Why Self-Storage Owners Must Have a Succession and Estate Plan

If you’re a self-storage owner, you must plan for the future of your business. We never know what life will bring. If you don’t intend to sell, what will become of your asset when you’re ready to step away, or something happens to you? You need a succession and estate plan, the purpose of which is to ensure your business continues to operate successfully and that its value is preserved.

Now’s a great time to meet with your trusted advisors and explore “what comes next.” Have you examined and prepared for the financial impact of the estate tax on your company? Do you have family members or loyal employees who’ll be able to take over the operation of the facility (or facilities) and continue to make good decisions for the future? Do you need to explore the benefits of third-party management?

Let’s discuss why succession and estate planning is so important, what poor planning could cost you, and ways to keep the business going if you want it to continue in your absence.

The Cost of Poor Planning

Every business has a beginning (development phase), a middle (operational phase) and an end (sale or transfer of ownership phase). It’s important to ensure that last phase is well-planned and there’s no emergency sale of your self-storage asset due to your unexpected death or incapacity. A distress sale and excessive estate taxes can be quite financially punitive. A good succession and estate plan will help avoid this hardship.

So, let’s talk numbers. In 2020, the federal estate and gift-tax exemption from the Internal Revenue Service is $11.58 million per individual. That means a single person can leave $11.58 million to his heirs and pay no federal estate or gift tax, while a married couple will be able to shield $23.16 million with proper planning. The tax is 40 percent on estates worth more than those amounts. Your state may have additional estate taxes as well.

While it isn’t enjoyable to think about, it may be that your self-storage operation (with other individual assets) already exceeds those exemption limits, and you would need careful planning to minimize the financial impact. Now may be a good time to revisit your estate plan with your accountant and attorney, especially if you own multiple facilities.

In addition, it’s an election year, so the estate and gift-tax exemption levels may be decreasing significantly, while the tax rates may be increasing. Proper planning here may be necessary for all self-storage owners.

The Importance of Personnel

As the owner, you need to know when to move on from the day-to-day operation of your self-storage business. It’s easy to stay in charge for too long. You may have a loyal family member or employee who has the ability and desire to continue the business you built, but if you wait too long to let that person grow into a leadership role, he might move on to another opportunity. Move over sooner than later and put a future leader in charge. You know you need to groom a successor, so act on it.

If you want the business to continue, it’s important to train and retain the key personnel who’ll operate and potentially expand it. Your staff are already an important aspect of your success. Hopefully, you’ve hired good people and kept them happy. To ensure they stick around, consider:

All these things will help to engage your team, and it builds the networking base and competency of your future leaders.

In some cases, neither a family member nor an existing employee is available or ready to take the reins. This can happen despite your best efforts. In these situations, consider hiring a third-party management firm for your self-storage business. The company can handle all aspects of operation, giving you the freedom to pursue other activities. The fees involved are usually 4 percent to 6 percent of gross revenue, including a base amount for smaller stores or those in lease-up.

When seeking a management partner, take a good look at regional and national firms. There are many excellent choices, and it might be the best option for your business.

Act Now

The big take away is you need a succession and estate plan. Without the proper planning, the value of your asset may be subject to a significant estate-tax burden. You don’t want your years of hard work to be blown up in a moment by something unexpected. The goal is to preserve the value of your business for future generations. A meeting with your trusted and competent accountant and attorney to discuss these matters is well-advised.

Jeffrey B. Turnbull is president of Kodiak Mini Storage II LLC. He’s been involved in the self-storage business as a developer, operator and owner for more than 20 years. He’s a licensed attorney in North Carolina, a licensed real estate broker in North and South Carolina, and a past president of the North Carolina Self Storage Association. He’s a regular contributor to “Inside Self-Storage” and a speaker at various industry events. To reach him, e-mail [email protected].