In recent years, management companies began taking on more responsibility for sites under construction. Their input and insight can save developers thousands in change orders, guiding the process in the right direction from the start.
Making a Silk Purse
Clearly Identify Goals
It Might Not Be a Good Fit If . . .
Is It Right for You?
Clients seeking to build or buy existing stores may also avail themselves of feasibility studies and due diligence services. Assistance includes in-depth market studies, demographics, detailed monthly expense and income projections, cash-to-carry calculations, unit mix and marketing tailored to location.
Sometimes new owners need consulting and planning expertise to turn around troubled stores and “re-image” existing locations. In these cases, budgets are prepared showing all items needed to complete the improvements and when.
Making a Silk Purse
Management companies often can achieve a “face-lift” from cash flow over a certain period, so owners don’t have to come up with a large sum of cash immediately. As an example, let’s consider a certain facility in metro Atlanta that called in a management company for help.
The location was inherited by the son of the original owner who lived out of state. In recent years, the store had become somewhat ignored, and all aspects of the operation needed improvement. Today, the site features a new front office, which replaced some small units. The store achieved a 23 percent “same store” sales improvement for 2006. Not many 20- to 30-year old stores can boast these numbers.
At year’s end, the store was enjoying 87 percent occupancy, much lower delinquency (below 8 percent of gross possible), fewer fees waived (less than 15 percent) and achieved 128 percent of its marketing goals for the year.
The manager onsite worked closely with the management company representative to make the magic happen. Together, they re-imaged a poorly performing store while improving all areas of operation. Referrals and repeat customers now account for 44 percent of all new business. The store face-lift occurred throughout 2006 from cash flow without any owner advance, and included the new office, a new sign and gate, painting, improved cameras and additional onsite services.
The owner looks forward to the store’s monthly reports and cash flow, and he communicates with his management-company rep regularly about upcoming promotions, store needs and status.
Third-party management is often the key to higher profits and facility values. Many lenders require a 6 percent management fee in the pro formas for new developments. Management companies should have a working relationship with the primary self-storage lending groups to assist clients with financing. There is typically a discount for management company’s clients from many suppliers and vendors.
Services to match numerous situations are available. here is an introduction to the range of offerings:
Store Startups: 5-year lease-up projections; pricing; unit mix; layout; office and operational needs; access systems; Yellow Pages ad placement and design; computer software and hardware systems; door and hallway-system recommendations; vendor bids, signage; marketing and collateral materials; design and production; website development and utilization; income and expense projections; valuations; and market/ demographics analysis.
Other services include office or apartment layouts; planning and zoning presentations; production of renderings; markups of plan sets indicating water and power needs, drive paths and gate locations, turn radii for trucks; and design requirements for the best possible community presentation. Also included are the setups of financial-reporting systems, rent and pay-online systems and an after-hours contact.
New Store/Office Setups: (This includes takeover sites as well as new construction, and some of the above items will be handled.) Policy and procedures manuals; employee handbooks and agreements; rental agreements; forms; hiring and training of managers (employees of the management company unless the project is consulting only); setup of customized store binders; printing and production of promotional items and collateral materials; operational signage package including gate and keypad signs rules, mph, referral, and thank you at exit; establish bank account; deposit tickets; after-hours deposits; golf cart ordering and customization; furniture; office supplies; shop setup; daily checklist; pre-opening and ongoing marketing program; setup of utilities and services accounts; office, apartment and unit pest control.
Human Resources: hiring, firing; manager-remediation sessions; Workers Compensation; training; insurance; benefits; and maintenance of files as dictated by law. Drug testing, background, employment verification and DMV records as well as mystery-shopping services are also included in budgets and programs to ensure proficiency with telephone techniques and other operational standards.
Property Insurance: expect to receive lower costs and increased coverage as part of a larger group, plus better risk-and-liability management.
Site Inspections and Visits: Monthly (at least) visits to each store with a report on curb appeal, manager uniforms, and operational-standards compliance. Will include a review on variances, executed rental agreements, delinquency and auctions, marketing and sales techniques, new projects, website activity and store performance benchmarks. One scenario is that the manager and the area manager both sign the report and a copy is given to the manager and sent to the owner.
Fee structures average 6 percent to 7 percent of gross income, until the site exceeds a preset minimum. Around the country, some areas are charging 7 percent to 10 percent, and requiring owners to use the store name the management company has for all its locations.
Most companies charge a start-up fee to begin a facility or take over an existing one. Fees may range from $5,000 to $10,000, depending on the company and services. Most use the same operating software throughout their locations; systems are usually set up by the management company, with business information customized to procedures for late fees, auction processes, administrative fees, automatic FTP of database, etc.
The fee includes oversight and services as outlined by the management company’s home office. The owner pays all store-related expenses: payroll for the site, utilities, trash, marketing costs, Yellow Pages, mortgage payments, etc. each item is shown on the monthly cash flow statement, available on or before the 15th of the following month. The statement shows the “current month actual” vs. “budget and year-to-date actual” vs. budget with the variance indicated in both categories.
Every owner and manager working with a management company should agree to a “Flow of Communication.” This means when the owner wants everyone to start wearing top hats, he asks the company to enact the program. Likewise, when the manager wants to start wearing a top hat, he calls the management company representative, who consults with ownership and starts the program. In my experience, facilities that disregard the communication policy get troubling results.
When managers feel they have multiple bosses telling them what to do and none of the bosses is communicating, problems arise. Similarly, if a manager is usurping the management company and going directly to the owner, difficulties crop up.
Sometimes a manager asks the owner directly for favors, such as days off or loans, counting on an established strong relationship. Sometimes owners cry for help because they get too involved with a manager and are backed into the corner. Management should have the expertise to deal with such requests—and never forget they have a fiduciary responsibility to owners and managers. In some cases, managers feel enslaved by multiple bosses, and usually quit or ask to be reassigned because of the barrage of conflicting instructions.
Many times, there is an insurance or legal reason for a procedure that owners don’t understand with the same indepth knowledge as the experts they’ve retained. Agreeing to abide by the management company’s rules usually produces outstanding results for everyone.
Clearly Identify Goals
Owners need to clearly identity their goals truthfully to the management company. Management companies need to know why owners are building. Do they wish to keep one store improving annually? Need to refinance? Come out of construction loans? Do they want to flip it in under five years? Are there other financial considerations, such as developing to the REIT standard as a future exit option?
Here is a scenario we use with my company: each store is balanced monthly and the account taken to a low minimum; cash flow is turned over to ownership for allocation to partners or investors.
Owners are made aware facility employees work for the management company and can’t be employed by the owner for a specific period following the end of the company’s services. Everyone understands what expenses will be the owner’s responsibility and which are included with the management or consulting services. The management company is the conduit for all information and keeps everyone focused on stated goals.
Even with all intense definition, documentation and requests for information, operations won’t go smoothly without defined goals, mutual respect and an understanding of the processes involved. To keep communication flowing (and avoid finger-pointing) everything should be in writing, so note meeting minutes, action items and who will do what.
It Might Not Be a Good Fit If . . .
A management company might not be the right choice if you don’t feel you can trust and communicate your goals and directives. Also, if you think you can save the 6 percent fee by hiring a company to help with financing, staffing and opening the store—and then attempt to hire the manager directly, you might reconsider and ask for a consulting or start-up contract instead.
If you don’t pay your bills in a timely manner and want the management company to finance your payroll and expenses, you should negotiate an equity agreement in advance; this will give the management company a percentage of ownership before becoming indebted and allow you to communicate beforehand your lack of funding.
Most fee-management outfits copyright their forms and manuals, protect their clients and employees, and work diligently to improve the operation. Industry education and activism are also ongoing.
Is It Right for You?
It’s not uncommon for a management company to improve facility income by 20 percent to 30 percent. Owners tend to let delinquents go too long and don’t always understand some of the legal timelines required by each state. That isn’t to say self-managed stores always under perform; there are some sharp, industry-savvy and highly involved owners who produce great results, but they tend to be the exception. If it’s your first self-storage location, get professional help. It can mean the difference in achieving the pro forma you gave your lender or losing all credibility and possibly losing the asset altogether.
Management companies know the key indicators for success and likely trouble spots. Often owners suffer from a simple case of the “forest for the trees”—they’ve been involved so long, they just can’t see what is happening around them, i.e., outdated systems, methods and product. A frequent owner mistake is failing to keep personal expenses out of the cash flow statement.
Your management company should zero out each store monthly and compare the actual numbers to those in the budget and after-debt service. This is the real operating picture and reminds us to avoid large lump sum payments, which can catch you off guard. Set up a reserve account to hold a monthly contribution equal to the amounts needed annually for taxes, maintenance repairs and insurance.
A management company’s dream client would be the person, family or organization that owns or wants to develop a state-of-the-art facility. They’ll understand the importance of hiring the best professionals to get the best result. And they’ll have a working knowledge of the development process and financing and want to build a brand with a distinctive image.
McDreamys would share goals and aspirations for storage ownership and become involved with the professionals overseeing the store in a way that promotes respect and furthers progress. They would be adequately funded, allow others’ opinions, participate with management professionals in annual events and communicate on a regular basis.
Ideal clients also would occasionally visit the store and make notes, which they would forward to their management representatives. They would support current programs they’d evaluated with management and support the ongoing effort by everyone on the team. They would not be wishy-washy, indecisive or ignore everyone for months at a time.
Realizing that everyone does a better job when given frequent attention, dream clients would gather all information and take recommendations from management. Not for the management company’s sake, but for their own.
M. Anne Ballard is president of Universal Management Co. (UMC), based in Atlanta, which provides global consulting for evaluations, feasibility studies, training and development services. For more information, visit www.universalmanagementcompany.com.