6 Common Myths About Self-Storage Development

Much like any commercial development, self-storage construction can be complicated, full of challenges and try even an experienced builder’s patience. Here are six preconceived myths about developing self-storage, and what you really need to know.

There are many preconceived myths about developing self-storage. Sometimes they sprout from pure enthusiasm over our industry from those who see the benefits of building a facility. Other times, they’ve just been perpetuated over the years. Like any commercial development, self-storage can be complicated, full of challenges that can try even an experienced builder’s patience. In the end, however, it’s well worth the effort, as evidenced by the intense interest in this real estate asset class today.

To help those new to the storage industry—or anyone who’s been out of the game for a while—here are six myths about developing a property in no particular order. Hopefully, this insight will help you make the right decisions in your quest for self-storage ownership.

Myth 1: I already own the land, so that eliminates a lot of obstacles.

Since the beginning of the self-storage industry, it seems that “already owning the land” has been and still is one of the biggest motivations for getting into the business. Decades ago, when the nearest competitor might have been 25 miles away in the next county, owning a piece of land gave you a leg up. In today’s super-competitive environment, however, it often puts blinders on otherwise very astute people.

I’ve heard on numerous occasions the pride folks feel that they’re using land their grandparents owned to build their first storage facility. I always challenge them to take a step back and objectively answer the question, “Would I buy this land to develop self-storage if I didn’t already own it?” In many cases, the answer is a resounding no! Notice I didn’t say in every case, but know that owning the land doesn’t mean it fulfills the vision of the ultimate self-storage site.

Myth 2: The seller’s real estate broker said it would be OK to build self-storage there, so I’m good to go.

With all due respect to my colleagues in the brokerage community, this myth most often results in problems. First of all, the seller’s broker is not working for you. His goal is to sell you the property, building or facility and earn a commission. When I find myself in this conversation with clients, I always lean on the adage, “trust but verify.” This is what you must do when buying land—or any asset.

You might trust the person with whom you’re dealing, but you still need to personally verify the information you’re given to ensure it’s 100 percent accurate. It’s the zoning or community building official who must confirm what you’ve been told, or the civil engineer you’ve hired. The last thing you want is to end up owning land that’s actually zoned for a park.

Myth 3: The land is zoned industrial so, of course, I can build self-storage.

All across America, the issue of how a piece of land is zoned and what you can build on it “by right” is a local political jurisdiction determination. I’ve lost track of the number of parcels of land with an “industrial zone” label that still involved the issuance of a special-use permit for self-storage. And in a few worst-case situations, self-storage wasn’t permitted in any zoning category within the community.

As a potential self-storage developer, you’re always knocking on the door of the local municipality responsible for zoning or development standards to get a definitive answer to these questions. You need to know: What zoning allows me to build self-storage and, realistically, what hoops do I have to jump through to get a building permit, especially if the land has to be rezoned?

Myth 4: The banker will just be interested in my personal financial condition, not the deal itself.

I can remember just one situation in all my years of consulting when a banker told me he didn’t care about the project the client was proposing to develop—he was prepared to give the customer a loan. However, this client turned out to be one of the largest public shareholders and among the biggest depositors at that local bank.

The details of your bank submission are critical. Even with the financial world truly awash in cash to lend, the bank’s underwriting department is still going to examine the details of the deal and, just as important, the management side of the project.

Yes, your personal economic circumstances, and the structure and financial condition of the general partnership or LLC applying for the loan, is a vital component. However, lenders know that while you may be qualified as a borrower with your financial strength, if you’re not prepared to manage and market a self-storage business, the loan could be at risk. I’ve always thought of it as the proverbial three-legged milk stool: your financial strength, the reasonableness of your development cost structure, and the proven ability to manage the ongoing business.

In many cases, lenders are willing to accept the credentials of a qualified third-party management company as a substitute for your limited personal knowledge within the storage industry. The earlier you start talking with your banker or one of the industry’s expert mortgage-brokerage firms, the faster you’ll determine your potential success in obtaining the loan you need to build your project.

Myth 5: A 30-day due-diligence period in my purchase contract should be plenty.

The terms of your purchase contract are all critical, whether you’re buying a piece of raw land to develop, an existing building to convert or an established self-storage business. However, no provision is more critical than the length of time you negotiate for your due diligence. One of the greatest myths is thinking you can get everything done in just 30 days. Look at a calendar. Within any 30-day period, you have at least three weekends, so there goes six days, with most offices closed and the inability to get the answers you need. Cross off another day if there’s a formal weekday holiday within your 30-day period.

If the property you’re buying requires a zoning change or special-use permit, do you really want to be obligated to buy the site before you know definitively what you can build? Of course not. So break this myth and establish a 90- to 120-day due-diligence period. Or extend the period until a permit to build has been issued.

Many land owners are reluctant to take their land off the market while you work through your due-diligence checklist. However, without a reasonable timeframe, you’re taking a significant risk and that’s not how you want to start your project. You can always close sooner if you’re lucky and get everything done before the due-diligence deadline.

Myth 6: Self-storage is very simply constructed, so I really don’t have that many building standards to worry about.

Don’t kid yourself into believing this one. There are just as many codes governing our industry as any other building-related industry in America. National building codes adopted by your state or local jurisdiction, Americans With Disabilities Act principles, building-insulation standards, local floor area-ratio requirements, building setbacks, green space and landscaping standards, storm-water management issues, impervious coverage maximums, etc., all need to be considered. You’ll be just thrilled with all the things you’ll learn about building standards and codes before you’re finished.

This means you need to assemble a solid team of professionals to help guide you through the maze that building has now become. Don’t buy into this myth and have it jump up and bite you with a requirement you didn’t expect, and don’t forget about the possibility of impact fees.

I could easily add more myths to this list. Instead, let’s finish with the encouragement of what thousands of entrepreneurs across the country and, now, around the world have experienced. You’ll soon be standing in front of your completed and fully occupied self-storage complex in several years and know that our industry still represents one of the finest entrepreneurial opportunities available.

Jim Chiswell is an industry veteran and the owner of Chiswell & Associates LLC. Since 1990, his firm has provided feasibility studies, acquisition due diligence, coaching and customized manager training. He’s a frequent speaker at industry tradeshows. To reach him, e-mail [email protected]; visit www.selfstorageconsulting.com.

TAGS: Development
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