Good News for Self-Storage: Maine Sales Tax May Be Delayed

Sep 21, 2009

A vast show of resident signatures in Maine may postpone a tax-reform bill that will add a 5 percent sales tax to self-storage and several other services in the state. On Friday, a group called Still Fed Up With Taxes turned in more than 60,000 signatures to the Secretary of State. That’s more than 5,000 in excess of what was needed to get the tax question added to the June 2010 ballot.

In June, the governor signed the bill that would reduce state income tax but levy a new tax on services and increase the meals and lodging tax. The law―parts of which were to take effect in October and others as of Jan. 1―will now be put on hold pending verification of the signatures by the state and possibly until a June public vote.

According to Maine Revenue Services, the delay will cost residents money, as most can expect to see their overall tax burden decrease, even with the additional sales tax. On the other hand, some say the sales tax is likely to be permanent, while the reduction in income tax is temporary.

Source: Kennebec Journal, Tax-overhaul foes turn in signatures

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Self-Storage in the South-Central States: Real Estate Snapshot

Sep 21, 2009

I recently assembled a roundtable of real estate experts to discuss the state of self-storage in the South-Central United States. I asked them to comment on their local markets and share their predictions for future performance. Joining us in the discussion are:

Bill Barnhill, Stuart LaGroue and Shannon Barnes, Omega Properties Inc., Mobile, Ala.
Jon Cerruti, Jack Stumpf & Associates Inc., Harvey, La.
Barry Comiskey and John Owens, Westar Commercial Realty, Lubbock, Texas
Paul Grisanti and Mike Helline, Grisanti Group Commercial Real Estate, Louisville, Ky.
Mark Keys, Cornerstone Realty, San Antonio
Barney Lehmbeck and Mike Procter, JR Fulton & Associates, Oklahoma City
Richard Minker and Tyler Trahant, Minker Trahant & Associates, Forth Worth, Texas

What terms are you seeing in today’s market?

Barnhill: Loans are available from some local community banks and a few insurance companies. The community banks offer loan-to-value (LTV) of 75 percent, 20-year amortization and interest rates in the high fives to 6.4 percent, with a five-year maturity. The few insurance companies making loans want a 55 percent to 65 percent LTV.

All of the above loans come with personal liability, although some banks will prorate the guaranty in the event there are multiple partners. The regional bank in our area is effectively out of the market for lending on self-storage and other commercial real estate. If lenders are willing to quote a stabilized project, the amortization, LTV and debt-coverage ratios are all quite stringent. The maturity offered is two to three years. They also require a new, updated appraisal.

Cerruti: A lot of sales are from local buyers and banks—people and companies who are familiar with the area. Familiarity gives a comfort level in these uncertain times, and banks are very cautious right now. Owner financing gives everyone an edge. The basic formula for banks right now is 70 percent to 75 percent LTV with 15- to 20-year amortizations, a balloon in three to five years, and 6.25 percent to 6.5 percent interest rate. Of course, a lot has to do with the status of the facility and the client.

Comiskey and Owens: Speaking from the last six months, our most recent self-storage loans have come from local or regional banks. As many of us know, self-storage financing has changed dramatically over the past year. In today’s market, we’re seeing amortization tables around 20 to 25 years, which is down from the former 30-year spread. LTV ratios have gone from as low as 90 percent to 70 percent to 75 percent in today’s market. Interest rates on these loans have been around 7 percent.

Grisanti and Helline: We’re finding that for income-producing self-storage properties, banks are willing to loan at 80 percent LTV. Of course, for development of self-storage, the requirements are more stringent, somewhere between 50 percent and 70 percent LTV, and this depends on the credit and other income of the applicant.

Keys: Our best sources for self-storage loans today include community banks, regional banks and insurers. Rates are presently between 6 percent and 7.5 percent for loans with five- to 10-year terms and amortization periods from 15 to 25 years. LTVs are ranging from 65 percent to 75 percent, and personal recourse is almost always required.

Lehmbeck and Procter: Loans are being provided mostly on a local level, with 20 percent to 30 percent down, and rates are ranging from 5.5 percent to 7 percent, adjusted annually with 20-year amortization and ballooned at five years.

Minker and Trahant: The local banks are most willing to look at storage deals. Typically, we are seeing 65 percent to 70 percent LTV required for purchases. Perhaps the most significant change recently is the underwriting. Lenders are not willing to finance a property based on future income, only on in-place income. This is impacting the sale of those properties in lease-up, or those with lower occupancies where the current valuation is not in line with the owner’s expectations. In our experience, the only lenders willing to loan on future income are those taking back the property.

What’s happening in your market with occupancies, rental rates and delinquencies?

Barnhill: In the past two months, we’ve seen a slow and steady increase in occupancies. Rental rates are holding, but with more concessions. The delinquencies are about the same as before, although more collection effort is required. The average occupancy for these areas is around 85 percent. With all this said, a few submarkets are depressed and offering steep concessions. Some overbuilt submarkets have an average occupancy as low as 50 percent.

Cerruti: Rental rates are being pressured. Occupancies are falling, and delinquencies are on the rise. None of these are drastic, but rather a natural occurrence related to our present financial situation.

Comiskey and Owens: For the most part, occupancy has remained fairly stable, depending on the season. I’ve heard of a lot more rental concessions now than in the past.

Grisanti and Helline: The established facilities are showing little, if any, increase in vacancy. For newly built facilities, occupancy rates are slow to increase. The bottom line is established facilities are doing fine, and new (or expanded) facilities are slow to fill.

Keys: While the capital markets are in turmoil, operating storage facilities are holding steady. Our data indicates only a modest decline (less than 5 percent) in income on a macro basis (the product of occupancy and rental rates). Despite the economic downturn, demand for storage space has not significantly declined. Delinquency rates, however, have risen from 2 percent to 3 percent to closer to 5 percent and need to be managed more diligently.

Lehmbeck and Procter: We are seeing occupancy on the rise. Vacancy is declining, with steady rental rates and low delinquencies.

Minker and Trahant: Overall, occupancies have been holding relatively steady. It’s hard to attribute any decrease to the economy because the winter months are typically slower. The majority of the facilities in our market have not raised rates in 12 months. However, there is the expectation that tenants at old rates will be increased slightly in the coming months.

What are the detriments to overpricing a facility for sale?

Barnhill: It may discourage a potential prospect from even taking a serious look at it. Once they review the initial numbers and determine that it’s overpriced, they’ll move on to the next deal without taking a closer look. It may also cause a buyer to determine that the seller is not at all serious about selling.

In some cases, potential buyers are afraid to even make an offer for fear they may insult the seller. When a facility is overpriced, it tends to stay on the market, becoming “stale,” and giving the impression something is wrong with it.

Cerruti: Overpricing, simply put, equals, “Will not sell.” Two years ago, a buyer might of had 10 facilities to evaluate and had to act quickly. Now, he has 100 facilities in front of him, and all are begging him to put an offer on the table. If a facility is overpriced, it won’t even warrant a second look. There are too many investment options right now.

Even if you do get an overpriced facility under contract, if the purchaser is borrowing from a bank, the appraisal has a very good chance of falling short of the contract price. To keep their relationships with banks, appraisers are being ultra conservative when evaluating properties.

Comiskey and Owens: If the market value of a facility is $35 per square foot and the facility is listed on the market for $50 per square foot, are you doing service to your facility? Probably not.

Grisanti and Helline: Overpricing a facility in this market is an exercise in futility. If you are intent on pricing at a 7 percent cap rate, wait until the market turns. If an owner insists on this high-selling price, he’s better off waiting for the market to catch up to him.

Keys: The main problem with overpricing a facility is that it will not sell. When the property doesn’t sell in reasonable period, buyers tend to stigmatize it, which may result in a lower sales price than could have been achieved if the property were priced appropriately for the market conditions.

Lehmbeck and Procter: Detriments include lack of activity on the property. Investors in Oklahoma are well aware of current property values. Sellers are holding the line on price, and buyers are buying on current cap rate.

Minker and Trahant: Overpricing impacts the overall sale of a property in several ways. Buyers have certain criteria they use before they even begin analyzing a property. One is cap rate. If a facility is priced too high (i.e., significantly below the buyer’s target cap rate), the buyer will not take time to analyze the property, and it will consequently be a lost opportunity for the seller.

Additionally, if the property is priced significantly above true value and remains on the market for a long time, buyers become wary of what the underlying issues may be with the property and are hesitant to evaluate the asset.

Have we reached the bottom of the market?

Barnhill: Typically, you can’t see a bottom until you’re past it. We’re looking for several indications that we’re past the bottom. First, overall occupancy rates and cash flows need to stabilize and improve to be more attractive for buyers.

Second is financing availability. We’re still in an environment where there are fewer financing options. That’s coupled with tighter, less attractive loan requirements. Finally, we’re finding buyers and investors still have greater risk aversion and higher return requirements.

Cerruti: There’s a natural cycle to the economy. In 2005 and 2006, we were on the top of the mountain. In 2007, we started to fall and, at the end of 2008, we entered the valley. It will probably take a few years to start climbing again.

Comiskey and Owens: Many self-storage brokers, lenders and investors wish they knew the answer to this question. Our market, fortunately, has remained relatively stable and strong. One thing we’ve noticed is the change in interest rates has made it harder to find upside to positive leverage in a facility that has a lower cap rate.

Grisanti and Helline: Judging from all other sectors of the commercial market, we’re seeing a definite turnaround. We went four months (January to April) without executing any lease or sale contracts. Since May 1, we’ve executed 10 contracts. This tells use the market is turning. We’ll know for sure in about two months if it holds up.

Keys: My sense is the market has bottomed out; however, the dismal state of the capital markets has brought on a liquidity crunch that may exacerbate the situation unless lending resumes. Storage facilities are not problematic assets per se, but unfortunately, they have been painted with the same brush as other more volatile real estate.

Lehmbeck and Procter: We’re hopeful that we’ve hit the bottom of today’s market, and feel fortunate Oklahoma has unemployment at below the national average.

Minker and Trahant: We feel the rest of 2009 and possibly the first half of 2010 will continue to be difficult for most industries. The negative impact on real estate value will most likely continue. In all likelihood, value will not begin to increase for this period. On a positive note, investors who’ve been sitting on the sidelines waiting for the bottom of the market are now inquiring about opportunities. Perhaps this is a sign that we may be closer to the bottom.

Michael L. McCune is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE.

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Reaching and Serving Boat/RV-Storage Customers

Sep 19, 2009

We recently got a call from a potential tenant who asked if our boat/RV-storage facility is going to run any specials on 30-foot spaces since the economy is so poor. We were able to tell him that our 30- and 40-foot spaces are full and we have a waiting list. We know that’s hard to believe in this economy, but it’s been true for us for the last two seasons.This particular customer added his name to our list, saying, “Your place is so clean and secure; I’ll just wait until I can get in.”

We’re often asked by fellow storage operators which marketing programs have been successful for us. We try to create programs that cost as little as possible, and we continually monitor our efforts. Here are some of the techniques that have worked for our business.

Know Your Customer

A large percentage of RV and boat storage spaces are rented for emotional rather than economic reasons. These customers are more concerned with convenience and amenities than price. To attract and keep this niche, focus on service and add-on offerings: clean restrooms and showers, boat detailing, coin-operated wash bays, RV dump stations and air stations top the list.

We offer a boat wash at our facility, and tenants love it. If you don’t have a boat wash on site, you can work something out with one of the boat- or car-wash businesses in town. We also rent a space to a detailer who is bonded and insured and has great references. We give him a discount since he sends us referrals. His detailing service is one of the best draws for our boat crowd.

Adjust Your Space

Not all facilities have the ability to change the size of its spaces, but this can be a great way to increase business. We recently looked at the demand for storage in our city, which is for 30- and 40-foot spaces. We had some 60-foot drive-thru spaces that weren’t moving as fast as we wanted, so we split them in half. This was a very inexpensive way to meet customer needs. It worked so well that we’re thinking of converting 10 more spaces this season. We can always revert them back to 60 feet if the demand changes.

Your facility may have similar potential to draw more business. Just make sure you’re not ruling out any options. The more aware you are of the demand in your competitive area, the easier it will be to make those decisions.

Customer Service

We talk about customer service all the time, but do we really give it our best? If you go the extra mile in this area, you will reap the rewards. We bake cookies for customers on holiday weekends and hand out free bottles of water when the heat is more than 100 degrees. We make sure our facility is spotless and has 24-hour access. We work every weekend and holiday, which is one of the main reasons we’re taking business away from our competition. Tenants love our concierge service and the flexibility of our facility hours.

Last season, we started sending thank-you notes to new tenants, and this has had a good response. We do it the old-fashioned way: We mail them. It makes it more personal and has the added benefit of allowing us to verify tenant addresses.

Referrals

Our facility has always had a referral program. We give someone a $20 gift certificate to any major store if he refers a customer to us. If an existing tenant brings us a referral, we give him $20 off one month of rent. This is one of our best marketing programs.

When gas prices went up last year, we gave out $20 gas cards for referrals. With gas prices climbing again, we’ve put our program back in place. The local gas stations love that we’re supporting them.

Work With Local Businesses

This is a wonderful way to institute great marketing programs you normally couldn’t afford. There’s a business in our town that has a popular coupon book. We wanted to do something similar, but we didn’t have the budget. Instead, we created a “Welcome Package” for new tenants that includes brochures from local businesses, a calendar of town events, a list of local restaurants, etc. We regularly visit businesses in town and ask if they want to advertise in the package. They love our program because we don’t charge them! We simply ask them to provide fliers.

Our cost for the project is minimal, and taking the time to meet with business owners face to face allows us to share what our facility offers. We put a few of our referral cards into a coffee cup with our logo on it. We leave this with the business, and they let everyone in their office participate.

Ask the Golden Question

To know your marketing successes, you need to know how customers found out about you. We have software that aggregates this information, but even if your software doesn’t do this, you can still track your marketing. As part of our new-hire training, we drill into every employee the importance of asking, “How did you hear about us?” They have a log in which they record the responses. This way we know which marketing programs are working for us, even if a person doesn’t choose to rent from us.

Adjust Your Rates

If you know your competition, you can adjust your rates accordingly. When we first opened, we raised our rate on a space size once that inventory was full, regardless of what was happening in the market. Now, our managers go out every six months and check the competition. Last season, with gas prices soaring, we discovered that a few of our spaces were over priced. We adjusted the rate and stopped losing customers.

There are creative ways to adjust pricing. This season, we’re telling potential tenants that if they pay six months in advance, we’ll lock in their rate. We’re also giving a small discount if they rent more than one space.

Security

Security for boat and RV storage should be top-notch. Boats can cost $100,000 or more, while large RVs can clock in at several hundred thousand dollars. We use high-tech security at our facility. It not only helps protect customers’ goods, it’s a great draw for prospective tenants.

Most boat and RV tenants desire 24/7 access to their vehicles, so while security should be stringent, the facility should also be accessible. At our site, gate entry requires a personal code and a fingerprint using biometric technology. All spaces have door alarms and a fire-sprinkler system. In addition, we provide an emergency phone number tenants can call if they have a problem, and they know we conduct a morning and afternoon security check.

To limit the risk of legal exposure and emphasize the security of our site, we run a credit and background check on everyone who rents from us. The program costs us very little and we simply add the expense to our sign-up administrative fee. Tenants like that we do this because they know we’re doing everything we can to protect their goods.

It’s very difficult and expensive to dispose of titled property, so any insight you can gain into a client’s credit and criminal background lessens the risk of eviction or lien-sale costs later. A credit check also helps you determine if a tenant is attempting to hide a vehicle under repossession threat.

One word of caution: The collection and storing of customers’ private information requires knowledge of state statutes. You should be well-versed in the law when dealing with this type of data. Protect your customer’s identity by filing any paper copies in a fire-proof safe and limiting access to authorized staff only.

Update Your Marketing

It’s critical to review your marketing brochures, print and Yellow Pages ads frequently. During a recent review of our own collaterals, we found we needed to make them more current. This helps to attract new tenants. Our website is updated at least quarterly, and we’re advertising more aggressively.

We also use e-mail blasts to reach tenants. We ask for their e-mail address when they rent a space, and we send them only important information regarding their accounts or information about our specials. We recently sent an e-mail about our referral program and had a good response.

Positive Attitude

It’s hard to keep a positive attitude when business is in decline, but when customers ask us how our facility is doing, we tell them, “Fantastic.” They always have a funny look on their face because they expect to hear how bad things are. Times may be tough, but who wants to rent from someone with a “poor me” attitude? We tell them business is going great and we love having them rent with us.

When it comes to your site marketing, keep an open mind, learn from your mistakes, and target your marketing efforts directly to boat/RV-storage customers. It’s a unique group with specific needs. Meet them, and you’ll be a success.

Ed and Terri Heil are the operators of Lake Havasu RV & Boat Storage of Lake Havasu City, Ariz. Ed serves as manager of operations and security, and Terri is the facility’s business-development manager. Both are members of and regional chairpersons for the Arizona Self Storage Association. For more information, call 877.764.1961; visit www.lakehavasustorage.com.

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