By Ed Clement
"Your Self Storage Planning - Site Selection - Design-Build" by Marc Goodin
Banks often have two very restrictive loan covenants that can be very detrimental to a new self-storage business.
It is important to remember that while we all like low-interest rates, they are often not the most important item when choosing a loan. The terms of the loan are what can make or break it. A 3-year vs a 1-year interest-only period is huge because it saves you money when it is most important. A bank that understands self-storage is incredibly helpful because you are more likely to get the important terms you need, close on time, and get the help and assistance you need.
Often banks require a certain debt service coverage ratio (DSCR) be met before they will convert the construction loan to a permanent loan. Generally, a DSCR of 1 means you can pay all your bills without putting any additional money into your business. You should look up the definition of DSCR online. Each bank may have a slightly different calculation.
Some banks require a DSCR of 1.25 or even 1.35 before they convert your construction loan to a permanent loan. This might be a possible goal for some commercial real estate developers to meet because they have clients signed to rent the majority of the space upon completion of construction. Typically, a self-storage will not meet a DSCR of 1.25 until you are over 70% rented. If you do not meet this ratio in their required time frame, they can and will ask for you to repay the loan immediately or provide significant additional money to reduce the amount borrowed so you meet the required DSCR.
In your initial negotiations with the bank, you need to make sure there either isn’t a DSCR requirement, or it is low (0.9 or 1.0), and you want to be sure there is a significant time period (2 years or more) to reach it.
The second restrictive loan clause is the prepayment clause. If you prepay the loan, some banks will require you to pay them for the loss of all the profits they would have made if you kept the loan until maturity. This can be in the many tens of thousands of dollars, even hundreds of thousands. Other banks will have a prepayment clause that requires a penalty paid (up to 5% of the loan) if the loan is paid off in the first 5 years (5% in the first year...1% in the fifth year). This is a more acceptable amount as it is only for 5 years, and it goes down 1% for each year of the loan.
There are many reasons you may need to pay off the loan early including selling the property, refinancing due to better rates, or personal reasons. Perhaps you want to build phase two and your bank will not loan you the money because they have too many self-storage loans on the books, forcing you to get a loan from another bank.
Review your bank’s DSCR requirements and repayment penalties early on, even before
you determine interest rates.
When applying for a loan, make sure everything is included, even the kitchen sink. Include office supplies, maintenance supplies, office furniture, office equipment, lawn mower, bank fees, appraisal fees, construction insurance, 1-year startup/carrying cost, and 15% cost overruns- you never know what the banks may accept. You can always borrow less in the end.
SBA loans can be an advantage for many self-storage developers for several reasons, with the number one reason being significantly reduced equity requirements. But if you do not go with an experienced self-storage preferred SBA lender, it can take more time than you have. A preferred lender is a bank that can approve your SBA loan without sending it to SBA for approval. Asking your bank if they are a preferred SBA lender and how many self-storage new construction loans, they have made in the last six months will provide a good insight into their self-storage lending experience.
Case in point:
Most banks provide funding after the work is in place, with no exceptions. Experienced self-storage lenders will understand that the building manufacturers typically require a substantial deposit of 20%, and then they are required to be paid in full before unloading the building parts at the job site. Make sure you have this worked out in advance with your bank before providing loans or application fees.
A great feasibility study does not mean your property will meet the bank’s required appraisal value. If you do not meet the loan-to-value ratio of 85% for an SBA loan, they will require you to put up additional collateral such as rental properties or your home.
The less detailed the construction specifications, documents, and plans are means that there will be more extras. If it is not specified in the contract, it is an extra. If it is not specifically noted in the details what materials or brands shall be used, the contractor will use the lowest quality products. If a construction time frame is not provided in the contract, it will take much longer than the verbal time frame the contractor gave you.
If any quantities are estimated, such as gravel, a unit price for extra quantities installed should be provided. It should be clear whether or not the permit fees are included in the contractor’s fees. A unit price should be included for possible unknown items such as ledge or dewatering footings otherwise the rates will be much higher later. Detailed soil testing and analysis should be done as part of the design process to prepare a better design and reduce surprises.
An AIA contract should be used as it is the industry standard, but it will require a multi-page addendum with a host of items for clarification to better protect you.
TOWN OFFICIALS/REGULATORY APPROVALS:
Some town employees, elected officials, town planners, and engineers may give your project the nod one way or another before it is in front of the regulatory commissions for
approval. Sure, it is best to have the town staff on your side. BUT! Beware: the votes that count are the regulatory commissioners’ votes. Always be over-prepared for every regulatory meeting. Have all your guns ready! I've designed hundreds of commercial site plans (as a civil engineer) and brought them before various commissions for approval. I have seen so many crazy things you would not believe. Be prepared. I always strongly recommend the four following things as a minimum:
1.) Bring your engineer to present the project at all regulatory meetings.
2.) As the owner of the business, you should always go to the meeting and be prepared to tell them a little about yourself and your self-storage dream; what an excellent job the design team has done, and that they are here to answer any concerns. Be sure to tell them you are excited to be part of the business community. Sometimes agreeing to a condition that night by the owner can make an approval happen vs a denial or delay. A second round at commissions after a denial can take a very long time, be very expensive, and often have the same results.
3.) Bring colored plans, details, photos, samples, your lease, reports, etc. - be the professional.
4.) Bring as many people as possible from town to speak in favor of the project and have them speak before the opposition! This can make a difference in a close decision.
Projects do get denied. Projects can take a long time to get approved. And regulatory commissions can add hundreds of thousands of dollars to the cost of the project. Make sure you have a seasoned self-storage expert on your side early on!
REAL ESTATE AGENTS:
They are not engineers, zoning experts, development experts, or self-storage experts. Their statement that the parcel is suitable for self-storage should be considered just the starting point of your due diligence. They will not be held accountable in any way if the property is not suitable for your needs. You, along with your experts, need to do your own due diligence.
You do not have to meet any minimum offer price suggested by the agents.
Some will only provide you with the facts on the listing. Others will do significant research to find land and they will also research a given parcel to start to confirm the site is feasible. You need the latter.
You must gather as many facts as possible about the property from the sellers in writing (email is fine) because these “facts” are often not true, and they will provide great ammunition to renegotiate the land price. Email me at email@example.com and I will email you my recent article The Three Steps of Land Negotiations for Huge Savings published in the Inside Self Storage magazine.
It is critical every employee follows the facility marketing, sales, and operations manual from A-Z and is not allowed to pick and choose. Every employee must be REQUIRED to follow it from day one. It is critical to have the required platforms and systems in place, so sales are not lost even when new employees are hired.
Hire for people skills, sales, and marketing skills first; business skills and energy second; and self-storage knowledge last. You can teach self-storage basics, but it is very hard to teach people skills, sales, and positive thinking.
Employees are going to focus on the number of units rented and not on income or profits as they should. They will want to lower rates and give discounts even when you should be doing the opposite. Salespeople want the lowest prices. Marketers want the best features.
When they tell you they know better than you or the manual, after six months of managing your facility, they are wrong.
Employees will tell you:
a. They do not need to follow the rental script because they are better off if they wing it. Wrong!
b. It is better not to rent on the phone. Wrong!
c. Marketing is a waste of time. Wrong!
If they do not follow the standard operating procedures starting day one and every day after, you will go downhill until they are replaced.
A new hire will tell you they are ready to do everything until everything includes things, they do not consider part of their job. Make the job description includes everything from moping the office floors to taking out the trash, cleaning vacant units to collection, etc.
Your manager is your number one asset. A good job description and company manual/policy is an important part of the interview process. They must agree to follow the operations manual and sales scripts and understand they are mandatory.
It is human nature to be upset when the deal is changed. You must be very, very specific about the manager’s job responsibilities, duties, and your company’s policies at the interview stage and it should also be in writing. Too often interviews are done off the cuff and informally. While a good prospective manager may have never worked in a self-storage before; they have to be a salesperson, a businessperson, a people person, and self-motivated. It is important to remember that just because they say they are, does not make it true. You need to call their references and read between the lines.
Any job changes or even clarifications after a manager is hired will be disruptive. Be sure to include everything in the manual, even common-sense things like not using the computer for personal social networking sites during the day or scheduling vacation time
in advance. The self-storage manager has to be the jack of many trades from renting, face-to-face offsite marketing, cleaning, calling for late payments, accounting, maintenance, marketing, etc. The more an employee understands the responsibilities of a manager before they are hired, the better the chances for success. A good job description and employee manual should be part of every job interview.
I even recommend you have a prospective manager read my book, Crush Your Competition, and your rental scripts between the first and second interview. It will help them better understand the marketing and customer service aspect of being a manager. Getting their thoughts on the book will help you determine if they are right for the position.
You should ask every possible employee, “what you would do to increase rentals?”
SELF STORAGE BUILDING MANUFACTURERS: (free conceptual site plans)
Their conceptual site plans often do not take into consideration all the land features and zoning regulations. A trustworthy manufacturer will tell you their plans are just a starting point and that you need to get a detailed site plan from a local engineer and Architect that is familiar with the local zoning regulations and building codes and has more details about the land.
Final unit layouts should not be done by the building manufacturer because they do not have the local information to determine the correct unit sizes and the number of units. They provide this service because most owners do not take time with their self-storage expert to do a unit layout.
Due to heavy demand, building delivery is often 13 to 26 weeks plus, putting many jobs way behind schedule. Make sure you understand the delivery time frames and order your building as soon as you have approvals/funding and are ready to hire a contractor.
“I have not designed a self-storage website, but I designed hundreds of great sites and can make you a great self-storage website.” Wrong!
The use of the internet grows every year. A lot of self-storage business comes from the internet. Your website has to be functional for the user, including potential clients, existing clients, your manager, Google, 3-mile geo populations, and more.
Your website has to tie into your management program, and kiosk, and make real-time rentals and payments.
Your website has to include a high-end social reputation portal and so much more.
Your website has to let your customers know how you are different – that you are in the fashion business! It is not a job for your local website designer.
It is your job to coach, educate and teach your employees. It is your job to help get the phone to ring and get prospects to stop by your self-storage facility. It is your manager’s job to market the facility, keep the facility in tip-top shape, provide over-the-top service, and rent at premium prices. A franchise helps make sure everyone’s job is done better, for more profits.
DRIVEWAY SIGHT LINES CAN BE A REASON FOR SITE PLAN DENIAL:
One of the most overlooked basic site plan issues is the requirement for safe driveway sight lines. Typically, a suitable sight line has to be provided for any commercial development. Since this is a safety issue, it is hard to get a variance or approval if not met. Sight lines are typically based on the speed of the existing traffic (not the speed limit). For actual traffic speeds of 25 mph, sight lines start in the 250 feet to 350 feet range and surpass 1000 feet for greater traffic speeds. I have seen plans well underway before it was realized that the required sight lines could not be provided.
U-HAUL TRUCK RENTALS:
U-Haul is more of a community service and marketing supplement than a big money-making proposition for most self-storage businesses. This is because it takes so much time from your manager’s main job of selling and marketing self-storage. U-Haul will rarely make sense if it requires you to hire more staff, which is often the case. As a U-Haul dealer, you are required to hitch the trailers to the vehicles. Many women cannot lift the hitch for a 6 x 12 trailer. You don’t get paid anything when a vehicle is checked in, and you make, on average, around $20 -$25 per vehicle rented. Don’t forget you are going to need parking spaces for the U-Haul vehicles. Often, it would be more beneficial to rent parking spaces. There is a strong connection between renting trucks and renting self-storage, so you should consider providing your own rental truck.
SELLING & MARKETING PLATFORMS:
Sales and marketing are going to make your facility stand out to make oversized profits. Throwing money into sales and marketing is not the solution. It needs to be the company mantra and philosophy. Over-the-top service, being an expert, overcoming concerns, understanding what today’s internet customers want, guerilla marketing, and connecting with clients and providing that just feels right feeling is the future of success
For a free copy of Marc's book, "Your Self Storage Planning - Site Selection - Design-Build"
Email me at firstname.lastname@example.org
Ed Clement is a franchise director at Storage Authority. One of his passions and responsibilities is helping franchisees find land by sharing how to find land both online and offline. Ed has a strong background in real estate, investment banking, and management consulting. He is available at Ed@StorageAuthority.com or 727 946 0745 to answer your questions and share the Storage Authority Franchise opportunity.