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Preparing a Self-Storage Facility For the Sale

You have received dozens of unsolicited calls over the years from so called “buyers” and brokers wanting to buy or list your facility. You’ve read other articles like this so you know the market has turned, cap rates are increasing, financing is difficult and there are fewer qualified buyers. You’re thinking about selling but waiting for the right time. In spite of a difficult market you’ve decided now is the time to sell your self-storage facility. Now what?

The first thing to do is decide whether you are selling your property yourself or enlisting the help of a broker. All the recommendations and suggestions made here assume you are hiring a broker, so if you are selling your property yourself you should transfer all the responsibilities I have assigned to the broker to yourself as you read through this article.

If you decide to use a broker to represent you, be sure to select the right broker. By that I mean somebody who knows the self-storage business and your local market in particular. This will be somebody with a track record of helping other owners market and sell their self-storage facilities. There are a lot of risks in this market. Don’t let your choice of brokers become another one.

Getting Ready

The right broker will establish realistic expectations of what the property will ultimately sell for and set an appropriate asking price to increase the likelihood that you achieve that goal. By setting the asking price too high you run the risk of not selling at all, thus missing the opportunity to achieve optimum value. By setting the asking price too low you risk leaving of money on the table. Most important, you must understand current market conditions and know if values are trending up or down. With this knowledge, you should be prepared to set a price that is “ahead” of the trend, whichever direction it is going.

The right broker will advise you as to which, if any, deferred maintenance issues should be dealt with before placing the property on the market. Unless your property is new, the buyer should not expect it to be in “like-new” condition. Therefore, it may not be necessary to spend much improving the property’s physical condition prior to sale. You should take the time to replace burned-out light bulbs, fix minor damage to doors and metal building corners, replace faded or missing unit numbers and generally clean up the appearance of the property.

If some aspect of your property’s condition might enhance the marketability of units or the amount of rent that can be charged for them, it should have been addressed long ago. It would probably not be cost-effective to address it now. In other words, property value is mostly a function of current income not what the income could be if you repainted all the doors, installed new landscaping or remodeled the office. Spending a lot now on issues like these will probably not translate into a substantially higher sales price because it takes time for these kinds of improvement expenses to translate into increased revenue.

The most cost-effective way to achieve optimal value for your property is simply to be sure it is clean. The most you should have to do is apply a seal coat if the asphalt is showing signs of deterioration.

The bottom line is that your property’s income is achieved either because of or in spite of its appearance. There are many buyers who look specifically for properties that can be improved because they believe that by purchasing such a property they have a better chance of growing the income than they would if they purchased a newer property in perfect condition.

Inform Your Managers

Sellers are divided on the subject of whether to inform their onsite managers the property is for sale. Those who choose not to inform management are either afraid the managers will begin looking for other employment or simply don’t want to unnecessarily upset them. You can’t expect to keep your manager in the dark for long when countless buyers, brokers, lenders, appraisers, insurance representatives and engineers visit the property pretending to be interested in renting units and never actually do so. The fact is that your manager will figure it out sooner or later, and it’s best that it comes from you.

Also, by informing your managers at the beginning of the marketing process you can enlist their help in accomplishing a sale by making sure the property is presented in its best possible light. You can also assure your managers that a majority of buyers will want to keep them, and if they are not retained, you will provide them with a severance package that will allow them time to secure new employment.

It is much better to have your managers on your “sales team” than to keep them in the dark and run the risk that they could actually harm a potential sale. You should, however, tell your managers to direct any and all prospective buyer’s questions concerning the financial aspect of the property to you or your broker. You should also instruct your managers to be completely honest when answering questions concerning the physical aspects of the property.

Prepare for Due Diligence

Negotiating contracts can be time-consuming and expensive. You should be prepared to respond to any offer you receive with a contract prepared in advance by your attorney or broker. That contract should allow for minor changes to be made to fit the particular counter offer you make to the buyer, and you should request the buyer use that contract if negotiations are to continue.

The contract will contain a list of items to be delivered to the buyer for review during the contingency period. Those items should be prepared in advance and delivered to the buyer quickly in order to minimize the length of time required for due diligence. The following items are typically included:

  • Last two years and year-to-date income and expense statements
  • Most recent real estate tax bill and notice of valuation
  • Current rent roll
  • Most recent ALTA Survey and Phase I environmental report
  • Building plans, if available
  • Service agreements and contracts
  • Preliminary title report
  • Copy of loan documents for the existing financing

Prepare for Financing

You should know whether your sale will require the buyer to secure new financing. With all the turmoil in financial markets today, require your buyer to demonstrate his ability to actually obtain the financing needed to close the deal. You may want to accept a lower offer if it’s all cash or if the buyer can prove his ability to get a loan.

You or your broker should contact a number of prospective lenders so you are prepared to provide whatever documentation a lender may require in order to process the buyer’s loan application as quickly as possible. The probability of a smooth and timely closing will be improved if you can provide your buyer with specific lenders’ names and phone numbers.

If there is an exiting loan that can or must be assumed, be prepared to share that information with the buyer. Assuming a securitized loan is also difficult these days. Find out what is involved and make sure your buyer is informed. If there is an existing loan that will have to be paid off, be prepared to deal with that as well.

Although there may have never been a better time to sell a storage property, it is still important to map the process and follow the plan.

Bill Alter has been a self-storage facility sales specialist with Rein & Grossoehme Commercial Real Estate since 1986. He has been responsible for the sale of nearly 100 facilities totaling more than 5.5 million square feet and more than $175 million. To reach him, call 602.315.0771; e-mail [email protected].

ISS Blog

"Sue Us!"

An irate self-storage customer turned to WFAA, a local news station in Dallas, after her stuff was sold while she was out of the country.

Pat Daugirda went to Afghanistan on assignment for the Army Air Force Exchange Service to help run a convenience store for American soldiers in Kabul. Before leaving, Daugirda placed everything she owned in a Public Storage unit, and ensured payment by agreeing to automatic debiting from her credit card every month.

When she got home, her unit was empty. According to the WFAA news article, Public Storage took her payments, but still cleaned out her storage unit. When it was brought to their attention, Public Storage's response was, "Sue us," according to the article.

While I know there are many missing facts here—and I can't fathom a huge company like Public Storage uttering "Sue us," to any tenant—there is a good lesson here. The most important is getting good contact information from EVERY tenants. Did Daugirda give the self-storage facility a means to contact her or any friends or family? While the article doesn't delve into that topic, I'm guessing she didn't.

Plus, why would Public Storage oust a paying customer? Chances are her credit card was declined. Again, the news station didn't ask those questions.

It's cases like these that give the self-storage industry a bad rep. For all we know, and let's hope this is the case, Public Storage followed the law and its company guidelines flawlessly and Daugirda is in the wrong. Regardless, the damage has been done to Public Storage's reputation. And while they'll have no trouble recovering because of their size and presence in the industry, a single operator might not be so lucky. One bad story on the local news could really hurt business.

If you have ANY questions about wrongful sales, how to handle collections, your rental lease, the Servicemembers Civil Relief Act or any other legal issues, the March issue of ISS has the answers. You can also find dozens of articles on legal issues on our website.

There are many people out there looking for an easy payday. Don't become a target.

Mele Group Brokers Sale of U-Store-It in Florida

The Mele Group and The LeClaire Team of Marcus & Millichap brokered the sale of two U·Store·It properties in Tampa and Ocala, Fla. Both locations sold to a single realty group from California and closed at $2,810,000 and $2,250,000 respectively. Michael A. Mele of Marcus & Millichap’s Tampa office and Chico LeClaire of Marcus & Millichap’s Denver office represented the buyer and seller. For more information, visit www.melestoragegroup.com.

Fire Destroys Irondequoit, N.Y., Self-Storage Facility

Fire tore through Irondequoit (N.Y.) Mini-Storage late Thursday, and Ridge Culver firefighters were hampered by 11 degree temperatures and frozen hydrants in their battle against the blaze. Chief William Burkovich said he believed the building to be a total loss, though firefighters from at least eight town companies were on scene to assist.

In addition to water issues, the team faced a problem of exposure to the wood Rochester Stamping building just to the east. Using a “water curtain” technique, firefighters were able to mostly extinguish the fire, though hot spots were found all over the 40-by-300-foot building. Additional dangers came in the form of stored goods such as motorcycles, acetylene tanks and gas cans, said Burkovich, some of which exploded.
 
Source: Democratandchronicle.com, Fire destroys self-storage building in Irondequoit

Oklahoma Self-Storage Business Charged $8k for Storm-Water Billing Error

Bob Cacy, owner of Lynn Lane Self-Storage in Broken Arrow, Okla., recently received an $8,000 bill for storm-water fees due to a city billing error. The blunder could cost area business owners more than $200,000, unless they convince City Hall to eat its own mistake. According to Keith Sterling, the city's director of communications, the error was a human one resulting when job duties shifted between departments three years ago. Storm-water billing got lost in the shuffle, and now businesses are expected to pay the price.

Source: NewsChannel 8, Broken Arrow Wants Businesses to Pay

USstoragesearch.com Self-Storage Members Raise $5k for Toys for Tots

Self-storage facility members of USstoragesearch.com raised nearly $5,000 for the U.S Marine Corps Reserve Toys for Tots Program during the 2008 holiday season. During November and December, 1,876 self-storage facilities nationwide offered a free month of storage to customers who donated $20 or more to the foundation.
 
In addition to assisting families in need, the fundraiser helped self-storage facilities gain exposure in their individual markets. More than 100,705 news websites posted press releases relating to the event, which resulted in approximately 264 storage-unit rentals for the participating members. Many facilities also acted as toy drop-off stations.
 
“We are happy with the results, especially during this recession. It shows us that people are still generous and willing to help those in need,” said said Megan Eckert, executive vice president of USstoragesearch.com. “Toys for Tots is a great foundation to work with, and our members are so generous.”
 
USstoragesearch.com provides service to more than 10,000 self- and mobile-storage facilities in the United States. Its online marketing program allows owner/operators to put their facilities in front of potential tenants looking for storage in their area. For more information, call 866.880.0742 or visit www.usstoragesearch.com.

Mixed-Use Development: The Next Frontier for Self-Storage

Over the past 40 years, the self-storage industry has remained an intriguing and challenging combination of industrial-zoned real estate within a retail-based business model. As the industry matured from a niche product into a desirable institutional classification, the retail nature of renting self-storage continues to take on added prominence and significance.

Consider the generational evolution of self-storage development that began in the early 1970s. The “first generation” of facilities were located primarily in rural areas and tended to be single-story, drive-up storage garages.

As the self-storage business matured and public awareness grew in the late ’70s and early ’80s, a transformation into the “second generation” of facilities occurred. These new generations of properties began to open up in suburban and urban locations with additional security features and amenities.

In the late ’80s and early ’90s, we began to see a move into a new “third generation” of self-storage facilities. These new properties possessed characteristics and appearances of modern office and retail properties. Multi-story properties began featuring high-end construction with brick and glass exteriors, professional landscaping, climate-controlled space, high-tech security systems, hydraulic elevators and luxurious retail sales offices. Third-generation properties began to open up along high-traffic thoroughfares and highways, located in affluent neighborhoods and densely populated communities.

As we entered the new millennium, the “next generation” of self-storage emerged. The mixed-use combination of retail businesses and self-storage is gaining favor in desirable commercial and retail corridors. Retail outlets acting as demand generators are attracting increased traffic to self-storage properties. Subsequently, self-storage operators are able to command higher rents in convenient retail-oriented locations.

Additionally, the retail components of these new developments help alleviate zoning and permitting challenges associated with self-storage facilities. The multi-tenant developments have turned these self-storage facilities into some of the most successful properties within the industry. The following are examples of these next generation self-storage developments.

Clybourn Galleria and U-Stor-It

The Clybourn Galleria in Chicago represents one of the most unique and successful mixed-use retail and self-storage developments in the United States. Previously known as the Artmark Building, the Clybourn Galleria is a 386,000-square-foot conversion of an 80-year-old former furniture factory in the heart of Chicago’s “Clybourn Corridor.”

In the past decade, the Clybourn Corridor had transformed from a stretch of languishing industrial buildings near Chicago’s densely populated lakefront neighborhoods into a trendy 1.5 mile retail corridor with several national outlets including Crate & Barrel, Best Buy, Whole Foods and Bed, Bath, & Beyond.

The Artmark Building was the last major industrial property remaining in the Clybourn Corridor. The building was located in a planned manufacturing district, which prevented residential redevelopment but was ideal for self-storage. The previous owner, Trizac Properties Inc., a public REIT, planned to redevelop the property into a telecom hotel datacenter, but when the telecom market dried up, Chicago-based First American Properties purchased the shuttered property.

The property was too large for renovation into a stand-alone self-storage facility. Instead, a new “lifestyle” retail development was designed consisting of upscale retail, self-storage and luxury offices. The development’s retail focus was geared toward the lifestyles of young professionals and urban couples residing in the adjacent lakefront neighborhoods of Lincoln Park, Old Town and Lake View. The surrounding demographics were highly desirable for self-storage, with a population of nearly 150,000 within 1.5 miles and average household incomes exceeding $100,000.

The Clybourn Galleria renovation included 65,000 square feet of office space on the fourth and fifth floors, with 60,000 square feet of self-storage on the third floor. The self-storage opened for business as a U-Stor-It facility with a prominent sales office integrated with the other retailers on the first floor. Customer loading with convenient interior access was integrated on the backside of the property. The balance of retail space at the Clybourn Galleria was leased to several upscale tenants including Trader Joe’s, Beautiful Beginnings, KinderCare, Crate & Barrel and J. Alexander’s Restaurant.

Several challenges arose during the renovation of this new mixed-use development, including having adequate parking spaces. The U-Stor-It facility required little parking, allowing almost all of the 150-car parking spots in the lower-level for customers visiting first floor retailers. Trader Joe’s was located on the second floor, and second floor parking was accessed via an exterior cantilevered ramp behind the building.

The convenient location and proximity to retail stores generated customers for the self-storage facility. It leased up quickly with rental rates among the highest in the entire market. Self-storage customers are attracted to the upscale nature of the overall development as well as the secure and safe location.

The Lock Up Storage Centers

The success of the Clybourn Galleria was preceded by another redevelopment of a similar obsolete industrial property situated within Chicago’s Clybourn Corridor. A few years earlier, The Lock Up Storage Centers converted a four-story former cosmetics factory into one of the first mixed-use self-storage and retail developments.

The facility consists of approximately 100,000 square feet of climate-controlled space and boasts some of the city’s highest rental rates. The separate retail space located adjacent to the self-storage conversion has nearly 16,000 square feet. Exterior surface parking for retail customers is located adjacent to the property. The retail space, originally leased to a Thomasville furniture store, was replaced with “Urban Fresh by Jewel,” a specialty grocery store.

The multi-tenant nature of this mixed-use project enabled the real estate tax burden to be reduced for the self-storage operation. The retail business was allocated a higher than pro rata share of taxes based on its valuable first-floor location with adjacent parking.

Simon Property Group and Simply Self-Storage

The next generation of self-storage has attracted the interest of the Simon Property Group Inc., the largest public real estate company with 383 shopping mall properties and 261 million square feet of retail space. Simon Property Group recently entered into a joint venture with Orlando, Fla.-based OB Co. to develop up to 20 new self-storage facilities. The new developments will be located adjacent to shopping malls and operate under the brand name Simply Self-Storage.

StorQUEST and McDonald’s

One of Los Angeles’ most highly visible developments demonstrates the synergy of combining self-storage with retail. The property overlooks the busy Pasadena Freeway with an average of 310,000 vehicles per day. A three-story, 54,000-square-foot former Storage USA facility was developed on a landsite of only 24,310 square feet. Currently, StorQuest owns and operates the facility.

The original property owner successfully integrated a new McDonald’s restaurant on the site by creatively designing a sufficient amount of parking spaces required for McDonald’s customers. The parking requirement for the restaurant did not interfere with the existing self-storage operation and helps bring additional local customers to the property.

Gateway Centre and LifeStorage

Another creative re-use of vacant retail space is the LifeStorage facility at the Gateway Centre Shopping Mall, located in the densely populated Rogers Park neighborhood of Chicago. The Gateway Centre is a grocery-anchored shopping center with national tenants including Dominick’s Finer Foods, Bally Total Fitness, Marshall’s, GNC, Foot Locker and Chase Bank. But approximately 115,000 square feet of retail space remained vacant.

The LifeStorage developers vertically subdivided the vacant space from the balance of the shopping center, allowing separate ownership of a new self-storage facility. The space was redeveloped into an institutional quality self-storage facility taking advantage of the bustling activity of the urban shopping center.

The next generation of self-storage has arrived with much success. The synergy of self-storage combined with retail is reaching some of the nation’s best-known retail corridors. With creative planning and designing, it won’t be long before the “future generation” of self-storage appears near the most upscale retail destinations—New York’s Fifth Avenue, Beverly Hills’ Rodeo Drive or Chicago’s Magnificent Mile.

Marc A. Boorstein, CCIM, is a principal with MJ Partners Real Estate Services, which offers self-storage disposition, acquisition and financing of single-assets and portfolios for institutional and private clients nationwide. To reach him, call 312.726.5800; e-mail [email protected].

Evaluating Your Self-Storage Finances

The economic environment of the last several months has been devastating not only to the stock market but also to the commercial real estate market. In fact, the problem is even more intensified in the real estate world because not only have prices dramatically fallen, but there are virtually no economically viable loans available to owners who want to refinance or to purchasers of properties.

Few self-storage owners realize the full extent the devastation this credit crisis has had on self-storage projects because unlike the stock market, there are no daily quotes in the newspaper or on the Internet to tell you what is happening in the self-storage world. While I can’t tell you exactly how much your property value has declined, I can tell you that the average property value is down between 20 and 25 percent, simply based on the change in cap rates.

If your revenues are down as well, the value will also be down by roughly the same percentage as the revenues in addition to the above declines. Unfortunately, the decline in value isn’t the worst of the problem. That distinction is saved for the resulting decline in the amount of your equity (after deducting debt) that results from the loan remaining the same and the value going down. This is, indeed, a very difficult situation.

Evaluate Your Situation

When will this all end? As I write this article in early November, I have not seen any of my real estate prognosticators venture a good guess—and neither will I. Maybe Winston Churchill said it best: “This is not the end. This is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

You are probably wondering about the title to this article by now; they are really strong words, so let me explain the situation. Starting at the beginning of this decade and lasting up until early 2007, the commercial real estate market was incredibly good to real estate owners. Interest rates were low and kept getting lower; loans were generous and easy to get; values kept rising; buyers were always ready and able to buy facilities, and consumers had plenty of money (thanks to home-equity loans) to rent self-storage units to store their new toys.

The fact was that if you owned a self-storage facility you, along with all of your colleagues in the business, were becoming rich. All owners were in the same boat, going the same way and it looked like a luxury liner! Now fast forward to 2008 when the credit crunch first hit in midsummer. It really was “just the start of the beginning,” although no one dared to know the dimensions of the ultimate problem. We still don’t know and we may not know for some time yet!

As owners realized that the “cruise ship” was beginning to take on water, a not-so funny thing happened: The ship divided into three groups when they started to evaluate the situation. The Predators got in the lifeboat and sailed to safety to sail again in the future; the Prey were thrown out of the lifeboat; and many of the others, the Unaware, went down with the ship.

The analogy gives us some idea of what is happening in the self-storage real estate world today. Some owners and investors (Predators) with cash and good credit possibly sold early and are beginning to look for good deals. They can be very patient until the prices come down even more because they know there are only a few buyers with access to financing.

However, some owners (Prey) have discovered their plight of declining values and are worried about the constant value of the mortgage eating away at their equity, not to mention declining cash flow because of the weak economy. Hopefully they had the good sense and fortune to have a long maturity loan from the start. If not, they should immediately begin to think seriously about refinancing or possibly selling. The problem is that when the old loan has to be refinanced and the value is down, the new lender won’t lend as much, and the owner may have to make a serious cash infusion just to refinance with a lower loan.

To continue the analogy, to keep your place in the boat you must carefully analyze the situation and act surely and quickly. Lastly, for those owners (Unaware) who haven’t reviewed their real estate situation to figure out exactly what they must do to resolve a potential problem, swimming lessons might be a good idea.

Do the Math

This analogy presents the gist of the situation, but some numbers might help you understand the mechanics as well as the magnitude. The numbers are illustrative, but are scalable in either direction to suit your property. The first column above shows the peak of the market, and the second assumes the same revenues and a valuation at a 9 cap rate. Nobody knows for sure where cap rates are today, but many experts think that cap rates will return to historic norms, which is in the “nine-ish” range.

The last column shows what will happen to value if the occupancy and rents are each down 5 percent and the resulting impact on the cash required to refinance the project. The loan-to-value ratios in the last two columns are very likely less than 75 percent, but rather than add another variable, I just used 75 percent. I believe that the math suggests a very serious problem on the horizon as this market moves forward; every day is one day closer to the maturity of the loan.

Consulting a real estate expert specializing in self-storage will either set your mind at ease or help you develop a plan to mitigate your situation. There are some very capable professionals in the industry who can help you navigate through the process. The best thing you can do is prepare yourself and not be caught unaware as the market continues to evolve around us.

Michael L. McCune is president of the Argus Self-Storage Sales Network, a self-storage real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com, a marketing medium for owners in the self-storage industry. For more information, call 800.55.STORE.

Stellar Asset Invests in U.K. Self-Storage

Stellar Asset Management launched a fund that seeks a minimum annual income of 6 percent by investing in self-storage space facilities in the Midlands and Northwest England.

The Stellar Income Fund is seeking to raise £1m to fund its first investment, with the maximum funds set at £10m. The fund will employ no gearing and is available to investors in tranches of £10,000. According to the group, the fund will acquire facilities that are trading. It will exploit opportunities from overleveraged operators and banks looking to restructure because of market conditions.

The first facility to be acquired is in Newcastle-under-Lyme, Staffordshire. The facility has traded for three years and generates the target yield of 6 percent.

Source:  Fund Strategy,  Stellar Looks to Self-Storage for Income

UNITS Franchise Opens in San Antonio

David Williams is opening a franchise of UNITS Mobile Storage, a portable storage company, in San Antonio. The 13,000-square-foot warehouse is on 1.5 acres near San Antonio International Airport. Williams owns the first UNITS franchise in the city.
 
UNITS allows residential and business customers to store their items in 16-foot containers that are water, mold and UVresistant. The company caters to homeowners looking to temporarily store their household contents while undergoing a remodeling; a small-business owner in need of extra storage space; or a contractor looking for secure storage on a jobsite.
 
UNITS Mobile Storage was developed in 2003 by Michael McAlhany, founder and president of UNITS’ sister company, Extra Room Self Storage. The company sold 23 franchise locations across the country in 2008 and has plans to sell a total of 50 franchises by 2011. For more information, visit www.unitstorage.com.