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Articles from 1997 In September


Issues of Facility ConstructionSelecting a contractor and negotiating the contract

Issues of Facility Construction
Selecting a contractor and negotiating the contract

By Scott Zucker

A property owner deciding to construct a self-storage facility must address the same issues that all owners face, whether they're developing their properties for self-storage, office, retail or even industrial use. First, the owner must choose whether to hire a design/build contractor who will both design and construct the project, or instead hire an architect to design the project and separately hire a contractor to build it. Second, the owner must consider how to negotiate the construction contract to protect himself from contractor defaults and defects.

Design/Build or Architect-Contractor

From the owner's perspective, there are certain advantages to using a design/build contractor in lieu of following a traditional architect-contractor-type arrangement. With design/build contracts, the contractor has the singular responsibility for both the design and construction and, therefore, if problems do occur, the owner can recover directly from the contractor for any deficiencies in either the design or construction of the project. Also, in a design/build contract, the contractor agrees to meet the owner's performance specifications rather than simply building the structure according to a set of plans. Therefore, if the plans are inadequate, the contractor is responsible for the additional costs to correct the problem rather than the owner.

Another advantage of using a design/build contractor is that the project can presumably be completed within a shorter period of time, since the contractor can begin work on initial phases of the project while later phases of design are being completed. Further, since the contractor has control over design details, the contractor can use familiar methods and processes in building the structure that may result in savings to the owner.

Obviously, a disadvantage of using a design/build contractor is that the design professional, commonly the architect, does not act as the owner's agent and would not be available to validate the progress and quality of the contractor's work. Therefore, the owner loses the ability of the architect to inform the owner about defects and deficiencies in the contractor's work. With design/build contracts, the owner has to hire another party to perform project inspections or the owner will assume the risk that the contractor is performing the work properly. An additional problem with design/build contracting is that most design/build contracts are entered into by negotiation rather than competitive bidding, and the owner may not obtain the lowest price on the project.

The traditional method of contracting for construction is when the owner first hires an architect to prepare a set of plans and specifications for the project, which is then used to obtain bids from certain general contractors. This provides for competitive bidding among the contractors and allows the owner to get lower prices for the work, since each contractor is trying to underbid the other. The owner then separately contracts with the general contractor to perform the construction of the architect's design. Under this method, the owner can use the architect to oversee the contractor's work and determine the progress and quality of that work. However, in this case, the owner would be warranting the sufficiency of the plans provided to the contractor and would be liable for any increased costs arising from defective or inadequate plans (which the owner would then seek to recover back from the architect). Additionally, there are no time savings in such a tripartite contractual arrangement between the owner, architect and contractor because the contractor does not even bid on the contract, much less begin work, until the design has been finalized.

Selecting the Contractor

Assuming that the owner approaches the project by first hiring an architect to design the work and then putting the plans and specifications out for competitive bidding, how should an owner decide which contractor should build the project? Simply being the lowest bidder should not be the only criteria for being accepted to build a project. Instead, it is highly recommended that the owner evaluate the interested contractors on issues other than price to determine which contractor is best suited to perform the work. Many owners will utilize a type of questionnaire for the contractor submitting a bid on a project in order to select the most appropriate one. The questionnaire would seek information that would include the following items:

  1. How long has the general contractor been in business?
  2. Who are the owners and operators of the business and who would be assigned to build the project?
  3. What types of previous projects has the contractor performed specifically in the area of self-storage?
  4. What has been the cost of similar projects performed by the contractor?
  5. What are the number of projects currently underway by the contractor?
  6. Does the contractor have a history of claims by its subcontractors or by owners?
  7. Has the contractor ever been in litigation or arbitration with its subcontractors and/or owners?
  8. Does the contractor carry adequate insurance?
  9. Does the contractor have bonding capacity?

Most importantly, the contractor should be required to provide to the owner bank references and five references of major projects completed within the last five years. The general contractor should also be required to provide as part of its bid a certified financial statement of the past five years of its business to demonstrate its fiscal stability. Assuming that the contractors competitively bidding on the owner's work have priced the work fairly and have answered the questions asked by the owner concerning their qualifications, the owner can then select the best contractor to build the project. The next step is to prepare the construction contract.

Negotiating the Contract

The parties need not reinvent the wheel each time a construction contract is prepared for the development of a project. There are many contract forms that have previously been prepared through the American Institute of Architects (AIA), or through a collaborative effort of the Associated General Contractors and the American Subcontractors' Association (AGC/ASA). Whatever contract is used, it is important that the document be balanced so as to provide protection for all parties to the project, including the owner, architect and contractor. It is essential that parties involved in a construction project enter into written contracts to memorialize their agreements concerning the work to be performed. Verbal agreements simply do not work and ultimately can result in significant disputes between the parties. With written contracts, the parties will be able to rely on the document to respond to the much asked question, "What did we agree to?" Within a construction contract, there are numerous provisions that should be included, but the following are certain items that are essential for a property owner and will help the owner if disputes arise concerning the construction of the facility:

Scope of Work. It is vitally important that the scope of work as described in the specifications and drawings prepared by the architect be identified in the contract and incorporated by reference. To the extent the scope of work is identified, this will eliminate questions as to whether certain work performed by the contractor is in the original contract or is an extra to the contract.

Time. A schedule stating when the project is expected to start and finish is especially important to the owner since the owner must be able to market to its customers when the facility will be open for business. Unless the parties are clear as to when the construction is to begin and end, the contractor will have too much flexibility in scheduling the performance of the project and will have no liability for completing the project late.

Payments. A method needs to be included in the contract to determine the contractor's entitlement for payment. A common practice is to use progress payments. Under this process the contractor submits its invoice to the owner based upon the percentage of work performed. Once an inspection is complete, the percentage amount of the contract matching the percentage amount of work performed will be paid. The owner can then retain a certain percent of that payment from the owner as retainage until the project is completed.

Changes. There are always changes on construction projects. Therefore, there needs to be a procedure in place for handling changes in the work. Changes should be made only by written agreement between the owner and the contractor. This way, there cannot be any disputes concerning verbal changes and the owner will be protected from paying for changes that the contractor may have unilaterally made during construction. The written change order must address the specific change in the scope of the work as well as the agreed upon price for the change. Further, if the change to the work will affect the contract time or schedule, this must also be identified in the change order.

Insurance. With every construction project, there should be insurance in place both by the owner and the contractor to ensure that if there is any personal injury or property damage during the project that all claims will be covered. Commonly, the contractor will have liability and worker's compensation policies and may also provide builder's risk insurance. The owner should also confirm that it has proper liability insurance to protect itself from other losses that may occur during project construction. The best course of action is for the owner and the general contractor to confirm that there is sufficient and proper coverage for all types of risk that may arise on the project during construction.

Bonding. Depending on the size of the project, it may be wise to obtain performance and payment bonds from the general contractor. A performance bond guarantees that if the contractor defaults or fails to finish the work on the project, the bonding company will step in and have another contractor finish the work at the original price. A payment bond guarantees that subcontractors and suppliers who have performed work on the project will be paid, reducing the risk that these subcontractors or suppliers will file liens on the project and cloud its title. In lieu of bonding, many times an owner will be satisfied by getting a personal guarantee from the owner of the contracting company to assure that performance will be met or payment will be made to subcontractors or suppliers.

Termination. The contract should allow the owner to terminate the contractor on the project if the contractor fails to perform, fails to pay its subcontractors and suppliers, disregards laws or ordinances, files bankruptcy, or is guilty of other breaches of the contract. Termination of a contractor is a drastic remedy and, therefore, the owner should only enforce the contract right as a last resort. If terminated, the owner should be entitled to recover back from the contractor any excess costs it incurs to complete the work beyond the original contract price.

Disputes. If a contractor defaults or performs defective work on the project and does not remedy the problem, the owner may be left in a situation in which they must pursue legal claims against the contractor for breach of contract, breach of warranty and/or negligent construction. Due to the tremendous costs of litigation, it is common for parties in a construction contract to agree to resolve their disputes through alternative dispute procedures such as arbitration. Arbitration is less costly and more efficient, and the panel of arbitrators selected to decide the case is comprised of individuals familiar with the construction industry and construction disputes.

Even with the careful selection of a contractor and the proper drafting of the construction contract, nothing can truly prevent the possibility of disputes between an owner and its contractor. However, with proper planning by an owner, the magnitude of potential disputes can be reduced.

Scott Zucker is an attorney with the firm of Weissmann & Zucker, P.C. Mr. Zucker, who specializes in self-storage law, is a frequent contributor to Inside Self-Storage and a regular speaker at Inside Self Storage Expos. He may be reached at (404) 364-4626.

Unit Mix Mistake No. 1

By Jim Killoran

Editor's Note: The following is excerpted from Self-Storage Startup, a manual for the development of self-storage properties. For order information, contact LeManx Information Products, P.O. Box 542, Shelton, WA 98584; (800) 764-1909.

The topic of unit mix has probably caused more hand-wringing among facility owners than most other considerations involved in the development of a self-storage property. Why? Most likely it's because up until this point they've probably been dealing with factors of a larger, more conceptual nature.

Think about it. Through your feasibility study, you first determined that your market will support "x" additional square feet of storage; you were extremely cautious in your site selection and all the necessary but frustrating steps to ensure its viability to your eventual success. Then came the layout of the facility, where you eked out the last possible square foot of rentable spaces. But now you're at the point where the rubber meets the road, the point where you say, "OK, this is what I've determined that my customers will want to rent, so this is what I'll build."

But it's not as though you are holding a stack of signed, long-term leases in your hand as proof of the commitment of your customer base. Even though you have done the legwork to determine who your customers will be and what they will pay for, you still are just making an educated guess as to exactly what your unit mix should be.

We've all heard it said before that we need to learn by our mistakes. Instead of setting out blindly to tackle this unit-mix dilemma and trying to reinvent the wheel, though, let's try to learn from the mistakes of others.

Unit-Mix Percentages Based on Type of Customer Base
Size Apt./Condo/Twnhse. Military/Com./High-income Sq. Footage Univ./ Manuf. Housing/Mid-Income Sq. Footage
5-by-5 10 % 5 % 10 %
5-by-10 25 % 20 % 25 %
10-by-10 35 % 30 % 35 %
10-by-15 20 % 15 % 20 %
10-by-20 10 % 15 % 10 %
10-by-25 0 % 10 % 0 %

Unit Mix Mistake No. 1

Here is where the common mistake is made of throwing your demographic homework in the trash and trying to please everyone by offering everything. Bad idea. Too many choices only serve to clutter your layout, increase the complexity of construction, hamper your ability to manage efficiently, and confuse your customer.

I know a man who decided to take the Henry Ford approach, which adheres to the notion that a car can be any color, as long as its black. In a similar vein, this man built a 300-unit facility consisting only of 10-by-10 units. His attitude was such that if someone needed a unit larger than a 10-by-10, they'd rent two. Furthermore, he didn't specify what a customer would do if they only needed a 5-by-5.

He built this project in 1988 in an area that had little or no competition to speak of, and he rented his units. Since then, other facilities have opened in the same area, offering a more standard fare of unit mix--a greater variety of sizes. Last I heard, this man was re-configuring some of his buildings.

Unit Mix Mistake No. 2

This configuration is known as the banker's mix. I don't believe that this mistake is as prevalent now as it was a few years back, mainly because the industry has matured to the point where a developer has to cater to his customer base or his project will fail. Earlier, when we could get away with the "If I build it, they will come" attitude, and the demand was such that the customer would take whatever we offered, we could dictate the mix to suit us. Or, in this case, the banker.

The theory behind the banker's mix was to increase the projected revenues of a project by including in your design a disproportionate number of small units, knowing that they command a higher-per-square-foot rent. The higher the projected revenue, the more viable a project would appear, and the easier it was to persuade the lender or investor to provide the financing.

Once again, this mistake meant ignoring your demographic research (if any was done at all) and plowing ahead with the wrong motive.

Forging Ahead

So, you have armed yourself with data concerning your potential customers. Now what? First, stop wringing your hands and read your data. Who will be your customers? Commercial, middle-income single family, higher-income single family, apartment/condo/manufactured-housing dwellers, military personnel or university students?

Based on your customer profiles, you can calculate--with reasonable accuracy--what mix to offer. Also, for reference, I offer the table below as a guideline based on my own experience and my study of the industry.

Be sure to establish the percentage of a particular type of customer before applying the above schedules. For example, if half of your customer base is apartment and condominium dwellers, and the other half is middle-income single family, then allocate half of your space to the percentages under the apartment column, and the other half to the percentages under the middle-income single-family column.

A quick note on climate-controlled space: Experience tells me that, save for the rare exception, all new facilities should offer climate control, even as much as 40 percent of your rentable space.

Doing It Right the First Time

The development of unit mix deserves the same level of serious research as your initial feasibility study. Make sure you plan wisely, investigating your customers needs for storage, long before the walls are in place. Reconfiguring can be a costly measure to rectifying mistakes that could have been avoided.

Finally, don't forget that you have a safety net available if you construct your project in phases. In other words, if you are already operating your first phase and are able to see which units rent the fastest, then you can customize your unit mix to fit your customer base. Plus, you can utilize the phasing concept of developing to help make a more accurate determination of how much space to devote to climate control.

Jim Killoran is the owner of LeManx Information Products. Based in Shelton, Wash., LeManx Information Products specializes in providing information to the self-storage industry. Mr. Killoran is also the author of Self Storage Success and Self Storage Startup. In addition, he has been in the self-storage business for 15 years and is co-owner of Freeway Mini Storage in Shelton, Wash. For more information or to order books, call (800) 764-1909, or write to LeManx Information Products, P.O. Box 542, Shelton, WA 98584-0542.

Surfin' the Net for Fun and Profit

SURFIN USA

Surfin' the Net for Fun and Profit

By R.K. Kliebenstein

Your approach to the on-ramp of the Information Superhighway may be impeded by very heavy traffic conditions and technological detours. Before paying the toll at the gate to the fast lane, you may want to consider taking the vehicle in for a tune-up, grabbing a good map to figure out where you are going, and taking a couple of defensive driving courses to avoid an unnecessary crash and frustrating delays caused by traffic congestion and lost souls.

Alphabet Soup

Just turn on your PC; dial up your Internet Service Provider (ISP) to get into the ARPANET; log on to the World Wide Web; type in the appropriate Uniform Resource Locator (URL); then download a file in #&6E976*.ORG and transfer the file to your BBS before playing in the MUD.

Is that as clear as MUD, or do you need an interpreter (available at www.language.com)? If it all seems like a code, then you may try to find some encryption software by searching "ENCRYPT" in your favorite search engine. But seriously, let's take a few paragraphs to plan our venture onto the Information Superhighway.

Caution: Surfing the Net can be addictive. It is easy to go from couch potato to mouse potato if you are not careful. Please refer to the glossary of common terms, and keep it handy as we begin our journey. Consult Figure 1 for a flow-chart provided by RentNet, the largest self-storage Web site for owners, operators and managers. This chart demonstrates the channels by which you access the Internet. Think of it as part of the "owner's manual" for your vehicle...one of those things you look at before you start the car, but soon forget until you are on the superhighway and can't figure out how to set the clock as you cross a time zone.

Selecting an ISP

There is a wide variety of options available to you for choosing an ISP. Ask yourself some basic questions, and then review your needs with the ISP salesperson.

How technically advanced am I? Do I understand enough about PCs to configure the set up for my modem, the dial up and the log-on?

Ask your prospective ISP about the set-up of your service, whether they will be able to configure your computer or at minimum, offer a verbal "walk-through" service if your technical skills are basic.

How often am I going to access the Net, and how much time am I going to spend surfing?

Most ISPs offer "unlimited" access time for a flat fee, usually around $25 per month. Be aware of potential rate increases, and if the price is too good to be true, it probably is since you may have access problems (busy signals) or inadequate servers (delayed e-mail, excessive down time and lack of customer service or technical support).

How many locations will I be accessing the ISP from?

You may want to consider how complex your needs are. Then ask your ISP how you can retrieve e-mail from remote locations, and whether they have ongoing technical support to assist you in a client's office or at work instead of home.

Will I be using a laptop away from home where I will need to access the Net from long distance?

Many local ISPs do not have toll-free numbers or have a limited service area, and when you leave the area, you may have to call long-distance at your expense to access the server.

Who else will have access to my PC, and what controls do I want to place on the use?

An issue in your family may be parental control. Some ISPs require passwords or have filters to deny access during certain time periods or require password controlled access to pornographic or adult-oriented sites.

Do I want or need a home page?

Some ISPs offer free personal home pages, and others will assist you in the design of the same. This is a case where a local small provider may be your best option. You can also try www.geocities.com for a free home page.

How permanent is this ISP in terms of an e-mail address?

If you are going to have your e-mail address printed on business cards, you may want to make certain that your ISP is a long-term partner or that it has a mail forwarding service at a reasonable cost if you switch providers. Any change of ISP could generate a change of address.

Assuming that you have successfully chosen an ISP who has your vehicle warmed up and on the on-ramp and headed in the right direction, you are ready to take your first journey on the superhighway.

Selecting a Search Engine

You know from the glossary that the search engine is like AAA's Trip-Tik(r) and an on-ramp combined. You tell it where to go, and it gives you the options of how to get there. Let's use, for example, the third most accessed Web site on the Net--Yahoo. You can connect to the Yahoo server by entering the following URL: www.yahoo.com. You will find Yahoo's home page. Place your cursor in the open bar and type in "Storage" (the destination of your journey). What you will see is Figure 2, a list of all the sites that are about storage. Place the cursor over the "Back" button and left click to take you back to the home page. Now let's really narrow the search by entering "Self Storage" + "Las Vegas." Now the search engine is going to give you a much more defined Trip-Tik. Look for the site you would like to visit, then click on the highlighted text (hypertext) and whoosh! Hopefully, at lightning-fast speed (not less than 28,800 BPS or bits per second) you'll find yourself in Las Vegas.

The search engine has searched through millions of Web sites to locate the exact destination you desire (or a list of several to choose from), and you are "virtually" there. If you consider the enormity of this task and what has happened, it is quite impressive. You have now begun to master navigation on the Information Superhighway.

There are several other search engines that will find your destination in similar formats. You may want to give these a try:

  • www.altavista.com
  • www.infoseek.com

One of the most enjoyable "surfing" experiences is typing the same search parameters into the search engine and looking at the differing results.

Surfing for Fun

If you are so inclined to fire up your Ferrari for some fun surfing, I suggest the following:

In Yahoo, you will find a button called "What's New." This gives you a list of all the new Web sites that have been added to Yahoo and lets you examine them by topic, or in just A-Z list form. If you choose Entertainment and People, you will find a list of personal home pages that individuals have posted up on the Net. You can tell a person's interests by looking at his hot links and seeing what kind of strange (politely diverse and sometimes perverse) ideas folks have for their personal cyber equivalent of a Yellow Pages ad. Try choosing some strange descriptions and finding the URL to see what server location these come from.

Well, if you have taken any of the preceding suggestions on a tour down the Information Superhighway, you have already been on-line a lot more than you thought you would be. I hope you enjoyed the ride.

Glossary

address
Code by which the Internet identifies you, so that people can send you mail. The official Internet for Dummies address, for example, is [email protected] because its user name is Internet and it's on a computer named dummies.com.

America Online (AOL)
A public Internet provider. If you have an account with America Online, your Internet address is [email protected], where your username is your account name.

ARPANET
The original ancestor of the Internet, funded by the U.S. Department of Defense.

BBS
Bulletin board system; a system that lets people read each other's messages and post new ones. The UseNet system of newsgroups is, in effect, the world's largest distributed BBS.

bitmap
Lots of tiny, little dots put together to make a picture. Screens (and paper) are divided into thousands of tiny bits, each of which can be turned on or off. These bits are combined to create graphical representations. GIF files are the most popular kind of bitmap files on the Net.

bps
Bits per second. A measurement used to describe how fast data is transmitted. Usually used to describe modem speed.

chat
To talk live to other Network users. To do this, you use Internet Relay Chat (IRC).

click
If you have a mouse, you already know. If you don't have one, don't worry.

client
A computer that uses the services of another computer, such as UseNet, Gopher, FTP or Archie of the World Wide Web. If your computer is a PC or Macintosh and you dial into another system, your computer becomes a client of the system you dial into.

.com
When this appears as the last part of an address (in [email protected], for example), it indicates that the host computer is run by a computer rather than by a university or governmental agency. It also means that the host computer is probably in the United States.

domain
The official Internet-ese name of a computer on the Net. It's the part of an Internet address that comes after the @. Internet for Dummies Central is internet @dummies.com, for example, and its domain name is dummies.com.

DOS
Disk Operating System. The original and still popular program that runs on PCs and takes care of the system basics, such as talking to files, printers and screens.

download
To bring software from a remote computer "down" to your computer.

e-mail
Electronic mail (also called e-mail or just mail) are messages sent by way of the Internet to a particular person.

FAQ
Frequently Asked Questions. This regularly posted UseNet article answers questions that come up regularly in a newsgroup. Before you ask a question in a newsgroup, make sure that you read its FAQ, because it may well contain the answer.

FAX modem
Modems that enable you to send and receive faxes in addition to ordinary computer-type data. It can go from your computer to theirs, or to their fax machine if they don't have a computer.

file
A collection of information (data or a software program, for example) treated as a unit by computers.

file-transfer protocol
A method of transferring one or more files from one computer to another on a Network or phone line. The idea of using a protocol is so the sending and receiving programs can check that the information has been received correctly. The most commonly used dial-up protocols are xmodem, ymodem, zmodem and Kermit. The Internet has its own file-transfer protocol called FTP to transfer files among computers on the Net.

firewall
If an organization wants to exchange mail over the Net, for example, but doesn't want the general public Telnetting in and reading everyone's files, its connection to the Internet can be set up with a firewall to prevent incoming Telnets of FTPs.

FTP
File-transfer protocol. This is also the name of a program that uses the protocol to transfer files all over the Internet.

GIF
A type of graphics file originally defined by CompuServe and now found all over the Net (GIF stands for Graphics Interchange Format).

Gopher
A system that lets you find information by using menus (lots of menus). To use Gopher, you usually Telnet to a Gopher server and begin browsing the menus.

gov
When these letters appear at the last part of an address (in cu.nih.gov, for example) it indicates that the host computer is run by some part of a government body, probably the federal government, rather than by a company or university. Most .gov sites are in the United States.

host
A computer on the Internet you may be able to log into by using Telnet, get files from by using FTP or otherwise make use of.

HTML
Hypertext Markup Language, used in writing pages for the World Wide Web. It lets the text include codes that define fonts, layout, embedded graphics and hypertext links. Don't worry. You don't have to know anything about it to use the World Wide Web.

HTTP
Hypertext Transfer Protocol, how World Wide Web pages are transferred over the Net.

hypertext
A system of writing and displaying text that enables the text to be linked in multiple ways and contains links to related documents. Hypermedia can also contain pictures, sounds, video--you name it. The World Wide Web uses hypertext.

icon
A little picture intended to represent something bigger, such as a program or a choice of action or object.

IP
Internet Protocol. A scheme that enables information to be routed from one Network to another as necessary. Don't worry. You don't have to know about it.

link
A connection. Two computers can be linked together. Also can refer to a pointer of a file that exists in another place. For example, rather than have a copy of a particular file reside in many places, some file systems (like the ones in UNIX, for example) enable a file name to point to another file.

mail
Includes voice mail, which you probably already know, and e-mail (or electronic mail), which is a powerful service the Internet provides.

modem
A gizmo that lets your computer talk on the phone. A modem can be internal (a board that lives inside your computer) or external (a box that connects to your computer's serial port). Either way, you need a phone wire to connect the modem to your phone jack.

MUD
Multi-User Dungeon; a "dungeons and dragons" type of game that many people at a time can play. These games can get so complex and absorbing that players can disappear into their computers for days and weeks at a time.

newsgroup
A distributed bulletin-board system about a particular topic. UseNet news (also known as Net news) is a system that distributes thousands of newsgroups to all parts of the Internet.

node
A computer on the Internet, also called a host. Computers that provide a service, such as an FTP site or places that run Gopher, are also called servers.

packet
A chunk of information sent over a Network. Each packet contains the address it is going to, the address of who sent it and other information.

ping
A program that checks to see whether you can communicate with another computer on the Internet. It sends a short message to which the other computer automatically responds. If you can't "ping" another computer, you probably can't talk to it any other way either.

pkzip
A file-compression program that runs on PCs. Pkzip creates a zip file that contains compressed versions of one or more files. To restore them to their former size and shape, you use pkunzip.

router
No, not a power tool used for finish work on fine cabinetry (that's pronounced "rowter"). This system, pronounced "rooter" in most countries, connects two or more Networks together, including Networks that use different types of cables and different communication speeds. The Network must use IP (Internet Protocol), though. If they don't, you need a gateway.

server
A computer that provides a service to other computers on a Network. For example, an Archie server lets people on the Internet use Archie.

shareware
Computer programs that are easily available for you to try with the understanding that if you decide that you're keeping the program, you will pay for it and send the requested amount to the shareware provider specified in the program. This is an honor system. A great deal of software is available, and people's voluntary compliance makes it viable.

SMTP
Simple Mail Transfer Protocol, the optimistically-named method by which Internet mail is delivered from one computer to another.

software
Computer programs that make computers usable as something other than a paperweight. Compare to hardware.

spam
Originally a meat-related sandwich-filling product, the word is now used to refer to the act of posting inappropriate commercial messages to a large number of unrelated, uninterested UseNet newsgroups.

subdirectory
A directory within a directory.

talk
A type of newsgroup that contains endless arguments about a wide range of issues, such as talk.abortion and talk.rumors.

TCP/IP
The system Networks use to communicate with each other on the Internet. It stands for Transmission Control Protocol/Internet Protocol.

Telnet
A program that lets you log into other computers on the Net.

upload
To load files on another computer.

URL
Uniform Resource Locator, a way of naming Network resources, originally used for linking pages together in the World Wide Web. Luckily, you don't have to know much about them--only people who write WWW pages really have to fool with them.

viewer
A program used by Gopher, WAIS or World Wide Web client programs to show you files that contain information other than text. For example, you might want viewers to display graphics files, play sound files or display video files.

Windows
An operating system for the PC that includes a graphical user interface; also a religion.

Windows95
The version of Windows after 3.1. Windows95 includes built-in support for TCP/IP, the Internet's Networking scheme.

WinZip
A Windows-based program for zipping and unzipping Zip files in addition to other standard types of archive files. WinZip is shareware, so you can get it from the Net.

WWW (World Wide Web)
A hypermedia system that lets you browse through lots of interesting information. The best-known WWW client is Mosaic.

Zip file
A file that has been created by using WinZip, pkZip or a compatible program. It contains one or more files that have been compressed and glommed together to save space. To get at the files in a .zip file, you usually need WinZip, pkunZip or a compatible program. Sometimes you may get a self-extracting file, which is a .zip file that contains the unzipping program right in it. Just run the file (that is, type the name of the file at the command line), and it will unzip itself.

R.K. Kliebenstein is director of acquisitions with Amsdell Companies, a land development, brokerage and management business located in Cleveland, Ohio. He may be reached at (800) 234-4494.

CAP RATES AND SALES PRICES

CAP RATES AND SALES PRICES
Facts, Fantasies and Trends

By Michael L. McCune

In the business of buying and selling self-storage facilities around the country, the discussion with both buyers and seller always ends with cap rates. Unfortunately, most people don't understand all of the ramifications of this simple sounding number. Hopefully, this summary and discussion will help clarify this mysterious, yet fundamental concept.

With us on this mission are Ray Wilson of Charles R. Wilson & Associates in Pasadena, Calif., and Steve Hopper, an Argus-affiliated broker with Whiteside Properties in Charlotte, N.C. Both have years of experience in self-storage appraisal and sales.

Additionally, I have asked some of our Argus Self Storage Sales Network affiliated brokers to comment on the application of cap rates in the marketplace and on trends they see developing in this crucial area.

As with any good rule of thumb, there are certain assumptions that are implicit in the calculations of the NOI.

What are cap rates and why use them?

Real-estate valuation is a very complex business with many variables that affect price. Over the years, real-estate people needed a way to compare property values in a market using a shorthand method, thus capitalization rates or cap rates came into general use. In a way, the cap rate tells you what investors expect to earn as a percentage of their investment. For example, a buyer who thinks a facility is worth a cap rate of 10.5 is saying that he wants a 10.5 percent return on his investment.

When the net operating income (which is subject to some assumptions to be discussed later) is divided by the cap rate, viola! you come up with a property value. This method is essentially a way to develop a price based on a stream of income. The net result is the lower the cap rate, the higher the price; likewise, the higher the cap rate, the lower the price.

This is only one of three methods used by appraisers to value a property, but it is the one most focused on by investors. It is the most frequently used because it does a very good job correlating property values and helps facilitate comparison between markets.

The underlying assumptions in calculating NOI

As with any good rule of thumb, there are certain assumptions that are implicit in the calculations of the NOI. Calculating NOI for self-storage facilities is no different. As we see later, when all of these assumptions are in line, the cap-rate calculation produces very consistent results. For cap rates to be useful and comparable, the NOI must be calculated on a consistent basis on all properties. The first assumption when calculating the NOI is that all revenues must result from reoccurring operations and not from any asset sale or insurance recovery. Secondly, depreciation and debt service should not be deducted from revenues to arrive at the NOI. Depreciation and financing do not reflect value, but merely reflect tax issues and capital structure. These revenue assumptions are clearly defined and are almost universally applied.

However, assumptions related to expenses are less uniformly applied and result in significant misunderstanding, particularly among sellers. The assumptions should include the following:

  • The property is properly insured;
  • The property is advertised in the Yellow Pages; and
  • Property taxes reflect current assessments.

Further, the expense numbers need to reflect that all labor costs necessary to operate the property are included in the NOI deductions, even if the owner is currently doing the work for free. It is also assumed that the expenses include a management fee over and above the on-site management expenses, ranging between four and six percent, depending on the size of the property. Another assumption is that of a replacement reserve, which is roughly 5 cents to 15 cents per square foot, depending on the age of the facility. If any of these assumptions are not included in the expenses, an adjustment must be made to the NOI.

Many owners may believe that some of the assumptions don't apply to them for various reasons, but there are almost no exceptions in the marketplace of real sales. In the end, ignoring these assumptions is, at best, merely self-deception, and, at worst, could have serious impacts on the financing or sale of a property.

Why do some properties have higher or lower cap rates?

Since all properties are not alike, they can command different cap rates. The variations from normal cap rates (between 10 and 11) usually reflects the quality of the project and the risk to the investors. For example, a metal-building project in a rural area that is 40 percent vacant would require a higher cap rate to reflect the increased risk and lesser quality. On the other hand, a large masonry project with full security, in a growing metropolitan area, with consistently increasing rents would command a premium cap rate, perhaps in the range of 9.5 to 10.

Once again, while the cap rates may vary, the underlying assumptions to the NOI do not. Property evaluations are somewhat subjective, but our collective experience would indicate that knowledgeable buyers and sellers agree on the quality of the NOI and with the risk variances that lie in a very narrow range of cap rates.

This chart (Exhibit 1) lists some quality and risk adjustments that will affect a property's value and the cap rate used to reflect that value. If you circle the applicable characteristics of your property and find that they dominate one column, the cap rate will likely be adjusted from the average in that direction. Obviously, the more the merrier, but don't cheat, because the market won't. The chart is not intended to be scientific and should be used only as a guide since many other variables can impact the cap rate. If done accurately, this should give you a good perspective of where your project fits into the range of cap rates. In summary, it takes a great facility to merit a 9.5 cap rate and not too many flaws to find an 11 cap rate.

Do cap rates really reflect the market?

The answer is unequivocal: Yes. If cap rates did not reflect the marketplace accurately, we would not be using them in so many ways. Exhibit 2 will give you an idea of the consistency of pricing in the market as well as how cap rates relate to pricing. For the purpose of this article, Ray Wilson has shared his collection of data with us and help create a very powerful visual representation of this point. The chart shows recent sales based on the sale price per square feet and the NOI per square foot. (Remember: To get the cap rate, we took the NOI per square foot and divided it by the sale price per square foot.) We have drawn on the chart lines that represent the cap rates, 9.5, 10.5 and 11.5.

As you can see, there is a real consistency of prices in this range with a convergence around 10.25. The few exceptions are almost exclusively for properties with a price per square foot more than $40. This would generally indicate a more exclusive and non-competitive market for the project. Often times additional expansion land distorts the calculation. This consistency in actual sale's cap rates tells us several things:

  1. Our shorthand cap-rate valuation method reflects the real selling price in the marketplace;
  2. There are no "greater fools" in our experience, otherwise, there would be quite a few variances or sales that are "way out of line;" and
  3. If a buyer or seller wants to participate in the market they must do so at market prices, i.e., market cap rates. It is clear from the chart that "greedy" sellers and "bottom feeding" buyers are not doing much business in the marketplace. Also, the consistency of the prices indicates that this is what economists would call, "an efficient market."

Comments from our experts

Let's ask our experts to give us some thoughts on cap rates and trends.

Are cap rates declining?

"The market is very competitive for first rate projects and the cap rates might be a little better for these projects, but run-of-the-mill good projects haven't gone down much."
Joan Lucus, Joan Lucus Real Estate Services, Denver.

"I think this is an excellent sellers market that has pushed the cap rates down about as far as they can go."
Stephen McKnight, Island Associates, West Islip, N.Y

What happens if interest rates take a jump?

"I don't think I want to find out!"
Harold Helm, Commercial, Louisville, Ky.

"Higher rates make financing more expensive and this squeezes the equity in a project. That means lower prices and higher cap rates. It also means it's harder to build a new facility, which is good for existing properties."
Joan Lucus

Do you ever see facilities sell at prices that are inconsistent with the cap rates we have talked about?

"I have buyers and sellers that really believe there is a greater fool out there, but I've never seen one close a deal."
Harold Helm

"Almost never. While many sellers point to sales that appear to have lower cap rates, typically the seller is missing information. A good example of this would be the availability of excess land to expand, which the buyer reflected in the offering price. The contributory value of the excess land must be factored out in order to determine the true cap rate."
Patrick A. Lemp, Self-Storage Consultants, Hartford, Conn.

Do buyers really look at the NOI adjustments we discussed earlier?

"We go to extensive length to verify sales, given that we are not only brokers, but MAI appraisers as well. In verifying sales with buyers, we have learned that these adjustments are made by most every buyer we encounter.
Patrick A. Lemp

"Almost all self-storage facilities are bought by other self-storage owners. This group knows the business and doesn't overlook the obvious."
Stephen McKnight.

Cap Rate Adjustments (Exhibit 1)
ITEM 9.50 - 10.00 10.00 - 11.00 11.00 - 11.50
Vacancy (last two years) 95% - 100% 90% - 95% <90%
Rates (last two years) Continuous Rise Steady Falling
Size >45,000 30,000 - 45,000 <30,000
Competition (3-mile radius) None One More than one
Competition's Vacancy 95% - 100% 90% - 95% <90%
Surrounding Area Growing Metro Large City Rural
Density (5-mile radius) >200,000 100,000 - 200,000 <100,000
Traffic Counts >25,000 10,000 - 25,000 <10,000
Median Household Income Above Average Average Below Average
Manager Full-time Living on Site Full-time Living on Site Other
Records (last 3 years) Computerized and Professionally Audited Computerized Other
Computer System Computers and SS Accounting Software Computers None
Construction Concrete or Brick Combination Brick and Metal Metal
Maintenance Pristine Little Deferred Maintenance Modest Deferred Maintenance
Security Full Gate and Card Access Full Gate Other
Access Very Direct Clear, but not Direct Difficult
Visibility Can See Sign and Facility Can See Sign and Entrance Can See Sign Only
Drives Concrete Paved Gravel

Michael L. McCune is president of Argus Real Estate Inc., based in Denver. Argus operates and manages the Argus Self Storage Sales Network, the nation's only network of brokers dedicated to the buying and selling of self-storage facilities. For more information on cap rates, contact Mr. McCune at 821 17th St., Suite 300, Denver, CO 80202 or at (800) 55-STORE.

Devon Self-Storage

Devon Self-Storage

Stone Mountain, GA.

By Amber Nickell

When Pace, a chain of warehouse stores, went bankrupt in the early '90s, it left dozens of spacious buildings empty. Kmart stepped in and bought the portfolio of properties--some were transformed to Kmart stores, others were sold to Wal-Mart, but many were left vacant.

One such building in Stone Mountain, Ga., caught the eye of The Devon Group, which owns 12 self-storage facilities, including one in Amsterdam. However, Kmart was already in negotiations with a buyer for the property. When the deal fell through, Kmart offered the property to The Devon Group, which accepted without hesitation, completing acquisition in April 1996.

"When we acquired it, it was a 97,759-square-foot box sitting on 15 acres of land," says Ken Nitzberg, CEO of The Devon Group. "The game plan was very simple: We convert the inside of the box to climate-controlled self-storage."

The conversion of the main building was completed in four phases. It essentially required demolishing some of the existing areas, such as office space, lunch rooms and rest rooms and erecting the metal units. The result was 646 units in 66,538 net rentable square feet. The first phase opened in October, followed by November, January and February with the opening of the second, third and fourth phases.

But what makes Devon Self Storage different from most conversions is the drive lane--which is wide enough for two semi trucks to drive side by side--that runs through the facility. After entering the property through the access-control gate, tenants with a unit in the main structure must enter their code again to open the 14-by-14 foot roll-up door that allows them to drive into the building. "If your unit happens to be right on the drive lane, you drive right to it, park, roll up the door and you're right there," Nitzberg says. "If your unit is further into the interior of the building, you drive to the nearest hallway and park. You put your belongings on a cart (provided by the facility) and wheel them to your unit." When tenants have concluded their business, they drive to the exit, where a sensor opens the door--also a 14-by-14 roll-up--and closes it behind them.

As a safety measure, traffic lights were installed at both the entry and exit. "When the customer enters his code, the door will start to raise and the red light comes on," says Wayne Rodgerson, project manager for the conversion. "The customers are asked to wait for the green light. When the door reaches the top, it hits a relay and only at that time does the green light come on. The same configuration is used for the rear door."

The drive-through facility has generated curiosity from both potential tenants and competitors. "We've found that the drive-through feature literally boggles our tenants' minds," Nitzberg says. "They've never seen anything like it; they've never experienced anything like it; they've never visualized anything like it."

The convenience of a drive-through facility is multiplied during inclement weather. Although the ceiling of the building reaches approximately 20 feet, the unit walls are only 8-feet, 8-inches tall. Therefore, rather than air-conditioning the individual units, the entire building is cooled and lighted from above. That means that during Georgia's warm, humid summers (or any other time of year), tenants go straight from their air-conditioned car into an air-conditioned building and enjoy the climate control while loading or unloading their units. In addition, tenants and their belongings are protected from wind, rain, dust and other undesirable weather.

The open-top units allow for creative use of video cameras in the main building. Rather than monitoring a single corridor or corner, cameras are strategically mounted above the unit partitions. From there, they can scan the entire building, including the inside of each unit. "If anyone tries to do anything and get over the top or in somebody else's unit, it's really easy to see them," Nitzberg says.

One of the problems with creating a drive-through self-storage facility--which Devon has done with many of its properties--is dealing with the local planning authorities. "They don't know quite what to do with us," Nitzberg says. "The minute you say, 'cars in the building,' the first mental picture that comes to the mind of city officials is a parking garage with 500 cars, with cars in and out all day long, non-stop."

This image raises concerns about exhaust fumes and leads authorities to suggest cost-prohibitive ventilation systems and other requirements for controlling air flow. But a self-storage facility has nowhere near the traffic of a parking garage--Nitzberg estimates an average of one car an hour--so there's little chance for emissions to accumulate.

"We usually end up spending a great deal of time educating the local regulatory agencies as to how these things work, what the dangers and risks are, how minimal they are and what we do to mitigate them," Nitzberg says. "Once we explain what we're doing and show some examples of what we've done elsewhere, they usually are pretty good. Some of the cities have been a little more contentious, a little more problematic than others, but in every city, at the end of the day, it's been OK."

Most warehouse-type stores are accompanied by an expansive parking lot, and the Devon property is no exception. In order to make full use of the land and to support facility recognition, several standard self-storage buildings were constructed. "We build those for a couple of reasons," Nitzberg says. "One reason being some people don't want to go inside; they want to be able to drive right to their door all the time. Secondly, some people don't want to pay the premium rent for climate control, so we have the non-climate control available as well. Third, and probably most important, (potential) tenants know the property as the Pace store. No matter how many signs you put up, they still see the old Pace store in their mind's eye until you build units on the outside with roll-up doors. The minute you put those buildings up, everybody knows it's a self-storage facility."

As of April, five non-climate-controlled buildings had added an additional 91 units and 11,550 net rentable square feet to the facility. And with lease-up rates hitting and surpassing targets, Nitzberg says the property likely will see more construction in the future. "We will build more (storage) space on what was the parking lot and literally keep building until we've used up the space--as long as the demand warrants."

Building Self-StorageThe advantages of a full-service manufacturer/erector

Building Self-Storage
The advantages of a full-service manufacturer/erector

By Jim Combs

When a property owner makes the decision to develop a self-storage facility, there are a number of important decisions to be made. In most cases, the first thing the owner will do is hire a site engineer who is familiar with local building codes and their enforcement, and who understands property-line issues and setback requirements. Once the site engineer has done his job, the owner can move on to the next phase.

The Owner's Options

At this point, the owner has a few options. He can hire an architect to prepare a set of drawings for the project, then hire a contractor to put up the buildings, or he can hire a contractor who will both design and erect the buildings. But there is still another important option that owners should seriously consider: the full-service self-storage manufacturer/erector.

"As a turnkey manufacturer, we design our own buildings and actually include the cost of the drawings in the price we quote our customers," says Tom Brandon, vice president of engineering at Statesville, N.C.-based BETCO Inc. "This can mean a substantial savings in engineering fees.

"In other cases, an owner might hire an architect before contracting with a manufacturer, and this can lead to trouble," Brandon continues. "For example, if concrete slabs are poured before components are specified and manufactured, the building may not agree with the manufacturer's standard designs. And 'specials' will result in increased project costs, as well as architect's fees."

More often than not, the engineering department of a full-service manufacturer has years of experience specifically designing self-storage buildings. This knowledge is not always found with some architects, who may not be well-versed in self-storage design. However, there are occasions when a local architect should be involved.

The Architect's Seal of Approval

There are at least two instances when a manufacturer's drawings may be scrutinized and will need an architect's seal of approval before construction can begin:

1) Some localities require an architect of record to provide design services and project coordination. It's the law. Always check with local authorities to determine specific requirements.

2) Some self-storage facilities may include a free-standing office building that is separate from the units themselves. In these cases, an architect will usually be retained to design the office structure.

In terms of getting the components to the building site, some manufacturers have the capacity to ship them on their own trucks. In addition, they may also be able to erect the buildings with their own professional crews. Once again, by choosing a full-service manufacturer, the owner can eliminate extraneous suppliers and simplify the process.

The Importance of Timing

Once the owner's property is ready to receive the components, timing becomes a critical issue. "If an owner isn't able to get his buildings up to suit his schedule, it can mean losing valuable leasing time and can translate into dollars as well," says Terry Huber, BETCO's vice president of manufacturing and construction, and chief operating officer.

"As a single-source supplier, we are in a better position to deliver on time because we can control the manufacturing process and the shipping schedule. When an owner deals with separate suppliers, timing can suffer," Huber says.

Cost Savings

Dealing with a single source also means certain cost efficiencies. It can be cheaper to deal with one supplier rather than two or three. The manufacturer who knows that a package deal is in the offing--including design, manufacturing, shipping and building erection--will make sure that the owners gets every financial advantage possible.

Even if the manufacturer's components are more expensive than the competition, the overall investment cost may be lower. This is because buildings made of high-quality materials, such as Galvalume, will withstand the test of time. The owner can look forward to many years of maintenance-free buildings. Unfortunately, some owners make the mistake of trying to save money by buying cheaper components in the beginning, only to pay more in maintenance costs down the road.

Selecting the Right Manufacturer/Erector

If you are an owner who does not have an ongoing relationship with a self-storage manufacturer, has had an unsatisfactory relationship, or has had no experience selecting a manufacturer, there are certain criteria that will help you with the decision. Make sure you choose a manufacturer that will offer the following benefits:

  • Full-service capabilities, from building design to building erection.
  • Top-quality materials that are prime USA-manufactured to American Standard Testing Materials (ASTM) standard.
  • Sales consultants who are knowledgeable and whose experience can be invaluable, particularly to the first-time owner.
  • A project manager who will be available to the owner at all times during the project, from start to finish.
  • Warranties on all materials and workmanship.
  • A history of successful projects and satisfied customers.

In the final analysis, the facility owner who considers all options at the outset of the planning process will benefit most in the long-term. Some options may be better for some owners than others, but just as in the medical profession, it's better to get a second opinion, even a third.

BETCO Inc. is a full-service, self-storage manufacturer/erector based in Statesville, N.C. For more information, contact Jim Combs at (800) 654-7813; www.betcoinc.com.

The InternetAre you on board or just bored?

The Internet
Are you on board or just bored?

By Jim Chriswell

When I asked this magazine's editor for the opportunity to write a story on the topic of the Internet, I told her it was not just going to be about various self-storage Web sites. I wanted to provide a business overview, from a layman's point of view, of how the Internet has become something that none of us can avoid or ignore.

I have found that there is a real dividing line between people when it comes to the Internet and computing in general. People appear to either embrace computers or fear them. There is very little ground in between these two sides. You may not like using computers or, like some of my friends, are not even interested in learning how to turn them on, but I honestly feel that if you ignore this growing information storehouse and new method of conducting business, you do so at your own peril.

A recent report from INTECO, an Internet research company, estimated that 37 percent of American households are online. INTECO also reported that 57 percent of online households indicated annual incomes of more than $50,000. Another company, IntelliQuest Research, set the figure at 40 percent, or 83 million adults age 16 or older, that are online. This report detailed that 56 million people, or 70 percent of those using the Internet, shopped online in the past three months.

Actual Internet usage has been doubling every year. A recent report projected that such use will double every six to nine months for the next several years. If they hold true, these trends will bring us to a point where the majority of the American population will be online within the next five years.

The other economic impact the Internet is having on the economy can be seen in the stock market. A recent Initial Public Offering (IPO) of Priceline.com opened at $18 a share on NASDAQ. By the end of the day, with the stock's last trade above $86 per share, Priceline.com had a stock value approaching $11 billion dollars. That was almost the value of American Airlines on that same day. Not bad for a company that was less than two years old and had never shown a profit.

My point is a simple one: As business people, we just cannot ignore the tidal wave that is sweeping the country and the world. Let me give a few specific examples of how our industry is already using the Web. Your facility may already be online and you just don't know it. As I reference specific Web sites, I will also provide you with their Universal Reference Locator (URL) address.

The largest current site for potential customers to find self-storage facilities continues to be Rent Net at www.rent.net/ctg/cgi-bin/RentNet/SelfStorage/. Divided into categories by state, this site provides links to specific individual facilities or companies. I have not seen a recent report on these companies' growth over the past year, but all of the public self-storage REITS have their own Web sites and so do a number of individual owners. Let me give you a few sites to check out yourself:

Being On Board

Is your facility already listed on the Internet? You may be surprised at the answer. Many chambers of commerce have Web sites that include all of their members. In some cases, universities and colleges have local self-storage sites listed on the institution's Web site. I have run into a number of owners that had no idea that they were on the Internet in this manner.

Nothing can take the place of your own Web site. It is a little like designing a Yellow Pages ad, except you have more room and the costs can be significantly less. The easiest way is to sit down and look at the sites that others have created. You will find a great deal of creativity has already gone into many of these sites. All you have to do is go to a search engine such as Alta Vista (www.altavista.com) and type in "self-storage." You will get back more than 7,700 pages for your review. Many of these sites are just subsections of a single site, but it will get you started. You may even get some ideas for your facility's literature and marketing materials from what you find.

There is also a variety of specific self-storage sites that you can turn to for help. Inside Self-Storage magazine has an excellent site at www.insideselfstorage.com, which includes a searchable archive. You simply type in the topic that you are interested in and a search engine retrieves recent magazine articles that may be helpful.

Jill and Stanley Waldman of Ask the Waldmans have created a great site at www.askthewaldmans.com. You can search for industry vendors, look at their latest column, get self-storage REIT stock quotes and even search for projects in a given city. It's a site worth checking out.

Also remember that many of the industry associations have Web sites providing a great deal of information. The national Self Storage Association has a site at www.selfstorage.org, the Texas Mini Storage Association has one at www.selfstor.com/tmsa.htm, and the New York Self Service Storage Association's site is located at www.nysssa.org. Your state association may also have an online presence.

Small-business consultant Mark Deion, based in Rhode Island, has created one of the best business-to-business reference sites that I have found on the Web. He says he built this site over the past several years to provide other businesspeople with a shortcut to the best Web sites that he has found. He also teaches MS Power Point presentations about the Internet at Brown University. Mark makes no money from his site--it's just a service that one individual is willing to provide. I urge you to visit www.deionassociates.com/hplist/ to see the many national and international links he has developed.

I'll admit to spending a great deal of time on the Internet each business day. I am fortunate in that, for the past two years, I have had high-speed Internet access in my home office via a cable-modem connection. I communicate via e-mail, research various topics, access banking information and buy products and services on the Web. It even surprises me at times the information that I can find.

For example, doing research for a client recently, I discovered that a growing number of communities have all of their real-estate tax records online. I was able to access the tax files on all of the self-storage facilities in the target market my client was considering. From my office in Buffalo, N.Y., I was able to learn not only the assessed values and annual tax amounts, but the total square feet of each project in Florida.

There are no hard numbers on the impact that Web sites are having in generating possible self-storage rental leads. Judging from the attention to detail that many self-storage companies have put into their sites, it is obvious that these owners are not willing to be left behind. If you have not yet gotten wet, jump into the Internet. It is not only educational, but may represent the future of marketing our industry directly to the individual customer looking for space.

P.S. Just to set the record straight, Vice President Al Gore did not invent the Internet. In fact, the roots of the Internet can be traced back to President Dwight Eisenhower. In 1957, he signed the legislation creating the Advanced Research Projects Agency (ARPA). It is from this agency that the World Wide Web, as we know it today, evolved. Senator Al Gore did introduce the Super Computer Network Study Act back in 1986.

Jim Chiswell is the president of Chiswell & Associates of Williamsville, N.Y. Since 1990, his firm has provided feasibility studies, acquisition due diligence and customized manager training for the self-storage industry. In addition to contributing regularly to Inside Self-Storage, Mr. Chiswell is a frequent speaker at Inside Self-Storage Expos. He can be reached via e-mail at [email protected] or by calling his office at (716) 634-2428.

Handling Construction Disputes

Handling Construction Disputes

By Scott I. Zucker

It appears inevitable, whether it's over the scope, quality, timing or payment for the work, that disputes will arise between owners and their contractors during construction projects. Eliminating these conflicts, or even reducing their magnitude, can save project owners not only money, but the time and stress involved in having to deal with such problems. The best way to avoid or reduce construction disputes is to address as many of the questions concerning the project up front and incorporate the answers to those questions into the construction contract. If the terms of the contract are mutually agreed upon before the work begins, the owner should be in a better position to handle any disputes that may arise once the project proceeds.

Drafting the Contract

1. Scope of Work

A common issue between owners and contractors is whether certain work performed by the contractor is in the original contract or is an "extra" to the agreement. As an extra, the owner would be obligated to pay more than the agreed contract price for the work to be performed. Therefore, it is vitally important that the scope of the work, as described in the specifications and drawings prepared by the architect and incorporated by reference into the contract, be clearly spelled out to avoid any ambiguity concerning what is to be included in the contractor's work.

2. Time

The schedule for performance is additionally crucial for avoiding any disputes between the owner and the contractor as to when the project is expected to start and finish. The owner must be able to rely on the schedule in order to obtain its financing, hire its employees and begin marketing the facility to rent its units. Unless both parties are clear as to what the schedule is for the project, the contractor will have too much flexibility in performing its work and would have no liability for completing the project late.

3. Payments

Another large area of conflict between owners and contractors is when the contractor should be paid for its work. A method, therefore, needs to be included in the agreement to determine the contractor's entitlement for payment. A common practice is to use progress payments. Under this process, the contractor submits its invoice to the owner based upon the percentage of work performed to date, and the owner or architect then inspects the work to determine that it has, in fact, been performed. Once the inspection is complete, the percentage of the contract value matching the percentage of the work performed will be paid. The owner will then retain 10 percent of that payment from the contractor as "retainage" until the project is completed. Final payment, which normally includes money from the accumulated retainage, would occur only when certain final conditions have been met under the contract. These conditions include the completion of all punchlist items, approval of the work by the architect, and the delivery of all lien releases and warranties to the owner. These lien releases insure that all of the subcontractors and suppliers have been paid by the general contractor for their work on the project.

4. Changes

There also needs to be a procedure in place for handling changes in the work. Without one, the owner and contractor can find themselves at the end of the project arguing over whether the contractor should be paid for its additional work. The construction contract must therefore state specifically how changes are to be agreed upon. It is recommended that all changes in the work be put in writing and the amount to be paid for the work be agreed upon before it is performed.

5. Termination

The construction contract should also include a provision whereby the owner can terminate the contractor if it fails to adequately perform its work, fails to pay its subcontractors and suppliers, disregards laws or ordinances or files bankruptcy. Terminating a contractor should be an owner's last resort, due to the fact that it will ultimately cost an owner more money to hire a follow-on contractor to finish the work. If an owner does terminate its original contractor, the owner should then make every effort to put in place another strong agreement with its follow-on contractor setting forth the same issues regarding the scope of work, schedule and payment.

Certainly, these are not all of the contract provisions that need to be considered when drafting a construction contract. An owner and the contractor must consider provisions such as indemnification, insurance, bonding, warranties, safety precautions, cleanup obligations, responsibility for temporary facilities, and the amount of liquidated damages for delay. All of these issues should be discussed so as to hopefully avoid any disputes once the project begins.

Attempting to Reach Solutions

If a situation arises (for example, work found to be defective) the owner and contractor should meet to discuss the problem and seek to reach an immediate resolution. Often times, this may be nothing more than the contractor's agreeing to fix its work. Yet, if the contractor is slow to respond to the problems, the owner can then rely on the contract to determine its next step. In this particular example, the terms of the contract that address approval of the work would be used to guide the parties. The construction contract would likely contain a provision that after notice of the defect by the owner, the contractor has only a short period of time to cure, or fix, the defect. If the contractor still fails to respond after notice, the owner is then entitled to have the problem fixed and can credit the cost of the repair against any money owed to the contractor. Unfortunately, sometimes problems cannot be solved simply through discussion. (For example, the contractor may claim that the problem is due to a bad design, not a workmanship failure). Therefore, it will be necessary to take the matter to the next level.

Commonly, at the next level of a construction dispute, it is helpful to bring in an architect or an engineer to act as an arbitrator between the parties. The architect or engineer can be asked to render a decision based upon his interpretation of the contract and the plans for the project. Even if the dispute goes to this "next level," the owner and the contractor should still be in the mindset of resolving their disputes amicably. If the disagreement expands past this point, it may require the parties to make a "business decision" about whether they want to continue fighting due to the time expense involved. Often times, it will cost more money to fight over a disputed issue than to mutually agree to share the costs to fix the problem.

Seeking Legal Action

If the terms of the contract or interpretation by an architect or engineer do not assist an owner and contractor in resolving their disputes, the conflict might rise to the level of legal action. Certainly, if the contractor defaults or performs defective work and the parties cannot amicably reach a resolution, the owner may have no choice but to file a complaint against the contractor for its breach of contract. A breach of contract complaint is simply a claim that the contractor has failed to perform pursuant to the terms and conditions of the contract. The lawsuit requests that the owner recover the money necessary to complete the construction of the project and repair the contractor's defects. The law allows other causes of action to be brought against a contractor and may include a breach of warranty claim or a claim for negligent construction if the contractor's actions have lead to personal injury or damage to other parts of the owner's property.

Not all construction disputes can be avoided through the use of good contracts. However, many of the smaller problems that ultimately mushroom into larger ones can often be avoided with the use of a strong contract and the ability of the parties involved to focus on seeking solutions rather than lawsuits.

Scott I. Zucker is a partner in the law firm of Shapiro Fussell Wedge Smotherman & Martin, based in Atlanta. He is an expert in the field of self-storage law and represents self-storage owners and managers throughout the country in matters that include contracting for construction, preparing lease agreements, defending tenant claims and handling employment disputes. Mr. Zucker also provides, on a consulting basis, advice to self-storage companies on operational safeguards in the areas of foreclosure proceedings, premises liability and hazardous-waste controls. Mr. Zucker can be reached at (404) 870-2232 or via e-mail at [email protected].

Limiting Your Liability Exposure, Part II

Limiting Your Liability Exposure, Part II

By David Wilhite

Sale and disposal legal liability coverage is unique to the self-storage industry. As you may recall from Part I of this article, sale and disposal legal liability provides self-storage operators with protection against conversion: the act of wrongfully taking, selling, using or destroying the goods of another party. Such claims are made against negligent acts arising from the disposition or disposal of customers' property when reclaiming space for which rental charges are delinquent or unpaid.

Due to the incredible diversity of goods commonly stored and the wide range of values of the property, the penalty for conversion can be extremely high. Not long ago a self-storage operator was held liable for $250,000 in damages by a California court for the wrongful sale of a customer's property. The court judged that the storage owner's notice of intention of sale was defective, since the operator's newspaper ad did not include the delinquent tenant's name, which was required by state law. The court ruled that the operator was in violation of negligence and conversion as a result of this error.

Nearly every state has specific statutes that govern the sale and disposal process, as provided for in the Self-Storage Facility Act. However, if the procedures are not precisely followed, the self-storage operator leaves himself vulnerable to lawsuits claiming loss or damage of stored goods.

Facilities in states where the statute has not been enacted should include a clearly-worded statement in their rental agreements that the owner serves as a landlord renting space to tenants suitable for storage; that neither the owner nor the facility exerts any care, control or custody over a tenant's property; and that responsibility for stored property remains vested with the tenant and not the landlord.

Most self-storage insurance providers offer sale and disposal legal liability coverage, which includes loss or damage to your customer's personal property, and protects you against claims arising from the sale, removal, disposal or disposition of customers' property when reclaiming space for which rental or other charges are delinquent or unpaid. The coverage further provides for defense and legal costs, even if a customer's suit is groundless or fraudulent. Best of all, the cost is quite reasonable for the peace of mind and protection you receive.

David Wilhite is marketing director of Universal Insurance Facilities Ltd. For more information, contact Universal at Box 5400, Scottsdale, AZ 85261-9957, call (800) 844-2101 or fax (602) 970-6270.

Managers' World

Managers' World

Bonus Programs...What Should They Consist Of?

By Pamela Alton


When an owner contacts me looking for a manager, one of the very first questions they ask is, "How much should I pay the manager, and what sort of bonus program should I have to motivate him?" I am not going to discuss wages in this article; however, I will try to give you some insight into the type of bonus programs I see being offered in the industry. Please keep in mind when designing a bonus program that there is no right or wrong.

A bonus program should consist of two things: One, it should motivate the manager to reach for a clearly defined goal; and two, the bonus should be attainable. There is nothing more deflating to a manager than working his tail off for bonus he can never reach.

One thing for sure is all managers will receive a base wage, and 95 percent of the time, they will also get some sort of bonus for doing a good job. In addition, about 70 percent of the managers today are receiving medical benefits.

Per Rental

To keep a manager sharp and motivated to answer the telephone effectively, some owners like to pay a commission per unit that the manager rents. It could be $3 to $5 for each rental of a 10-by-10 or smaller, and $5 to $10 for each rental larger than 10-by-10. Or, it might be a flat fee of $3 to $10 no matter what the unit size. This type of bonus could be paid to the manager and relief manager, based on how many units they each rent. A lot of owners like this type of bonus because it is probably the easiest for the accounting department to handle. However, there is not much motivation for the managers to keep sharp and on their toes. Sure, they will receive a per-lease bonus for each unit rented, but where is the motivation to keep their existing tenants happy or to collect as much income as possible each month?

Percentage of Monthly Income

The manager could get a percentage of the monthly income. For example, if your facility has been bringing in $40,000 per month and you think a good manager could bring in more, you might say to your manager, "I will give you 20 percent of anything over the $40,000 base." So, if the manager brings in $43,000, which is $3,000 more than the expected income, he will receive $600 for the month, and it could be split with the relief manager, 70/30. This type of bonus really motivates the managers to make timely collection calls and collect as much money as they can each month, not rent units at a discounted price or waive late fees.

Income and Delinquency

The bonus could be based on a predetermined monthly goal of the income and delinquencies that will be expected at the facility each month. When you sit down with your manager at the end of each year to prepare the annual budget, you might say, "OK, for January we will set goals of 92 percent occupancy and 5 percent delinquency, and for February we will have 93 percent occupancy and 5 percent delinquency. For March, it will be 95 percent occupancy with 4 percent delinquency," and so on. If the manager achieves the occupancy goal, he gets $200 or $300; likewise if he achieves the delinquency goal.

With a "split" bonus, the manager could achieve half the bonus if he reaches one goal but not both. This type of bonus also motivates the manager to get the highest occupancy and lowest delinquencies. Most managers think in terms of occupancy and delinquency percentages, not monthly income. If they achieve higher occupancy and lower delinquency, then this translates into higher profits for you.

Shopping or Sales Skills

Some owners are now using a shopping or sales-skill bonus in conjunction with other bonus programs. In this case, the manager is shopped on a monthly basis, and given a bonus based on his telephone or face-to-face performance. With this type of bonus, the manager usually is given a telephone sales script to follow. If he uses the script and asks all the questions--providing the facility name and directions, providing his name, asking for the caller's name, etc.--he is given a specified bonus, perhaps $100. If the manager misses just one item on the script, the bonus is reduced to $5 or $10--a big difference. There is a real incentive for the manager to make each telephone call count and should translate into more rentals. Used in conjunction with other bonuses, this method keeps the manager sharp in his telephone sales.

There are several "shopping" services in the industry today. Some shop your manager and just send him a written notice a month later, which has some good points. However, if you just give the notice to your manager and don't discuss the findings with him, it is a worthless piece of paper. Some services will immediately follow up with your manager after the "shopping" call and evaluate his telephone presentation, as well as send a written evaluation. This way the manager can immediately get feedback from his telephone presentation.

Late Fees and Commissions

Some owners figure X amount per month in late fees will be collected at their facility. Managers, on the other hand, often prefer to drop the fee when a tenant complains about it. To reduce late-fee credits, an owner could work them into a bonus system. For example, all late fees over a specified amount go straight to the manager. This will make the manager think twice before he is so willing to drop late fees, because he is giving away some of his own money.

Another avenue for bonuses is in sales of ancillary products. Some owners pay commissions on sales of locks, boxes, packing supplies and insurance policies, and give this to the manager as a monthly bonus, which motivates them to sell these items.

Rental trucks are another form of income. If you have trucks, it's advisable to pay your managers a commission on them, otherwise there is not a lot of motivation to actually rent the trucks. Renting trucks is not easy for the manager, especially at an active facility. Truck-rental companies may want to convince your manager that he is there only to rent the trucks. However, your business is owning a storage facility and renting space. Your manager should devote his time to renting space and collecting rent. With truck rentals, your manager has two bosses: you and the truck-rental company. By compensating your managers for truck rental, they will have the incentive and motivation to rent the trucks and bring in the added revenue. The average truck commission paid to the manager is 30 percent of the owner's profit. Some owners pay 50 percent, some only pay 5 percent and some pay nothing.

Contests

If you have more than one site, you might want to consider organizing contests between your various locations as another incentive to keep your managers sharp. If your sites vary in size or locations, it is a little more difficult to determine which site does better than the rest. Therefore, these contests should probably be based on percentages. For example, you could reward managers at the facility with the highest percentage increase in rentals or the facility with the highest percentage reduction of delinquencies or the highest percentage increase in income over the previous month, and so on. Obviously, this sort of bonus program takes more time to calculate than a per-rental bonus. However, you might find it drives your managers to compete with one another, resulting in more profits. You could use weekend trips, cash, small TVs or appliances, or whatever you like as contest prizes.

Whatever bonus program you chose to motivate your managers, it should be designed to keep your managers sharp and on their toes and to make them stretch to reach goals. At the same time, it should be attainable by the manager. It is de-motivating for a manager to work hard for a bonus that is so far out of reach that he can never achieve it. It will only deflate your manager and, in the long run, hurt your facility as well as your chances of retaining a good manager.

You and your manager might elect to design a program using a combination of bonuses to help keep them sharp, motivated and focused. These bonuses could be paid on a monthly, quarterly, biannual or annual basis, or a combination of these. By working with your managers and getting their input and feedback, you will come up with a good program that they will be pleased with and that will make you, your manager and your facility a winner.

Pamela Alton is the owner of Mini-Management TM, one of the industry's largest nationwide manager services. Mini-Management also offers policy and procedures manuals, sales and marketing training manuals, inspections and audits, consulting, low-cost "Storage Support" TM, telephone shopping and training seminars.
For more information on the services offered by Mini-Management, call (800) 646-4648.