The Big Stuff: Making Capital Improvements at Your Self-Storage Facility

Ah, capital improvements …the big repair and replacement projects that eventually need to be done at every self-storage property. They not only impact how the facility looks and functions, which affects its value, they can severely stress your finances if not anticipated. Failure to prepare can quickly result in lost income. You don’t want to be caught flat-footed and forced to pay out of current cash flow or, worse, your own pocket.

The following will help you assess your self-storage site for potential repairs and replacements, so you can better plan for the work. You can use this guidance to create your own capital-improvement strategy.

Areas to Assess

The first step is to make a list of all the potential capital improvements at your self-storage facility. Make notes regarding the expected remaining lifespan of each building component and piece of equipment as well as its replacement cost. If you need help, lean on the expertise of an engineer, architect and other vendors with whom you’ve partnered in the past. Searching online can also provide a lot of the information you need, except for items that require inspection. Your list should address:

Many of the components listed above should be inspected by an expert to properly determine the condition and estimated remaining life. If you bypass these checkups, you increase the chance that you’ll have to deal with replacements sooner than expected.

The initial quality of any item will have an impact on how soon it needs to be repaired or replaced. The better the quality, the more longevity. This is why it pays to vet options early in the facility-design process, so you can ensure the best components. If you developed your self-storage facility yourself, capital-improvement costs should have been considered during this phase. If you acquired the asset from someone else, it’s important to obtain the installation and expected end date of each item from them.

Big-Ticket Items

With so many moving parts, a self-storage facility might require lots of work over the years to remain functioning and competitive. However, there are a few projects that are common and hefty. Here are three common components for which the lifespan can be substantially different from what’s expected based on design decisions and maintenance strategy.

Pavement. This can have a significant replacement cost, typically well over $100,000. That said, a high-quality product, which comprises 3 inches of pavement with 12 inches of gravel base, can last as long as 20 years or longer. If you were to reduce that thickness to 2 inches, the pavement would have a significantly shorter life. The same is true if the gravel doesn’t meet material specifications or isn’t properly compacted.

When pavement is installed correctly, it requires only limited maintenance for many years before cracks or low spots occur. At that point, you can fill cracks or selectively replace the pavement at low spots or places where cracking is excessive. This may buy you a few extra years to prepare for the expense of replacement.

Roofs. A replacement here is another major expense, so it's important to know the type of roof you have to predict its lifespan. Sometimes the material type and thickness (gauge) is chosen by the building manufacturer or architect, but there can be a substantial product-life variance between one product and another. These factors and installation all impact longevity.

Your roofs should be inspected annually. You might be surprised by some of the items you’ll find. Some areas of metal roofs can rust, causing premature failure.

HVAC units. Replacement can easily cost more than $10,000 per unit, and a self-storage facility often has several. Left to their own devices, some contractors will install the cheapest brand available. It’s important to know the manufacturer, model and size of the HVAC unit being used. Often, it’s worth the added expense to buy a product with a longer guarantee and expected life.

Again, regular maintenance can extend the equipment’s useful life. Have your system checked annually by a qualified HVAC mechanic and repair it as required. Oh, and don’t forget regular filter replacements!

Budgeting Advice

To prepare for capital improvements to your best ability, set up a savings account or accounting designation specifically for these projects. Using the list you created above, you should know when items are expected to need repair or replacement and at what cost. Now you need to decide if you want to fully pre-fund each project or set aside a percentage each year. For example, if a piece of equipment is expected to last 12 years, you could save one-twelfth of the replacement cost each year, so you have the full amount when the item needs to be replaced.

In practice, not all self-storage owners take this approach. Another option is to save only 50% of the expected expense, with the understanding that if that amount isn’t enough to cover the cost, the balance will come from your profits. If you intend to finance the outstanding balance, you might choose to save only 25% in advance. This sometimes makes sense if the mortgage is renewed every five or 10 years. The key thing to remember is the earlier you start your fund, the less you must save annually.

I should also mention that when it comes to filing your taxes, you may have to depreciate or expense all or part of your capital expenditures (capex) over a specified period. Typically, there’s a limit to the capital-improvement write-offs that can be expensed in the same year they’re built or installed. Thus, it’s important to review your depreciation options with a certified public accountant. You may want to tackle some capital improvements over multiple years for tax-savings purposes.

Project Triggers

Ideally, you’d like to pursue all self-storage capital improvements on your own timeline, but that isn’t always possible. Failures can occur unexpectedly through no fault of your own. Sometimes, investment is necessary to evolve the business and stay competitive. If you aren’t careful, negligence might also necessitate additional work.

There are times when a component will wear out prematurely or instantly without warning. A good example is a lightning strike that fries your entire camera system. To prevent a situation like this from financially crippling your business, create a capital fund in addition to any operational cash reserves, so money can be dispensed quickly to cover unexpected issues. By combining these reserves with your “safe cash” and ongoing capital-improvement savings, you should be able to weather a major hardship. In addition, check with your insurance company to confirm that you’re covered for damage sustained from flooding, wind and lightning.

Some upgrades, such new technology, are necessary to remain competitive, improve efficiency or cut operating expenses. Converting a facility to LED lighting is a good example. These types of renovations are voluntary and don’t have a deadline, so they can be scheduled for a time when you aren’t juggling other big-ticket or time-sensitive projects.

Other capex may arise due to operational oversight. Failure to perform preventive maintenance, for example, can lead to premature failure and lost profit. It can also prevent you from optimizing your rent to help fund planned projects. The value of an old, rundown self-storage facility vs. a well-maintained one can be drastic and prevent you from addressing emergency or desired upgrades.

As you can see, there are plenty of reasons to have a thorough capital-improvement plan for your self-storage operation. The financial risk of not having one can be catastrophic. Beyond having to delay needed improvements or repairs, operating without a capex safety net can severely impact your profits or force you to pay from personal funds.

Marc Goodin is president of Storage Authority LLC, a self-storage franchise, and the owner of three self-storage facilities that he designed, built and manages. He’s been helping others in the industry for more than 30 years. To reach him, call 860.830.6764 or email [email protected]. You can also purchase his books on facility development and marketing in the Inside Self-Storage Store.