A measure that would repeal the Arkansas state tax on mini-warehouses and self-storage services is headed to the House floor for a vote. SB 2, sponsored by Sen. Bobby Glover, has already passed the Senate and gained the endorsement of the House Revenue and Taxation Committee. The bill would repeal the tax beginning July 1, 2011. The Arkansas Department of Finance and Administration said losing the tax would cost the state about $4.2 million a year. The tax was enacted in to help pay for an overhaul of the state's public school system.
 
Source: arkansasbusiness.com, Repeal of Warehouse Tax Headed to House Floor

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Wisconsin-based management company Wolf River Partners acquired a self-storage property in Cleveland for $1.1 million. Purchased from CRZ3 LLC, the 35,000-square-foot facility was built in 1926 and is in the Downtown South industrial submarket. George Henshaw of Transaction Realty represented the seller, and Rocco Neri of RESG Cos. in Chicago represented the buyer.
 
Source: CoStar Group, Self Storage Facility Sells for $1.075 Mil.

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Kangaroo Self Storage of Glasgow, Scotland, has reported a surge in storage demand from 20- to 30-year-olds who are returning to live with their parents. The company says these customers intend to store their belongings until the economy recovers. Faced with unmanageable debts, redundancies and the collapsing housing market, many young adults simply cannot afford their own homes.
 
“Six to eight customers per week tell us they are storing their belongings and moving back in with their parents,” said Chris Stevens, the company’s managing director. “Demand for our smaller sized rooms has never been so high.”
 
Customer Lesley Morris is one of many suffering under the Scotland credit crunch. “I just couldn’t afford to stay on in my own flat,” she said. “Thankfully, my parents are supportive and happy for me to move back in with them for a while. Kangaroo Self Storage has the perfect size room for my needs.” Morris said she doesn’t know when she’ll be able to afford her own place again.
 
Kangaroo Self Storage provides services to Glasgow and Dundee, Scotland.

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There once was a time when selecting management software for a self-storage business simply meant choosing from a handful of vendors. They all did a good job of offering similar features at similar costs. Now, the number of providers has increased considerably. There are more features, and the cost difference between the many types of software on the market are a bit broader, making the choice more complicated and time-consuming.  

For those embarking into this industry for the first time, consider your needs and business practices before purchasing a software package. Is your objective to simply provide your manager an organizational tool with which to track tenant names, unit numbers and addresses? Maybe you’d like a more practical and efficient way to print notices, charge monthly rents and late fees. Or, you might be a report addict and require reports for everything.

Construct a list of features you feel your business may need, keeping in mind the skill level of the managers operating the program. The right manager and software combination will complement each other and increase efficiency with the least amount of problems. This could mean fewer telephone calls to you and more accurate reporting for your accountant.
 
Getting Started

First, you need to consider the PC requirements of the management program. If you plan to use an existing PC, consider its age, operating system, onboard storage devices and the storage media it currently uses to back up data. If you intend to purchase new equipment, you should still review the program requirements and know exactly what is expected of you and your computer.

You should also determine the difficulty of the program configuration. Some reputable providers will help with the initial setup and customization of their products. This could be accomplished several different ways. It’s critical for your provider to offer help with this setup process. I have come across numerous operators who were left alone during this process and crucial settings were never completed. The results included missed late fees and mailings and, the most common oversight, taxes incorrectly accessed.
 
Growing Your Business

Another critical consideration is whether the chosen software will grow with your business. If you change unit rates, numbers, late fees or lien configurations because your occupancy increases or your state laws change, can your software adapt? How complicated will it be? These answers will depend on the program you purchase.

This brings us to my next point: What kind of security is built into the program to prevent someone from arbitrarily changing crucial settings? When your property assesses late fees or places a tenant in overlock or lien status, this configuration is usually regulated by state laws and described in your lease agreement. Password protection within the program should only allow authorized personnel to make these changes, while at the same time preventing someone from accidentally or intentionally making system changes and placing you and your business at risk.
 
Remote Access

If accessing your software remotely is on your shopping list, there are several third-party solutions, including GoToMyPC and LogMeIn. These proven solutions make remote access easy and affordable. There are also several Web-based management software programs designed for the self-storage owner. Both methods allow you to access your system, draw desired information, review reports and make changes. Two details to keep in mind:

• The expense. A third-party solution will be a minimal expense, if any, compared to a Web-based product, which can involve a healthy, reoccurring monthly fee.
• The database. Who has possession and access to your tenant database and who is responsible for data backups?

Technical Support

What technical support options are available with the software? While discussing features and pricing, remember to ask the provider about support. How much comes with the original purchase? What are the hours of operation, and in what time zone is the support staff? Software vendors are spread across the United States, so if there is a problem with your system, how long will you have to wait until help is available? 

Also, be cautious about a provider’s promise of “24-hour support.” You may find someone on the other end of the line any hour of the night, but it doesn’t necessarily mean he will have the tools or expertise to solve your problem. Another important question is if there is a charge for technical support. If so, will you need a credit card when you call or will you be billed after the call is completed?
 
Software Training

Reputable software providers offer training for their products. In many cases, the programs are easy to learn, and with the help of a good manual and a few short calls to the provider’s help line, you and your manager will quickly be on the way.

However, allow yourself and your staff time to practice with the product. I have seen a few well-meaning individuals purchase products during the last week of the month with the intent to be up and running by the first. Unfamiliarity with the new product, potential mistakes and added stress of being rushed will quickly create negative feelings toward the new software. Allowing a few weeks for training and practice can make all the difference in the world.
 
Finding a Vendor

The software industry has become lucrative for manufacturers. New self-storage suppliers appear every year. Many quickly come and go, so find out how long the software vendor has been in the industry, then limit yourself to those who have conducted themselves ethically. If they have, you will have no trouble finding customers who use their products and approve of their practices.

Ask yourself: Does this vendor have enough industry knowledge? This gives the vendor the ability to write helpful software for your business. The software should be rich in features specific to self-storage. For example, while QuickBooks is a valuable accounting program for many businesses, comparing it to software written for self-storage exposes its shortcomings. QuickBooks is a general-accounting program, not self-storage-specific.

The package written for a storage business will have many more features to benefit your day-to-day operation, such as rental activities, automatic lien processing, late fee and mailing capabilities. Both programs can track money, but software for self-storage will save thousands of staff hours each year.
 
The Cost

You probably already know what I’m going to say: You get what you pay for. Software providers price their packages based on system features, market value and their competition. Behind the scenes, your vendor must support the product with any software fixes, produce upgrades, provide qualified technical support and pay handsomely for future development. If the provider doesn’t charge accordingly for the product, it simply won’t be around to help you.

Instead of focusing on the dollar amount, consider the value that comes from using a solid management program. The product will assist in collecting every penny owed to your business and save hours of manpower. Your new program will undoubtedly pay for itself over time.

Obviously, a program light on features will cost less than one with more features. Some providers have a base price for their product then charge for add-ons and specific features. If you choose not to purchase add-ons, you can save money and still get a quality management software program.

Each management software program will be different in appearance, operation and cost. They may operate differently while doing the exact same thing. One product might require more steps to perform a move-in, accept a payment or transfer a tenant compared to another product. A good management program is powerful enough to benefit your operation but accessible for your managers’ use.

Remember, the choice of management software should not be based on a single feature. Look for the best overall product for your business, the vendor’s tenure, integrity and customer service, and how you will be treated after the purchase.
 
David Essman is the director of marketing for Sentinel Systems Corp. of Lakewood, Colo., which has manufactured self-storage management software and security systems since 1975. For more information, call 800.456.9955; e-mail [email protected]; visit www.sentinelsystems.com.

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In September, The Lock Up Self Storage will open a two-story, 100,000-square-foot storage facility on the west side of Tropicana Field in St. Petersburg, Fla. Converted from an old phone-book plant that has been empty for years, it will be bigger than the five-story U-Haul facility already on the stadium’s eastern flank.
 
The facility’s developer, BRB Development LLC, owns a total of 29 Lock Up facilities throughout Connecticut, Florida, Hawaii, Illinois, Massachusetts, Minnesota, New Jersey and New York. The company offers amenities such as free half-day use of a moving truck, indoor loading bays, carpeted hallways and commercial space for rent. Some of its facilities offer wine storage.
 
Self-storage is becoming an option for Chicago developers interested in mixed-use projects. Designed with a faux-stucco facade and a barrel-tile overhang, the Lock Up is designed to blend in with townhouse and condo projects.
 
Source: Tampabay.com, Lock Up self-storage facility being built near Tropicana Field

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Beacon Realty Capital, a commercial real estate financial services firm, recently closed a $2.3 million refinancing transaction for a 53,000-square-foot self-storage facility in San Antonio, Texas. The five-year, fixed-rate loan was arranged using credit union financing.
 
Based in Chicago, Beacon arranges debt and equity financing for new and existing projects, advises on the acquisition and disposition of real estate assets, and provides commercial loan servicing for correspondents. Since its founding, the firm has closed debt and equity financings totaling more than $5 billion.

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The Illinois and Indiana Self Storage Associations will host the Great Lakes Self Storage Expo, June 4-5, 2009, in Lisle, Ill. Created for self-storage professionals in the Midwest, the conference includes two days of seminars and networking events as well as product and service exhibits. Educational opportunities include: 

• An “Improving Your Sales Skills” seminar presented by Kyle Zimmerman, general manager and part owner of Fort Wayne Self Storage
• A luncheon with industry consultant Jim Chiswell, presenting a session on “Internet Marketing”
• A seminar titled “Understanding Your Self-Storage Market,” taught by facility-valuation expert Charles Ray Wilson
• A seminar by industry legal expert Jeffrey Greenberger on “Self-Storage Law: Record Retention”
• An open-forum Q&A session with all four speakers
  Roundtable discussions

The event also includes a cocktail reception on June 4 and cash-prize drawings in the exhibit hall.

The expo is sponsored by Inside Self-Storage, which provides a monthly magazine, bi-annual tradeshows, an online community and learning resources for the self-storage industry. 

For more information, visit www.glss-expo.com.

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A group of financial experts predict the U.S. recession could be over by the end of 2009.

Chicago-based Dow Jones Indexes assembled a group of financial experts to assess the impact of the Obama Administration's actions and how it could affect the American economy.

The group predicts the economy will emerge from the current recession by the end of the year, but not without some significant problems. The unemployment rate could peak at nearly 10 percent in the first half of 2010, and home sales will take time to recover.

Source:  MSNBC.com,  Financial Experts See Recession Ending This Year

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The year 2008 will be remembered as a paradigm shift for valuing real estate. As the recession takes hold of the economy, we have seen lenders tightening their loan parameters, the pool of buyers reduced, and investors demanding a higher return on their equity.

Lenders

Today, typical loan-to-value ratios are 60 to 65 percent, as opposed to 80 to 90 percent achieved in the last two years. Debt-coverage ratios have increased from 1.1 to as much as 1.65. Whereas many loans were being signed between 5 percent and 6 percent, interest rates have increased to 7 percent or even higher.

In addition, many lenders have decreased the amount of their amortization periods. During the height of the credit boom, it was likely for borrowers to secure interest-only periods as well as 30-year amortization schedules. Now, it’s difficult to achieve interest-only periods and amortization schedules are trending toward 25 years.

One of the major shifts has been the validity and the liquidity of the sponsor, the person who is receiving the loan dollars. Two years ago, most loans were non-recourse, accomplished without personal liability of the sponsor. Today, the reverse is true: The sponsor is usually personally responsible for the loan, the recourse. In addition to recourse, a lender might require a substantial down payment from the sponsor and also require a deposit be made with the lender to meet reserve requirements.

Buyers

Many investors were able to enter the real estate market due to the low down-payment requirement and non-recourse loans. Factor in aggressive amortization and interest rates, and it’s easy to see the barriers to enter the real estate market were low; therefore, the demand for real estate skyrocketed. Since equity was plentiful, competition between buyers ensued. Many offerings had multiple letters of intent, leading buyers to curtail their return requirements to be the winning bidder.

As the lending environment changed in late 2007 and in 2008, many buyers had to sit on the sidelines because of the new levels of equity required to acquire real estate. As down payments of loans increased, buyers increased their equity position threefold.

Return Requirements

Over the last year, we have seen cap rates increase modestly for all real estate investments. Investors are focusing on in-place returns and capping net operating income (NOI) approximately 100 to 200 basis points higher than the preceding year.

One method investors used for the last 20 years is discounted cash flows (DCF), which is a projection of how a real estate property will perform over time and the return thereon. DCF includes not only today’s rents and expenses but also the growth of future rents, tax assessments, lease-up, and the value of the facility at the end of the hold period.

For office, retail and industrial, many investors create a 10-year DCF with a residual amount at the end of the term. A typical lease term for tenants is five to seven years. By having a 10-year DCF, an investor can incorporate tenant improvements and leasing commissions in their projections with the majority of the tenants expiring/renewing at least once.

With long-term leases, the typical real estate investment will be slow to capture the upside in value as the market recovers. Over the next couple of years, many leases will be signed at lower rental rates, locked for the next five to seven years.

Investors have usually put emphasis on the DCF with 50 percent of value derived from existing cash flow and the other half from the residual value. When the markets peaked in 2006-07, many investors lowered their cap rates and put more emphasis on the residual value. This was accomplished by initially low cap rates when purchasing the property, along with increasing rental rates and occupancy over the next 10 years for an aggressive residual value. The split dropped as low as 20 percent on cash flow to 80 percent residual—on a 10-year DCF. We are now seeing a shift back to a 50-50 split.

Self-Storage’s Uniqueness

While the self-storage industry shares many characteristics of typical real estate investments, a few things make it unique to investors. The main difference is the lease term. A typical self-storage lease is month to month. As the economy recovers, a self-storage investor will be able to capture the improving rental rates quicker by renewing month-to-month tenants at a higher rate.

In addition, a cap rate for office, industrial and retail is handled differently than self-storage. Annual tenant improvement, maintenance reserves and leasing commissions are excluded from NOI. Even if an investor is purchasing these types of assets at an 8 percent cap rate, it does not take into account the tenant improvement and commissions at lease expirations.

Self-storage does not have tenant improvements or leasing commissions, and maintenance reserves are included in NOI. Therefore, an investor purchasing a self-storage property at an 8 percent cap rate is a true return compared to office, industrial and retail cap rates.

Due to short leases in self-storage, most investors typically run a five-year DCF. The shorter hold period for self-storage will have an effect on the cash flow and residual split. Self-storage typically utilizes 35-65 percent on a stabilized property versus 50-50 for a 10-year DCF, which is attributed to the shorter hold time.

In 2008, self-storage operations were resilient against the recession. Many operators’ NOI increased or held steady for most of the year. Today there are higher barriers to entry and fewer lending dollars, which could mean less competition for those already in existence. Put it altogether and self-storage is poised to reap the benefits of a recovering economy.

Steve Mellon is a managing director at Holliday Fenoglio Fowler LP. He has been involved in excess of $1.3 billion worth of self-storage transactions. HFF’s self-storage professionals offer comprehensive services, specialized experience, knowledgeable investment sales and capital markets expertise to storage owners and investors nationwide. For more information, visit www.hffselfstorage.com.

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