Inside Self-Storage is part of the Informa Markets Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Sitemap


Articles from 2001 In October


Self-Storage Finance

With interest rates at record-low levels and a sagging economy, would this not be a great time for self-storage finance? One would certainly think the banks would jump at the chance to finance self-storage properties, given the low interest rates. Lower rates make it easier to qualify for a loan, correct? Lower rates mean the money costs the banks less, so they have more "profit," right?

Well, the news is not really so optimistic. Sure, lower rates mean your debt-service coverage is higher, so the loan is "stronger," but the story not told is one generated by fear and uncertainty. Bankers do not want to get caught with a low-interest-rate loan on the books, and when it comes time for you to qualify for a loan to pay them off, they want to make sure you will be able to qualify under "normal" lending conditions.

You have heard the political pundits speak of lowering interest rates to spark up the economy, but all it really does is put a fire under the feet of lenders to make better, more conservative loans--that usually means fewer loans pass muster, and the advances are at lower loan-to-values. Most borrowers are pursuing fixed-rate loans instead of variables when rates are as low as they are today.

Low Interest Rates Means Low Interest Rates, Right?

Low interest rates in the press (the lowering of the discount rate) means banks pay less for the money they borrow from the Fed. But in the real world--the self-storage borrowing world--it means some reduction in rates, but not in direct proportion to the Fed lowering the discount rate. Quite simply, if the Fed lowered the discount rate to 3 percent tomorrow, it would likely have little to no effect on your typical self-storage loan.

Since the commercial mortgage-backed securities (CMBS) collapse in September 1998, lenders have protected themselves with interest-rate floors so they do not get caught with loans on their books they cannot sell. That means that, generally, no matter what happens with discount rates, self-storage loan borrowers will still pay around 7.5 percent for loans--at a minimum. Short of a long explanation of securitization, lenders do not want to make loans in a low-interest-rate environment where when rates go back up--and they will go back up--they or conduits cannot sell the loans without losing money on the discount.

Is It Confusing Yet?

Let's use the following example. The numbers will not be accurate, but the concept is correct.

ABC Mortgage is arranging for a $2 million loan for Sam's Storage. The 5-year Treasury Index is at 4 percent. The interest rate or note rate ABC has provided is 6 percent. The loan is closed Nov. 1, and funded by Carl's Conduit. On Nov. 15, rates begin to rise very quickly, and by Christmas, the 5-year Treasury is at 8 percent. Sam is very happy! He got his loan closed before interest rates went up, and can now take $100,000 of the loan proceeds and buy a U.S. Treasury bill and make 2 percent just for being smart. Meanwhile, the stock market has regained all of its momentum, the Dow is up to 15,000 and stocks are hot. Sam is taking the rest of his money and investing in Dave's Dot.com and is just waiting to become a bizillionaire.

Carl's Conduit is now ready to securitize the loan. On Jan. 5, Carl's Conduit announces to Wall Street it has a pool of loans to sell. The bond market is in the tubes, and bond buyers are wanting a 9 percent return on their money--after all, they could buy U.S. Treasury bills at 8 percent, so for the extra risk of a mortgage-backed bond, they want at least 1 percent. Poor Carl! No one wants to buy the loans he made at 6 percent. In order to recoup his capital, he sells the note for $1.5 million and not only loses $500,000 of principle, but also loses all the costs of the transaction.

If ABC Mortgage had arranged for a portfolio loan instead of a conduit loan, Bob's Bank might have a similar problem. Banks operate on short-term money, such as savings deposits and borrowing from the Fed to make loans. Let's use much of the same scenario as with Carl's Conduit: When the Treasury rate increased to 8 percent, Chairman Alan Greenspan also raised the discount rate to 8 percent. Bob's Bank borrowed the $2 million it lent to Sam from the Federal Reserve at the great rate of 4 percent, and it borrowed the money for six months. When Bob's Bank had to borrow money again to "refinance" the money it lent Sam, it had to borrow it at 8 percent. Sam is only paying 6 percent, so Bob's Bank is losing 2 percent on every dollar of the loan. Sam's loan officer is now working as a relief manager at Sam's Storage.

Is It as Clear as Mud Yet?

The above examples are extreme, but they may help you understand that lenders are very careful in low-interest-rate environments to make good loans, because even if they did not lose money selling these loans, they cannot afford to have any borrowers default, which would mean they lose any interest or principle due to a foreclosure or bankruptcy. Therefore, to make "better" loans, they only advance 70 percent loan-to-value (LTV) instead of 75 percent LTV--a more conservative loan. They require the debt-service coverage (DSC) ratio to be 1.4 instead of 1.3, which simply means they make a smaller loan relative to the value. In some cases, the conservative loan underwriting does not even pay off the existing loan, such as a construction loan.

At the time of this writing (and things may have changed by press time), my company is quoting interest rates on refinance transactions at 7.5 percent to 7.75 percent for good loans (60 percent LTV, 1.6 DSC), and money is available to qualified borrowers. Borrowers can expect to pay 1 percent to 2 percent for loan-origination fees and 1 percent for loan costs (assuming the loan amount is at least $2 million). Construction loans are at prime plus 1 percent to prime plus 2 percent, and the advance rate is between 60 percent to 65 percent of cost, and 70 percent of value.

Coast-to-Coast Storage Mortgage specializes only in self-storage related loans. RK Kliebenstein, president, will be happy to explain in greater depth any of the above scenarios, and assist you in pre-qualifying for a loan. He can be reached at 561.367.9241.

Glossary of Terms
(Financial terms from article in order of appearance)

Debt-Service Coverage (DSC)--The amount of net-operating income (NOI) for a self-storage property in relation to the loan payment. For example, if the loan payment is $100,000 (annually) and the NOI is $100,000, the ratio is 1:1. If the NOI is $130,000 and the payment is $100,000, the ratio is 1.3:1, which is a typically acceptable (minimal) debt-service coverage.

Advances--Loan amount.

Loan-to-Value (LTV)--The percent of the loan amount when compared to the value. For example, if the loan amount is $2 million and property value is $2 million, the loan-to-value is 100 percent. If the loan amount is $3 million and property value is $4 million, then the loan-to-value is 75 percent, which is a typically acceptable LTV.

Fixed-Rate Loan--The interest rate on the loan does not change until the loan is due.

Variable-Rate Loan--At certain periods (from monthly to annually), the interest rate on the loan is adjusted or changed by the bank, depending on interest rates in general. For example, if when your loan was made the Index was at 5 percent and the margin is 3 percent, the rate you pay is 8 percent. With a variable-rate loan, if you had an annual adjustment, and one year after the loan was made the index was at 6 percent, the new rate you pay is 9 percent. This reflects a typical loan at the time of writing.

  At Loan Start At time of adjustment
Index 5 percent 6 percent
+Margin 3 percent 3 percent
Note Rate 8 percent 9 percent

Discount Rate--The interest rate the Federal Reserve System charges member banks to borrow money.

Fed--Federal Reserve Bank.

CMBS--Refers to commercial mortgage-backed securities. These securities are very similar to mortgage-backed securities in terms of structure, flexibility and variety of tranches or tiers. The key difference is that CMBS are collateralized by commercial properties and not residential mortgages.

Loans on Their Books--Loans made by an institution that have not been sold or paid off.

Sell--It is a practice for lenders to sell loans in the secondary market. If you have ever had a home mortgage, you know that to whom you send your payment or to whom you make out the check can change from time to time, meaning the bank or lender has sold your loan. In commercial mortgages, the payment is usually made to the same place (same name), but the investor or holder of the mortgage may change.

Securitization--The process of homogenizing and packaging financial instruments into a new group of loans. Acquisition, classification, collateralization, composition, pooling and distribution are functions within this process. One common advantage of securitization is the enhancement of liquidity relative to the underlying collateral or financial instrument. Another benefit is the movement toward standardization of unit specifications.

Conduits--The firms, usually investment banks, that fund the loans and put together the pools of loans to sell.

Note Rate--The rate you pay as shown on the promissory note.

Dow--The most widely used indicator of the overall condition of the stock market; a price-weighted average of 30 actively traded blue-chip stocks, primarily industrials, also called the Dow Jones Industrial Average.

Pool of Loans--See Conduit. A group of commercial loans, including all types (apartments, office buildings, self-storage, warehouse) from all over the United States, in all sizes (typically not less than $1.5 million), are all put together in a group or "pool."

The Costs of the Transaction--Appraisals, environmental reports, structural, engineering or property condition reports, lender's legal fees, surveys and inspection costs are typically paid for by the borrower when the loan is made.

Chairman Alan Greenspan--The Chairman of the Federal Reserve.

Default--Failure to make a payment.

LTV--See Loan-To-Value.

DSC--See Debt-Service Coverage.

Underwriting--The process by which the loan request is scrutinized for the lender to make a determination if he wants to make a loan and, if so, at what rate and terms.

Qualified Borrowers--Borrowers who have good credit (scores above 700), strong net worth (at least equal to the loan amount), good income (enough left over after expenses to make 9 months worth of payments) and experience in owning, developing and managing self-storage properties.

Origination Fees--Fees charged by a lender for processing a loan application, expressed as a percentage of the mortgage amount annual percentage rate, also known as points.

Cost--The total of all costs of the project including land and soft costs. Sometimes lenders will include developer fees, interest reserves and operating deficits, while others will not.

Value--MAI appraised value.

NOI--Net operating income, including at least 5 percent management fee in addition to salaries that are well above minimum wage (and time-and-a-half for overtime, plus benefits); a replacement reserve of at least $12 per square foot and a 10 percent vacancy factor.

Mortgage-Backed Security--A broad term that encompasses generic and pool-specific securities predicated on real property. The term also refers to private-label or agency securities, pass-throughs or derivatives such as collateralized mortgage obligations. It can refer to the over-the-counter options on mortgage-backed securities as well. These mortgage-backed securities are viewed as either plain vanilla or exotic.

Tranches--The set of classes or risk maturities which comprise a multiple-class security, such as a CMO or REMIC. A tranche is the piece, portion or slice of a deal or structured financing. The so-called "A to Z" securities of a CMO offering of a partitioned MBS portfolio. It can also refer to segments that are offered domestically and internationally. Tranches have distinctive features that, for economic or legal purposes, must be financially engineered or structured in order to conform to prevailing requirements.

Facility Maintenance

As the fall and winter months approach, it is not only time to think about outdoor maintenance of your facility, but also maintenance of your office entry and area. The office is the first point of appeal a prospective tenant will see. It is imperative it be neat, tidy and appealing.

Stand back and look at the front of your facility. How does the entry door look? If it's painted, does it need a new coat of paint or a new sign posting office hours? If it's glass, do you try to keep it clean and free of fingerprints? What about the awning, if any--is it in good shape or does it need replacement? Do you have planter boxes near the entry? If so, how do they look? Is it time to replace them with winter annuals if you are in the South, or time to retire them to the company unit until next spring? How do your curtains or mini-blinds look? Are they tired and worn and needing replacement? Do you have an "OPEN" sign in your window that displays office or gate hours? If not, perhaps you should head to the office-supply store and get one.

Now it's time to look inside the office. How does it look and smell? Yes, I said smell. Some offices can be less than pleasing to the nose, as you know. If you need a little something to help in that area, consider getting a potpourri jar, air freshener, candles, flowering plants--something to help the office smell pleasant.

Now take a look at your counters. Are they neat and uncluttered? Do your tenants have room to sign a rental agreement or write out their rent checks? Do you display other items beside those associated with storage? If so, are they attractively displayed or should they be there at all? How does the countertop look? Is it clean and well-maintained or does it need replacing? If it needs replacing, get some bids from contractors for your owner or supervisor. What about the front of the counter? Is it all scuffed up and in need of painting or does it look good?

Take a look at the walls. Are they cluttered with papers push-pinned to them? Do they need a new coat of paint? If so, should you call painting contractors or handle the job yourself? What about your decorative pictures--are they clean or do they need replacing? Do you display a sign that outlines your rules and regulations, items illegal for storage, prices and fees? If not, perhaps you should have one made.

What about your carpet or other flooring? When was the last time you had it cleaned or replaced? Do you need a doormat to help keep the office clean? Should you get some bids for new carpeting or tile?

How is your office furniture--desk, chairs, tables, file cabinets? Do you need more cabinets, shelving or storage units? Is your chair in good condition or tired and worn-looking? Make sure you have a good sturdy one, since you sit there many hours each day. How does your desk look? Should it be moved to make your office area "flow" better or be more appealing? Is it time to consider replacement? If so, get some bids and submit them to your owner or management company.

What about your software? Are you still running a DOS-based program? Is it time to replace that program with a new one? How about getting some quotes or demos from the various software vendors and discussing them with your owner or supervisor? How is the hardware holding up? Do you have enough memory in your computer system? Do you need a new computer, printer, copier or fax machine? What about your phone system--do you have enough lines? How are the telephones themselves--do you need new ones?

Do you have plants--silk or live--in the office? Do they need replacing or do you need to purchase some? Green plants look inviting and with silk ones everyone has a green thumb. Just be sure to dust or hose them off once in a while to keep them looking neat.

Is it time to order new business cards, forms, fliers or brochures? Do you have attractive displays for these items? If not, head to that office-supply store.

Do you have company uniforms? If so, are they old and tired-looking with frayed collars and stains? Or are they too small from washing? Is it time to order new ones? If so, don't forget your relief managers.

Facility maintenance is not only keeping the grounds, hallways, roll-up doors, etc., neat, clean and in good working order. Your office area is also extremely important and should be well-maintained. This is the first impression at any facility, so remember, you never get a second chance at a first impression.

Pamela Alton is the owner of Mini-Management® Services, a nationwide manager-placement service. Mini-Management also offers full-service and "operations only" facility management, training manuals, inspections and audits, feasibility studies, consulting and training seminars. For more information, call 800.646.4648; visit www.minimanagement.com.

The Female Persuasion

When self-storage owner Henry Oxnard began the design for a new facility, he took his employees' concerns to heart. "It started with the reluctance of our female employees to take inside units," explains Oxnard, who offers a free unit to all employees. "That evolved into thinking of our women customers," says Oxnard, owner of the Drive-Up Self Storage in Houston.

Oxnard says the majority of self-storage facilities, including his own, are not designed for women, even though women are often the final decision-makers when it comes to renting storage units. "Landscaping is minimal. There's very tight parking, narrow aisles, long corridors and hard-to-lift doors," he cites as examples of features adverse to female customers. Oxnard turned to his wife and female employees for ideas on how to build a more female-friendly storage facility. "What evolved was a different approach," he says. Oxnard collaborated with David Boothe, president of Landmark Interest Corp., to come up with an innovative design. "Between the two of us, we refined my ideas and made it work," Oxnard says.

The first decision was to eliminate corridors, something the women in Oxnard's company considered unsafe. Instead, Oxnard opted for climate-controlled, drive-up units and a covered drive-thru area (Oxnard owns the patent for the drive-up concept). The duo then turned their attention to the parking surrounding the units. Spacious parking was essential to allow for easy access and flow. Next came the landscaping. Lush grass, colorful flowers and towering trees were planted to give the landscape a fresh, springtime look.

The office-supply area and front office were also expanded, giving them more of a retail appearance. "All those things you hear about wasted space--landscaping is wasted space, large aprons in front of the office is wasted space--that's not really what I see," Oxnard says. "There's an economic value to 'wasted space'--that is you get more customers faster and they're happy. We're very happy we did it."

Drive-Up Self Storage opened in March and was 70 percent occupied by early summer. Oxnard plans to use the same design for another drive-up storage slated to open next year.

While there has been an increase in female renters, Oxnard says it's not as dramatic as he imagined it would be. "Men also like the design," he says with a chuckle. "It's easy to drive into. It's easy to park and back up, and pull into the site with a trailer. The accessibility and the ease of use have been a big thing. When customers walk in, they mention how beautiful the facility is and they feel comfortable."

User-friendly, attractive facilities seem to be the future in self-storage design. One of the reasons is city planning and zoning boards don't like the stacked, cramped look that has dominated the self-storage industry for years. "Now a lot of us are building really good-looking facilities. We're evolving," Oxnard says. "We will evolve further into a full retail business. We'll have large parking lots and landscaping. We're going to have hours like a retail store."

Like Oxnard, more Landmark clients are requesting imaginative designs that include covered driveways, extensive landscaping and high-tech security systems. "A lot of people think price sales. It doesn't. It's amenities," Boothe says.

Not only is the self-storage design changing, so is its place in the community. Operators have discovered getting involved in the neighborhood is good for business. When Oxnard learned a local schoolteacher was battling cancer, he offered her a rent-free unit to store donated items for a rummage fund-raiser. Oxnard's generosity helped him make his mark in the area. "We got known very quickly. It was very good publicity for us. It helped us a great deal and it helped the lady a great deal," he says.

Drive-Up Self Storage also has an electronic reader board where nonprofit organizations can display information free of charge. "If you operate a local business, a mom-and-pop operation, you need to be known as nice people and be nice to people," Oxnard says.

The Northeast

I spend a good deal of time talking to real estate brokers all across this great country of ours. I am hearing some of them report the universal glow the industry has basked in for the last couple of years is now turning into cautious optimism in some regions of the country. This is not Chicken Little saying the sky is falling, but merely some of our brokers noticing, in some cases, the wind is beginning to die down.

I thought it was time to survey the situation in an orderly manner and determine the facts on a region-by-region basis. Indeed, reading the reports of our brokers, the Northeast appears to remain positive for self-storage. However, as with all good things in the world of commerce, such times attract competitors, and the Northeast is no exception. Our Northeast brokers--Linda Cinelli, John Gilliland, Ed Magilton and Joe Mendola--join us in this survey.

1. Have you seen the impact of a recession in your area yet?

Cinelli: From my experience, the New Jersey market has never been better. Most areas are experiencing the same market conditions--higher rates and low vacancies. Rental rates have definitely gone up due to low vacancies.

Gilliland: Yes, I've seen it in occupancies. In my area specifically, I know of several projects where occupancies are stalled at 55 percent to 60 percent due to too many properties coming on line at the same time. The market is there, but it will take a couple of years to lease up.

Magilton: Sixty-eight percent of the facilities I track charge between $75 and $120 for a 10-by-10 unit, while 15 percent have rates above $120. While prices are set locally and vary from town to town, there appears to be no difference in occupancy rates no matter what the area price is. I think occupancy may be getting ready to stabilize at this point because of the new construction going on.

Mendola: The only impact I have seen is that storage is remaining very strong with the event of auctioning of major corporate inventories and auctioneers using self-storage to store better goods.

2. Are investors still interested in self-storage and, if so, what kind of investors are they?

Cinelli: Investors as a whole are very serious in pursuing investment opportunities. Most people are experienced with the self-storage industry, but vary in the amount of units they own. We see new developers expanding into self-storage business as well as those feeling the stock market crunch.

Gilliland: Experienced buyers are looking for the cream of the crop in the first-tier cities only. Local, first-time investors are the buyers who are really active. Everybody is talking about the mini-storage business, and they want in.

Mendola: Yes, investors are still interested--everyone from the first-time buyer to the entrepreneur to select REITs. But the properties have to be priced right or they will not sell.

3. Are the local banks continuing to make loans in your area? Are the falling rates having any impact on the buyers?

Cinelli: Banks are still loaning money and are very active in soliciting the self-storage broker for clients.

Gilliland: Falling interest rates have had an impact on prices, but not the desire to purchase a property.

Magilton: Interest rates will eventually affect the owner/investors rate of return and will push down the sales price to maintain returns, but not until there is an inventory of facilities on the market from which to choose.

Mendola: Yes, there is no better time to borrow construction money than now. Rates have fallen between 200 and 225 basis points. Long-term rates are equally as good.

4. Are you seeing any signs of overbuilding? Is it really a big deal in the Northeast?

Cinelli: Not yet. Some areas of the suburbs are nearly overbuilt.

Magilton: I see a lot of new construction going on, but I will not classify it as overbuilding at this point. Years ago, a small number of self-storage facilities met the needs of the area. As the years have passed, new storage facilities continue to be built and existing ones are being expanded. Yet the occupancy rates continue to climb in this area. I feel this is because a larger segment of the population has become aware of self- storage and is now using it.

Mendola: Yes. There are many tradeshows for self-storage and as many participants who want to be owners when they come back from them. There are some signs of overbuilding in certain markets; however, the Northeast has been undersupplied, so major oversupply has not happened yet.

5. Are there many conversions (i.e., warehouses to self-storage) in your area? If so, are people concerned this could add too much space?

Cinelli: In my market, we are seeing the most popular conversions in industrial buildings. There are some retail centers that could be turned into storage. The developers will have to be very much in tune with what the towns have on the agenda as far as existing approvals.

Mendola: Yes, there are conversions in my area. The Northeast has many older building--including mill buildings--and these lend themselves to self-storage conversion. The saving grace is these buildings are usually in areas where vacant land is either very expensive or in very short supply--usually both.

6. Which, if any, REITS are active in purchasing self-storage properties in your area?

Cinelli: Most of the big names are purchasing in the New York/New Jersey area.

Mendola: Sovran, Amsdell, Public Storage and Storage USA.

Michael L. McCune has been actively involved in commerical real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In January 1994, he created the Argus Self Storage Real Estate Network, now the nation's largest network of independent commercial real estate brokers dedicated to the buying and selling of self-storage facilities. For more information, call 800.55.STORE or visit www.selfstorage.com.

Inside Self-Storage Magazine 11/2001: The 2001 Legislative Year in Review

The 2001 Legislative Year in Review

By D. Carlos Kaslow

The 2001 legislative year has been a good one for the self-storage industry. Eight state legislatures considered more than a dozen bills that would directly affect self storage. Four states enacted laws supported by the industry, and only one of four bills opposed by the industry has any chance of passing this term.

Arizona and Missouri enacted industry-sponsored late-fee bills. Both efforts were based on model legislation developed by the Self Storage Association. Both bills contain four elements that are vital to positive late-fee legislation:

  1. They define a late-fee as a charge for the untimely payment of rent.
  2. They clearly distinguish between late fees and lien-enforcement costs and permit a storage operator to collect lien-enforcement costs in addition to late fees.
  3. The laws provide storage operators with a late-fee safe harbor. If an operator charges a late fee described in the law, it is presumed reasonable and cannot be challenged. For example, the Missouri law states that a late fee of $20 or 20 percent of the monthly rent is presumed reasonable.
  4. A storage operator may charge a higher fee if it is justified by the his costs of doing business.

Arizona, California, Maryland, Missouri, North Carolina and West Virginia now have laws that affect the way storage operators set late fees. The North Carolina law is the most restrictive and was passed three years ago at the instigation of a legislator who had a bad experience at a self-storage facility.

West Virginia became the 47th state to enact a self-storage lien law, which includes a section on the late fees a self-storage operator may charge. So the state's operators were able to take care of two issues with a single bill. Alaska and Nebraska are the only other states that have not enacted self-storage lien legislation. There is a lien bill pending in Vermont, but prospects for passage do not look good.

While the industry had several successes in passing industry-supported legislation, it was also successful in stopping anti-industry bills. The Arizona Mini Storage Association was able to derail one of the strangest bills ever introduced. The bill would have amended the state self-storage lien law to make lien sales far more difficult to conduct. Some investigation revealed the bill was the handiwork of a frequent buyer at self-storage lien sales. He thought auction prices were too high and believed that by making the sale process more difficult, auction sale prices would drop. This was a truly crazy legislative idea and AMSA was able to kill this bill in short order.

California self-storage operators faced the prospect of being regulated by the state Public Utilities Commission. The real target of the bill was the storage-to-go business, but traditional self-storage operators were being included in the bill's regulatory scope as well. The SSA opposed the regulation of any aspect of the storage business as a public utility but was especially concerned that traditional self-storage business, which is part of the commercial rental real estate industry, might become a regulated utility in California. Fortunately, the bill was amended several times and its application to traditional self-storage was deleted. There is still hope the bill will not pass, but final legislative action had not been taken at press time.

The self-storage industry is too large and too successful to be ignored by the nation's state legislatures. Storage operators need to stay alert for legislative developments in their states. More important, they need to be organized so they can take action to promote their legislative agenda and to react swiftly when hostile legislation is introduced. The SSA is working to assist the industry in achieving this goal. The association now tracks legislation in all 50 states and is working with storage operators at the state level to have networks in place to promote the industry legislative agenda. One question every storage operator should ask is: What would we do if a nutty piece of legislation like that bill in Arizona were introduced in our state? If you don't have a good answer to this question, you may want to give the SSA a call.

D. Carlos Kaslow is an attorney in Berkeley, Calif., and is the founding partner of the Self Storage Legal Network and author of the Self Storage Legal Review, a bi-monthly newsletter covering self-storage legal issues. He is also general counsel for the national Self Storage Association. For more information, visit www.selfstorage.org.

General Guidelines

Direct mail can be a very cost-effective marketing technique for storage operators. The problem is many people have been given a lot of misinformation about it. I'd like to clear up some of the misconceptions and give you specific suggestions on how to maximize your effectiveness when you use this method of marketing.

First, let's cover some basics. No matter what kind of marketing you're doing (and that includes direct mail), make sure your results are trackable. I only have one sign in my office. It reads: "Measurement Eliminates Argument." To "measure" direct mail, insist prospects either bring in the direct-mail piece when they visit you or that they give you a code from the direct-mail piece to receive a certain discount. Without tracking your results, how will you know whether something is working? The answer is: You won't.

Second, you have two types of direct mailing you can use: You can either send out a "solo" piece or participate in some kind of co-op mailer. The second category would include things like Val Pak or Money Mailers, where your piece is included with a group of other coupons from other vendors.

Lastly, remember how to judge the effectiveness of your efforts. It is strictly a matter of dollars spent vs. dollars generated. If you spend $1,000 and generate $5,000, you've made $4,000. In the storage business, the revenue generated does not come in immediately. It comes in over a period of time as an annuity in the form of rent. If you generate 17 additional renters, they won't pay in advance (but if they offer to do so, please don't refuse them). The money from these new tenants will come in on a monthly basis.

Measure your dollars generated based on what your average tenant generates for you. National averages tell us a tenant will generally stay for approximately seven to eight months and he will pay somewhere around $70 per month for a unit. Multiply these averages together and you get approximately $500. Cut that number in half to cover your "hard costs" of doing business and you get $250. Assuming every fifth tenant will send you a referral, you need to add back $50, which leaves you $300 total. That's the dollar amount you can assume each tenant will be worth to you.

When assessing the effectiveness of your direct-mail efforts, you also have to realize that return on marketing dollar (ROMD) is a crucial tool to measure your efforts. You naturally want to concentrate your efforts in those areas where you get the greatest return for your time, energy and money. If you pay $1,000 and get $5,000, that's good. If you spend $1,000 and generate $7,000, that's better. However, you have to consider another very important fact: There are some renters who may not respond to the most cost-effective means of marketing. The reason? That particular method of marketing does not cause them to buy. You still want to try and capture them through some other means of marketing.

General Guidelines

You must employ a variety of marketing methodologies in order to be the most successful you can be in the storage industry. Direct mail is just one of many methods you can use. That being said, here are some general guidelines that apply to solo and co-op mailings.

Headlines. What you print at the very top of your mail piece is crucial to its success. Take your biggest benefit and match it with your potential renter's greatest need. If you don't grab people's attention at this point, you've lost them forever. You have one shot, so make it your best one.

If you are targeting a very specific niche, go after it directly in your headline. Don't be guilty of a watered down, slushy headline--go for the jugular. An example might be, "How every lawyer can cut his rent by 17 percent, virtually overnight." You would then make the case for how most lawyers inevitably have one room in their offices piled with junk and generating no revenue.

Codes. Make sure you have a code number or numbers on each direct-mail piece you send out. Without a coding methodology, you have no way of measuring results. This is not an optional item.

An irresistible offer. If you're going to use direct mail at all, give prospects your absolute best, super-duper-deluxe offer. Don't try and build up to the offer over time. Make prospects take action now. This means giving them something of high perceived value with low or no cost to you. Go out to the vendors in the local area and get them to give you some special offers you can give away in the form of a coupon. Bundle them together and calculate what the entire package would be worth. Then, in your offer, tell prospects if they visit your facility and bring your mailer, you'll give them $349 (or whatever the value is) in free coupons.

Web page. If you've captured folks with a great headline and sucked them in with an irresistible offer, you may also want to direct them to a website. Then you can let the site sell them. By getting people to take this extra step, they have gotten slightly more committed to doing business with you. This doesn't mean you don't try and sell them with your direct-mail piece alone, but it does mean you can use the website as your backup.

A "you" piece. Most direct-mail pieces I see boast about the organization selling the services. They say something like, "We've been in business for 105 years ... blah, blah, blah." My response to that kind of drivel is, so? What can you do for me? How can you save me money, time, etc.?

Don't make this same mistake. Concentrate not on your storage facility, but on how prospective tenants can benefit from using your services. The best way to do this is to always pair features with benefits. This works perfectly with direct mail and when you're speaking to prospects on the phone. For example, don't say "We have 14 different size units." Instead, explain the benefit this creates: "You never pay for more space than you need."

Design elements. When you design a direct-mail piece of any length, make it simple. You can still make it professional, but don't complicate the issue. Remember the saying: "A confused mind always says 'no.'" Stick to one or two typestyles only. If you include a graphic, make it simple and relevant. Graphics should illustrate a problem your storage facility addresses. This means you should avoid using a picture of your facility. I don't care how nice it looks--it will not be your most effective use of space.

Solo Mailers

Solo mailers are those you send out on your own. You design and mail them (or get the help of qualified expert)--you do the work. Done correctly, this can be an intelligent marketing strategy. Within the category of solo mailers you have two primary options: postcards or mailers enclosed in envelopes. Both can be effective when used appropriately.

Postcards. The beauty of postcards is they are cheap and easy to create. You can make a decision to do a postcard mailing and, in less than 48 hours, they can be out the door. They also get the message into the hands of people without them having to open a letter--they are delivered "unwrapped." Because your message is not covered in an envelope, it doesn't involve that extra step.

Letters. If you choose to test a letter over a postcard, remember some key elements: First, never use labels, as they scream "junk mail." Instead use a plain white envelopes with stamps (not metered mail), and have letters hand addressed. I've seen response rates jump more than 800 percent just by following these simple steps.

Always pick a small group to test with your envelope mailer and make sure and send it more than once. Send your first mailing and, 10 days later, follow up with a second mailer referring to the first. Follow up another 10 days later with another one referring to both previous ones. While this may sound cumbersome, it will be worth hiring some high school kids to hand address the envelopes if you get the response rates. Also, I wouldn't test this on more than 1,000 prospects at a time.

Co-Op Mailers

Val Pak and Money Mailers are the two most popular co-op mailers around. If you know of any others, please let me know. These two will mail your offer to a given area or ZIP code for around $500. Remember the numbers--if you get just two renters from the mailer you've nearly broken even.

The same rules apply to these co-op mailings as to others. Don't be talked into a fancy design for your ad. The best design is one that pulls the best results. If everyone else's mailers are four-color, consider using black and white. If everyone else's ads have lots of pictures and graphics, consider designing one without any. And don't listen to the sales reps for these organizations who claim you need to mail repeatedly to get results. If you don't get good results from your first effort, you simply need to change your offer.

Mail to Whom?

To whom do you mail your postcard or letter? Certainly not anyone outside of a 3- to 5-mile radius, though a 3-mile radius is probably the best. Do you mail to a generic list of homeowners? There is an operator in my neighborhood in Las Vegas who does this. My suspicion is he does not have any tracking system in place. Why? It would have proven this method to be a waste of time.

You should target a group. Test small. Target a specific niche such as lawyers or doctors, or target a very specific neighborhood. (Don't forget your own!) Once you've decided which group to target, it's fairly simple to hire a company to produce a list for that particular group. If the list company has a minimum-purchase requirement on the size list you must buy, there is no law that says you have to mail to everyone on the list. If you have to purchase a list of 3,000, only mail to 1,000 and put the other addresses aside until you get some results.

Consider Professional Help

No, not psychiatric help! (Unless, of course, it's warranted.) I mean help with your mailings. You should try and follow the above recommendations on your own; but if you can't, call a qualified expert to assist you in writing and designing your direct-mail pieces. Beware of advertising agencies. These folks get paid regardless of whether the campaign works. They have a vested interest in one thing and one thing only: you paying the greatest amount of money. Why? Because their compensation is almost always a percentage of the total media dollars spent.

If direct mail isn't a portion of your marketing efforts, it should be. Don't expect to generate loads of cash on your first efforts. Follow the guidelines above and you'll be happy with your results--maybe not immediately, but after some intelligent tweaking of your mail pieces. Good luck.

Fred Gleeck is a self-storage profit-maximization consultant. He helps storage owners before and after they get into the business with services including feasibility studies and onsite marketing audits. He is the author of Secrets of SelfStorage Marketing Success--Revealed! and numerous other training items for self- storage operators. To get regular tips on self-storage, send Mr. Gleeck an e-mail at [email protected]; or call 800.345.3325.

Year 2001 Claims in Review

As we enter a new year, it can be helpful to review the types of claims reported by self-storage facility owners across the country during the past 12 months to help you assess your own risk of loss. As you will see, many of the kinds of claims filed were at least partially preventable. The fact that 2001 will be remembered for relatively stable claims activity is a good indicator that facility owners as a group are becoming increasingly aware of the hazards inherent in running a self-storage operation and are taking proactive measures to help guard themselves against loss.

Lightning-Induced Power Surges

The most common type of claim submitted by facility owners in 2001 was for equipment damage, primarily security systems, due to lightning-induced electrical power surges. However, there were a number of claims for damages to computers, fax machines and other office equipment as well. At least some of these losses could have been prevented had surge protectors been in use. Also known as lightning barriers, surge protectors provide a first line of defense against electrical damage by instantaneously clamping down on power surges and diverting them harmlessly to ground. Even in cases where no outright equipment failure may occur, the life of electronic equipment can be significantly reduced following a lightning surge, and surge protectors can significantly extend that life.

Damage to Tenant Property

Another common claim in 2001 is property damage to others' property--for example, a gate closing on a tenant's vehicle. This type of claim is normally covered by business-liability insurance, which covers those amounts you become legally obligated to pay for damages to other's property; injuries suffered by tenants or visitors while on your premises; personal-injury lawsuits involving libel, slander and physical eviction of a person; and false arrest. For best protection, liability limits of $1 million or more are generally recommended even for the smallest of facilities.

Sale-and-Disposal Legal Liability

Nearly every state has specific statutes that govern the sale-and-disposal process. However, if the procedures are not followed to the letter, or if there is an error in any step of the process, the self-storage operator leaves himself vulnerable to lawsuits claiming loss or damage of stored goods. In 2001, we handled numerous claims arising from the negligent sale, removal, disposal or disposition of customers' property when reclaiming space for which rental or other charges are delinquent or unpaid. If you or your staff are involved in the sale-and-disposal process, you must be aware of lien law. Consult with an attorney about preparing a written procedure that outlines the exact steps for disposing of a delinquent tenant's property. Read and follow all state statutes to the letter. Note also that sale-and-disposal legal liability provides for defense and legal costs, even if a customer's suit is groundless or fraudulent.

Remember, no matter how large or small your self-storage facility may be, securing adequate coverage is essential for protecting your business and your peace of mind.

David Wilhite works for Universal Insurance Facilities Ltd., which offers a complete package of coverages specifically designed to meet the needs of the self-storage industry. For more information on Universal's coverages, or to get a quick, no-obligation quote, call 800.844.2101; fax 480.970.6240; e-mail [email protected]; visit www.vpico.com/universal.

The Cost of Things

I know the date on the cover says November. Our annual finance issue. We publish it every year at this time, and normally it's of no consequence that the articles included are written in September. Sure, the economy is tenuous and could change quickly, causing information to be outdated before publication. But this year we had far greater concerns.

The author of our feature story, "Who Wants to Be a Self-Storage Millionaire?," which was intended to be a spirited piece, called the week of Sept. 11 to say he felt awkward being so insouciant. He felt compelled by our national tragedy to be more earnest. Being one who knows writing is only worthwhile when born of something genuine, I agreed it was important he honor that impulse. In the end, he managed to temper grief with the original task. I admire all of my writers for forging ahead during such a difficult time, honoring their commitment to me and this magazine. I admit I was embarrassed at how trivial the production seemed in comparison to greater events.

I also respect the determination of those who joined us in Nashville, Tenn., Sept. 20-22, for our conference and expo. There was debate, of course, as to whether it was wise to continue with such a venture. Ultimately, we could not let fear defeat us--a sentiment largely shared in this nation. Life has not halted. And, to the contrary, the spirit of patriotism and fierceness of will have seemed to make us more invincible.

We at Inside Self-Storage want to extend our prayers and deepest sympathies to the victims of the Sept. 11 attacks as well as their loved ones. We do not yet know what these events will ultimately cost us--in our personal lives, our economy, our politics or our hearts. What we hope is we will emerge from this trial--like a phoenix from the ash--valiant, strong and unified.

Best wishes,

Teri L. Lanza
Editor
[email protected]

Installation

Installing a new roof on an existing self-storage facility used to be a nightmare. It meant the self-storage owner and roofing contractor faced a variety of liability issues. After all, removing an old roof from a self-storage facility to install a new one left tenants' belongings open to a number of elements. Now those fears are a thing of the past.

David Fout, president of Fout Companies in Orlando, Fla., found a way to replace worn out, leaking roofs without any violation of tenants' goods. This turnkey general contractor for the self-storage industry recently reroofed a 70,000-square-foot facility in south Florida, which was 20 years old and consisted of seven structures.

"We installed a new roof over an existing standing-seam roof system with Roof Hugger, an attachment for retrofitting roofs," says Fout. "I used the retrofit system for two reasons. First, I wanted to eliminate the tenant-liability issues you are usually faced with when you take a roof off a self-storage facility. We were able to literally put the retrofit roof product on and install the entire roof system without the tenants even knowing we were there."

Fout says the second reason he chose the retrofit system is because he was able to increase the existing structure's wind-load capabilities. "This type of retrofit-roofing attachment is able to take a standard system installed on a typical self-storage building and increase the wind-load rating by way of additional retrofit attachments on closer spacings, and that's what we did," he explains.

Fout also realized he was able to insulate the facility with the retrofit system as well as put on a new roof. "I applied a rigid insulation between the retrofit pieces to increase the R-values because some of the buildings are being converted to climate-controlled spaces," says Fout. "The insulation made a dramatic increase in the efficiency of the building. It was incredible."

According to D.V. "Red" McConnohie, the inventor of the patented retrofit-roofing system, "A properly designed retrofit-roofing product achieves a 'thermal-break' air space between the old and new roof sheets, which allows for optional insulation. The system should also prevent cold bridging to allow U-values in excess of current building requirements to be achieved." McConnohie has more than 40 years of metal-structure design-build experience throughout the United States and overseas.

When comparing retrofit-roofing systems, McConnohie advises you look for systems that have undergone a variety of tests, and have passed the tests with excess capacity. These include dead-load tests, certified laboratory uplift tests, computer finite-element analysis and low wind-shear silhouette. The system should be certified to meet or exceed all local code requirements. It should also maintain or improve the integrity of the original design loadings. And, the system should duplicate the desirable "roll and flex" of the original structure to accommodate thermal and wind-load movements.

Installation

"This type of retrofit product does not require any special equipment. Only standard tools and fasteners are necessary," says Dale Nelson, president of Roof Hugger Inc., the company that produces the system. "Precision-punched notches act as a continuous template. The system is pre-punched to 'nest' into existing rib profiles. This 'nesting' into the old panel profile achieves a rugged, stable and low-silhouette connection system. It also has pre-punched pilot holes for rapid fastening into existing support structurals." Nelson has 27 years of design-build metal-structure experience.

"Retrofit-roofing attachments are absolutely a piece of cake to install," comments Fout. "I personally was involved in the first few buildings just to see how well the product worked, and it worked better than we anticipated. There were no bugs to work out."

Fout says the system's subpurlins, which are each 10 feet long, were delivered by common carrier. The subpurlins were removed from the truck with a forklift and put directly onto the roof. The installation began immediately.

"The transition from the retrofit attachment to the roofing process was continual," says Fout. "We had two people screwing down the attachments and right behind those two people was a small crew doing the insulating and putting down the roof. It was a very simple process."

Prior to having the retrofit-roofing system delivered to the site, Fout cut off all the old trim and had everything ready for the new roof. From start to finish, the entire reroofing job lasted less than six weeks. "We didn't have to rip off the old roof, and that's where we realized such a significant time savings," Fout comments. "You can take your time savings and put it in the bank as a credit to what you would have normally done."

"To place new roof panels on a building where an old roof has been torn off, the crew must work over open purlins encumbered with 'fail-safe' safety systems," McConnohie explains. "The owner, contractor and workforce all face unnecessary liabilities. When retrofitting, however, the process permits them to enjoy safety and time and dollar savings. The labor savings are dramatic!"

Cost-Effectiveness of Retrofitting

"Prior to retrofit-roofing attachments, the alternative was just a hat channel screwed to a metal roof," Nelson says. "But retrofit systems are much better, more stable and more effective than hat channels, with just a very slight increase in material costs that is more than offset by the labor savings. For the building owner, retrofitting a roof is a great alternative to stripping off the old roofing system. Retrofitting saves you up to 70 percent of the cost of labor on the preparation of an old roof."

Fout declares retrofitting is absolutely cost-effective. "When you have to rip out something and dispose of the refuse--such as the tear-out and haul-off of an old metal roof--it can get quite pricey," he says. In today's environmentally conscious society, most municipalities prohibit throwing old, galvanized metal roofing in the local dump; it must be taken to an approved disposal area. Some parts of the country even require contractors to hire an environmental-waste company when removing a metal roof with its lead-based galvanized coating. As a result, it has become very expensive and time- consuming to dispose of this type of debris. "By retrofitting a roof instead of replacing it, you not only save that high cost of tear-off and haul-away of the old roof, you are using a structure that is already in place without disrupting it in any way," says Fout.

Retrofit Roofing and the Future

"A lot of first-generation self-storage facilities are coming up for reroofing in the near future, and I can see where retrofitting is the solution to the problem," Fout says. "I have several other projects coming up this year for reroofing, and instead of tearing off the existing roofs as we had to do in the past, we will use retrofit-roofing attachments. It doesn't just alleviate tenant liability issues, it affords great convenience for buildings that are already inhabited."

Fout claims the retrofit market desperately needed this type of roofing system. "I will use retrofit roofing as much as I can, especially now that I have seen how well it works," he says. "I even recommend it to competitors. Without a doubt, retrofitting is the way of the future."

For more information about Roof Hugger, call 800.771.1711 or visit www.roofhugger.com. David Fout can be reached at 407.644.1828.

Michael Trunko is a full-time journalist specializing in business, construction and safety issues. He has had more than 650 feature articles and case studies published during the past 20 years. He is based in Copley, Ohio, and can be reached at 330.670.0552.

Financing and Loan Types

Watching the economy during the past year has been like riding a roller coaster. The unemployment rate is up, corporate earnings are down, inventories are up and interest rates are down. So with all the talk from recession to recovery and hard landing to soft landing, how is the self- storage market performing? It appears to be holding up amid the sluggish economy. Most facilities are enjoying increasing rental rates--albeit at a slower pace than in past years. Nationwide, the number of new developments within the past 12 months has not outpaced demand.

Some owners believe the self-storage industry is recession-proof. The theory is when the economy is growing, people will consume goods and businesses will increase their inventories. When the economy slows, people downsize their homes and businesses and relocate their goods and supplies to less-expensive self-storage space.

Dissenters from this theory say the concept of a recession-proof business is unrealistic, and there are already pockets of overbuilding emerging in some markets. It may be true that self-storage operators with substantial experience and stabilized facilities will withstand an economic downturn better than their commercial real estate counterparts. However, a sluggish economy makes it more difficult for operators of stabilized facilities to raise rents and operators of new facilities to lease up. This is apparent in some markets where new facilities have reached 70 percent to 80 percent occupancy and are struggling to inch higher.

Does the uncertainty of the economy lead to volatility in the financial markets? The answer is yes. Though most lenders are still active, they are carefully monitoring the real estate markets to see if they will follow the declining trends that have plagued corporate earnings. This uncertainty is evident in a trend toward more conservative underwriting from real estate lenders. However, since most lenders during the 1990s resisted the temptation to initiate the aggressive lending programs prevalent in the 1980s, overbuilding has been kept to a minimum.

For example, most lenders in the '90s were reluctant to fund much above 75 percent loan-to-cost on new self-storage developments, even though 100 percent loan-to-cost loans were available in the '80s. This restraint has allowed lenders to tighten their lending policies rather than eliminate them completely. But we are still waiting to see how self-storage lenders will respond if the economy continues to be sluggish. Furthermore, most lenders do not understand the fundamentals of the self-storage business and are more likely to eliminate loan programs for this product if the economy heads toward recession. Those lenders who do understand the self-storage business are still susceptible to the performance of other types of commercial real estate in their portfolios. If a lender is accounting for losses on his commercial real estate loans, he is less likely to aggressively pursue new self-storage loans.

Weigh Your Options

In today's economy, you must evaluate all of your financing options. It is important to align yourself with a realty-capital advisor who can help you navigate through the uncertain times ahead. There is currently a trend toward consolidation, which means the bank or finance company you relied on for financing may not be around in the future. There are other companies that have decided to stop financing self-storage projects altogether and one or two that have filed for bankruptcy. In light of these uncertainties, it is more important than ever to seek the services of an advisor who can help you identify the best debt or equity player for your particular situation. An advisor can help you identify the most appropriate source of financing--whether it is from a commercial bank, credit company, life-insurance company, pension fund, private financial institution, investment bank or savings and loan.

The good news is, once you find a competitive self-storage lender and successfully complete the due-diligence process, you should be able to secure some of the lowest interest rates in history. Many variable-rate loans will be priced over LIBOR or prime, both of which are at historically low levels and have dropped by 3 percent over the past 12 months. For example, as of this writing, the prime rate has fallen from 9.5 percent to 6.5 percent, and the three-month LIBOR has fallen from approximately 6.5 percent to 3.5 percent over the past 12 months. (LIBOR, or the London Inter Bank Offering Rate, is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded among banks in London.)When lenders add their margins to these indices, it equates to variable-rate loans in the high 6 percent to high 7 percent range. The fixed-rate lending market is just as favorable. Many of the fixed-rate loans today are priced over 10-year U.S. Treasuries that have decreased by almost 2 percent over the past 18 months. With the additional margins added on to the 10-year Treasury, it is possible to obtain fixed-rate loans in the low 7 percent range for 10 years.

Finally, due to the fact that interest rates are at historical lows, you should be closely scrutinizing your financing alternatives in today's market. What are your financing options as they relate to construction loans, bridge loans and permanent loans?

Construction Loans

The interest rate for a construction loan today is lower than what most of us pay on our credit cards. The majority of construction loans are provided by commercial banks for owners developing a new facility or expanding an existing one. Typically, banks with which you already have a working relationship offer the most aggressive loans. The banks will place an enormous importance on your experience, track record and results of a feasibility analysis.

These loans are full recourse, and the lender will need to scrutinize your personal financial statement to determine if you meet its net-worth and liquidity requirements. The lender will completely analyze your pro-forma statements including your projections of rental income, vacancy, months to lease up, expense ratios, etc. All of your projections will be compared to the market, and you must justify the use of projections that are more aggressive than the market. Additionally, your costs to construct the facility will be compared to those of other facilities recently constructed in the market.

Once all the lending requirements have been met, you can expect to receive some very competitive pricing, since most construction lenders will provide variable-rate loans based on LIBOR or prime. Your overall interest rate can be anywhere from 7 percent to 8 percent for a loan that provides 75 percent loan-to-cost.

For owners whose banking relationships have been disrupted, I recommend seeking the assistance of a realty-capital advisor to secure a new relationship. A larger institution may have acquired your bank or your loan officer may have moved on to other opportunities. As a result of the industry consolidation, there are smaller banks looking to develop relationships and provide competitive loans for self-storage developments. Many of these banks look to realty-capital advisors to bring them new clients since they are not sufficiently staffed to directly originate.

Bridge Loans

A bridge loan is usually a short-term, variable-rate loan used to replace a construction loan prior to the property achieving full stabilization. This may be necessary because the construction loan was for 18 months and the property is not fully leased at the end of that term, or merely to replace the construction loan with one that has a lower interest rate or is non-recourse. A bridge loan can also make sense when an owner acquires a facility that was poorly managed or collecting below-market rents.

The bridge loan will provide the owner a short term (three to five years) to reposition the property and pay only a minimal prepayment penalty to pay off the loan. The property is then normally sold for a profit or the loan is paid off with a long-term, permanent, fixed-rate loan. Many bridge loans are non-recourse and priced over LIBOR. The LIBOR pricing allows loans to be funded with overall interest rates--today in the high 6 percent to low 7 percent range. It should be noted that most of these loans will have a floor interest rate to ensure a minimum return for the lender.

The most important aspect of these loans is their flexibility. If you are leasing up a facility or repositioning it, you can receive additional funds in "earn-outs" as you increase the property's income. Another difference between a bridge loan and a construction loan is if a facility is seasoned enough, the lender will go from 75 percent loan-to-cost to 75 percent loan-to-value, which can equate to significantly more loan dollars.

Permanent Loans

The intent of a permanent loan is to capitalize on low, long-term, fixed interest rates. At the time of this writing, you can secure a fixed rate in the low 7 percent range for 10 years. However, due to the restrictive nature of the prepayment penalties on these loans, your business plan should involve keeping the facility for the entire length of the loan term. Additionally, this loan should be obtained once you have fully stabilized the property and determined you do not wish to pull additional equity out of the property for the length of the loan term.

A unique feature of most permanent loans is you can pull equity out of the property. For example, if you spent $1.5 million in construction costs to develop a facility and it is worth $3 million in three years, you would qualify for a $2.25 million loan at 75 percent loan-to-value. The difference of $750,000 between the permanent loan amount and the original construction cost is your profit. You do not have to reinvest the profit back into the existing facility.

Since most of these loans are based on the performance of the actual property, they are non-recourse and, therefore, your net worth and relationship with the lender are less important. The lender is concerned with the historical operating numbers, asset quality and market dynamics in making a lending decision. Although your experience, net worth and credit history are weighted, the key to getting the lowest fixed rate in the market is keeping good historical records on the performance of your facility.

Most permanent lenders will scrutinize your historical operating statements and compare them to other facilities in the market. If you keep good records, the lender will be able to give you credit when you are managing the facility better than your competitors. However, they will still default to some industry standards even if you can prove your facility has lower expenses. For example, most permanent lenders will underwrite to a minimum vacancy of 10 percent and a minimum management fee of 6 percent.

There are also two different types of permanent lenders in the market--one is a portfolio lender and the other is a commercial mortgage-backed securities (CMBS) lender. A portfolio lender will keep the loan on its books during the course of the loan term. The benefit to this type of loan is its flexibility with the ownership structure, prepayment penalty, loan term and in-house servicing. The negative to this type of loan is the fixed interest rate is usually .5 percent to 1 percent higher.

A CMBS loan, on the other hand, will allow you to receive 75 percent loan-to-value financing in the low 7 percent range for 10 years. However, for the reduced interest rate you will give up substantial flexibility in your loan terms. For example, you will be required to form a single-purpose entity as the ownership structure of the facility; you will have very restrictive prepayment penalties in the form of yield maintenance or defeasance; and you will be required to escrow funds for real estate taxes, insurance and capital improvements. If your intent is to hold on to the property for the long-term, this may be your best option to lock in historically low, fixed interest rates.

Now is the time to examine your business plan and determine if you are paying too much for your proposed or current financing and/or if your financing matches up with your investment strategy. The current economic environment is somewhat unsettling; but if you have an existing facility or new development with an excellent feasibility study, now is the time to lock in financing. There are still a number of lenders aggressively investing their money into self-storage projects, and with rates being so low, now may be the best time to grow your business.

Eric Snyder is a vice president with Buchanan Street Partners, a West Coast-based real estate investment bank. The firm makes principal investments on behalf of its private and institutional clients through The Buchanan Funds while also providing realty-capital advisory services to owners and developers. Mr. Snyder can be reached at 949.219.1201.