If you’re a self-storage owner considering a third-party management company, you should do your homework before handing over the keys to your valuable investment. When researching potential candidates:

• Compare multiple companies
• Understand how each management company works and makes its money
• Talk to current and past owners
• Get detailed information about what services are provided and all fees
• Weigh the pros and cons

There are many advantages to hiring a third-party management company. If you’re considering the switch, review the benefits these companies can offer.

Volume savings. One of the main advantages of using an experienced management company is your ability to leverage the company’s size. Because management companies allocate costs over multiple facilities, they help you reduce expenses. The cost-savings will vary depending on the size of the company and the number of facilities it manages. The more sites it has, the more savings that can be realized on items such as Yellow Pages ads, facility maintenance, advertising campaigns, Internet marketing and property insurance.

Branding. Most management companies will allow you to maintain your existing brand, so you don’t have to change signage and other branded items. However, you may also lose out on Internet opportunities, such as free listings on major search engines.

Shared amenities. Many larger management companies offer amenities that you, as an independent operator, could not provide, such as a call center.

Revenue management. Revenue management is much more complex than looking at your competitors’ prices and matching their rates and discounts. It’s imperative that you have a strategy to push rates higher while minimizing move-outs. While this can be a daunting task for an independent owner, a management company can help you manage and maximize revenue. Just be sure to understand the revenue-management philosophy of the companies you’re comparing, and review their quantitative results.

Human resources. The challenge of finding and keeping staff can be onerous and expensive. A management company will often take care of all hiring and firing, background checks and references, and training.

In-house legal counsel. Large management companies will also have experienced in-house legal counsel to review leases, keep up on industry law, and be available if a lawsuit occurs.

IT support. Small technical problems with computers, software, telephones or Internet service can cause huge headaches for most owners, wasting valuable time and opportunities. Third-party management companies frequently provide IT support services to all their properties at a significant cost-savings.

The Cons

Although there are many advantages to hiring a third-party management company, there are also disadvantages all owners should take into consideration before signing a contract.

Limited experience. The owners of most management companies have worked in the storage industry for a notable amount of time, but their experience is may be limited to a particular market. Management companies with broad experience are more likely to generate success in any market.

Limited accessibility. Most management companies operate within a set geographical area. If your facility is outside this area or far from the company’s other managed facilities, it may get overlooked. Also, the additional costs related to travel may not be included in the management fee. Cost-savings (and competitive advantage) from shared local marketing may also be less if a property is in a remote location compared to other sites managed by the same company. Regardless of the size and location of the management company, visit the office and meet the staff before making a decision.

Required vendors. Some management companies get discounts from their vendors and will require owners use these vendors. This can present a conflict if the owner has established vendor relationships. Carefully evaluate all vendors and contract terms presented by the management company.

Communication. Lack of communication between the facility owner and management company can result in misunderstandings relating to costs, expectations and performance. These problems can be prevented through open communication and due diligence by the facility owner.

As the self-storage industry evolves, we will continue to see the formation of many third-party management companies. Although there are many pros and cons to consider in the decision-making process, an owner can often exceed his own expectations by hiring the right partner.

Noah Springer handles the management of all strategic partnerships for Extra Space Storage. In 2007, he helped create the Extra Space Storage Joint Venture Program, in which Extra Space joined forces with local developers to develop self-storage facilities across the United States. To reach him, call 801.365.4628; e-mail [email protected]; visit www.extraspace.com.

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On Oct. 3, Hawaii Self Storage will hold Kapolei’s first swap meet and craft fair from 9 a.m. to 4 p.m. at its facility on Kamokila Boulevard. The free event will feature nearly 30 craft vendors and more than 20 of the facility’s storage tenants selling items such as designer handbags, gift baskets, handmade jewelry, custom banners and stickers, tees, hats, and more. While there, attendees can have their car detailed or sample food from local vendors.
 
HSS is Hawaii's largest self-storage operator, with facilities in Kaimuki, Kapolei, Mililani, Pearl City and Salt Lake. The company has numerous programs designed to give back to the Oahu community, including 12 annual high school scholarships, the Lockers for Literacy program and support of athletic teams. This year, HSS was named a winner of the Inside Self-Storage Humanitarian Service Award, and has been named “Best of the Best” by the Honolulu Advertiser for four years running.

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SMD Software Inc, a provider of self-storage and portable-storage management software, announced that its SiteLink software product is compatible with all 32- and 64-bit versions of the new Microsoft operating system Windows 7, scheduled to be released on Oct. 22.
 
“Windows 7 will be well-received, not only because of its speed, but also the reliability over Windows Vista,” said Luke Lenzen, SMD’s chief technology officer.

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Sovran Self Storage Inc., a self-storage real estate investment trust (REIT) based in Buffalo, N.Y., has commenced a public offering of 3 million shares of common stock. The underwriters will be granted a 30-day option to purchase up to 450,000 additional shares of common stock to cover overallotments, if any.
 
Sovran intends to use the net proceeds from the offering to repay a portion of the company’s unsecured indebtedness and terminate one or more interest-rate swaps relating to the debt. The remaining proceeds, if any, will be used for general business purposes.
 
BofA Merrill Lynch is acting as sole book-running manager for the offering.
 
Sovran acquires, develops and manages self-storage facilities. The company owns or operates 383 stores under the "Uncle Bob's Self Storage" trade name in 24 states.

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Oklahoma City 10, a website by CitySpur that publishes top-10 lists of businesses in various categories, has posted a list of the top 10 self-storage facilities in the city. According to the website, the facilities are:

1. Apublix Self Storage
2. U-Store All
3. U-Stor Self Storage
4. Public Storage
5. Eagle Crest Mini Storage
6. Lake Forest Mini Storage
7. B & B Mini Storage
8. A Plus Mini Storage
9. A-1 Mini Storage
10. Harvey Self Storage

To research and assemble a list, CitySpur staff research businesses in an area by interviewing the businesses themselves as well area-specific journalists, tallying online reviews, and gathering feedback from consumers.

CitySpur is an online business directory that creates listings for the best local establishments in a city with a goal of assisting consumers. The company creates websites with top-10 lists for cities nationwide.

Source: Journal Record, The top 10 self-storage facilities in Oklahoma City

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An unidentified white male robbed the 4 Storage self-storage facility in Bristol Township, Pa., yesterday morning. The robber entered the business just before 9 a.m., implying that he had a firearm, though he did not explicitly say so or show a weapon. He made off with some cash, but no one was hurt.
 
The man was described as being heavy-set, in his 30s, with a light-brown or dark blonde goatee. Police are investigating.

Source: The Trentonian, Self-storage jacked

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Storing.com, a Bedford, London-based storage company, is celebrating  10 years in the self-storage industry. The company offers long- and short-term storage solutions for commercial and residential customers. Storing.com also offers a collection and delivery service, including an experienced crew of movers, in several areas, including Herts, London and Essex. The collection service is free to customers who sign a six-month lease.

Storage.com also offers shipping services, a wide range of packing materials, and records-management storage including bar-code cataloging and document tracking. Other benefits from Storing.com include discounted rates and fixed-price guarantees for up to five years.

“I have been extremely pleased with how Storing.com has developed, especially in the current economic climate,” says Director Guy Burridge. “It shows that customers are still out there, but they simply want good value and hassle-free service, as well as the security of knowing that their possessions are in safe keeping.”

Source:  Official Spin,  Storing.com,  Self Storage London Still Offer Best Value

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The implosion of the subprime residential-lending market and tightening of the overall credit markets has had a significant impact on self-storage lending. As losses on residential loans have mounted, banks’ willingness to lend on commercial properties has dropped significantly. In an effort to firm up balance sheets for bank stability and regulatory purposes, lenders have largely scaled back lending in all commercial sectors, including self-storage.

Another significant effect of the credit crisis is the temporary elimination of commercial mortgage-backed securities (CMBS), or conduit lending. Given the tremendous volume of conduit loans placed on self-storage properties over the last five to seven years, this is a noteworthy change for this sector’s investors and borrowers.
 
Today’s Lending Climate

The CMBS blowup was due in part to overly aggressive lending in a few specific sectors, such as large metropolitan office and apartment loans. For instance, 10-year interest-only loans to office developers based on underwriting that assumed tremendous rent increases post-acquisition were some of the worst-performing loans placed by conduit lenders in the last three to four years.

Many large transactions with little cash equity were financed aggressively based on unrealistically optimistic financial projections. Lenders were making loans on pro forma income that never materialized.

Today, the landscape for self-storage asset debt has changed quite a bit, depending on the amount of leverage the developer is seeking. For low-leverage loans—60 percent loan-to-value (LTV) or less—on good quality assets, non-recourse financing is available. Recourse-only loans are available as a borrower approaches 70 percent to 75 percent LTV.

Interest rates range from 6 percent to 8.5 percent depending on the leverage, asset quality, and borrower net worth and experience in the industry. For those deals, the borrower’s personal net worth and credit history will come in to play and have a significant impact on lending parameters. The industry is typically seeing a maximum of 75 percent LTV, 25-year amortizations, three- to 10-year fixed rates, and closings taking roughly 60 days from start to finish.
 
The Return of the Lending Market

Conduit lending will resume in the future, likely in late 2010 or early 2011. However, the conduit-lending platform will be modified considerably. It is possible that future conduit lenders will need to hold a piece of the loan on their books as opposed to selling the entire loan in the secondary markets.

It’s also likely that lenders placing conduit loans will take a larger role in the servicing of these loans, which will allow them to build a stronger relationship with borrowers than in the past. There will be a market for good loans in the self-storage sector in cases where the borrower has a solid track record and the asset has consistent cash flow.

As the government’s Term Asset-Backed Securities Loan Facility (TALF) program takes hold and investors begin to pour more money into top-tier commercial bonds, it will have an affect on spreads and competition for regional banks and a few other lenders that seem to be the only groups right now with the desire to lend aggressively. Borrowers, however, should be concerned about loans coming due on average-quality storage facilities—ones for which occupancy hovers in the 80 percent range or lower.

Based on current market conditions, there are options for positioning assets to weather this economic storm. For owners that currently have loans coming due, there are choices. Consider transitioning to a two- to three-year bank loan that will help you get through the most turbulent part of this lending environment, after which you can expect credit requirements and lending parameters to loosen significantly.

Specifically, the conduit market should come back in the next 12 to 24 months. Loans coming due now will be able to be refinanced with moderate to aggressive terms.  Bank loans with non-punitive prepayment penalties will enable borrowers to transition to a long-term, non-recourse loan with minimal cost.

There are additional steps you can take to prepare your business for a better loan in the future. Spend the extra capital to keep your asset in good shape, drive or maintain occupancy at high levels, and keep your tenants satisfied. In this way, you’ll be a market leader that will survive to see not only more aggressive lending, but also the return of higher property valuations and a more vibrant market for self-storage property owners and investors.
 
Anthony DiMarco has placed more than $1.2 billion in commercial financing since 2000. He’s the managing director for Security Mortgage Group of Rochester, N.Y., a provider of commercial mortgage financing for income properties including self-storage, apartments, manufactured home communities, and commercial/industrial facilities. To reach him, call 585.423.0230; visit www.securitymortgagegroup.net.

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Whether you’re a seasoned self-storage owner with decades of development experience or someone looking to build and operate your first facility, this article applies to you. It’s about setting up a new facility up for success by planning for marketing from the very beginning, before the doors are even open.
 
The self-storage industry is comprised of many knowledgeable, sometimes brilliant developers and investors who can recite entire books of financial terms and strategies with their eyes closed. They have an eye for excellent properties and can find the best financing, negotiate a sweet deal, and carefully manage the construction process. But once they receive their certificate of occupancy, their momentum comes to a screeching halt.

Because self-storage is such a fantastic real estate investment, many operators treat the business as if all the work happens up front, assuming the rest will fall into place. But we’re in a completely new market today, facing stiff competition, consumers with savvy, and an economy that has everybody holding onto their wallets. After you spend all that energy financing and building a facility, customers are not going to just beat down your door, no matter how nice it is.

To improve your occupancy, customer value and efficiency, you need a smart, strategic marketing plan from the very start. That means adding marketing into the initial financing and budget. 

Two Case Studies

As an investment, marketing is every bit as important as the land on which you build. When you sell your facility, potential buyers are going to look at net operating income (NOI) to determine what they’re willing to pay. A second-rate facility on a sub-par piece of land but with good NOI will fetch a higher price than a state-of-the-art facility on the best corner in town with low NOI.

My friend, your income isn’t coming from fancy roll-up doors or meticulous landscaping. Customers are your sole source of revenue. They pay for rent, supplies, insurance and whatever else you decide to sell. So, acquiring customers is something that deserves a good chunk of your focus and cash.

The biggest mistake I see people make when they finance their self-storage investment is failing to allot enough money for marketing. This one function will generate your income and determine the value of your asset. To illustrate my point, I’ll share two real case studies. To protect their identity, we’ll refer to them as Operator A (OA) and Operator B (OB).

OA is a fantastic person and somebody I’d trust to develop my own facility. He builds great properties on excellent sites―maybe not “Facility of the Year” properties, but nice for their respective markets. He started in the storage business 15 years ago when marketing meant a nice marquee sign and a decent Yellow Pages ad, so he has little to nothing to spend on marketing after a facility is complete.

On each of his two most recent projects, he’s bleeding $25,000 to $30,000 per month. Both have loans coming due, and he lies awake at night in a cold sweat wondering how the bank is going to react to his extremely low occupancy and income.

OA could have easily solved his problem with by allotting $10,000 per month for marketing in the first 12 months to 18 months of operation, and then $3,500 per month thereafter to maintain income and occupancy. That may sound like a lot, but compared to what he’s losing and what his NOI could be with a cap rate applied, it would have been the best $10,000 per month he could spend. But he didn’t budget it, and that’s the way he operates. Sad story.

OB is new to the industry and came from a retail background where acquiring and keeping customers was the most important function of his business. When he financed his facility, he made certain to over budget for marketing just in case things were tougher than anticipated. He allotted $2 per rentable square foot, per year for the first two years, which allowed him to crush his competitors and stabilize in just 14 months in a competitive market.

OB has money to spare and is far ahead of his projections. He now spends a small amount to maintain his occupancy and enjoys a great income from his investment. Getting new financing when the time arrives will not be an issue, and he sleeps like a baby at night.
Marketing is no longer something eccentric or crazy operators do.

It’s every bit as important as your land and building materials. Make sure you budget for it when planning your financing and execute an aggressive plan after you open. Learn from the stories of OA and OB, and your life will be much more easy, fun and lucrative. 

Derek M. Naylor is the 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.

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