Ask any mechanic, dentist or specialized tradesperson, and he'll tell you: Being successful depends on having the right tools for the job as well as knowing how and when to use them. It’s the same for self-storage investors and operators. In fact, a full and fully utilized toolbox has never been more critical than in today’s rapidly evolving self-storage market.
Once a relatively simple business, self-storage has become increasingly sophisticated, with technology being the driving force. As a result, owners are “re-tooling” their businesses, improving long-standing practices with the use of new technologies. Smaller operators, however, are recognizing that scale and capital can make a big difference in the ability to fully exploit state-of-the-art tools.
For example, large operators who can fund and operate sophisticated Internet-marketing programs are better positioned to capture consumer demand. This has led a growing number of smaller operators to affiliate with larger counterparts for access to their high-tech platforms and scale economies.
One of the easiest ways to partner with a larger operator without giving up ownership is through third-party management. This arrangement, which allows smaller owners to access and leverage a larger operator’s technology and processes for a fee, can offer benefits of scale that include marketing, access to call centers, sophisticated revenue management, lower cost of goods and services, and other efficiencies that are quantifiable over time.
A less obvious area that can directly benefit from third-party management is financing. How? Let’s take a look at how third-party management can be a valuable tool for obtaining a financing package in three different scenarios.
Shoring Up New Investors
Lenders understand that self-storage is an operational business, and they are often reluctant to bank a first-time investor. Third-party management can help new investors secure financing.
Lenders base their real estate credit decisions on strengths, weaknesses and mitigates to a transaction, which ultimately translate into calculated risks and returns. A lender may have great appreciation for the self-storage industry and be very comfortable with the physical real estate, but a lack of comfort with a particular sponsor’s experience can mean, at best, a higher cost of funds and, at worst, a decision not to provide financing.
An easy way for a first-time investor to overcome this obstacle is to propose the use of an experienced third-party management company to drive the operation. This may give the lender the additional level of comfort necessary to push the loan through approval.
Insulating Out-of-Town Investor Buyers
Similar to new investors, out-of-town buyers often present a paradox for lenders that third-party management can be useful to overcome. Local and regional banks, for example, are a traditional source of financing for self-storage transactions. They typically have a relationship-oriented mindset with their customers and a geographic footprint that dictates where they can lend. When an existing bank client chases an opportunity outside the bank’s footprint, the existing lending relationship may not be willing or able to follow that investor out of market and provide funds for the opportunity.