The full impact of the coronavirus pandemic on the self-storage industry is still unclear. For many operators, the question remains whether rising unemployment and business closures will significantly impact unit rentals in the long term. Self-storage may be considered “recession-resistant,” but financial health can still be challenging in times like these, particularly for owners who just opened a facility or are in the middle of lease-up. With that in mind, let’s explore four potentially stabilizing options you may want to consider.
Rework the Budget
A business owner often has the qualities of both an entrepreneur, who dreams of growth, and an accountant, who has clarity and feels the pressure to manage income. When times get tough, there’s an opportunity to balance what’s hoped for with what’s needed. Accordingly, many self-storage operators will begin to review their expenses, which is wise in the current circumstances.
To help “trim the fat,” you can do things like renegotiate contracts with vendors, evaluate and modify your staffing needs, and explore other ways to reduce static overhead costs. Look at your marketing strategies and where you’re focusing your sales energies. You can often rework these plans to increase revenue. Sometimes, thinking outside the box will help you discover how to effectively differentiate your business from competitors.
With interest rates being attractively low, this seems like a smart option. Just remember that the desire to restate the deal on a pending loan will be almost impossible until banks are able to fully calculate their exposure from outstanding debt. Based on the pandemic and its impact on valuations, the willingness of banks to defer payments or restructure borrower obligations will be unique situations because of fiduciary obligations to stockholders.
Banks learned a considerable amount about their lending risks and the devaluation of assets during the Great Recession. As a result, there will be a move toward strengthening the base of their capital and avoiding actions that impact their liquidity during this period of economic uncertainty.
Sell Your Property
As the markets turn, self-storage owners interested in exiting their investments will find a large supply of willing buyers. Though selling now may not have been the plan you envisioned, if your storage business creates risk to other assets you own or your overall sustainability, looking for an exit with a buyer who can cover the cost of the debt and even provide a return on investment may be exactly what’s needed.
The deep pool of buyers in this industry is one reason self-storage has one of the lowest foreclosure rates among any type of real estate. Typically, properties for sale are within a value range that can be bought and sold quickly, with minimal due diligence. Based on where capitalization rates have been within the last year, it’s still likely that sellers will be able to exit their investments—even with lender defeasance provisions—without significant loss and possibly even some gain.
One of the most subtle impacts of the Coronavirus Aid, Relief and Economic Security Act was the passage of the Small Business Reorganization Act (SBRA), which changed the laws for small businesses considering a Chapter 11 bankruptcy or “reorganization.” SBRA raises the maximum qualifying debt for a Chapter 11 filing from $2.7 million to $7.5 million through March 27, 2021.
This means that small businesses that otherwise wouldn’t have qualified for this quicker and more cost-effective protection will now have the opportunity to use this filing. Unfortunately, to be eligible, the debtor cannot be a single-asset real estate company, which would likely exclude a large number of self-storage operators who’ve organized their businesses under this limited-liability structure.
There are obviously other downsides to any bankruptcy. Under most lender provisions, filings create a loan default and trigger claims under any personal guarantee that was created.
Explore Your Options
Self-storage is a unique business, one that seems to survive in good times and bad. Though it’s unclear what the next few months will look like for real estate, it’s always good to plan ahead. Explore your options now. It may be time to consider your finances as well as the long-term outlook.
Scott I. Zucker is a founding partner in the Atlanta law firm of Weissmann Zucker Euster Morochnik & Garber P.C. and has been practicing law since 1987. He represents self-storage owners and managers throughout the country on legal matters including property development, facility construction, lease preparation, employment policies and tenant-claims defense. He also provides, on a consulting basis, advice to self-storage companies in the areas of foreclosure and lien sales, premises liability, and loss-control safeguards. To reach him, call 404.364.4626; e-mail firstname.lastname@example.org.