Self-storage paper became a serious note niche in the late 1990s. The industry had become more legitimate in the eyes of Wall Street, and the public was becoming aware of its benefits, said Eric Snyder, then director of self-storage financing for FINOVA Realty Capital in Irvine, California.
“As of the end of 1997, we hit the billion-square-foot milestone. And only 4% of the population is using it,” Snyder said. Commercial use was also rising: about 30% of self-storage customers were commercial users, “and in some facilities it’s 50%.”
Here are the elements of the ideal self-storage deal, according to the lenders and note buyers interviewed at the time.
Management that fills units
Managers who attract customers increase the value of the note. “When a person calls, they know how to greet them and turn that into an appointment to come in and see the facility,” Snyder said. Some managers read a script when a potential customer calls. Others hand out brochures at target markets such as universities, apartments and military bases, and advertise in the Yellow Pages. “If the service is good, self-storage is a lot of word of mouth.”
“It is helpful if the manager lives on the property or has a business adjacent to it so the facility is monitored daily,” said Rebecca Anderson of First National Acceptance Co. of North America.
If management lacks industry experience, related retail experience often suffices, said John Gussis of First Security Commercial Mortgage. “A lot of operators use people who ran apartment complexes in the past, who have been involved in other retail operations, including selling cars, furniture, clothing.”
Some owners prefer to hire retired military personnel as on-site managers, Gussis said, “because they’re a little older, they’re a little more mature and they’re well-disciplined.” And as Chris Sexton of Metropolitan Mortgage put it: “We prefer better quality units with on-site managers.”
Location and natural markets
Location is critical to financing any property type, but it’s especially important for self-storage, because most users discover a facility by driving past it. The best locations are on major roads with high traffic counts. “We want to see a minimum of 20,000 vehicles per day,” Snyder said.
Self-storage started near Texas military bases in the 1970s, but its future belongs to prime retail locations near residential areas. Self-storage is often the highest and best use for that space, Snyder said. At the time, he noted, “You can get up to $1.50 per square foot per month. In many places that’s the same as retail and office.”
The note is worth more when the facility sits near a natural market, such as commercial tenants, renters with limited storage space, or college students who need storage over the summer, said Ricardo Riemer, vice president of Love Funding Corp. in Washington, D.C.
Geographically, self-storage does well in states such as Florida, Louisiana and Texas, where soil and weather conditions rule out basements. It also does well in recreational areas, where people need to store bulky “toys” such as jet skis, snowmobiles and boats.
Amenities, services and security
Amenities that raise the value of the property, and so the note, include climate control, carpeted hallways and computerized entry. Most facilities also run complementary businesses, such as selling locks and packing materials, renting trucks, and even TV and VCR repair. Some, particularly those near retail areas, rent out office space too. (Lenders underwrote this ancillary income at 10% of rental income.)
Security matters most: fencing around the property, a single gated entry and exit, guards, bright lighting, surveillance cameras and an alarm on each unit’s door, Gussis said. “Security is important because that’s the number-one thing they’re selling. … It’s the first impression. You want to make sure that when you come back, your stuff is going to be there.”
Make sure the facility’s amenities match the competition’s. If competition is limited, lenders don’t care which amenities a facility lacks, Snyder said. “But if you’re located in a market that is expanding rapidly, and there’s a lot of land available, and the facility is 20 years old, we’re going to look harder at that.” Then again, a facility without standard services may do well if it’s the cheapest in the market, Riemer said.
Unit mix and occupancy
Target notes on facilities whose units match local demand, Riemer said. “If you have a lot of apartment residents, you may need smaller units. If you’re in a resort area, you might need storage for trailers and RVs. … Not every location should have a hundred 5-by-10 units.” Nationally, the average unit was 110 square feet, Snyder said. “If a facility’s average is 300, I’ll want to see why.”
Industry-wide occupancy was 91% in 1996 and dropped to 87% in 1997. “That shows more facilities coming on-line,” Snyder said. FINOVA expected borrowers to show occupancy of 85% or higher.
A well-run facility should not be more than 91% to 92% occupied, Gussis said. “If they’re 100% occupied, they don’t have any units to rent, and their rents are probably too low. That means they’re not optimizing their rental structure.” Lenders automatically underwrote at least an 8% vacancy.
What to put in the note package
Lenders and investors want to see the property and its market, not just the numbers. Include:
- Color photos of the property. They show an out-of-town investor what the property looks like to the average customer. Take them in good weather to show the property at its best.
- Maps. Provide a city map marked with the facility’s location and a neighborhood map showing the area in detail. Riemer suggests also marking the location of competing properties.
- Market data. Describe the trade area, including the top five competitors, their locations and their rental rates. Lenders use this not only to understand the market but also to test the owner’s knowledge of it, Riemer said.
Why a partial purchase fits
Self-storage notes are well suited to a partial purchase. “A partial purchase is also a good idea to keep the seller involved since he is probably closer geographically to the property than you are,” said First National Acceptance Co.’s Rebecca Anderson.
