THE EUROPEAN ENTREPRENEUR IS ATTRACTED TO THE SELF-STORAGE sector for one of two reasons: either for the "pension-fund"-style income stream the self-storage facility offers once the site is near full, or the potential sell-out value of the facility to an acquisitive investor.

It's mainly for the latter that European entrepreneurs and property tycoons have such an appetite for the self-storage sector. People believe there is a quick pound to be made. However, in Europe, there's nothing quick about finding, securing, setting up and filling a facility past the break-even point and into profit. Or is there?

What the European, independent, self-storage market is crying out for is a benchmark deal it can shake in front of the bank manager's nose. With availability of financing becoming more a barrier to entry than finding the right site, what the European entrepreneur needs is evidence and ammunition to convince his funding partners or bankers self-storage can offer a viable return on capital, a regular monthly income stream or, ideally, an exit via a sell-out with a huge return on the invested capital.

What sort of deal terms and structure would prove to the doubting bank manager your business plan was viable and a good risk to fund? Imagine this fairy tale: You acquire, at a very attractive price, an existing, loss-making, leasehold self-storage facility the current owner doesn't want. Next, you stabilize the business, realizing how much time and attention is going to be required to turn it around. Not wanting to get bogged down with day-to-day issues and neglect your current cash-cow business, you install a key man. I mean a key man, a $150,000-a-year package man.

With that sort of investment or overhead, there is no turning back. You have to expand to another site or fail. So within nine months, you sign a sublease on a super-modern, 35,000-square-foot warehouse with mezzanine capability and main-road frontage—thanks to providing some form of guarantee or security, of course. You get this site to break even in nine months due to bulk letting, drive-by frontage, a good fill rate, and a nice rent-free period as part of your sublease deal.

While your key man is doing the fill-up business, you've courted a property developer/investor who rates you and gets you a brand-new lease on a third leasehold site. You fill it and break even in groundbreaking time. So what have you got just two and a half years later?

So is this a fairy tale? So far, it seems too good to be true. Well it is, because it's only half the story. The rest is you spend the next 12 months haggling prices, negotiating warranties and trying to get existing landlords and tenants to agree to assignments, new leases, surrenders and various other issues, including the due diligence, replacement of bulk lets with self-storage income, value-added tax (VAT), tax planning, legal fees, time and sheer hard work. In the meantime, you're enjoying an increased revenue stream.

Twelve months later, you sell. You've done it! You've converted a small-scale, loss-making, single-site operation into a coveted, second-generation chain of facilities with strategic value. You're a hero. You've done the groundbreaking benchmark deal the independent operators and entrepreneurs in the U.K. industry need to convince bank managers self-storage is viable. That's fantastic, but there is someone who wasn't so pleased: the bank manager, because you won't be needing his money for a while!

Is this truth or absolute fantasy? It would be a great bit of investment credibility for the cash-starved, independent-operator market place—and great news for the big boys, with more sites opening. Acquisition opportunities are eventually created by this very type of market development.

Andrew Donaldson is the founder and chief executive of Active Supply & Design (CDM) Ltd. of Cheshire, England. He is also the founder of the Self Storage Sentinel newsletter, Rent-A-Space Limited (now a multi-site operator) and selfstorage.uk.net. For more information, e-mail [email protected]; visit www.askactive.com.