Canadian Development and/or Acquisition

It's a whole other country up there

By Jeff Kinder

If it wasn'tfor the Academy Award nomination for the song "Blame Canada," from the grungeanimation flick South Park: Bigger, Longer & Uncut, most Americans probablywould not have even thought about their neighbor to the north at all in the past severalmonths. Americans seem to either ignore Canada completely or make broad assumptions aboutthe country with which they share the world's largest undefended border, and then fill inthe 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 mostpeople. Many of us have been thinking about our free-trading partner to the north as apotential market for our products. As an American who has lived in Toronto for three yearsand, along with my Canadian partner, The Rose Corp., has an interest in a six self-storagefacilities in Ontario, I'll try to share a little perspective on our industry from atrans- border view.

Know Your Territory

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

But it is also true that Canada is a parliamentarian confederacy with a Queen, has astrong socialist party that is currently in power in several Provinces, deals in looniesand two-nies, extends all the way to the North Pole where it shares a large border withRussia and Scandinavia, is a unique multi-cultural mosaic instead of a melting pot, is asigner of the North American Free Trade Treaty (better described as the thousands andthousands 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. Ifyou are looking at Canada for your next acquisition or development, you've got to get toknow the territory.

Be Prepared

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

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

Once you are comfortable with how you are set up, you've got to get to know theterritory. Canada's major cities are not virgin frontiers for the conquering self-storagecrusader. There are already sophisticated markets and operators that are growing andtrading as in U.S. cities. U-Haul is there. Public Storage is there. Shurgard came andwent. (What did they know that I don't?) There are also several Canadian operators thathave multiple facilities and an appetite for growth. So what are the opportunities for usentrepreneurial 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 othermarket 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 stereotypesor being otherwise politically incorrect, I will say that given self-storage is anevent-driven business, Canadians are less mobile, have fewer life-changing events andshould, therefore, require less storage per person than similar populations in the UnitedStates.

Once you have developed or acquired your property, you've got to get to know theterritory. Although unemployment is higher in Canada than the United States, it is stillrelatively low. Your payroll costs will be higher in relation to your revenues. Someprovinces are very labor-oriented, and your total payroll costs will be significantlyhigher. 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. Somecollect for the Federal Goods and Services Tax (GST). Some have a unified tax. Someprovinces 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'sright: If you happen to have any money left after going through the tax gauntlet, you aretaxed for the privilege of putting it back to work. To the uninitiated, it sometimesappears that one level of government is taking a dollar from you, paying itself 25 centsto pass on 50 cents to another level of government, and nobody is quite sure what happenedto the other quarter. OK, so it's not really that bad, but regulatory compliance and youroverhead 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 choosefrom, and none of them are looking for a significant exposure to storage. There are a fewSchedule 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 earlieststages and the concept of non-recourse loans is just coming into focus. The Rose Corp. inToronto, Swan Corp. in Calgary, and other boutique financial houses are the best optionsfor mezzanine financing. But all of them are looking for local integrity, because theyknow it is a whole other country. Get a partner or operating principal who is on theground and can help you navigate your way from A to Z.

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

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

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

Mr. Kinder has been in the self-storage business since 1986. He worked for NationalSelf Storage and Public Storage for 11 years in operations management and marketing. In1991, he moved to Toronto, to serve as vice president, operations, for CanadianMini-Warehouse Properties, Ltd., heading up the Public Storage subsidiary, and in 1997, hestarted Advantage Self Storage™. For more information, call (301) 774-0243; e-mail [email protected].