Self-Storage Businesses and Government Don't Mix
By Matthew Van Horn
Over the past three years, how often have you heard about the government investing, bailing out, or getting involved in private business? It seems like a never-ending story. This is a trend which doesn’t seem to be ending with the banking, insurance or auto industries.
According to a news report out of Boise, Idaho, the state recently purchased a self-storage facility in the area. This was a private business purchased as an investment, which will be owned and operated by the state. The article also stated the new state-owned self-storage facility will be tax exempt. Tax exempt is two words any private self-storage owner will never hear, but then again your private business doesn’t get to be a ward of the state along with all of the benefits that come with this designation.
This discussion is not meant to start a political argument. This is not liberal vs. conservative, right vs. left, capitalist vs. socialist vs. fascism, or any other type of group infighting propagated throughout the media. Instead, we should be taking a common sense approach to why this is a horrible idea for the self-storage industry. Let’s look at some reasons why this is dangerous.
For a country based on the spirit of competition, this is completely unfair to the independent self-storage owners in this area. Now that the facility is tax free, that nice property tax number, which we as private operators have to take into account on an annual basis, just disappears. Wouldn’t it be nice to add that tax number back to your net operating income at the end of the year? What happens if this property has financial problems? What happens if it starts to struggle with increased competition? Does the state raise that tax rate to siphon off revenue from competing self-storage facilities?
Politicians Are Not Self-Storage Experts
Some politicians have owned businesses in the past, and some have even been extremely successful, but government isn’t business and vice versa. We need to have respect for the self-storage industry. It’s an industry unto itself. There are laws, verbiage, marketing techniques and nuances that are not the same as stadium, office, school or parking-meter management. Experience is king and it’s hard to learn on the fly.
Lack of Accountability
What if the property conducts a lien sale incorrectly and becomes involved in litigation? Who’s responsible? We don’t know who’s responsible, but we know who will pay—the great citizens of Idaho. When a company or individual develops or acquires a self-storage facility they’re held accountable to the investors or the financial institution who provided them with the funds for that self-storage facility. Since these investors or financial institutions are also typically held accountable to shareholders or other interests, each self-storage project is put through the typical underwriting process.
Does any citizen in Idaho know what went into the due diligence of this project? Is the project run by committee? If a competing facility down the streets lowers or raises its rates, or decides to offer a new special, is the management of this facility quick enough to make the necessary market adjustments?
Now that the state owns a self-storage facility in this area of Idaho, will they allow any other self-storage facilities to be constructed? Will the city or the county allow someone to plan and develop another storage facility in the area? The city or county is now out of the business of collecting taxes and development fees and into the self-storage business. If you had the power to keep competitors out of your market; what would you do?
If this self-storage facility has financial trouble or doesn’t meet projections does the state government bail it out? Typically a distressed self-storage property is disposed of through the market. Do you see a politician taking responsibility for a property that loses money? Will they take responsibility for the two to four jobs that are lost because of this? No way. They will continue to either support a money-losing property or sell it—with the taxpayers taking the loss in both cases.
How many people did you hear on TV say they will never buy a GM or Chrysler vehicle as long as the government is involved? How many of your friends said the same thing? One customer at this state-owned self-storage facility commented that if he had known the self-storage property was owned by the state he would’ve never rented there and went with a private business. This is an intangible that should be considered.
Government has a poor track record when it comes to innovation. The next great storage idea mostly likely will come from somewhere else.
These are just a few reasons why this state-owned self-storage facility is a bad idea. Where will the government stop? Will you go around the corner and see the state-owned fast-food restaurant next to the state-owned gas station, which leads to the state-owned grocery store? I guess we can all work for the government … I heard they have great pensions.
Matthew Van Horn is vice president of Cutting Edge Self-Storage Management, a full-service management company specializing in management, feasibility studies, consulting and joint ventures within the self-storage industry.