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Articles from 1997 In October

Ask The Waldmans

Ask The Waldmans

Working for Free

Dear Waldmans: I am an assistant manager of a self-storage facility, where I work a 27-hour work week. Because I live on the premises, however, my employer expects me to be on-call at all times for security reasons. I am required to live on the premises, where my employer pays the rent and utilities. I am paid a salary of $200 per month, which totals approximately $1.85 an hour. In addition, I receive bonuses depending on how many units I rent throughout the month. My question is whether my room and board and bonuses should be included in my compensation or is my employer breaking the law by not paying me a minimum wage?

--Short-changed in Mass.

Dear Short-changed in Mass.: If you are still absolutely sure you are working for free after reading this article, you have an obligation to say, "no."

Generally, the minimum wage prescribed by the Fair Labor Standards Act (FLSA) must be paid in cash or negotiable instruments, such as a check. However, the FLSA does not require that all wages be paid in cash. It permits an employer to offset the minimum wage obligation by the reasonable cost or fair market value of board, lodging or other facilities furnished by the employer to its employee, even if this offset reduces an employee's cash wages below the statutory minimum wage.

In order for board, lodging and facilities to be included in an employee's compensation, an employee must receive a benefit for which he is charged. Over the years, courts have found that when an employer provides a free apartment to its employee, and the employee accepts the contractual agreement, the apartment along with the amenities will be part of the employee's compensation, even where the primary benefit of the arrangement was not necessarily derived by the employee.

Moreover, time worked under the FSLA depends on the particular circumstances of each case, in accordance with general concepts of employment. Some factors to be considered in determining if time devoted to a particular activity is time worked include 1.) whether the employer controls or requires the hours spent in the particular activity; 2.) whether the employee has any freedom to leave the premises during those hours; and 3.) whether there is relief from on-call status.

Generally, an employee who resides on the employer's premises on a permanent basis or for an extended period of time is not expected to work all the time. He should be able to have periods of complete freedom from all duties, during which he may leave the premises. Moreover, the mere fact that an employee is given no relief from his on-call status does not make the time compensable, as long as he is free to use the time for his own purposes.

As to your question regarding bonuses, the FLSA mandates that bonuses can be included in an employee's compensation only in limited circumstances. In most cases, where bonuses are provided as compensation for services rendered, they can be credited against minimum wages due, subject of course to a few exceptions. For example, bonuses promised to an employee to induce him to work more steadily, rapidly or efficiently or to remain with the employer, do not qualify for exclusion from an employer's compensation. On the other hand, where bonuses are in the nature of gratuities (i.e., Christmas gifts), they may not be included in an employee's compensation.

Based on the above, it appears that your board and lodging and bonuses may be included in your compensation. However, we do not have all the facts to make a definite determination as we would need to know all the specific details. If you feel that your employer is violating the FLSA, we recommend that you discuss your situation with an attorney who specializes in employment law.

A father-daughter team, Stanley and Jill Waldman are self-storage owners/operators and attorneys. In addition, Ms. Waldman holds a master's degree in labor and employment law from Georgetown University. Together they have co-authored a number of books on self-storage operations, including Getting Started in the Self-Storage Business, Self-Storage Business Management Forms, The Policy & Procedure Manual for the Self-Storage Business, Selling Your Self-Storage Business and The South Carolina Tools Manual for Self-Storage Operators. Comments and questions may be sent to: Ask The Waldmans, P.O. Box 21416, Charleston, SC 29413; or via their Web site:

Your Facility Report Card

Your Facility Report Card

Dean's List or Academic Probation?

By Cecile Blaine

If your facility was a student, what grade would it get on its end-of-the-year report card? Would it be an A+ or a C-? You be the judge. The end of the year serves as an excellent time for you, as a facility operator, to take a look at your business and assess how well it is doing in terms of maintenance and management issues.

Now is the time when the maintenance schedule you put together at the beginning of the year should be put to the test. Have the daily, weekly and monthly chores been done regularly and on schedule? If not, you'll want to make note of them and set some goals for next year. What are the priorities? What is being neglected? What projects need to be budgeted for? Answers to these and other questions will help you create not only a maintenance schedule for next year, but a budget, as well.

Typically, the manager is the person who is in charge of implementing the maintenance check list and the budget that fuels it. If that is not the case, however, it's time to stay after class, says Jim Chiswell, owner of Chiswell and Associates Ltd., a consulting firm out of Amherst, N.Y. "Don't let another year go by without (the manager) getting involved in the process," he stresses. "The manager is the front line. He is the greatest tool that any owner has--whether the facility is going to be successful or not.

"When filling out your facility's report card, look first at the key maintenance issues that directly affect your customer. Chiswell recommends keeping the customer in the forefront of your minds. "I want to make sure that my customers are happy," he says.

Where's the Water Fountain?

Leaky roofs and flooded units, for example, can spell disaster at any facility. "The whole issue of water for this industry can be a killer," Chiswell points out. As a result, maintaining the quality of a facility's roofs and gutters is essential.

Sigel Roush agrees. As vice president of Capacity Development, a facility management firm in Highland Park, Ill., Roush says you should start tallying your facility's report card from the top. "You should make sure that the integrity of the roof is in tact, especially the flat roofs," he says.

Roush's staff walks the roofs of his facilities once a month to clear them of garbage, because those items can eventually rust and create leaks and other internal problems. Some of the worst cases involve people throwing automobile batteries on roofs, with the battery acid burning holes in the roofs or even causing explosions, according to Roush. Because the roof is such an important and vulnerable area, it's a good idea to add it to the annual report card.

You can't have well-maintained roofs with stopped-up gutters. Sooner or later, gutters that aren't draining properly will back up and force water, snow or ice onto the roofs. Then, leaking can't be far off. By the same token, you need to keep nearby trees trimmed and keep leaves from building up in the gutters. So, that's another section of the report card that needs attention.

Lots of today's facilities are designed with storm water retention systems, creating yet another channel in which water can back up and flood a facility. As a result, operators need to maintain the drain and make sure it is free from garbage, leaves or anything else that could stop it up.

"You want to make sure your storm water receivers are clean--not just the top of the grate. Pop the grate right off and get down and really look. If you've got to get down in there with a shovel, you've got to do it," says Chiswell.

Open Sesame

Another maintenance issue that can directly affect customers is the security gate. If the gate hasn't received proper attention throughout the year, such as a monthly oiling, it could break down unexpectedly--leaving customers locked out and angry. "When was the last time you spent a few dollars to have someone come in and make sure that the chains are properly oiled, that the motor is tuned up, or that the linkage is tight?" Chiswell asks. "Again, from the perspective of a northeast operator, you are going to have more harsh conditions," he adds, which make it advantageous to maintain it now.

Likewise, swing doors can rust if the hinges are not oiled regularly, preferably on a monthly basis. According to Roush, when a customer who hasn't visited his unit for a year tries to open the un-oiled door, he sometimes bends the hinges instead. "Then, you have to replace it," he says. "That is just way too much fun for one adult in the winter."

Snow Days

Winter's here, and part of your facility's report card should include a section on winterizing your business. Is your facility ready for the first snow? Do you have a company that will provide snowplow services? Do you have a current contract with the company, and how do you know they will come when you need them?

"I don't care what business you are in--you want to make sure that the person who is charged with the responsibility of plowing that lot is reputable, has insurance, and that means he probably isn't the lowest priced guy in town," Chiswell points out.

Problems with pavement and driveways need attention before winter hits, because chances are they will only get bigger. Cracks or potholes need to be patched before the freeze-and-thaw cycle makes a Grand Canyon out of your driveway.

School Daze

Winter means shorter days and longer nights. How does your facility look at night? This may be more important than you'd like to think because, as Chiswell points out, "There are as many potential prospects driving by your facility at night when no one's there as there are during the day. And a properly lit facility can look very attractive and much safer."

Changing light bulbs in the late fall can prevent having to expose yourself to the elements in the coldest winter months. In fact, some facilities track when they change bulbs and do a mass bulb change in the fall. "We try to make sure that we change those in October or that you don't have to go out in the dead of winter and change a halogen bulb," recalls Roush.

From Loafers to High Heels

The end-of-the-year report card requires that you look at your facility from a different perspective for once. Try to look through new eyes, recommends Chiswell. Ask yourself if your facility is as comfortable for women as it is for men. "You have to look at your self-storage facility like you have a pair of high heels on," he says, pointing out the importance of female customers in the scope of business.

Appealing to women through the decor of the office is another element of the business that is worth looking into. Chiswell suggests adopting a decor that is female-friendly.

"I'm not saying paint the office pink and have bows everywhere, but not early Tool Time, either," he says.

Maintenance Allowance

By the time you've given your facility it's grade for the year, you have collected enough information to create next year's maintenance budget. Some lenders require a set-aside maintenance budget of 4 or 5 cents per square foot, per year. Whether you arrive at it through guesswork or an equation, the research you've just done is invaluable. And the older the facility, the more need there will be for a maintenance budget. In fact, Chiswell recalls, "I've seen facilities that are 5 years old that have just been totally ignored and a facility that is 10 or 15 years old that looks 10 times as sharp," due to the degree of maintenance that has been followed by the manager and operator.

R.M.A. (Remember Me Always)

Probably the most valuable information you gather through a facility report card is about your customers. Who were they? How old are they? Where do they live? Whether you have a computer or not, you now have a full year's worth of customer information at your fingertips, and it would be a crime not to use it.

"Let's say that the average commercial customer is renting a 10-by-10 or larger space, and we determine that by looking at the trends, that our commercial customer stays an average of 20 months and that our average residential customer stays an average of three months," says Chiswell. "Who would I rather have?

"(Commercial customers) pay better, they stay longer. But in many cases, we are doing nothing to try to attract them."

Likewise, it's also an excellent time to ask yourself if you are getting the kind of return on auctions that you are looking for. If your recovery rate is very low, then you might want to direct more attention toward negotiating with customers and avoiding auctions altogether. "Let's say you auction 50 units, and on those units, you averaged 90 percent recovery," says Chiswell. You could consider your auctions very successful. If, however, you only recover 10 or 15 percent of what's owed to you through the auctions, then it is probably better to make a deal with your customers to get them to pay what they can, so you can repossess the unit.

Final Exams

Getting an "A" on your facility report card at the end of the year is certainly something to write home about. Whether you get to go to the head of your class or you have to stay back a year, sometimes the journey is just as important as the destination. In other words, no matter what grade you received on your facility report card, use what you've learned about your facility in the next year as far as knowing where the sticky maintenance issues are, budgeting, marketing and handling delinquent accounts. In all these areas, it is easy to see that a little maintenance each month goes a long way toward keeping the annual chores down.

"By staying on top of the faciliy, by correcting the little things, it prevents them from creating major problems later," concludes Chiswell.

Protecting Yourself Against EmployeeDishonesty

Protecting Yourself Against EmployeeDishonesty

Employee dishonesty insurance, sometimes referred to as crime coverage, is one type of insurance that may be as essential for protecting your self-storage business as fire or liability insurance. Dishonesty losses in the United States are known to be in the billions of dollars each year, and employee theft stands as one of the most under-reported crimes affecting businesses. In fact, more money and property are stolen annually by trusted employees than by all of organized crime.

One compelling reason for securing crime insurance is that employee dishonesty losses are excluded from coverage under virtually all commercial property policies. Fortunately, employee dishonesty coverage is available from many specialty insurers at very reasonable rates. When you compare the potential losses you may suffer from employee theft with the very affordable cost for this coverage, crime insurance becomes a prudent investment for concerned self-storage facility owners.

Unfortunately, dishonesty insurance is often overlooked by many self-storage facility owners who prefer not to be suspicious of the people working for them. The fact of the matter is that your most trusted employees are in the best position to use their knowledge of your business operations to steal or embezzle from you.

What can you do to protect yourself from employee dishonesty? The best available defense includes implementing strict operating controls in combination with careful employee supervision--and securing adequate insurance protection. The focus of this article is to provide a brief overview of commercial crime exposures facing self-storage facility owners and the coverages available to protect yourself against them.

Crime coverages can be tailored to fit the size and scope of your self-storage operations and can protect you against such losses as robbery, burglary, theft, embezzlement and more. In most cases, your business-property and liability package policy can be endorsed to provide coverage against employee dishonesty, the loss of money and securities from your premises, and the loss of other covered business property such as computers or office furniture. Keep in mind that covered items may also include the property of others for which the insured is liable, so you will be covered in the event that an employee was to steal from one of your customers.

Employee dishonesty insurance can be written in two ways: as a blanket-coverage policy or as a scheduled-coverage policy. With blanket coverage, the limit of insurance applies to each loss, no matter how many employees caused the loss and whether or not any were caught and identified. With scheduled coverage, the limit of insurance applies per employee, who must be specifically identified (either by name or title) in the policy declarations and who must be identified as the person(s) causing the loss.

Although scheduled coverage might appear to be more desirable than blanket coverage, that is not always the case. Scheduled coverage is usually much more expensive than blanket coverage for any given number of employees, and the per-employee limit of a scheduled coverage form applies only to those employees that can be precisely identified as the perpetrator(s) of a dishonest act.

One very important point concerning employee dishonesty claims is that "dishonest acts" must be committed with "manifest intent." In other words, a loss resulting from an unethical act, such as lying, must be due to the employee seeking personal gain. Without manifest intent such claims would be disallowed. Also, inventory shortage claims are excluded from employee dishonesty policies, because losses can occur from a variety of reasons besides theft, such as accounting errors.

Money and security claims, and business-personal claims are not the only losses that can be covered under employee dishonesty. Riders are available to protect you against check forgery, credit card misuse and computer fraud/theft of information to supplement your existing protection at extra cost.

In addition to implementing security controls and procedures, several commonsense measures can help minimize your risk of theft. Checks should be immediately stamped "for deposit only," for example, and invoices should always be stamped "paid" to circumvent the chances of paying the same invoice twice. Fidelity bonds are also available that can give you added protection. However, for true peace of mind, it's probably best to expand the value of your insurance by purchasing dishonesty insurance. Consult your insurance agent for complete details. *

David Wilhite is marketing director of Universal Insurance Facilities Ltd. Universal offers a complete package of coverages specifically designed for the self-storage industry, including loss of income, employee dishonesty, comprehensive business liability, hazardous-contents removal and customer storage. For more information, contact Universal at Box 5400, Scottsdale, AZ 85261-9957; phone (800) 844-2101; fax (602) 970-6240;

MaintenanceA full-time job at any facility

A full-time job at any facility

By Pamela Alton

There are several reasons why a tenant will choose to rent at your facility, including: location, convenience, hours of operation, price, cleanliness and attention to maintenance. You do not have to have a brand-new, state-of-the-art facility with video cameras, door alarms, etc., to run rings around your competition if it is clean and well-maintained.

Take a look at your site through the eyes of a prospective tenant. Would you rent at your facility? People choose to use storage for a number of reasons, but one thing is certain: They are storing because they believe their items are valuable. Otherwise, they wouldn't pay rent each month to keep their goods. Does your manager receive plenty of calls and get people to come and visit the facility, yet they don't choose to store there? Could it be because the facility is dirty, run-down and in need of major repairs? Most prospective tenants will come visit the facility they are considering to store at before they actually move their items into a unit. The first impression means everything.

Maintenance of a facility should be a full-time job for your onsite manager. Keep in mind that there is more to maintaining a facility than just running a broom around the floor of a vacant unit. Maintenance and cleanliness mean different things to different people. Don't assume your manager has the skills or the knowledge it takes to maintain your facility. Show them what is expected of them and make sure you give them the tools to do their job effectively.

Interior Maintenance

Obviously, the manager must keep all vacant units swept, clean of dirt and debris, and free of insects and rodents. The facility should be sprayed regularly to keep insects at bay, and rodent poison should also be placed in each unit. Look up at the ceiling in a unit and make sure all cob-webs are removed. It wouldn't hurt to place a copy of your facility's rules and regulations, along with a list of items that are illegal to store, on the inside wall of the unit. Hallways, stairs and elevator shafts should be swept and kept clean. Hallway lighting should be checked daily, and any burnt-out bulbs should be replaced immediately. When your manager does his morning "walk down," taking extra locks for overlocks, he should also bring a notepad and pencil, and a small broom and a dustpan so that he may accomplish several tasks and save some time.

Keeping hallways, stairwells and entryways swept will give interior units a well-maintained look. This tells the prospective tenant that the manager cares about his facility; in turn, the tenant will feel good about storing their good with your company. Make a note here that using blowers in the hallway does not keep them clean--the dirt and dust just goes into the air and right back down again. You might consider getting a push-type of sweeper that has revolving bristles. It can be pushed down the hallway, it picks up a lot of dirt, and it can be attached to the back of an electric cart so it can be pulled behind to sweep the driveways. This does wear out the bristles faster, but your manager can do this daily and keep his driveways neat and clean without hiring an outside driveway-sweeping service. The interior and exterior roll-up doors should be dusted on a regular basis also.

Exterior Maintenance

The exterior grounds should be kept clean, lighting should be adequate, and flags, banners and signs should all be in good condition and replaced when necessary. Drive through your facility in the evening and look for places where lighting could be improved and to see how well-lit your signage is. Landscaping should be trimmed and well maintained, any large trees should be pruned, and worn-out plants and shrubs should be replaced. If you have extensive landscaping, hire a landscaping company. If your manager is doing his job correctly, he has enough to do besides spending his time gardening.

The same goes for the maintenance of or electronic gates, elevators or lifts. They should be inspected by a licensed, reputable company experienced in servicing these items. Your manager can do minor repairs; however, I would advise hiring outside contractors for any major repair work.

The following list includes some of the tools and items your manager will need to do his job:

  • Electric golf cart
  • Charger
  • Extension cords
  • Carts, dolly (hand and refrigerator)
  • Ladder
  • Driveway sweeper
  • Brooms (push and regular)
  • Dust pans
  • Electric drill
  • Light bulbs
  • Rags
  • Cleaning supplies
  • Bathroom supplies (toilet brush, etc.)
  • Miscellaneous tools (wrenches, etc.)
  • Bug spray and rodent poison
  • Facility signs (gate and office hours, closed holiday, etc.)
  • Overlocks (keyed alike, 100, red)
  • Vacancy tags and keyed-alike locks (100, yellow or green)

Annual Assessment

Each year you should assess the condition of your facility and make note of any major repairs or deferred maintenance that must be addressed. Collect bids in advance for the repair work so that you may build it into your annual budget. If you have asphalt driveways, you need to have any cracks repaired and the whole facility resealed every two to three years. Each year, have your roofs inspected. Patch spots that may cause leaks in the future, have any skylights resealed and dented downspouts replaced. A new coat of paint on the exterior buildings and interior hallways can make a world of difference. A 20-year-old facility can have years taken off with a fresh coat of paint. Even roll-up doors have been successfully repainted for a fraction of the replacement cost.

Office and Apartment

Another area for consideration is your facility office. Is it time to update it by purchasing new office equipment, replacing flooring or carpeting, installing new counter tops, or putting on a fresh coat of paint? What about the onsite apartment? Does it need new carpeting, flooring, counter tops, appliances or painting? Make sure you sit down with the manager each year and discuss the condition of your facility, office and apartment. Receive at least three bids for improvements and add the cost into your annual budget.

Maintenance of your facility is the responsibility of your manager, and it is the owner's responsibility to supply the manager with the necessary tools and funds to accomplish their tasks. If you have more than 1,000 units, you will want to consider a full-time maintenance man to help your manager. By keeping your facility clean and in good repair, you can extend the life of your investment, your manager will experience the pride of ownership and people will want to rent at your site.

Pamela Alton is the owner of Mini-Management®, the largest nationwide manager-placement service serving the self-storage industry. Mini-Management also offers full-service and operations-only property management, policy and procedures manuals, sales and marketing training manuals, inspections and audits, consulting and training seminars nationwide. For more information on the various services offered by Mini-Management, call (800) 646-4648.

Maintenance A Competitive Edge

Maintenance A Competitive Edge

By Tom Berlin

Self-storage has become significantly more competitive over the past few years. New facility construction is exceptionally strong in most markets across the country and shows no sign of stopping. The four self-storage REITS are continuing their market-share consolidation in the major metropolitan markets by purchasing many of the choicest properties. As an independent self-storage operator, you need to ask yourself how you can compete.

An often overlooked component of the "storage decision" is the appearance and maintenance of our facilities. With so many options, self-storage customers are more selective about which facility they choose for their storage needs. Small differences between competitors can decisively influence a potential customer's storage decision.

Maintenance is one factor playing a greater and greater role in the success or failure of a facility. It doesn't matter how old a facility is or what amenities are offered, if maintenance has been neglected, potential customers will go elsewhere and profits will decline.


The first impression a potential customer gets when they pull into your facility can determine whether they will rent space or move on to a competitor. A new facility that looks dirty will give potential customers a worse impression than an older location that is immaculately clean.

Storage buildings and lot. The area around the storage buildings must be kept free of all kinds of litter. This includes manmade litter, such as bottles, cans, paper, etc., and natural litter, such as leaves and twigs. Cigarette butts are often overlooked, but their presence around the office and storage buildings makes a store look unkempt, regardless of how clean it is otherwise.

Nothing should be stored anywhere outside, regardless of whether it is equipment used in maintaining a lot, trash bins, pallets for tenants or similar items. They should always be kept inside a unit.

The manager should patrol the lot at least once a day for a variety of reasons, one of which is clean-up. During the inspection, the manager should pick up any debris. Daily cleaning is easy and fast, and ensures an immaculate appearance at all times. Our managers have golf carts with 50-gallon, plastic trash cans on the back to help make clean-up a little easier.

Not only do our managers keep our facilities clean, but they pay attention to the area surrounding our sites as well. It is both neighborly and good business to help take care of trash on the other side of the fence. Rarely do people comment on how poor a job your neighbor is doing when trash sits on his side of the fence vs. your side.

Dumpster area. Dumpsters should be enclosed within some kind of privacy fencing to keep them out of sight. How often they are emptied will depend on the facility, but it should be often enough so that the lids can be kept closed at all times.

Whether you allow tenants to use the dumpsters is an individual decision. We do at some locations, but at others, tenant use is prohibited without approval from a manager. Experience should be your guide on this matter. If your manager is spending a great deal of time cleaning up trash left by tenants, you may want to leave your dumpster unlocked and encourage tenants to use it, or consider charging the tenant for its use.

Rental office. The rental office must be spotlessly clean. The floor should be vacuumed, swept or mopped at least daily. During the winter, this may need to be done several times a day. We have found it is cost effective to use a commercial mat service for office walk-off mats. The service will pick up dirty mats and replace them with clean ones on a regular schedule. Sundry-item displays should be dusted weekly and always kept fully stocked. Counters should be kept free of clutter and cleaned frequently. Pay careful attention to the area behind the counter--it should always be neat and clean. Nothing is less professional than a messy desk or a manager searching around piles of paper to find something.

One area that is easily overlooked by managers is the public restroom. It must be sparkling clean whenever it is used by a customer, and supplied with handsoap and appropriate paper goods.

Lawn Care and Weed Kill

Weed kill should be used regularly anywhere weeds may appear, but especially in the cracks between the building pads and the pavement. Weeds in these areas seem to grow faster than anywhere else and can look extremely unsightly. We have had asphalt crack fill installed in these areas with a great deal of success. All shrub and flower beds should be free of weeds and mulched regularly. Lawns should be cut weekly. We also have a professional landscape company apply fertilizer and weed killer to the lawn periodically during the summer months. Each of our locations has an irrigation system that automatically waters all lawns and flower beds.

Building Maintenance

Masonry and metal. Storage buildings need regular maintenance, regardless of their construction type. The exteriors of all buildings should be regularly inspected for damage caused by people or nature. Cracks in masonry buildings should be filled to prevent water leakage into the units. Rust on metal buildings should be removed and the area repainted in order to prevent further deterioration.

Tenant-caused damage. Damage to buildings should be repaired as soon as it is discovered. It could cause a potential tenant to question how secure his belongings will be at your facility. Most damage to storage buildings occurs on the corners when a customer misjudges the turning radius of his vehicle. An effective way to minimize building damage in these areas is to install bollards (metal pipes filled with cement) at each corner, approximately one foot from the building.

Roofs. Customers expect that their stored possessions will be kept dry; therefore, regular roof inspections are essential. Managers should always check the ceilings of units that have been vacated to determine if there is any evidence of water leakage. We believe roofs to be so important that we have a consultant inspect the roofs at our facilities every two years and provide us with a report of their condition. Necessary repairs are made immediately. One of the few certainties in life is that small problems will become big problems if they are not addressed quickly.

Gutters. One frequent source of water leaks and flooding is clogged gutters. The site manager should check the gutters frequently to make sure they are free of leaves and other debris. Our managers "formally" clean the gutters every spring and in the fall after most of the leaves are off the trees. Also, make sure down spouts do a good job of draining water away from the buildings; if not, consider extenders.

Doors. A door that is difficult to open will anger even the most easygoing tenant. Door springs need to be lubricated regularly to keep them operating smoothly. If the doors at your facility have a tension regulator, as many new models do, they should be adjusted as needed. While the procedure is very simple, managers need to be trained in the adjustment method.

Pull cords on units doors are essential for tenants to be able to get the door closed. Missing or worn pull cords should be replaced. Door latches should be lubricated frequently and should always be easy for customers to operate. Replacing latches is easy to do and goes a long way in maintaining positive customer relations.

Painting. Storage buildings, unit doors, bollards, keypad holders and the office should be repainted if they look "tired." Be sure to check with the manufacturer of metal buildings and doors for their recommendations on what kind of surface preparation and paint should be used. Not doing so could result in a paint job that will peel.

Vacated Spaces and Open Units

Storage units should be cleaned as soon as a tenant vacates and kept clean until they are re-rented. Our managers use a vacated-unit checklist to make sure that all rubbish has been removed, the unit is broom clean, the door springs have been oiled, pull cords have been replaced as needed, door latches are working easily, there is no evidence of leaks or bugs, and needed repairs are identified and made.

Open units are an invitation for trouble. Tenants may mistakenly move into the wrong unit or discover that they need more space once they start moving in and commandeer an empty unit. Occasionally, a tenant who is moving out of one unit will use a vacant unit as a receptacle for their trash. We have even had a case of someone living in a secluded, vacant unit at one of our sites. The easy solution is to lock all vacant units with inexpensive yellow padlocks that are all keyed alike. This also helps tenants feel safer because there are fewer places for people who do not belong on site to hide.


At our facilities, anywhere from 25 percent to 60 percent of our new tenants learn about us by driving by the location. Therefore, the main sign in front greatly contributes to a facility's success. Whenever the sign face starts to age or the lettering and graphics start to fade, we have them replaced. Don't forget that bulbs in signs also need to be replaced regularly. Over time, lamps will weaken and lose some of their illumination, and nothing makes a facility look shoddier than a sign with a burnt-out lamp. Unit numbers, building identification, directional signs, rules and other signage should also be fresh-looking and easily visible.


Paving should always be stripped as necessary and in good condition and repair. We inspect all paving every spring, and have repairs made and cracks filled before the start of the busy season. Regular maintenance of paving will help to prolong its useful life and delay the need for full replacement.

Seal coating is a good way to spruce up a facility's appearance. In addition, the asphalt industry maintains that seal coating replaces oil that evaporates from the paving and makes it last longer. We also have our lots swept regularly by a commercial sweeping service and whenever strong summer storms have dumped leaves and other debris on site.


Good interior and exterior lighting is critical. It is one of the best ways to deter crime and help potential tenants choose your store over another. Not only must there be enough fixtures to adequately illuminate all corridors, driveways and areas between buildings, but they must also be in working order. Bulbs and photo cells must be replaced regularly. Our policy is that a burnt-out light bulb must be replaced in 24 hours.

Gates and Fences

The computerized entry-gate system and the perimeter fencing are key components of your security system and how potential tenants view your facility. The key pads of the computerized entry gate need to be clean, with instructions for use. The perimeter fence must be free of holes and, if damaged by vehicles, repaired. The gate-operator mechanism should be regularly maintained according to the manufacturer's maintenance recommendations.

Create a Reserve

Identifying items that need maintenance and having the money to pay for them are two different things. A maintenance budget should be established at the start of each fiscal year for routine items such as lawn care. In addition, a reserve should be created and contributions made regularly so that funds are available when high-cost capital improvements, such as roof and paving replacement, need to be made.

Maintenance is one of the most important aspects of a self-storage operator's job. It is neverending, but the appearance of the self-storage facility can make the difference between a potential tenant choosing you vs. your competitor and, ultimately, success vs. failure.

Tom Berlin is vice president of operations for Pogoda Management Co., one of the largest owners and operators of self-storage facilities in the Midwest. For more information, call (248) 855-9676.

Should You Consider Add-on Services?

Should You Consider Add-on Services?

By Ray Fisher

To resolve the question of whether or not to offer add-on services, the self-storage owner should focus on his purpose of business, his manager's time and the rental office.

Owners need to define their purpose of business. Are they going to provide an office with a manager that can provide on-going customer service, or are they going to provide an office with a mini-mall of add-on services?

Add-on services that are not directly related to renting units--such as packaging and sending boxes, truck rental, mailbox rental, etc.--only benefit the entrepreneurs that sell the add-on services or products, not the owner of the facility. With the failure rate of add-on services, established by themselves as a business, the astute self-storage owner will easily recognize the detriment it would be to his business. The time and effort invested in the add-on services only hinders the potential income of the self-storage facility's primary business--renting units.

Consider how the add-on services would affect the manager and the office, in general. The manager is the most important asset of any facility. A manager is, or should be, fully occupied with ensuring the success of the facility--through proper management of the office, marketing and maintenance--without adding other services. Most add-on services distract the manager from other duties and lessen his effectiveness in completing them.

The office should be inviting and pleasant to managers and tenants, as well as prospective customers. For the office to be filled with all the bells and whistles of add-on services only reduces the main objective of the business.

On the other hand, items such as locks, boxes and tape are important specifically to the business of moving and storing belongings and, therefore, should be kept in the office. These can be compactly displayed and easily marketed during the rental process. Anything else beyond this infringes on the manager's duties of running the facility and sacrifices a neat office appearance.

Finally, it is recommended that the owner and manager discuss the pros and cons of add-on services to determine which will actually benefit the facility and which services deter the manager from more important activities. The objective is to discover which services and/or products optimize the manager's time and maximize the profits of the self-storage business.

Ray Fisher is resident manager of Keylock Mini Storage of Pinellas Park, Fla. In addition, he is actively involved in manager training and technical support for Accountable Management of Lutz, Fla. Mr. Fischer may be reached at (813) 526-1800; e-mail: [email protected].

Inside Self-Storage 11/97

By Eric Snyder

Are you looking to finance either a new or existing self-storage facility? There are a variety of factors to consider. You can save time and money by being prepared and knowing the right way to go about locating the lender you need. Here are some of the most commonly asked questions about self-storage financing.

Q: When is the best time to consider refinancing an existing loan?

A: When the note is approaching maturity, or when interest rates are lower than that of your current loan. Prospective borrowers should allow at least six months prior to maturity to shop for a loan: 90 days to find the most competitive lender and 90 days to close the loan. The borrower should factor in the cost of any prepayment penalties.

Q: What can I do to improve my odds of getting a loan?

A: Before sending photographs of the property, take care of any deferred maintenance. Then prepare an organized and thorough loan package. Having experienced management in place helps, so does keeping good records. Borrowers also should make sure they understand their market, by researching the occupancy and rental rates of competitors.

Q: Do I need to have previous experience in the self-storage industry to get a loan?

A: No. You can contract with an experienced management company to manage the property.

Q: What information must be provided to the lender for a loan quote?

A: You should have pictures of the facility as well as the adjacent property, operating statements for the last three years and occupancy reports for the past year. You also will need to provide market information, including rental and occupancy rates of competitors; the number of existing storage facilities within a three-to-five-mile radius and the population of that area; an analysis of factors that drive the local economy, including an evaluation of the diversity of businesses in the area; an assessment of any new facilities planned in the market area; a completed borrower questionnaire; and borrower financials.

Q: How long will the loan process take?

A: Banks and life insurance companies usually require at least a 60-day due diligence period. An experienced self-storage lender can have the loan processed in 45 days.

Q: What costs are involved?

A: Third-party reports for appraisal, engineering and environmental analysis will run about $10,000, if there are no special circumstances. Legal fees will add another $5,000 to $10,000 to the cost, again, if there are no complications. The loan fee will cost an average of 1 percent of the loan amount. Title and survey fees also must be added to the total.

Q: How do I estimate the size of the loan for which I would qualify?

A: Because of the seasonal nature of the self-storage business, most lenders will underwrite cash flow and loan-to-value based on the trailing 12 months. The cash flow estimate is equal to the net operating income divided by the debt coverage. That ratio is then divided by the loan constant. Most loans have a maximum loan-to-value ratio of 75 percent. Lower leveraged loans will allow the lender to provide a lower interest rate.

Q: How does the lender determine if there are any environmental risks associated with the land?

A: Ultimately, the liability for any risk rests with the property owner. A three-stage environmental site assessment is required. Phase I includes both a document inquiry as well as a physical walk-through. Phase II includes taking soil and water samples to determine the level of potential contaminants. In Phase III, remedial work to remove the contaminants is carried out.

Q: What is meant by securitization?

A: These are lender bundles similar to mortgages, which are analyzed by rating agencies and then used as collateral for bonds purchased by institutional investors.

Q: Should I have a fixed- or variable-rate loan?

A: It depends on the needs of the individual borrower. The fixed-rate loan provides a secured interest rate without fluctuation. Right now, interest rates are at a historical low, so most borrowers are requesting fixed rates to lock in low-interest rates. However, if a borrower is looking for prepayment flexibility, then a variable-rate loan may be more appropriate.

Q: What prepayment options do I have?

A: Most loans have lock-out periods, then yield maintenance prepayment penalties. Declining prepayment schedules are available for a higher interest rate.

Q: What is the optimal occupancy rate preferred by lenders?

A: Most facilities operate at an economic occupancy of 85 percent to 90 percent and a physical occupancy of 90 percent to 95 percent. In today's market, a low occupancy rate may be a sign of poor management or an overbuilt market.

Q: Can I still qualify for a loan if I've had a bankruptcy or foreclosure?

A: A lender will consider your application if the creditors have been paid back. It also could depend on whether the bankruptcy was due to market conditions or to the management of the borrower.

Q: What is the preferred business organization for self-storage operators by lenders: a partnership, corporation or limited-liability company, etc.?

A: Lenders have no preference. However, if the loan is going to be securitized, it must be a single-asset entity affiliated with an individual who controls all material business decisions.

Q: When does a non-recourse loan become a recourse loan?

A: When there is evidence of fraud, misappropriation of funds, any material misrepresentation, intentional abandonment of the property, discovery of hazardous substances or breach of certain covenants in the loan documents.

Q: Will I have a grace period for my loan payments? What is the late charge?

A: It varies by lender. The rule of thumb is to allow a five-day grace period. The late charge generally is 5 percent to 10 percent of the payment.

Q: Can I pay the property taxes and insurance, or does it have to be impounded?

A: Most lenders do require an impound account for taxes and insurance.

Eric Snyder is vice president of Belgravia Capital Corp., based in Irvine, Calif. As head of the self-storage program, Mr. Snyder is responsible for the analysis and negotiation of loan requests throughout the United States and Canada. He had analyzed more than $1 billion in requests for financing since the program was launched in January of 1994.

Waterwood Self Storage

Waterwood Self Storage

Edmond, Okla.

By Jeff Sacks

Bill Howard is a modest man to say the least. After all, he runs several successful self-storage facilities in Edmond, Okla., and attributes his good fortunes to nothing more than the fact that Edmond has virtually doubled its population over the past 10 years.

"I have the right location and the right town, and the right location in that town. It's not any real tribute to my intelligence; it just happens to be in the right place at the right time. It's nothing I did particularly," says Howard.

Humble Beginnings

Howard first got into the self-storage industry after attending a mini-storage convention in San Francisco in 1983 with his friends Bob Williamson and Joe Looney. The friends owned a Budget Mini-Storage in Oklahoma City that they started around 1979, one of the first projects of its kind in the area.

"They were enamored with mini storages, and then I became enamored with them," Howard continues. "I owned a piece of land in this little town of Edmond, and I went ahead and built the first phase of a project there in the west part of town."

Howard was in commercial construction, erecting a line of metal buildings for other people and for himself. Then the idea of constructing self-storage facilities came to him and, as he says, "The mini-storage business seemed to be an easier, more profitable venture than a free-standing building. So I just naturally drifted into the mini-storage end of the business. I still contruct buildings, too, and operate other businesses, but mini-storage is one of the better things I do." And by better, you can bet he means more profitable.

Howard started in self-storage with a 20,000-square-foot project called Edmond Extra Storage, which he has since expanded to 54,000 square feet.

Of his first attempt in the self-storage industry, Howard says, "It was a nice mini, but I made the mistake of building it off the main road and sold the lot in front." This, of course, hid it from the view of passersby and hurt occupancy rates.

However, a few years ago he added an extra building that is tied to the main road, and this has brought up occupancy rates at the facility to the mid-90 percent range.

Then in April 1994, he built the project he is most proud of--Waterwood Self Storage, a 63,500-square-foot facility located one mile east of downtown Edmond.

Location, Location, Location

When you have a good location with a growing population, what better way to maximize your business than by building more self-storage facilities in the area?

Although he'd probably deny such economic strategizing, that must have been some of what was going through Howard's mind when he built Waterwood Self Storage.

"We're in a growing town, probably the most booming town in Oklahoma right now," he says. "There are a lot of new developments and a lot of new homes in this particular little town. When you have a lot of people coming and going, a lot of subcontractors, a lot of people building new homes, a lot of new businesses coming to town, you pick up a lot of tenants from that."

Waterwood is in the center of a partially developed office, hotel and restaurant area, across the street from the Ramada Hotel and next door to a Denny's restaurant. The University of Central Oklahoma, the state's second-largest college, is within view of the facility. Frontage is limited, but adequate.

According to Howard, Edmond is an upscale, bedroom community located 10 miles north of Oklahoma City. It is a college town, but only 30 to 40 college students are Waterwood tenants. "Customers seem to be divided, about 60 percent residential and 40 percent commercial. We have a lot of people moving into this area--probably over 50 subdivisions being constructed--so we rent units to people waiting for a house, subcontractors, retirees and so on."

Mission Possible

Waterwood was a challenge to develop for several reasons, says Howard. "Land is very expensive, three- to four-acre sites are scarce, and re-zoning is heavily contested on all commercial projects."

Howard had the good fortune to find an excellent location that was properly zoned and also included an offsite, master water-detention facility.

However, "Even with zoning and water detention pre-approved, it still required four Edmond planning board meetings and two Edmond city council meetings before a building permit was issued," says Howard.

City of Edmond requirements include extensive landscaping, brick and wrought iron fencing, precast walls, limited door exposure and a residential appearance for the office.

"In addition," Howard adds, "we were faced with a site that was about one-third solid rock and sloped 26 feet from north to south."

After extensive engineering, Howard's people came up with a plan to drop the buildings 2 feet for every 40, and erected a 12-foot step wall on the rear of the property.

"Most of the facility on three sides is totally enclosed with aggregate wall panels, including the retaining walls. All the wall panels were precast in Oklahoma City, then trucked to the site and erected," says Howard.

The overall building layout of Waterwood Self Storage is a pleasant-looking residence/office facility with 16 storage buildings. There are 500 units, ranging from 5-by-5s to 10-by-25s. The current occupancy rate is 92 percent, and usually runs around 95 percent during the spring and summer months.

Location aside, one of the other aspects of Howard's facilities that make them more successful than some of the others in town is that he tends to build nicer-looking projects.

"We've done a lot of brick, wrought iron and landscaping, and tried to make it look upscale. I think people tend to want to go to a nicer-looking project. There are some older, shabbier-looking units in town, and we seem to do better than they do. We seem to get better rates and better occupancy, and I think we have better location," he says.

However, he offers up this piece of advice: "I think it always pays to do things with a little bit better quality. You get better tenants and better managers."

Security Measures

Waterwood is operated with an "open gate" policy, with hours of 7 a.m. to 7 p.m. There is a 24-hour surveillance camera that uses VCR recording.

"Our most important security measure is to require all customers to use a round lock or a 2-inch (#5 Master) lock on all doors. These locks are almost impossible to cut and have eliminated most burglaries," says Howard.

"It's amazing that people will put $10,000 worth of goods in a unit and then use a $2 padlock to secure them."

The managers of the facility, Sammy and JoAnn LeGrande, live in a spacious 1,600-square-foot space, which includes a double-car garage and a 300-square-foot office. They started with the project when it originally opened in April 1994.

With the help of reasonable land costs, Howard, acting as the general contractor, was able to bring Waterwood Self Storage to fruition at a very reasonable cost and, he is proud to note, "The finished project blends well with the area. City officials and others who originally protested the project now agree that it is an asset to the community."

What to Do When You Get Sued

What to Do When You Get Sued

By Scott Zucker

Getting sued is somewhat analogous to having a car accident. Sometimes, no matter how hard you try to drive safely, there's always a chance you'll get rear-ended by the other guy. Under today's legal system, even if a business does everything right, it can still be sued. The self-storage business is no exception. Like all other businesses, storage owners face potential disputes with their employees and vendors. As property owners, storage operators additionally risk premises liability claims such as personal injuries. But most commonly, they face claims from their tenants alleging wrongful sales, damage or loss to their stored property.

Unfortunately, having a good lease and following the proper procedures for foreclosure and sale will not prevent you from being sued. Litigation has exploded in this country and self-storage facilities, based upon their public operations, steady flow of cash and large insurance protection, are big targets. It's likely that in the course of operating your facility, you will eventually be sued.

The following is a crash course on what happens in a lawsuit and some things to think about as you travel down the road of litigation. (Watch out, it's a bumpy road.)

1. Notify Your Insurance Company

Upon service of the lawsuit, one of the first things a storage owner should do is notify the facility's insurance company. The insurance company, if it has any questions whether the claim is covered under its policy, will likely issue what is known as a "reservation of rights." This means that it will assume the obligation of defending you in the lawsuit, but reserves its right to later determine whether the claim is actually covered.

The insurance company will then assign the lawsuit to a lawyer who represents the insurance company in your area. The facility may also request that their own lawyer (if they have one) represent the facility in defending the lawsuit on behalf on the insurance company. If you have insurance, but fail to notify your insurance company, the company may be able to refuse coverage based on lack of notice. It is a prudent policy to always notify your insurer in response to a lawsuit.

2. Gather the File

It is your obligation as the facility owner to maintain all of your records concerning the operation of your business. If the lawsuit relates to a tenant loss or damage claim, you will need to pull together the tenant's file and all the pertinent documents relating to the claim. If the lawsuit involves a personal injury, you should obtain a copy of the incident report, photographs taken (if any), police reports or any other documents relating to the incident. All of this information, as well as names and addresses of individuals who have knowledge of the matter, should be provided to the lawyer handling your case. Remember, your lawyer can only defend you to the extent that he or she is given complete information about the claim.

3. File an Answer

Once the case has been assigned to a lawyer, it is the lawyer's obligation to file an answer to the complaint. If you are not insured and do not submit the claim to an insurance company, then you are obligated to file it. If you or your lawyer do not file an answer to the complaint, you will be in default. In other words, if you fail to answer the complaint, the court will presume you are admitting the allegations of the complaint, and a judgment against you will be entered. It is imperative that a timely answer is filed in response to a complaint. If it is appropriate, your lawyer will seek to dismiss the complaint at the time the answer is filed based upon specific legal defenses.

Unfortunately, many of these defenses can be cured by the plaintiff, and even if the case is originally dismissed based upon such defenses, the case can later be refiled.

4. Discovery

After the answer is filed, and before a trial occurs, there is a phase of the proceedings called discovery. During discovery, each party is entitled to ask questions of the other party to learn all about their position in the case. Discovery can take the form of interrogatories (written questions to the other side), requests for documents or depositions. In depositions, the parties meet face to face and lawyers ask questions in the presence of a stenographer who keeps a written record of the testimony. Depositions are used both for discovery and for later use at trial to impeach witnesses who may later change their testimony. Discovery can be a long, arduous process that is very costly to both sides. However, discovery is necessary in order to build a case for the plaintiff and to defend a case for the defendant.

5. Negotiation/Settlement

Through the course of discovery, and up until trial, it is important that both sides always keep in mind the practicalities of settling the lawsuit. If the plaintiff has brought a lawsuit that has merit and there is some risk that the defendant facility may ultimately be found liable, there may be some benefit in negotiating a settlement of the tenant's claim. Settlements are oftentimes the best resolution of a bad situation. Negotiations for resolution and settlement commonly occur from the beginning of the case to the end. However, most settlements are best reached early on in the case. Settlements are often harder to conclude closer to trial due to the time and expense already incurred by the parties. Settlements should not be reached lightly. However, they are an economic reality of litigation due to trial costs and the physical and mental wear and tear on facility owners involved in the litigation. Furthermore, where there is a risk of high damages, settlement reduces those damages to a lower number.

6. Trial

Certainly, not all cases can be settled, and ultimately many cases are brought to trial. Just like on TV, the parties are able to present their cases before a judge or jury (the trier of fact) and have their day in court. The parties are able to tell their sides of the story and allow the trier of fact to then decide on two issues: 1) whether the facility is liable for the loss or damage, and 2) the amount of damage suffered by the plaintiff. It is possible that a judge or jury may find a facility liable for the loss or damage to tenant's goods, or to have been responsible for a party's injury, but at the same time find low damages. Unfortunately, the most common scenario is one in which liability is found, as well as significant damages.

Trial is generally broken down into six parts. First there is jury selection and a process of voire dire. This is the phase in which both the plaintiff's and the defendant's lawyers interview the potential jurors to select appropriate jurors for the trial. Once the jurors are selected, each party gives its opening statements presenting its side of the case. After the opening has been concluded, the plaintiff then presents its case to the court. At the conclusion of the plaintiff's case, the defendant is then entitled to present its case to challenge the case of the plaintiff. At the conclusion of the defendant's case, each side presents its closing arguments. Last, there is the jury deliberation and verdict.

Lawsuits are not fun experiences for the parties involved. Unfortunately, lawsuits cannot be stopped. Hopefully, however, frivolous lawsuits will be dismissed, valid lawsuits will be settled, and defensible lawsuits will be tried and won.

This article is reprinted from the Mini-Storage Law Commentary, a newsletter for owners and managers, written by Scott Zucker and published by the law firm of Shapiro, Fussell, Wedge, Smotherman & Martin. The information included is generalized for the purpose of illustrating principles and laws, but legal counsel is always recommended. For more information regarding the article or to obtain a copy of the newsletter, contact Mr. Zucker at One Midtown Plaza, 1360 Peachtree St., Suite 1200, Atlanta, GA 30309; (404) 870-2232.

Show Me the Money

Show Me the Money

By R.K. Kliebenstein

Several types of loans and financing options exist for self-storage development. This article will outline a few of the most common types as well as offer some alternatives.

New Development Construction Loan

This is most easily issued by a local or regional lender with whom the developer is an existing client. These are often "relationship" loans. The strength of the deal depends greatly on the ability and performance (track record) of the borrower than on the property. Gerald "Jerry" Buck of Huntington Bank in Cleveland, Ohio, says the best place to look for construction financing is to start with your relationship bank. "If they are not interested in the loan, they can often tell you the banks in the market that are active in (self-storage) lending. And do not stop when you have one lender interested. A limited amount of competition is good." However, when too many lenders get involved, they become discouraged, and they spend their time pursuing easier transactions, he adds.

Permanent loans are now being offered to self-storage
owners at very aggressive interest rates, long loan
terms and long amortization periods.

Forward Commitment. Accord-ing to Eric Snyder of Belgravia Capital, "The self-storage industry is becoming increasingly competitive and lenders are requiring developers to engage in extensive research prior to providing forward commitments." This transaction commits the permanent lender to provide a "take-out" (see below) loan upon the achievement of an agreed-on criteria. The achievement of a specific occupancy (percentage) or level of Net Operating Income (dollar amount) predicts the take out. The risk level is very high if conditions for a take-out are not agreed upon.

The take-out loan will be highly speculative if the lender is willing to state the loan will close on a certain date. A forward commitment under those circumstances would likely be a relationship loan, as previously discussed. There is usually a 1 percent to 3 percent fee for this type of commitment.

Read the loan documentation carefully, paying attention to the terms and conditions agreed upon at the issue of the forward. A developer may be willing to make commitments to get the deal done that he would later regret, especially if market conditions change to the benefit of the lender.

Take-out Loan. This moderate- to high-risk vehicle for finance is prepared at the time the property has neared stabilization or a distinct trend has developed that the lender can underwrite. The loan pays off the construction or "mini-per," and is customarily referred to as a "perm" or "permanent loan." This credit facility is typically long term and contains prepayment penalties and/or yields maintenance. "These loans are based on the operating strength of the property," says Neal Gussis of First Security Commercial. "Many (borrowers) utilize this vehicle to achieve several objectives. Many construction lenders have limited funds available for a single borrower. Refinancing with another lender allows the construction lender to have the funding capacity for the next project."

"People also seek to replace the construction or mini-perm with a permanent loan to obtain some or all of their initial equity in the project," he continues. "A company can allow its clients to borrow in excess of the initial cost if the property's cash flow meets our required debt-service coverage. Many permanent loans also reduce the property owner's personal obligation (recourse). Because of the presence of national lenders specializing in self-storage, including First Security Commercial Mortgage, permanent loans are now being offered to self-storage owners at very aggressive interest rates, long loan terms and long amortization periods."

Mini-perm. This is often a combination of a construction loan and a take-out loan. The term varies from three to five years, but basically gives a developer enough time to complete construction and stabilize income. It can often "roll-over" into a permanent loan, and is commonly issued by regional banks.

Refinance Existing Property to Extract Equity. This is an excellent tool by which to develop new properties, if the option is available. By refinancing an existing property and taking out the equity, you may be able to pay for the new project without finance costs to the project. Make certain if you have differing entities for the new and old project that an equitable arrangement is made to pay for the access to capital. See "refinance" for a description of this type of credit.

Construction Partners. How about asking each of your suppliers and sub-contractors to invest their goods and services as a contribution toward the project for partial ownership? This could be a very complicated and difficult method of financing, but it is creative and has proven to be a successful, non-traditional financing method.

Equity Partner or Contractor Partner. This is a fairly common method of financing. If you are a contractor and can contribute to the construction, but lack the land or development expertise, then you have solved one-third of the challenge. Perhaps you have an equity partner willing to invest cash to build the facility with the prospect of a more traditional form of permanent financing.

Development Partners. Several of the large real-estate investment trust's offer joint-venture development programs with a combination of equity and debt financing. These tend to be very deal-specific transactions and can often have constraints that would not give the developer "free reign" or total control over the project. This can be a very inexpensive way to access capital and can be a "marriage made in heaven" for the right partners.

Existing Facility Finance Options

Refinance- or Purchase-money Loans. At such times that loans have matured, or to recapture equity in an on-going existing facility, the most common credit facility is the typical refinance--loan structure based on cash flow. This loan is of low-risk and generally carries the most favorable of rates and terms. Typically, these are long-term, low-cost, "cash out" transactions and are readily available from national lenders (conduits), such as First Security Commercial Mortgage, Belgravia Mortgage Capital and some investment banking (securities) firms such as Bear Sterns or CS First Boston. Local banks may also offer a refinance or purchase money transaction, although the local bank may require a personal guarantee (recourse) and/or additional collateral. Bank loans may not have the significant payment penalties--a very attractive feature for some investors.

If you are a contractor and can contribute to the construction,
but lack the land or development expertise, then you have solved
one-third of the challenge.

Hard-money Loans. If the debtor has had credit problems, it may be necessary to obtain financing from a hard-money lender. The term "hard money" is suitable because it is usually hard to pay back. Typically, based on the value of the property more than any other factor, these loans will carry interest rates 5 percent to 10 percent above market rates. Oftentimes, the hard-money loan is a precursor to a sale that takes place as the result of a deed instead of foreclosure. A loan broker arranges the hard-money loan, which is usually a last resort when all conventional financing methods are exhausted.

Less Conventional Sources

Syndication. The tool of choice in the 1970s and 1980s was pre'TRA '86. This involves the grouping together of individual investors and having them fund the transaction. This is a difficult method for novices or developers looking for an income stream. Typically, the syndicate makes money on the front and back ends of the deal, and usually returns in the form of disbursements (dividends) the cash flows. There used to be tax advantages for offering passive investors this type of transaction, but those days are gone. Syndications often involve high legal fees at the time of solicitation (as compared to more conventional lending), but are still generally less expensive than bank or conduit loans. The level of fees to the investor may be high to very high.

Seek legal counsel when considering any non-conventional
source of financing, and if the source is not well-known,
investigate the origin of the funds, as well.

Securitization. This method is generally only available at very large dollar amounts, unless several deals are being secured at one time, in the range of $50 million-$100 million. They are very expensive up front, and usually carry all of the provisions of a typical conduit loan. In fact, it is identical to the conduit loan, with the exception of the source of origination. The debtor receives some fee savings because of economies of scale. Rates are sensitive to the bond market, usually tied to Treasury bond rates.

Public Offerings. This method is strictly limited to only the largest of deals, and only makes sense as the deal size gets close to $250 million. They are available through brokerage (stock market) firms and are very expensive up front--not so much as a percentage of the total transaction, but they can cost a lot of money, with no guarantee the deal will close. The funding is highly volatile depending upon the stock market, and requires extremely strong debtors with high growth aspirations.

Uncle Bob and Aunt Tillie. Yes, relatives can serve as a source of capital. I firmly believe that family and friend connections to capital are one of the least explored and greatest resources for capital. All things being equal, this is usually the least expensive and most easily approved methods of financing. There may be an emotional price to pay, not quantified in currency.

The following chart gives a matrix of financing alternatives and some key points. By juxtaposing the terms and types, one can identify the type of financing that may best suit their needs. Borrowers are encouraged to always get a second opinion and "shop" their financing options. Once the lender has made an offer, it is not proper to disclose those terms to a competitive lender and try to bid one against the other.

Borrowers should always attempt to negotiate with the lender. Perhaps up-front costs can be reduced or interest rates shaved slightly. It does not hurt to ask. Seek legal counsel when considering any non-conventional source of financing, and if the source is not well-known, investigate the origin of the funds, as well.

R.K. Kliebenstein is the director of acquisitions for The Amsdell Companies of Cleveland. Prior to his current assignment, he worked for Westar Management in Las Vegas, where he was responsible for new-store marketing. His tenure in real estate dates back to 1979, with a focus on self-storage since 1990. Mr. Kliebenstein may be reached at (800) 234-4494, ext. 227.