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Avoiding Self-Storage Development Mistakes: 3 Key Areas for Prudence

Self-storage developments have been classified as “no-brainers.” If that were so, you wouldn’t expect very many mistakes to be made, but nothing could be further from the truth. Here are three key areas in which developers can avoid costly mistakes.

March 12, 2016

9 Min Read
Avoiding Self-Storage Development Mistakes: 3 Key Areas for Prudence

By RK Kliebenstein

Self-storage developments have been classified as “no-brainers.” If that were so, you wouldn’t expect very many mistakes to be made, but nothing could be further from the truth. Over the years, I’ve encountered thousands of facility developers and learned lessons from their blunders. Self-storage is a sophisticated asset class, and there’s little substitution for experience and expertise. Here are three key areas where you can avoid costly mistakes.

Key Area 1: Tech Tools

From creating the vision to planning a grand opening, developers have myriad tools available to them. Too often, I’ve seen them struggle with a shovel when they needed a bulldozer and loader. This is the Information Age! The Web has more resources than we have time to take advantage. There are several tools I recommend when taking a project idea through development.

A good computer or laptop, with software and Internet connection. Make sure you’re connected day and night. You may eventually need to read computer-aided design (CAD) files, so I suggest getting plenty of memory and storage. iPads are a great on-the-run tool but lack the power to maximize what websites have to offer. For example, the mobile version of LoopNet lacks features you’ll need to prospect sites.

As much as I love the beauty of an Apple, it seems Microsoft still rules the business world with robust versions of Microsoft Office. Full use of Excel is going to be an absolute. Get a copy of Microsoft Project, as you’ll need it for tracking your development as well as for reading and collaborating with your project manager, construction superintendent and accountant in preparing draw requests.

Printers. Make sure you have a variety of printers available, from a full-color production printer to a plotter for print full-scale drawings and renderings.

Monitors. I also advocate having dual computer monitors so you can swipe docs and application data back and forth. I personally own them but don’t have them for corporate use. Not a week goes by that I regret not having them. If you have the real estate on your desk or workspace, consider using two 26-inch monitors.

A four-door pickup truck. From driving to vacant land sites to delivering materials to the jobsite, an Escalade EXT or equivalent will be your best friend. When you start hauling around sets of plans, hard hats and work boots, you’ll soon understand the need to go big or go home. When you’re getting close to the grand opening, you’ll be surprised at what you’ll be schlepping to the project, from office furniture to store displays.

Key Area 2: Expertise

Many mistakes have been made by self-storage developers who thought they knew it all or believed they couldn’t learn from others. Consider every day a valuable opportunity to learn something. It’s great if you have a working knowledge of your tasks, but nothing replaces the eyes, ears and skills of a seasoned industry professional.

I remember a developer who thought he knew how to read a survey, only to find out an easement listed on the title policy wasn’t recorded when the original survey was prepared. Instead of corroborating the title report with the survey, he didn’t order an update—and didn’t know how to cross-check the survey—and ended up with a building over the top of a utility easement. Ten years into ownership, the building was demolished when the electric utility sold easement rights to the water company for water supply and sewer. That was a $500,000 mistake that could have been avoided with a $2,000 land-attorney review.

Self-Storage Development Mistakes***

I recall another developer who purchased a site with previous recognized environmental conditions (REC). The environmental consultant said no further action was required. A document from the state concluded the site had been fully remediated to standards at the time the letter was issued. Deep in the report were the fine-print parameters for ongoing ownership, beyond the initial construction.

Years later, a water-main pipe broke and excavation was required, which disturbed the soil. It violated a condition of the approved REC management plan, which required encapsulation of the site. The newly exposed site had to be retested, and because standards had become more stringent, the testing was more accurate and required further remediation, which was much more expensive than just fixing a water-line break.

A consulting session for a few hundred bucks would’ve made the developer aware of the issues, and proper action could’ve been taken to mitigate this risk. An environmental consultant could’ve suggested one simple document modification from the state that would’ve avoided a great deal of time and expense.

Here’s another example: A poorly designed grading plan with improper sheet flow and fall can cause disastrous results for a facility once a big storm dumps an extraordinary amount of precipitation on the site. Imagine having inadequate room to push snow and how that can cause a disastrous impact on cash flow because the facility has to be closed.

When the thaw finally happens, flooding may occur because of inadequate drainage. The problem can be exacerbated when snow melts and runs under the metal, later freezing and expanding. This causes concrete expansion and breakage. It also causes ice to form under the studs, which triggers the exterior walls to buckle where water ponds in the cracks. An experienced civil engineer, architect and even construction superintendent could see these possibilities and prevent disastrous results.

A smart developer will hire an experienced storage consultant to sit down with the set of plans and talk through best practices and designs. The perfect consultant will have self-storage experience that runs the gamut from site selection to operation. He can coach you through the entire process.

Sometimes the changes a professional will suggest will be minor, like storing carts at the building entrance or adding another elevator to service upper floors. Maybe it’s something as simple as how many electrical plugs to install in the office area. To help you avoid errors big and small, you should have an experienced storage consultant on your team.

Key Area 3: Capitalization

One of the most disastrous development mistakes is under capitalization. When you think it’s going to cost a lot, the rule of thumb is that it’s going to cost a lot more. Contingency is a valuable tool in making sure you have money to pay for all the things you didn’t anticipate or know you needed.

Self-Storage Development Advice***

Soft costs are the “black hole” in the runaway cost universe. It’s hard to anticipate what’s going to happen in the entitlement process and, therefore, even more difficult to predict what the costs are going to be. Seasoned zoning lawyers aren’t inexpensive, and the one with the lowest hourly rate may not be the best. Remember the adage, “Trust but verify.” These are words of wisdom when dealing with entitlement professionals.

In 2005, I was working on a personal development project with a "hired gun who could get the deal done" (yes, that’s how this attorney represented himself). The project set me back more than $35,000 before the city council voted 6-1 against me and I finally pulled the plug. Upon investigation, my “hired gun” did very little to lobby for the project, and required extensive and expensive engineering to make submittals.

Today, a veterinary clinic sits on that site. The nearest self-storage competitor is 98 percent full and the rate on a 10-by-10 is $299! Shoulda-woulda-coulda! The $1 million price tag for the land was almost staggering at my capitalization level. Had I been better capitalized, I would have gone back in with a more politically connected (and expensive) lawyer and fought for the site. I would’ve spent a lot more money lobbying for approval votes, and even more cash to have the proper text amendments written to submit to council. With the right bank roll, this project was worth the fight.

Hard costs are pretty easily defined in a new-build project. The more straightforward the project is, the lower the risk. When surrounding buildings are truly “beautiful,” it might be a clue that the standard self-storage aesthetics aren’t going to be enough. When the site isn’t "pad ready," the costs can quickly get out of hand.

Make sure utilities are available to the site and traffic engineering is complete. The cost of a deceleration lane can be huge, and center turn lanes are astronomical! You’ll find that with budget cutbacks in you state’s transportation departments, the development-approval process can be their means to getting private developers to pay for needed public improvements.

Keeping your office design to more function than art will help control construction costs. Spend the money where you get the most bang for your buck. Great access points, upgraded hallway and door components, LED lighting, and super-saver heating and cooling units are places to spend.

In the world of hard costs, a conversion project can be the largest unknown. Make sure before you close on a property that you find out as much as you can about the building. Old structures can have hidden costs like asbestos abatement or, if it’s a multi-story project, insufficient live loads on the floors. Never assume the prior use means it meets codes for a self-storage facility. The cost of adding structural support can be daunting. Developers are cautioned to do their homework, or hire engineers to determine the cost of making the project acceptable for self-storage use.

Make sure you understand the required electrical service for a multi-story conversion, including elevators, heating and cooling, and lighting. Verify sufficient water service to the building to ensure the fire mains are large enough to meet the Uniform Building Codes for self-storage use. Trust but verify!

The pro forma should also be all-inclusive. Development budgets often fall short of the expenses incurred when moving from Certificate of Occupancy to operations. From paper clips to access control and security cameras, many a novice developer has missed or underestimated the cost of opening the doors.

So while it may not take a brain surgeon or a rocket scientist to become a successful self-storage developer—although I know of at least two in the industry—it takes plenty of brain power to do it right. If you don’t have it, hire it!

RK Kliebenstein is vice president of acquisitions for Metro Storage LLC, a privately owned, fully integrated real estate operating company specializing in the acquisition, development and management of self-storage facilities nationwide. He’s also a frequent speaker at industry events. For more information, call 847.235.8965; e-mail [email protected]; visit www.metrostoragecorporate.com.

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