake-up call for approximately three out of four operators. According to a 2008 survey, 73 percent of self-storage operators do not offer a storage insurance option to their tenants. Why? This same survey suggests that 52 percent of the operators not offering insurance to address property damage or theft claims believe it is too much trouble.

The truth is you can avoid trouble and maintain good customer relations by offering your customers an insurance option, or by retaining some limited financial responsibility and responding to your customers in a positive manner when their property is damaged.

Understanding Liability

The self-storage industry has worked hard to develop a strong wall of legal insulation for the self-storage operator. Statutes in most states now recognize the limited liability of the operator for loss or damage to tenants’ stored property. Many states laws are further enhanced by a provision the operator may include in the rental agreement that eliminates their legal liability for negligently caused damage to stored property.

These protections work well in theory but are often challenged in practice. Your agreement may be clear that you take no responsibility for your customers’ stored property, but when the agreement conflicts with what your customer feels to be fair and reasonable after a loss, an argument and a legal challenge may follow.

Insurance for tenants’ stored property was developed almost 30 years ago at the request of self-storage operators as a way to deal with liability issues. When your customers have a way of being compensated for their loss or damage, their motivation to argue, complain and sue is often eliminated. Rental car companies and phone service providers understand this, and so should you.

There are many ways for you to provide this service to your customer. Let’s look at your options.

Brochure applications. The oldest and perhaps simplest option is to provide your customers a brochure that will allow them to purchase insurance on their stored property through a postage-paid mail-in application included in the brochure.

A more recent but equally simple evolution of the mail-in option is referral to the website of an insurance provider that allows your customer to purchase insurance for stored property online. Depending upon the insurance provider you select, you may be asked to pay a nominal fee for the pre-printed materials you give to your customers or it could be free.

Pay-with-rent. Another tenant insurance program allows you to offer your customers the option of purchasing insurance and paying for their coverage along with their monthly rent. This pay-with-rent insurance option requires you to collect and account for the premiums with an insurance-tracking module in your self-storage management software program, which is now available in most self-storage management software. Also, a higher percentage of customers will purchase this option over those who are given a mail-in application or directed to a website.

An additional benefit is insurance providers will pay you a commission or administrative fee for this service. However, you may be required to obtain an insurance license to provide this service. A number of states, including Arizona, California, Florida, Illinois, New Jersey, North Carolina and Texas, have enacted limited licensure laws that specifically recognize this activity and require the facility or the individual manager to obtain a license. In other states, similar laws are either pending or the issue has not yet been reviewed and considered.

Limited financial liability. Another option is for you to act as a landlord by accepting or retaining some limited responsibility in your rental agreement. We are not talking about offering insurance to your customer. The concept is for you to accept or retain some responsibility as a service provider, and permit your customers some limited compensation for their loss as part of your rental agreement.

Your agreement probably contains a non-liability provision, and your rental charge has been set in contemplation that you will not have to respond to property damage issues raised by your customers. A number of self-storage operators are currently backing away from the typical lease, eliminating any responsibility by offering customers the option of having the operator accept or retain some limited financial responsibility for damage to property in exchange for a modest increase in rent. The increased rent is charged to fund the payment to customers for damage to stored property.

When your roof leaks or a storage unit is burglarized, even the most reasonable tenants will tend to believe that you have failed to provide them with the service in which you have been paid. Operators who choose to retain or accept limited financial liability for damage to customers’ property through their rental agreements have an option of purchasing insurance to transfer part or all of this contractual liability to an insurance company.

Act Now

While the tenant insurance options discussed in the preceding paragraphs will often work to avoid tenant disputes and litigation or even provide an additional layer of legal insulation to the self-storage operator, the alternative of accepting some limited responsibility to resolve claims for property damage will go further in resolving the customers’ expectations of the service in which you have charged them.

The concept of the storage operator’s ability to accept or retain responsibility for stored property has also been challenged in the regulatory arena. Concerns are being brought to regulators’ attention by an insurance provider that storage operators are crossing into the business of insurance.

However, as of the writing of this article, states that have thoroughly reviewed and taken a firm position on the issue, with the notable exceptions of New Jersey and Texas, have come to the opinion that an operator may either accept or retain limited responsibility for stored property within the context of their rental agreements and may charge for this assumed or retained financial liability. The concept remains an unresolved issue in some states including Connecticut, Kentucky and Pennsylvania.

Let’s return to the original premise of this article: most self-storage operators do not offer their customers a tenant insurance option or a lease that retains or assumes some responsibility for damage to stored property, and most of those operators who do not claim it is too much trouble to do so. This is a matter of customer service, of meeting customer expectations, and avoiding problems arising from the inevitable property loss.

The optional solutions are simple to implement and will either cost you little or nothing, and could increase your revenue stream. If you are one of the majority of operators who do not currently offer your customers some way to recoup for their losses to property stored in your facility, put down the magazine, pick up the phone and call your insurance provider.

Scott Lancaster is the regulatory compliance officer for Deans & Homer. He started his insurance career in 1976 as a licensed insurance agent and broker in California. Deans & Homer has provided insurance products designed to respond to the unique risks of the self-storage industry since 1974. For more information, call 800.847.9999; visit www.self-storage-insurance.com.

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I am writing this letter to give you my unvarnished thoughts on today’s real estate market and what I believe to be a self-storage owner’s options. These options are difficult and limited because the market is also unusually tricky.

I got into the real estate business in 1971 and have been, for the most part, happily and profitably engaged for some 37 years. Of course, there were periods of credit crunches, high interest rates, three serious recessions, savings-and-loan debacles, overbuilding and a significant period of very high inflation. Each one of these difficult times ultimately ended with a resolution, but not without some personal pain and, in the case of some of my real estate colleagues, serious negative consequences. 

As 2007 ended, I began to think there was something quite different about this “slowdown.” It occurred to me that the real estate market that had preceded the now-accelerating decline was dramatically out of line with any previous market. This boom of excesses was beyond the scope and magnitude of anything I had seen in the past. Prices were at record highs both nominally, and more disturbing, in relation to the incomes of the properties (i.e., extremely low cap rates).

Likewise, every property type was involved in this bubble. Exacerbating the problem was that usual financial underwriting standards were simply discarded and loan amounts were ridiculously generous; interest rates were low and often recourse was not required. The recovery would be more difficult this time because there were more causes of the problem. While my experience told me that, as usual, everything would work out with a little time, my instincts were much less sanguine. My instincts are now proving to have been more accurate.
 
The Real McCoy

This period of contraction, either directly caused or materially aggravated by the excesses of the entire real estate market, has resulted in the worst economic situation in living memory. This is the Real Mccoy! It's also clear that in the end, the fortunes of real estate will bear an outsized portion of the destruction of wealth because of the continued decline of real estate values (rising cap rates) and the lack of liquidity in the financial markets. Given the magnitude and diversity of this problem, it will not be solved quickly―in years, not months! Unfortunately, I am not alone in this assessment, but I do sincerely hope I am wrong.

The circumstances of this debacle leave self-storage operators few options and many challenges. Being unprepared is not  good.  My experience tells me owners have three choices.

Option 1: Batten down the hatches. If you want to hold on to your property for the long pull, the questions you must consider are:

• Are you willing to hold the property for five years? 
• Do you have solid financing currently in place for a contractual period of at least five years?
• Do you have liquid resources to cover the debt service in the event your revenue declines 20 percent?
• Are you among the five most competitive properties in a 3-mile radius?

If you can’t answer yes to these questions, you will have a serious problem reaching your objective of holding the property for a long period. Opportunities to refinance a loan are scarce in today’s world, and the terms will be difficult as to rates, adequate loan amounts and recourse. Your risk of not having enough loan term or staying power in a credit crisis and a seriously decaying economic environment is high.

If your current loan was made in 2002 through 2006, it is highly probable the property could not be appraised at a value that would yield the same loan amount as your current loan amount. This is because the loan-underwriting standards have gone from extremely lax to impossibly stringent. Remember, many loans have personal recourse and there are significant tax impacts on the “forgiveness of debt” in a foreclosure. If your answers are “no” to any of these questions, try Option 2.

Option 2: Move on. If you are thinking of retiring, lowering your risk, concerned about your market or just want to take it easy, then maybe you should think about selling. The necessary questions to answer include:

• Are you willing to sell at the market price or wait several months so you can?
• Do you believe prices are down at least 20 percent or more from the highs in 2006? 
• Does your loan not have a “lock-in” that prohibits a sale?
• Do you understand cap rates have gone up dramatically and generally range from 8 to 11, depending on the location and property?
• Are you willing to pay the taxes?

Once again, the right answer is yes! In summary, the serious buyers are scarce, almost always knowledgeable about self-storage and, for the foreseeable future, are looking only for projects that are attractively priced. Further reducing the number of buyers is the availability of financing in a diminishing loan market.

Additionally, there soon will be foreclosed properties on the market that will add a new and detrimental dimension to the market competition. The net result is if you expect to sell in today’s market place, you must be aggressive in pricing, patient and emotionally ready to recognize the market as it is. If any of your answers are “no,” you may want to think about Option 3 or return to Option 1.

Option 3: Remain in denial. Denial, by simple default or negligence, is often a popular choice when presented with rather stark and limited options. By any standards, the first two options are more difficult and denial is easier—for now. However, the other two options give you some ability to protect the fruits of your investment and labor and will likely improve your future options.

Experience speaks to me on denial; the words that come to mind are worry, more worry, recrimination, angst, helplessness and guilt, to name a few. Thoughtful action is always more productive than worrying about doing nothing!

Good self-storage brokers can help you understand the market and assist you in buying or selling properties. Although they can't change the market, a good broker will work with self-storage owners to find the best solutions in today’s challenging environment.
 
Michael L. McCune is president of the Argus Self Storage Sales Network, a self storage real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com, a marketing medium for owners in the self-storage industry. For more information call 800.55.STORE.
 
 

Door to Door Storage Inc., a national provider of portable-storage containers and moving services, will donate the free use of 10 storage containers to the University of Texas (UT) at Austin for its 2009 Trash to Treasure event. For the third year running, the containers will be used to sort and store items donated by students leaving campus at the end of the school year. Items will be collected between May 13 and 24, and then sold to raise funds during a huge garage sale on Aug. 23.
 
Trash to Treasure is a goods-recycling program run by the Student Government Campus Environmental Center (CEC), an agency of students interested in the environment. During Door to Door's participation, more 90 tons of waste has been kept out of landfills by this event. Last year, more than $14,000 was raised for student-run environmental programs, such as recycling and energy conservation.    
 
More than 100 volunteers are needed to operate the program. For every shift worked, a volunteer helps raise $50 for the environment and prevents 75 pounds of stuff from entering the landfill. Details can be found at www.trashtotreasureut.com.
 
Founded in 1996, Door to Door Storage has operations in more than 20 U.S. metropolitan markets with its corporate headquarters in Kent, Wash.

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Ironbridge Self Storage in Chesterfield, Va., suffered a fire this week that damaged 36 units but resulted in no injuries. The first firefighters on the scene found heavy fire in three units, which ultimately spread to 10 units; an additional 26 units had water damage. Once the fire was contained, more crews were called to contain the water runoff, as firefighters did not now what was being stored in units. The cause of the fire has not yet been determined.
 
Source: Richmond Times-Dispatch, UPDATE: Chesterfield storage fire damages 36 units

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As the number of homeless people on Oahu, Hawaii, increases to the thousands, self-storage companies are struggling to keep them from living in their units. Using a storage unit as a residence is not allowed and is usually stipulated in a facility’s rental agreement.
 
Tony Goulart, operations manager for Hawaii Self Storage, the state’s largest storage operator, said that while the company empathizes with the homeless, it does not condone living in units. One of the rules for renting a unit at one of the company’s properties is that it is not to be used as a domicile. Some homeless people do rent units to store their belongings, but they are not supposed to sleep in them.
 
Hawaii Self Storage is currently offering four free months of storage through its Transition Assistance Program to those who can prove they are experiencing residential challenges.
 
Source: KHON2.com, Homeless Seek Housing in Storage Units

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Challenges associated with the economic turmoil occurring in 2008 have driven many companies to cut back on expenses. Many cost-cutting decisions and changes can positively impact your bottom line, but they may also have a much more adverse effect on your employees, partners, investors and business. A few areas of concern highlighted in this article are fiduciary liability, employee benefits liability and directors and officers liability.

Fiduciary Liability

Fiduciary liability is generally an insurance coverage that holds a questionable value to many business owners and is an important coverage if you offer employees a retirement or welfare plan. Since you are choosing the plan’s third-party asset manager and the investment options available, you hold a personal fiduciary responsibility to the plan’s participants.

A fiduciary bond is required by the Employee Retirement Income Security Act of 1974 (ERISA), which protects the employer from theft of employee benefit-plan assets. However, a fiduciary bond does not protect the individual fiduciaries and the retirement plan from liability arising from errors in plan administration and breaches of fiduciary duty under ERISA. That is where fiduciary liability coverage picks up the slack.

Most employers offer defined retirement plans including employer-provided pensions, where the assets are controlled by fiduciaries and plan sponsors, or the more common “defined contribution” plans, commonly referred to as 401(k) plans.

Typically, the difference between these two is who has discretion over the investments. The pooled assets of employer-sponsored pension plans are controlled by the fiduciaries with little or no intervention by participants or employees. On the other hand, 401(k) plans are driven by the individual plan participant (the employee) who chooses the investments, sales timing and threshold for investment risk.

Fiduciaries generally believe they have no fiduciary liability exposure to participants of a 401(k) plan since the employee has virtually full control over his own individual plan. However, despite the employee’s control, these plans still have an exposure to lawsuits from the plan’s participants.

For example, participants are usually restricted to a small number of investment options chosen by the fiduciaries and/or sponsor. This creates a problem if participants feel they are not being given a good enough opportunity to place their funds into investments that should perform the way they are recommended.

Also, the plans are often managed by a third-party administrator chosen by the fiduciary and whose fees are negotiated by the fiduciaries, not the participants. This can often create a problem for the plan’s participants because they may feel they are being overcharged for administrative fees and the third-party administrator is not providing enough value or performing for what they are charging.

Lastly, fiduciaries often provide a company match to the employee’s contributions. In today’s economic environment, reductions or elimination of company matching is occurring more frequently. This could potentially be considered a breach of fiduciary duty to participants if they were not properly notified of the change. Because of these roles taken by the employer or fiduciaries, they still hold the same liability as fiduciaries of employer-provided pension plans.

Due to the current economic conditions and the slumping of the financial markets, many employees have seen their nest eggs disappear almost overnight. It is essential to realize that these employees can or may be responsible for their losses. The importance of having fiduciary liability coverage or increasing current limits of coverage is at an all-time high. The size of your company does not eliminate you from litigation by a retirement plan participant if you are offering this benefit to your employees.

Employee Benefits Liability

The common misconception is that Employee Benefits Liability (EBL) is an insurance coverage that provides protection for many of the same exposures associated to fiduciary liability. It is often confusing to differentiate between the two, but the main difference is that EBL only protects against claims for errors and omissions in plan administration, not against any breach of fiduciary duty under ERISA.

In addition to retirement plans, EBL also extends to provide protection for errors in administration of other employee benefit programs such as group life, health, dental, automobile, educational reimbursement, workers’ compensation, savings and/or vacation programs. Errors or omissions in administration commonly include misinforming employees of the content in any benefit programs, giving advice about a program, handling records in connection with a benefit program, or an error in administration that affects enrollment, termination or cancellation of any employees under a benefit program.

Often, administrative errors go overlooked by principals and officers of companies, but the potential impact on employees when an error occurs can be significant. Employers who offer health insurance to employees are responsible for providing information regarding the enrollment period for their employees as well as ensuring they have properly been offered an opportunity to accept or decline coverage if they qualify.

Additionally, one of the core responsibilities of employers is to make sure they are in compliance with their group health providers’ requirement for the number of employee participants. Almost all carriers require at least 75 percent of qualified employees participating, or provide an acceptable waiver stating they are already insured under another qualified health plan (usually with their spouse’s company) and therefore decline coverage from their employer.

One example of an administrative error connected with this rule would be if an employer did not acquire the acceptable waivers from non-participating employees and a significant claim (such as a participating employee being diagnosed with cancer) was turned in to the group health provider. The insurance carrier has the right to review your records before accepting the claim and may potentially deny and cancel coverage to the diagnosed employee since the employer was out of compliance and did not administer the records of the plan properly.

Further, the employer could potentially be sued by the diagnosed employee for an error in administration of the company’s health plan, as well as the medical costs for the claim itself, which could amount to thousands, if not millions, in favor of the employee.

Administration of your company’s benefits programs should never be taken lightly as mistakes and errors do occur throughout a company’s lifetime. It is strongly recommended you consider this coverage as EBL is typically inexpensive and can be added to your existing policy with your general liability insurance provider.

Directors and Officers Liability

The last and likely one of the more important liability exposures to highlight pertains to directors and officers (D&O) of private corporations. As leaders of a company, directors and officers can be held personally liable to shareholders, employees, customers, partners, investors, creditors and other third parties for the decisions they make.

A common fallacy is that if a company is privately owned, it is not exposed to any type of D&O liability. This is completely untrue as directors and officers in both public and private corporations are required by law to act diligently and with due care, avoid conflicts of interest and activities that benefit them personally at the expense of the corporation, and to comply with the numerous federal and state statutes regulating management and corporate conduct.

As the credit crisis continues to increase the problems that most businesses face today, the most common form of D&O liability stems from the alleged decisions and wrongdoings officers and board members made for the use of corporate funds. Despite the warnings and foresight provided by many financial professionals regarding riskier finance instruments being touted, many corporations have found themselves holding on to much more debt and risk than they have ever had before.

Also, the failure of a business can ultimately lead to lawsuits by former employees against the officers personally since they may have breached their fiduciary duties to attempt to benefit themselves and ignore the affects it may have on the employees.

The disregard for D&O coverage is common throughout private companies. But officers of a corporation make decisions that may lead to a business failure. This failure could potentially affect the constituents you are responsible to, and protecting your own assets or personal investment into the business should be a significant concern.

As economic conditions continue to change, executive liability insurance protection comes to the forefront since these are the areas that most lawsuits are persistently occurring. There is no denying that there will be some bumps along the road ahead, but rational risk management and appropriate and adequate insurance protection will help your company find its way.

Note: This article is not intended to offer legal advice. Any descriptions of coverage provided herein are not intended as an interpretation of coverage. Policy descriptions do not include all the policy terms and conditions contained in an actual policy, and should not be relied on for coverage interpretations. An actual insurance policy must always be consulted for full coverage details.

Mike Gong is a real practice principal and self-storage practice leader for Arthur J. Gallagher & Co., an insurance broker and risk management firm. For more information, call 800.568.0833; e-mail [email protected].

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The COWs Dealership Program, launched in 2009 by Miami-based TrailPods LLC, is a low-cost entry into the mobile-storage industry designed as an add-on business to an existing self-storage or moving company. The program comes with branding (marketing materials, signage, uniforms and use of the COWs logo), reservation software, business training and support, but it is not a franchise. It costs considerably less than other mobile-storage concepts because it does not require additional real estate, special vehicles or a special driver’s license, nor are their franchise or residual fees.
 
The “Container on Wheels” is a three-in-one product including a powered hydraulic tilt-bed trailer, an enclosed utility trailer and an easily transported storage container that can be towed by any SUV or pickup truck. The container, available in 8- and 16-foot models, is built from a bright white composite material that is weatherproof, lightweight and strong. The trailer is built from structural steel, with a pressure-treated wood floor and powder-coated steel frame that are weather-resistant and durable. The powered hydraulics operate by remote to simplify loading and unloading.
 
COWs are popular for moving, short-term storage, overflow inventory, remodeling projects and other storage tasks. Aimed at do-it-yourselfers, the program allows customers to pack and unpack at their own convenience. Info: www.get-a-cow.net