Hungry for Development?

Ray McRae Comments
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People with a track record in other business types often think self-storage is no different than anything else. Investors who enter the business with an open mind and a willingness to learn from experts have a much greater chance to meet goals quickly and successfully.

True Grit

Self-storage is a retail business with an underlying real estate component, yet it’s distinctly different from other real estate investments. The business component is similar to a hotel/motel operation; a self-storage facility may chase 600 checks per month and have a revolving door of new tenants replacing vacating tenants. In comparison, strip-mall real estate maintains a small, long-term tenant base with leases of one to five years or longer.

People typically use self-storage during life-shifting events, i.e., moving, job changes, divorce, death, boomerang kids. Their needs for storage are genuine—if not, self-storage owners would have a slim chance to reach stabilized occupancies.

The cost to carry a self-storage project to lease up while tying up capital for a long time isn’t appealing, especially considering you’re running a retail business seven days a week with employees, customer-service issues and public relations. One can quickly get a taste of the unappetizing side of self-storage development if expert help isn’t solicited at the start.

Full-Service Help

Expertise can be contracted from a full-service, property-management company specializing in self-storage. A slate of services are available:

  • Site and market analysis, feasibility 
  • Site design and layout 
  • Coordinates entitlement issues (dealing with municipalities, planning/zoning, site-plan approval) 
  • Coordinates and recommends lender/financing sources 
  • Prepares construction, operating budget pro formas 
  • Recommends contractors, metal-building suppliers, security and software systems and other necessary vendors 
  • Assists in negotiations with suppliers 
  • Handles construction-bid processes 
  • Assists in overseeing construction 
  • Maintains detailed accounting construction costs and funded draws 
  • Set up office, showroom, operating software and computer hardware 
  • Oversee operations once the project is open for business 

Many property-management companies also develop for their own companies’ purposes. By working with one that develops and operates self-storage facilities for themselves, a new storage developer has the opportunity to leverage past experience to their advantage.

Don’t Wait

Waiting too long to bring in experienced help can be a costly mistake. Sometimes newcomers start the development process on their own—only to bring in help after spending thousands in entitlement fees, architectural/engineering fees, attorney fees, etc. If this sounds familiar, sit down with a professional in the self-storage business to review what you’ve done and where you are on the path to developing your project.

Many proposed projects—and even those under construction—aren’t designed efficiently in regard to land coverage, resulting in huge losses of potential income. Others have designs that may not be user- or management-friendly, creating incurable functional problems, which can only be remedied by spending a small fortune.

If you have a design penciled, let a self-storage professional review it. This could be the best money you ever spend. A specialist can catch and redesign a poorly drawn self-storage layout, resulting in a substantial increase of the developer’s equity. The optimum time to seek help is during the site-selection phase of your venture.

Hiring Help

Once you’ve decided to hire a professional, self-storage property-management company, make arrangements to interview several firms. Your candidates should supply you with at least the following information:

  • Company history and background of the officers and key employees 
  • List of properties owned and managed by the company 
  • List of client references 
  • Copies of pertinent agreements such as development-services agreements and management contracts 
  • Accompany you on a tour of their latest development projects 
  • A breakdown of the scope of services provided

The Interview

Be sure to ask about the following:

  • Long Distance vs. Local: Can you effectively service the area in which the proposed project is planned? What kind of services can you provide specifically?
  • Joint Ventures: Would you consider a joint venture with me on this project? If so, what is you typical joint-venture structure?
  • Site Layout and Design: Can you provide a site layout in CAD?
  • Cradle to Grave: Can you deliver a turnkey product? In what areas don’t you help us coordinate?
  • Enhanced Equity: How can I expect my equity to be affected by taking advantage of your services and economies of scale?
  • Competition: How do I know you won’t help someone build across the street from me? What happens if you’re approached by a competitor? Would you be willing to grant some kind of trade area protection?
  • Fees and Associated Costs: What is your fee structure for development, and for property management? What other costs should I expect?
  • Operations/Management: Who will be signers on the trust accounts? how many days after month’s end can I expect financial statements? What information will you include? Do you meet all necessary state-licensing requirements for property-management companies?

Don’t be shy when inquiring about services. You want to make sure you choose the best fit for your situation. Contact references provided to you and ask them about the property-management company’s services and attentiveness to detail. Use other sources such as government entities that may regulate management companies or trade journals such as Inside Self-Storage magazine to verify information provided to you.

Closing the Deal

When you have chosen the property-management company you’d like on your team, meet to discuss these topics:

  • Timeline: This should outline a realistic timetable to take the project through planning and zoning, site-plan approval and other entitlements. Identify key events such as timing and funding of a construction loan, when construction documents will be completed, when the bidding process will begin, expected permit dates, start of construction, completion of construction, etc.
  • Goals:
  • It’s imperative to discuss objectives and the role you wish to play during the development process.
  • Negotiations: You may have expertise in entitlements/site plan approval, for example. If so, you may want to consider taking the lead in this area and negotiate to exclude this from the management company’s scope of work for a reduced fee.
  • Communication Chain: Establish who’ll be the contact person for your investment group and property-management company. You need a central point of contact on each side to receive and disseminate information to appropriate parties. establish how you’ll communicate with each other and how often.

Any key points or promises arising out of this meeting should be put in writing and signed by both parties.

The Grand Finale

Once you’ve inked the deal with the property-management company, be prepared to hit the ground running. Time is of the essence and your goal should be to stay on budget with specified timelines. every delay can cost the project a bundle and potentially cut into any interest reserves you built into your loan.

Selecting the right company for your development will create value for your project, increasing your equity beyond the associated fees and costs of hiring one. You’re making a multimillion-dollar decision when developing a storage project. Treat it that way and your rewards will be many. 

Raymond E. McRae is the vice president/director of operations for Mesa, Ariz.-based Storage Solutions, which conducts feasibility studies, third-party management, market surveys, consulting, auditing, acquisitions and development for the self-storage industry. For more information, call 480.844.3900; visit www.storage-solutions.org

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