Business and Government Don’t Mix … The Chilling Conclusion, Part II
In November of 2010, it was reported the State of Idaho decided to buy a privately owned self-storage facility. The Idaho Department of Lands is currently operating this facility in competition with private business owners.
This is part two of a blog concerning the state’s response to an inquiry from the Self Storage Association (SSA). As I wrote in a previous blog the concerns with this type of state can be broken down in to seven main issues:
Tax-free operation : No property taxes will be paid by this state-owned facility, period.
Experience : The state has no experience in the self-storage industry.
Lack of accountability : The rest of us have to be accountable on an individual basis to investors or financial institutions. Who’s held accountable for this facility and to whom?
Competition: What will hold the state back from limiting competition to their new self-storage facility?
Bail out: With the government as an investor, a bailout is always possible. No fear of the facility being disposed of through the market if it fails financially.
Consumer backlash: How many people do you know that will not buy a GM vehicle because of government ownership?
Innovation: The government has a horrible record when it comes to innovation.
The following are the remainder of the questions from the SSA along with answers by the state, and my analysis of the state’s responses:
SSA: If the state-owned facility does not pay property taxes, how will the state establish rental rates? If these rates are based upon operating expenses that do not include the same property tax expenses as private sector owner/operators, will your pricing be discernibly cheaper, thus undercutting private competing operators?
State of Idaho: State law requires trust managers charge “market rates” throughout the duration of its leases and contracts. Like all investors, the trust has fixed and variable expenses, even some that private parties do not have, like general governmental overhead. In tough economic times that means profit margins are pinched. We are experiencing that now in some of our other commodity-based asset types that sill necessitate marketing products in the current down economy.
Similar to private REITs [real estate investment trusts], we use local third-party contractors to manage our commercial office/retail/industrial properties. These contractors handle day-to-day operations using their staff (not state employees), and they advise the state on marketing, maintenance and pricing, etc., commensurate with prevailing market conditions. These contractors pay attendant business and income taxes based on their business operations.
Analysis: Again, another answer we need to really pick apart. First, no one cares that the management company for the self-storage facility pays its required taxes, welcome to business. Every management company pays taxes based on the amount of business income it generates. Regardless of whether this facility is privately owned or state owned that tax revenue would still be there as long as the management company was contracted. If a management company wasn’t contracted by a private owner then the privately owned self-storage facility would still be responsible for property taxes, which the state-owned self-storage facility is not responsible to pay.
Second, the answer doesn’t elaborate on what the state considers “market rates.” Are market rates considered to be an average of all available rates in a designated radius? Is 5 percent or 10 percent above or below the average rate still considered market rates?
Third, what are these “general governmental overhead” expenses that are so much more than the expenses an average private owner is responsible to cover? I would like to see a list of these line-item expenses listed as overhead. I don’t believe for a second that these extra operating expenses are enough to offset the fact that the state doesn’t pay the thousands of dollars in property taxes the private owner is responsible to remit to the state annually. You should not be investing in self-storage if you need a state-granted property tax subsidy to cover your operating expenses so that you may be profitable.
SSA: Does the State of Idaho plan on continuing the practice of purchasing private self-storage businesses?
State of Idaho: We are sure you can appreciate that no prudent investor would openly reveal its specific business strategy. That said, the trusts’ over-arching asset management plan does articulate the desire and need to bring more diversification to the current portfolio.
Analysis: The answer to this question is yes, summed up in the statement “desire and need to bring more diversification to the current portfolio.” The state is not Gordon Gekko or any other private investor and should be clear about its investment strategy to the people of Idaho. Other industries in the state of Idaho should have a cold chill run down their spine with this response.
As I’ve stated before, regardless of what area of the self-storage industry you work in, this issue affects your business. The question really is: What can we do? First, identify Idaho state representatives that support private industry and make them aware of this issue.
Last, every self-storage operator in Idaho needs to support and contact the Idaho Self Storage Association and the SSA. I highly recommend you read the state’s responses as they were released by the SSA and posted on the ISS website. We work in a great industry that’s exciting and constantly changing. Private investment keeps costs down and rental rates affordable, let’s make sure that continues.
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. To reach him, e-mail email@example.com .
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