Developing a self-storage facility is a lot like putting a 500-piece jigsaw puzzle together. First there's the feasibility study, which determines if and where the project should be built. The steps involved in the feasibility alone are probably equivalent to dozens of jigsaw pieces. This is the time, too, when the unit-mix pieces should factor into the picture because, as many first-time developers find out too late, demographics play the biggest role in resolving the unit-mix dilemma. According to Dan Curtis, vice president of DBCI and author of this month's cover story ("Unit Mix for the Next Millennium,"), the population needs to be broken down into the numbers of single-family and multi-family homeowners, as well as dwellers of military bases, apartment complexes and college dorms. Each of these groups requires different storage needs, and unit sizes and occupancy patterns vary accordingly.

Another several dozen puzzle pieces should be devoted to an intensive marketing plan. It's not enough to open a facility and print an ad in the local Yellow Pages directory. Owners and managers need to work diligently to develop a multi-faceted marketing campaign, says Mini-Management's Pam Alton, who penned this month's feature, "Marketing--It's More Than Just Advertising."

Finally, pricing must claim a sizable chunk of the puzzle, too. Once again, demographics will play an important role in settling on the best prices for your units. But what kind of role should the competition play in determining your pricing strategies? With a fresh approach, Jim Killoran, author of Self-Storage Success, tackles this and numerous other pricing questions in "Pricing Strategies," an excerpt from his book.

In other areas this month, industry tax specialist Michael Donohue doles out words of wisdom on forecasting real-estate taxes; Scott Zucker sets the record straight on "The Legal Limits of Marketing Your Facility",  and the honorable Joe Niemczyk and Mel Holsinger share their views on management, operations and the future of the industry.

Finally, we hope you and your family enjoy a happy, healthy, eventful (but safe) Fourth of July weekend.

Cheers,
Drew G. Whitney
Editorial Director
[email protected]

Scott Zucker

The following article was reprinted with permission from the Mini-Storage Law Commentary, published by the law firm of Shapiro, Fussell, Wedge, Smotherman & Martin. Marketing your facility is an essential part of operating your self-storage business. Without customers, all you have is a lot of space for rent and, worst of all, no revenue. Every self-storage owner or manager knows the importance of "selling" his services to the public. What many operators do not know are the risks of "overselling" their services and the potential liability that may await them for making promises they can't keep.

If nothing else, the catch phrase "truth in advertising" should govern a facility operator's actions while marketing his facility. Whether it is through Yellow Pages advertising, brochures, signs or just word-of-mouth, telling the truth about your facility will guard you from later claims by your tenants that you misrepresented to them the services to be provided for the rent that was paid. For example, if your facility has video cameras that are on 24 hours but are not monitored, you cannot say you offer "24-hour security." Instead, you can say that you offer "24-hour surveillance." Similarly, if you have managers living on site, you cannot say that you have "24-hour on-site managers." Instead, you can say you have "resident managers." Whatever the example, it is always best that the statement be factual. It is also always better to be more specific in your advertising about what services your facility provides so your customers will not expect more than is provided and be disappointed.

It is equally important in your advertising that you choose descriptive words carefully. Facility operators should never use words such as "guarantee" or "promise" unless it relates to "friendly service." Certainly, a facility owner or manager should never promise or guarantee the safety or security of its tenants' property, and should always avoid using words such as "security" in its advertising.

By simply glancing through the Yellow Pages under "storage," it is common to find statements like "security fences and gates," "security-code access gates," "full security fencing and lighting" or "safe and secure storage." These phrases could connote that the self-storage facility is promising to safeguard its tenants' goods, which is exactly opposite of what a self-storage facility provides. It is much more appropriate to use phrases such as "perimeter fencing," "personalized-code access gates" or "fenced and lighted."

Once again, self-storage is the business of renting space suitable for storage. It is not a warehouse-type business and does not provide for the care, custody or control of its tenants' goods. Yet, if a storage facility represents through its advertising that its tenants' goods will be safe and secure, it risks altering its legal obligations to its tenants to make it responsible for the protection of those goods.

For example, in a case decided in Washington state, a tenant whose property was stolen from a Shurgard facility sued the company for the loss. As part of its case, the tenant argued that Shurgard had falsely advertised the security of the facility. Specifically, the tenant claimed that Shurgard had advertised in its Yellow Pages ad: "We have safe storage all locked up," and in a separate flier, "Shurgard managers live right on site... making sure everything is safe and secure." Last but not least, the tenant argued that the name "Shurgard" was meant to imply a "degree of diligence and security."

Although the court in the Washington case did not find in favor of the tenant on its loss claim, it did not disallow the tenant's claim for false advertising under the state's Consumer Protection Act. Since the case was ultimately settled, the issue of whether there had been false advertising by Shurgard was never resolved. Unfortunately, that leaves the question of what is appropriate storage advertising to later cases. However, the Shurgard case provides a strong warning to other storage operations to avoid overselling in its advertising.

A recent case decided in Michigan provides another example of how advertising can get a self-storage facility into trouble. In this case, a tenant's property was destroyed by a fire at the storage facility. The tenant sued the storage facility for the property loss and argued that the facility's advertising was fraudulent. To support its case, the tenant showed that the facility represented in its Yellow Pages advertising that the storage units were "fire resistant." The tenant claimed that since their property was destroyed by fire, such a representation was fraudulent. In its defense, the storage facility presented testimony of an expert who attested that "fire resistant" did not mean "fire proof." Ultimately, the storage facility was able to prove that the materials used in the construction of the storage facility were actually fire resistant, and that fire resistant was not synonymous with fire proof. Although the storage facility won the case, the fact that the lawsuit arose over the words "fire resistant" and "fireproof" provides another lesson to storage owners to be careful in the words they select for their advertising.

In addition to truthful advertising, it is crucial that facility owners and managers never make false representations to their customers about security issues or whether or not prior incidents have occurred at the facility. A facility manager must be honest in answering these sorts of questions, both with prospective and current tenants. For example, if a potential tenant asks if there has ever been a fire, theft or flood at your facility, the manager must answer honestly. The owner or manager is allowed to say, however, that since the incident occurred, efforts have been made to prevent future occurrences (if, in fact, such efforts have been made).

If a facility operator acts with deceit, the court can choose to invalidate a tenant's lease based upon the fraudulent actions. In a recent case decided in Georgia, a tenant whose property had been stolen sued the facility for the loss. The tenant claimed that the storage facility had committed fraud based upon misrepresentations as to the occurrence of prior break-ins. The tenant argued that had he known prior break-ins had occurred, he would never have rented the space. Although the facility had a very strong lease protecting them from liability for such a loss, the court held that the tenant's lease was void due to the manager's false statement to the tenant that there had never been a theft at the facility, when in fact such thefts had occurred. The court ruled in favor of the tenant for the value of the stolen goods. The most important aspect of this case is that, due to the misrepresentations made to the tenant, the court ignored the otherwise strong provisions of the lease that would have protected that storage facility from the tenant's loss claim.

Most commonly, tenant complaints arise where their property is stolen or damaged. If you have told the truth about the risk of self-storage, have not promised the security of your tenant's goods and have been honest in answering questions posed by your tenants, your defense to claims by tenants that you are responsible for the loss will be strengthened. Certainly, nothing can prevent a tenant from suing a facility for the loss or damage of its goods. However, in order to enhance a facility's defense to such claims, it is becoming increasingly important for a storage facility to be clearer about the services it provides. As shown by recent court decisions, any misrepresentations to tenants can affect a storage facility's rights to defend itself on claims brought by tenants. Marketing is essential to a self-storage facility's success, but if not handled carefully and honestly, it can also be the reason for its failure.

Scott I. Zucker is a partner in the Atlanta law firm of Shapiro, Fussell, Wedge, Smotherman & Martin, LLP. The above article was reprinted from Mini-Storage Law Commentary, a newsletter published by the firm for owners and managers of self-storage facilities. A frequent contributor and Inside Self-Storage Expo speaker, Mr. Zucker specializes in self-storage law and construction litigation. He may be reached at 1360 Peachtree St., Suite 1200, Atlanta, GA 30309; phone (404) 870-2200; e-mail [email protected].

By Dan Curtis

Now that the self-storage industry is more than 30 years old, it can be considered a "grown-up" member of the business world as well as one that continues to improve. An important consideration in this continuing improvement is the proper use of unit mix.

As an example of how something good can become something even better, consider a Texas property of 500 units built in the early 1970s. Totaling 100,000 square feet, the units are all 10-by-20s, and each unit rents for $50 per month. The facility has always been nearly full. Helped by low expenses and taxes, the project has been paid off for years and provides about $240,000 in annual net income. At today's cap rate, it is worth about $2.4 million, or about $24 per square foot, a handsome return on a project that cost about $1 million to build.

That's not bad, but if the project's unit mix was more like the current standard, including climate control and current pricing levels, the same facility could easily bring a net income, before expenses, of $600,000 annually. At about the same cap rate and expenses, the project might easily be worth $5.4 million. It would also be much less vulnerable to competition, and easier to sell and keep rented.

This facility provides the perfect example of the importance of a good unit mix. As development continues,and competition stiffens, and as better storage products are offered, it will become even more important.

Much was learned about the profitability of self-storage in the '70s and '80s, but in the '90s we hear fewer stories of a facility's unit mix being totally dedicated to the one-size-fits-all formula. The influence of Public Storage, Shurgard and other REITs has been strong, as they are now more competitive. Major owners have also contributed to a much better self-storage product. Early in the industry, the theory had a Field of Dreams approach: "If you build it, they will come." But, as we approach the millennium, we should probably focus on a more suitable maxim such as, "Build it smarter and increase income."

Today, builders must contemplate careful land planning in order to effectively profit from available land space. Unlike in the past, environmental issues must also be satisfied in the early stages of planning. Increasingly tougher building codes and higher land costs are also factors in predicting project success. These issues all effect the final unit mix and the eventual bottom line on income.

Factors Affecting Project Feasibility and Unit Mix

Long before determining the correct unit mix for a facility, a developer must consider the practicalities of building in certain locales. Although not a guaranteed formula for success, the following list includes factors that weigh heavily on a self-storage facility's outcome:

• Population. Determine the population within a three- to five-mile radius, using small ratios for dense, urban areas and a larger radius for rural areas.
• Average age of population. Seek out a marketplace where the average age is slightly above 33.5 years old, which is the national average.
• Income. This should be slightly above the national average of $34,000 per year per household.
• Education. This should be above the national average of 11.4 years.
• Nationality. Mixed areas are best.
• Family size. Smaller families generally have more disposable income.
• Climate. Moderate and warm areas have larger concentrations of self-storage.

Influence of Types of Living Units

When determining the feasibility of a self-storage project, developers should also consider the types of housing in the area:

• Single Family. These have good potential, especially if houses have single-car garages and no basements.
• Multi-Family. These have the best potential if income level is high and garages are not provided.
• Town Homes. Usually, storage is limited and owners are mobile, making this climate attractive to self-storage development.
• Mobile Homes. Space is drastically limited and, usually, both homeowners are employed.
• University Housing. Although this is a seasonal renting area, storage is well used by this group.
• Military. Always a good prospect for storage, but unpredictable military-base closings can drastically damage a self-storage business.

Collecting the Facts

All this demographic information can be obtained in various ways. For example, utility companies have huge bands of collected data, real-estate companies have information on who is moving in or out, and companies such as National Decision Systems in Washington, D.C., have complete data that can be purchased for a minimal cost. Check the Yellow Pages directory for the "Market Research" listings. Builders who own storage facilities may also have collected a large amount of information, as do local chambers of commerce. Keep in mind, though, that some prospective builders may want to keep intentions confidential.

Once all the above data is gathered and plans are being consolidated, competitors in the targeted area must also be surveyed. Honesty is always the best policy when interviewing a competitor's manager. Interviews should always be friendly and never combative. Share information and, if managers are friendly, ask if they know other managers in the area. They may know one that could be considered as a manager for the new facility being planned.

When doing a competitive survey, make certain no project is overlooked. A new one may not yet be in the Yellow Pages, or may be on a street normally not traveled or in a low-visibility location.

With all of this demographic information collected, a prospective builder may still not have all the answers, but a few basic guidelines can be helpful. Keep in mind that every area is unique and different problems can also create possibilities. For example:

• Multi-family, condos and apartment housing offer the largest rental potential.
• Military and commercial renters remain tenants longer than others.
• University and single-family renters use smaller unit sizes.
• The average unit mix varies 85 to 120 square feet in size.
• High-income tenants in transition tend to rent larger-than-average units.
• As projects fill up, phone calls for larger units typically increase.

Stay Flexible

No guidelines for unit mix will work verbatim, which is why it's so important to remain flexible throughout the whole procedure. Remembering this, a builder may elect to phase a project, leaving as much as 25 percent or more to be completed at a later date. In large projects (100,000 square feet or more), it is not unusual to set aside as much as 50 percent of space for future buildout. This "set aside" space can be used for bulk storage. If outside, it can be converted to RV storage, which also creates a profitable ancillary income. Also, when phasing it is practical to purchase partitions and doors for installation at a later date. Obviously, this helps to reduce immediate construction costs.

Most tenants prefer outside units for ease of accessibility for loading/unloading, which entitles the operator to charge a premium for these spaces. Nevertheless, interior units may have a marketing advantage for security reasons, and they might be better protected from moisture, bugs or rodents, offsetting the convenience of drive-up units. If land use dictates the use of inside units, the average size will still be about the same as outside units.

Climate Control

All facilities, whether new or conversions, should feature at least some climate control. On the average, approximately 40 percent of U.S. storage units are climate controlled. Rent premiums for climate control are usually 25 percent to 60 percent higher than conventional storage. Operating costs for climate-controlled units are approximately 10 cents per square foot per month, but this varies depending on the climate conditions in different parts of the country. Climate inside may vary from a low of 40 degrees in winter to 90 degrees in summer. Much of the time, it can be controlled by using dehumidifiers.

Multi-Story

As land costs rise and land availability declines, multi-story storage becomes a viable alternative. Under-utilized land had always been a problem. With multi-stories, land utilization can far exceed 100 percent. Building codes require a design load of 125 pounds per square foot. Construction cost per unit is somewhat higher as space is lost to hallways, and the extra expense of elevators must also be included. Fire sprinklers are usually required, and unit mix will be nearly the same as in single-story construction.

Conversions

This method of self-storage development has recently been gaining in popularity. Utilizing a big box in good condition but with an obsolete use is now being done in all parts of the country. Column spacing developed by building size may dictate odd unit sizes, but that is no real problem. Renters may prefer a 5-by-10, 10-by-10 or 10-by-15, but will nevertheless accept a 7-by-7, 8-by-12 or 12-by-12 at the same price level, once they have pictured how their possessions will fit into that space.

Conversions are easy to develop in phases by simply holding an area in the building for later build-out. Often, in second or third phases, the large unit mixes that were in the first phase are used again, probably because of acceptance by the public.

Conclusion

To achieve the right unit mix, builders must first study the demographic of the targeted area, noting the traffic patterns and location of competition. Higher land costs may require multi-story development and a climate-controlled building with higher rent. Unit mix will remain about the same as in conventional storage. It is preferable to build an upscale property with a variety of unit sizes. A mix with limited unit sizes may be hard to rent, and the value of a property is greatly enhanced by keeping units rented at the highest possible rental rates.

Dan Curtis is vice president of Douglasville, Ga.-based Doors and Building Components Inc. The company provides the self-storage industry with roll-up steel doors, filler panels and partitions and complete hallways systems, among other services. Mr. Curtis is a frequent contributor to Inside Self-Storage as well as a speaker at numerous Inside Self-Storage Expos. For more information, contact DBCI at (800) 542-0501.