Canadian Development and/or AcquisitionIt's a whole other country up there
Copyright 2014 by Virgo Publishing.
By: Jeff Kinder
Posted on: 07/01/2000



 
Canadian Development and/or AcquisitionIt's a whole other country up there

By Jeff Kinder

If it wasn't for the Academy Award nomination for the song "Blame Canada," from the grunge animation flick South Park: Bigger, Longer & Uncut, most Americans probably would not have even thought about their neighbor to the north at all in the past several months. Americans seem to either ignore Canada completely or make broad assumptions about the country with which they share the world's largest undefended border, and then fill in the blanks with stereotypes of Doug and Bob McKenzie or Robes Pierre.

But we self-storage professionals have proven time and again we are not like most people. Many of us have been thinking about our free-trading partner to the north as a potential market for our products. As an American who has lived in Toronto for three years and, along with my Canadian partner, The Rose Corp., has an interest in a six self-storage facilities in Ontario, I'll try to share a little perspective on our industry from a trans- border view.

Know Your Territory

Meredith Wilson said it best at the beginning of Music Man when the traveling salesman kept repeating the mantra, "But you've got to know the territory." It is true that Canada is a democratic nation of laws that define a stable commercial environment where capitalism thrives and the primary currency is the dollar, where 90 percent of all residents live within 100 miles of the United States border and most speak English (although not necessarily as their first language), where there is a "Free Trade" agreement with the United States, and where you can watch the Today show in your hotel room in the morning.

But it is also true that Canada is a parliamentarian confederacy with a Queen, has a strong socialist party that is currently in power in several Provinces, deals in loonies and two-nies, extends all the way to the North Pole where it shares a large border with Russia and Scandinavia, is a unique multi-cultural mosaic instead of a melting pot, is a signer of the North American Free Trade Treaty (better described as the thousands and thousands of pages of trade-by-this-set-of-rules-treaty), and has an entire Ministry (Cabinet-level position) dedicated to minimizing America's influence on its culture. If you are looking at Canada for your next acquisition or development, you've got to get to know the territory.

Be Prepared

Before you even start to worry about the market, city or province where you are planning on doing business, you will need to understand how that "free"-trade agreement and associated tax treaties really work. Depending on how you structure your companies on both sides of the border, you will be paying 5 percent to 25 percent of your earnings to the Canadian government as withholding tax, just for bringing it back across the border. Unlike the way most Americans view withholding as a temporary payment pending the filing of a return, when the Canadian government withholds from you, the money is theirs and you are without.

There are many organizational options from which to choose in trying to minimize your taxes. There are federal corporations, provincial corporations, provincial unlimited liability companies, limited partnerships, etc. They all have their quirks relating to liability and the way you may already be structured in the United States. Spending a couple of grand with a large, cross-border accounting firm will be frustrating, but worth it.

Once you are comfortable with how you are set up, you've got to get to know the territory. Canada's major cities are not virgin frontiers for the conquering self-storage crusader. There are already sophisticated markets and operators that are growing and trading as in U.S. cities. U-Haul is there. Public Storage is there. Shurgard came and went. (What did they know that I don't?) There are also several Canadian operators that have multiple facilities and an appetite for growth. So what are the opportunities for us entrepreneurial carpetbaggers in Canada?

We all struggle with our own concepts of "underserved" and "overbuilt" when it comes to markets. If Las Vegas was the standard, every other market in North America--except for Phoenix--is grossly underserved. Like most U.S. cities, the major Canadian cities may have specific trade areas or pockets of opportunity. They have also experienced the effects of new competition mitigating everyone's results. At the risk of gross generalization, spreading cultural prejudice, reinforcing stereotypes or being otherwise politically incorrect, I will say that given self-storage is an event-driven business, Canadians are less mobile, have fewer life-changing events and should, therefore, require less storage per person than similar populations in the United States.

Once you have developed or acquired your property, you've got to get to know the territory. Although unemployment is higher in Canada than the United States, it is still relatively low. Your payroll costs will be higher in relation to your revenues. Some provinces are very labor-oriented, and your total payroll costs will be significantly higher. If you thought your electricity and snow-removal bills were high in New York, you'll just love winters in Quebec.

Some provinces charge a Provincial Sales Tax on storage, some just on merchandise. Some collect for the Federal Goods and Services Tax (GST). Some have a unified tax. Some provinces even tax the tax. Once you are done paying taxes on your transactions, operations and profits, you will run into the harsh realities of Capital Taxes. That's right: If you happen to have any money left after going through the tax gauntlet, you are taxed for the privilege of putting it back to work. To the uninitiated, it sometimes appears that one level of government is taking a dollar from you, paying itself 25 cents to pass on 50 cents to another level of government, and nobody is quite sure what happened to the other quarter. OK, so it's not really that bad, but regulatory compliance and your overhead are more expensive.

Partner Up

If you are going to do business in Canada, you need someone who knows the territory. Financing is a whole other ballgame above the 49th. There are only six big banks to choose from, and none of them are looking for a significant exposure to storage. There are a few Schedule B banks that each have their specific mandates and niches. Heller is there. Merrill Lynch is there. Finova is there. But conduit lending is still in its earliest stages and the concept of non-recourse loans is just coming into focus. The Rose Corp. in Toronto, Swan Corp. in Calgary, and other boutique financial houses are the best options for mezzanine financing. But all of them are looking for local integrity, because they know it is a whole other country. Get a partner or operating principal who is on the ground and can help you navigate your way from A to Z.

Operations and marketing are as unique as each trade area. There are no Canadian self-storage laws that define our industry. There is some legal precedent within the appellate courts that give self'-storage operators some degree of direction in their rental agreements. Delinquent tenant procedures are a combination of landlord/tenant, mechanics and storage lien, and common law. Particularly in Quebec, where you need to mix in a little Napoleonic Code, we all live close to the edge in dealing with our delinquent tenants and getting our spaces back. The ethnic diversity found within the mosaic culture of Canada gives operators an opportunity to target specific markets in rentals, and recruiting and requires operators who want to truly maximize their top line to really get to know the territory.

I hope nothing I have said has deterred anyone from coming to Canada and experiencing for themselves the wonderful things the country has to offer. The song "Blame Canada" only works because there is no other society more blameless. The cultural mosaic only works because of the unique tolerance and celebration of diversity that exists above the Great Lakes. The cities are clean. The streets are safe. The water is blue. The American jokes are funny. It may even be a place where you want to do business. Enjoy Canada for what it is: a whole other country. And, if after you have done your homework and gotten to know the territory you decide you want to do business there, come on up. The competition is waiting for you.

Jeff Kinder is the president of Advantage Advisors, LLC, and principal in The Advantage Group. Advantage owns and operates self-storage facilities in the United States and Canada for its own account, and is a fully integrated acquisitions, development, financing and management-services supplier to the self-storage industry, helping individuals, corporations and asset managers maximize their self-storage investment.

Mr. Kinder has been in the self-storage business since 1986. He worked for National Self Storage and Public Storage for 11 years in operations management and marketing. In 1991, he moved to Toronto, to serve as vice president, operations, for Canadian Mini-Warehouse Properties, Ltd., heading up the Public Storage subsidiary, and in 1997, he started Advantage Self Storage™. For more information, call (301) 774-0243; e-mail president@advantagestorage.com.