One area of operations in which self-storage managers are often quick to throw in the towel is the collection of bad debt. Collecting delinquencies can be an additional source of revenue, but most operators throw up their hands and say, “I am just happy to have my space back.” However, just making a tenant think you actually collect your delinquencies, even if you do not, will help operations in several ways. There are also some things you can do in advance to ensure you have a chance of collecting your bad debt.
At the outset, let me be clear that I do not advocate keeping delinquent tenants in hopes of collecting the rent over taking all efforts to get the tenant out of the premises as quickly as possible. These two concepts are actually congruous. You should do everything you can to be rid of a nonpaying tenant to minimize your damages, even if this course of action means relinquishing some past-due rent. A lien sale is the last thing you want to do if you can’t avoid it in any way.
That being said, many operators offer to forgive all past rent and charges due in exchange for the tenant removing his stored property. Operators also sometimes discover abandoned spaces and do nothing to pursue the tenant for the balance after he vacates. Others do not try to collect the balance on a unit after application of sale proceeds. It seems the main reason operators do not pursue collections is they see each delinquency as a small amount, not worthy of expending additional resources. In many cases, if they did a few things differently, they would have enough information to make it worth trying to collect the debt.
At the end of each year, look at the bottom line of your bad-debt expense or write-off. If that amount is more than a few thousand dollars, that should tell you two things: 1) you are missing out on a source of revenue, and 2) you are not doing the right things at the inception of tenancy to let customers know you are tough about collecting unpaid rent.
This column serves two purposes. First, it is a discussion of how to increase your collection revenues. It is also establishing the mindset of your tenants regarding your willingness to collect delinquent or unpaid rent and charges.
One of the most significant things you can do from an active collection and mindset perspective is join one of the credit bureaus. This will allow you to report delinquencies to the bureau and, hopefully, affect a tenant’s credit in the event he leaves you with a delinquency.
There have been many changes to the Fair Credit Reporting Act and Fair Debt Collection Practices Act over the last several years that make it much harder for you to be an active member of a credit bureau. However, several services have been created to act as your intermediary with the credit bureau so you are not the active reporting entity—the service is the intermediary. While there is a fee for the service, sometimes there can be no stronger statement on the wall of your facility than a sign that reads, “We report all delinquencies to the XYZ Credit Bureau.” (You may want to use this sign even if you do not actually report to the credit bureau.) If you use an agency to collect your bad debt, make certain it is reporting debts to the credit bureaus for you. If it isn’t, you should consider another agency.
The most certain way to get and keep a delinquency on someone’s credit report is to file a lawsuit against that person and obtain a judgment. The credit bureaus pull this information directly from the court records; therefore, you are not the reporting entity and do not have all of the various reporting requirements. Yes, you might spend $35 to $50 to file a small-claims complaint; however, nothing is more likely to get you paid by a stubborn tenant than a notation on his credit report. The next time he goes to make a large purchase or obtain other credit, he will be denied until your debt is paid.
To have a chance of a successful lawsuit, you need to get good information up front from your tenant. When the tenant signs the lease is what I call the “honeymoon period.” This is the time to ask questions and record information about your new tenant.
Above and beyond obtaining the standard name, address and Social Security number, ask for a few other things, such as all work phone numbers. That will give you another way to reach your tenant in the event you need him during the tenancy. It will also give you a place to look to garnish or attach wages in the event you have to sue him for delinquency.
You should also ask for next-of-kin or emergency-contact information. Often, we rent to people who are in “housing flux.” Six or nine months from now, when the tenant is delinquent in his rent, it is nice to be able to call his contact, find out where he is, and explain you are about to sell his property because rent has not been paid. You may or may not get paid or find out where your tenant is; but it is better than having nowhere to begin in your collection search.
If your state permits, make a copy the tenant’s photo identification. I cannot tell you how many times a tenant has provided a false name or identification—normally his sibling’s or child’s—to avoid detection for all prior bad deeds in the event you run any sort of credit or criminal report. If you are not collecting a copy of identification, you are giving away the shop.
It is helpful to have a copy of a tenant’s ID to declare a default if you later realize you have been given false information. If the ID is legitimate, it is also useful to have it for a street address and height and weight statistics, in case you need them. If your state is one that still places Social Security numbers on photo identification, make sure the number given to you on the lease matches the one on the ID. Use common sense—if the person trying to rent from you appears to be 40 to 50 years old, and the ID birth date is in the 1980s, you probably have false identification. You may never have to use this information, but if a person becomes delinquent, it is useful.
Next, make a habit of photocopying all payments you receive from your tenants, except for automatic debit/credit-card payments. Set a requirement in your office to do this in February and August of each year. This allows you to keep track of where your tenants are banking, and you may even capture a new address off the checks. Further, if and when the tenant defaults, you know what bank to contact for garnishment, if you choose to obtain a judgment.
Don’t be shy about asking for information, such as where the tenant banks, as part of your lease/application process. Many tenants pay with cash or money order but do have bank accounts. You need to know where those are if you later want to enforce a judgment. You will feel more confident spending the money to file a lawsuit if you know where a tenant works and banks.
Many tenants pay with a credit card, or you require an automatic charge to a credit or debit card. You should actually see the credit card you will be charging. While you do not want to copy the card, you should note from what bank/financial institution the credit card is issued. Some are national providers, and you may not be able to figure out from the card where the tenant banks; but if you know who issued the card, you can often subpoena the credit-card company and ask for its records on your tenant as part of your discovery or debt-collection process.
Be Tough on Time
Maintain tight deadlines. One of the most common mistakes I see is a facility allowing tenants to be 30 or 45 days delinquent before doing anything to collect, overlock or terminate the tenancy. Most states have selfstorage statutes that prevent you from exercising remedies until a tenant is 45 or 60 days late. However, those statutes do not say you cannot do anything until 45 or 60 days—they say you cannot start the lien-certification process until that time.
Most self-storage facilities make phone calls after a tenant is a few days late. Most even overlock or deactivate a gate code. Even still, your calls and letters have to get as much attention as possible. For example, they will be more effective if you say, “I would hate for this delinquency to become a judgment and have to garnish you at XYZ Co., your place of employment, or attach your accounts at XYZ Bank.” If the tenant knows you know where he works or banks, it is an extremely powerful tool to get your debt paid.
Do not let tenants slip away from you. U.S. Postal Service forwarding orders are good for one year from the date they are filed. If you are not sending something to your tenants at least once a year with the words “Address Service Requested” on the outside of the envelope, you are missing a valuable way of keeping track of your tenants. For about $1, you will get a little yellow mailing label on a post card advising you of any forwarding address that has been filed by tenants to whom you send mail.
All marketing advice tells you not to lose communication with your tenants or communicate with them only when you raise rents. Here is another great reason to spend the money at least once a year to send a newsletter or some sort of update to your tenants: to keep track of where they have gone before it costs you more money to skip-trace them.
Some operators send “record updates” to their tenants. The letter reads something like, “We are updating our files or upgrading our database. Would you be so kind as to make sure we have all of your current information?” They either print the current information on file or provide blanks to fill, asking for name, a current address, current employer, expiration dates of credit cards used for auto pay, and banking location.
Some managers even offer entry to a drawing for a $50 or $100 gift certificate to a local restaurant in exchange for a returned card. You would think no one would bother to reply to these inquiries; but if you wave gift certificates under tenants’ noses, the replies come in droves. Some operators report response rates as high as 75 percent.
If a tenant is not using a debit card, credit card or checking account to automatically pay his rent, do not be afraid to ask if he would now like the option. After tenants have rented for a while, they learn to trust the self-storage concept and your facility. They become more willing to opt for automatic funds withdrawal. The best way to avoid a delinquency problem is to be automatically entitled to collect as much rent as possible up front.
Other Safety Measures
You should include language in your lease that allows you—at the time of application, during tenancy, and even after tenancy for a period of time—to pull consumer credit reports and criminal records for your tenants. This is a simple paragraph that can be placed in your rental agreement or on a separate addendum, such as:
I hereby authorize XYZ Self-Storage to obtain consumer reports, and any other information it deems necessary, for the purpose of evaluating my application. I understand that such information may include, but is not limited to, credit history, civil and criminal information, records of arrest, rental history, employment/salary details, vehicle records, licensing records, and/or any other necessary information. I understand that subsequent consumer reports may be obtained and utilized under this authorization in connection with an update, renewal, extension or collection with respect or in connection with the rental or lease of a residence for which application was made.
While you may not currently pull credit or criminal reports on your tenants, some day you may choose to. In the meantime, it is nice to know you have a release on file to allow you to pull credit histories or criminal records if you find it necessary. For the small fee of a credit report, you will be able to tell whether a tenant is falling behind on all of his bills or simply ignoring your fees.
This information is valuable in your negotiations with your tenant. If he is 60, 90 or 120 days behind on his mortgage and credit cards, your approach might be, “Please just come get your stuff out and we will forgive the debt because you are hopelessly uncollectible.” However, if all the tenant’s other obligations are current, it adds a lot of ammunition to your telephone calls to say, “It appears you are current with your other credit grantors. Why are you disinterested in paying our bill? We hope to avoid taking judgment or action against you, such as garnishing your wages at XYZ Co. or attaching your bank account at XYZ Bank.”
In collections, victory is as much about your mindset as the activities you undertake to collect debts. Keeping close track of your tenants—their personal, professional and banking information—and using that information when you speak to them about their delinquencies, gives you a strong upper hand in negotiations to get the rent paid.
Jeffrey Greenberger practices with the law firm of Katz Greenberger & Norton LLP in Cincinnati, which primarily represents owners and operators of commercial real estate, including self-storage. Mr. Greenberger is licensed to practice in the states of Ohio and Kentucky, and is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. He is a regular contributor to Inside Self-Storage magazine and the tradeshows it sponsors. For more information, Mr. Greenberger can be contacted at Katz Greenberger & Norton LLP, 105 E. Fourth St., Suite 400, Cincinnati, OH 45202, or by calling 513.721.5151.