- Your great Aunt Martha is richer than God, has only a few days left on earth, and is leaving you her entire estate.
- Your best friend and business partner is Bill Gates, and you happen to have been one of the original investors in a little company called Microsoft.
- Your bank just informed you that because of your track record and borrowing history, any and all loans you seek are preapproved.
- You have controlling interest in Shurgard.
- Your last 15 self-storage projects have been home runs.
If you meet any of the above criteria, consider yourself blessed. If you meet two or more and are open to blind dates, I have several relatives you need to meet! All kidding aside, there seems to be some mystique surrounding the process of conducting a feasibility study. Who should you use? How much will it cost? What should you expect? Let's look at the procedure from the very beginning.
Finding a Feasibility Firm
Referrals. Referrals are great, but if you are referred by someone who just thought he got a good report, it doesn't do you any good. In addition to a referral, seek other references. It is also a good idea to go into the open market and shop your options. I suggest investigating some of the following sources.
Tradeshows. Go to industry tradeshows and visit the exhibits of companies that conduct feasibility studies. A good firm will be highly visible and available to answer questions. A tradeshow is a commitment. On average, it costs a company approximately $5,000 to exhibit (including travel and materials). If a firm is not willing to invest in meeting new prospects, you must wonder why. It could be the company just couldn't make it to a particular show; or it could be it is too busy to take on new business, financially unsound or just generally unavailable.
Articles and seminars. Look for a firm that contributes to the industry in ways other than advertising and marketing and keeps abreast of self-storage developments beyond its particular focus. Seek a well-rounded professional who has experience and expertise in acquisitions, management, brokerage, training, operating, financing and development. Perhaps the firm has written articles or conducted seminars on some of these topics. Not only are these good ways to learn more about the feasibility process, but they may provide insight to the quality of the firm.
Trade associations. It is a good idea to deal with firms that are members of state and national self storage associations--preferably ones active in the associations' activities. Giving back to the industry is an important part of the business process. It keeps consultants in touch with reality.
The Internet. These days, most reputable companies will have a website of some sort. If you search for a firm online, there are some things to look for: How informational is the firm's website? Can you view feasibility reports online? Are there other samples of the firm's work? Are fees listed? What about descriptions of levels of service? Are consultants' resumes posted? What kind of information is the firm willing to share?
Last year, I had Lasik eye surgery. Tempted as I was to use the doctor with the lowest price, I had to ask myself, is this a price- or quality-driven purchase? I submit that if you are putting millions of dollars at risk (or borrowing that kind of money), saving a few thousand dollars on a study is probably not in your best interest. Here are some hints on what you can expect to receive in the different price ranges. Keep in mind that in addition to the fee, the client is expected to pay for travel and expenses.
$0-$2,999: Fuhgeddaboudit. For that kind of fee, there is not much quality research or analysis a consultant can do. A knee-jerk reaction is the best this kind of analysis can produce. Pay for sufficient research so you can form an educated opinion.
$3,000-$4,999: The average consultant should charge around $75 per hour for his service. For this kind of fee, expect a one-day quickie. By the time travel and report-preparation time is included, the consultant cannot really afford to spend more than 35 to 45 hours total in this fee range. If he loses a day in travel and it takes two days to prepare the report, you might only expect him to spend a day or two on research and formulation of opinion. This fee should get you a decent report with the benefit of the consultant's instincts, but not a lot of documentation. If you are not using the report for a lender or investor, this may be all you need to spend.
$5,000-$8,000: In this fee level, you should expect a very high level of service. The consultant should be spending about 40 hours or more on research alone, and at least two to three days in gathering market information. The report should be very comprehensive and demonstrate to your banker or investor the level of research and analysis that went into the consultant's opinion. At this fee level, you should also get a loan package in addition to the feasibility study. (For more information, see the accompanying sidebar.)
$8,001-$10,000: This fee range should provide lots of follow-on service. The original assumptions should be updated and included at this fee, and you should get some design consulting. A unit mix is a must, so this level of service should include a beginning layout of the site, marketing plan, management plan and plenty of phone-consulting time. The consultant should invest well over 125 hours into the project. You should expect at least three to four days in the marketplace, and a significant amount of follow-up. You should also expect the consultant to offer to interact with engineers and architects in the process.
You should expect the firm will send you a letter of engagement or professional-services agreement. If it uses a one-page agreement, it may say something about the relationship you can expect, i.e., shortcuts throughout the process. While the agreement or contract should not be in volumes, it should address at least the following:
- Who are the parties?
- What is the cost?
- When is the report to be delivered?
- What are the liabilities of the consultant? (Relative to the assignment and the report, the consultant's insurance company is going to want to see strong language in this part of the agreement. If there's no language, there's probably no insurance.)
- How many copies will you receive?
- How are expenses calculated and paid?
- What kind of reliance language is included?
- What kind of controls are there on the report distribution? (A good consultant will be concerned about who will rely on the report and to what extent.)
You should expect to pay a deposit of approximately one-half the fee, plus expenses or a travel advance at the time you execute the agreement. The consultant should provide quotes for air fares and try to save you money by booking one to two weeks out.
When obtaining a feasibility study, gather the following information about your consultant:
- How many self-storage projects he has developed (not how many has he sold or how many feasibility studies he has done).
- How many feasibility studies he conducts each year. Make sure this is not just a part-time endeavor. Avoid brokers who may have a conflict of interest.
- Is he insured? With whom and for how much? Would he provide a certificate of insurance for errors and omissions or professional liability? Insist on insured consultants.
- What is the consultant's volume of self-storage transactions? A good target number might be something in the $500,000 range.
Where did the consultant receive his training to become qualified to consult? What kind of formal or informal training does the firm have?
- Ask for references. For whom has the consultant worked? Do you know them? Are any of the consultant's clients large firms such as Storage USA, Extra Space, Public Storage, U-Haul or Sovran?
- When was the last time the consultant sat behind the desk of a self-storage facility to know more about customer wants and needs? How does he stay in touch with the real self-storage world?
- In what types of properties does the consultant specialize? If your consultant is limited by geography or size, make certain he has the experience you seek.
- How long will it take to get the report? A good consultant is busy. A great consultant is busy and has depth--a feasibility study is not just a one-man show. Look for a consultant with enough resources to get the job done.
Subject to its purpose, the report should contain the following essential elements:
Community analysis: How much does the consultant research the local community? What historical perspective does he have? History repeats itself; knowing the roots of a community helps a consultant to know how it can support your project.
Neighborhood analysis: What comments are made about the neighborhood, its growth and composure? How are commercial and retail activity characterized? What does the consultant report about residential activity?
Site analysis: What does the consultant say about the site? What are its strengths and weaknesses?
Competitive analysis: Who are the competitors? Most important, how do they compare to your project? Where are they located? Does the consultant profile their amenities so you can compare apples to apples? Which competitors are primary and which are less important?
Rate analysis: How many competitors' rates does the consultant survey? Do they match your unit mix? What can he tell you about why the rates may be higher or lower? How easy is it to compare profiles of the competition?
Unit mix: How did the consultant derive your unit mix? Some would argue there is no formula that can determine a unit mix. It is an analysis based on market research, competitive data and experience.
Market definition: What are your primary and secondary markets? Does the consultant use nice circles to define a market? Rarely is a market circular--railroad tracks, freeways, golf courses, commercial developments, mountains and major arterials can divide it. A good consultant defines the market by man-made, natural and socioeconomic barriers.
Market analysis: Does the consultant know how you will get to stabilized occupancy? Does he know from where your tenants will come? Has he discussed barriers and competitors relative to the market?
Demographic analysis: A good study will define the primary market and analyze the demographics within it. Ask to see examples of defined market-demographic analyses. A thorough report will not only recognize and analyze the demographics of your site, but will pull reports on competitive sites to determine similarities and differences. Beware of postal counts--they do not tell the whole story.
Economic analysis: What data does the consultant provide to determine the economics of the deal? You should see month-by-month budgets for at least five years. This data will be needed to determine returns on investment. How thorough are the pro formas? Do they allow for expense and income increases? How do they treat the lease-up period? How does the consultant determine what your operating reserve should be to carry the project during negative cash-flow periods? Is this a "plugged" or calculated number?
Exit strategy: How are you going to exit this investment? What kind of guidance does the consultant provide? Does the report define institutional-grade criteria, and how does your project stack up? The consultant should perform three pro forma evaluations: base case, pessimistic (worst case) and optimistic (best case). He should be able to comment on how he stressed the analysis to determine the variances to base case.
Square-foot-per-capita analysis: It is one thing to analyze the square foot per capita, but an entirely different analysis to compare it to others in your market, the top 50 and 100 U.S. markets, then the whole country. How recent is the consultant's data? How many comparisons does the report cover? How does the square foot per capita relate to the market area as defined by barriers, not circles?
Cost analysis: To determine the return on investment, the consultant must determine how much money you are going to invest, which means a rough cost estimate is required. How does he obtain this number? How much detail does the report provide on the assumptions?
Return analysis: How does the consultant determine if the project is viable? At minimum, you should see internal rates of return, developers' yields and cash-on-cash returns for a period of five to seven years. Look at the assumptions and make certain the consultant can tell you how he came up with the returns. Most important, how does the consultant comment on the returns specific to your project?
The accompanying sidebar provides a list of what you should see in your report. There is no substitute for hard work, sound research and prudent analysis. The instinctual, subjective analysis is invaluable when the consultant puts his experience to the test, but a good consultant can only arrive at an educated decision through research. Do not settle for shoddy or minimal investigation. Ensure the consultant avoids shortcuts and gives you the benefit of thorough fact finding and an educated opinion.
For a detailed list of self-storage consultancy firms with contact information and links, visit the Inside Self-Storage online buyer's guide at www.insideselfstorage.com and click "Consulting."
RK Kliebenstein is president of Coast-To-Coast Storage, with offices in Boca Raton, Fla., San Diego and the Washington, D.C., area. Coast-To-Coast is a self-storage consultancy business that assists developers and owners in operating more efficiently and profitably. If you have questions about feasibility studies, Mr. Kliebenstein can be reached by phone at 561.367.9241; e-mail [email protected].
The Feasibility Report
What it should include:
- Table of contents
- Self-storage industry data
- Area, location and competition map
- Project description
- Photographs of property
- Community data
- Municipality data
- Flood map
- Macro and micro site analysis
- Square-foot-per-capita analysis
- Market demand
- Definition and comments on primary and secondary markets
- Competitive analysis: primary and market
- Unit mix and rental rates
- Absorption analysis
- Exit strategy
- Store-operations commentary
- Insurance quote
- Yellow Pages quote
- Construction-cost estimates
- Five to seven years of month-by-month budgets
- Investment-return analysis
- Conclusion and recommendations