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Buying Class C Properties

Has the ongoing recession and the subsequent lack of development capital left you waiting on the sidelines to begin your next project?   With 124 bank failures this year alone (as of the date of this article) and more expected to come throughout the balance of 2009 and well into 2010, many developers have been scratching their heads and contemplating their next move.   The self storage builders in my area are literally begging for projects and practically doing them at cost just to keep afloat and to avoid anymore layoffs.  
Well one strategy that some developers and investors are beginning to consider is investing in Class C Properties.  Class C Self Storage Facilities are generally defined as older properties in need of repair or updating, often first generation, single-level sites that may be unfenced, and they typically lack in security features and amenities commonly found in Class B or Class A Properties.  They may also possess a less desirable unit max and orientation with regard to door operation, upper levels, and lack of temperature control.  They may also suffer from having poor access and limited visibility and subsequently, rental rates are lower than Class A or Class B Properties.
This may not sound so appealing to the masses, but don’t discount the potential for the savvy investor who is willing to put forth the effort in turning these Cinderella facilities into the belle of the ball.  Some investors and small companies have made a small fortune focusing only on investing in Class C Facilities and improving them to a solid Class B contender.  And it’s not as tough as you may think.  Though the leap from a Class B property to a Class A property is difficult, you’ll find that the jump from a Class C property to a Class B property is quite simple, and with a very small amount of work and capital investment.  
Which leads us to the question of how to go about finding these diamonds in the rough?   Uncovering these gems is no more difficult than finding a good piece of development property, and in most cases, it’s even easier.  First, there are a number of these facilities listed with Commercial real estate brokers, business brokers, on commercial and self storage websites.  You can also get a comprehensive listing of all facilities in a given market by purchasing directly from the numerous list brokers who have the names and addresses of all the facilities in a geographic area.  You may begin the process by creating a relationship with the brokers to assist in finding properties that meet your buying criteria while simultaneously contacting the owners directly with a mailing campaign, or just by cold calling the facilities in person or by phone after “Googling” all the facilities in your targeted market(s) for acquisition.  
“Sounds appealing – but in today’s lending environment, where do I find capital and funding to purchase these Class C properties” you ask.  Well contrary to popular belief, banks are still making loans on Self Storage Facilities.  Historically, Self Storage has the lowest loan default rate of all commercial real estate when compared to apartments, office buildings, and retail strip centers.  And banks are taking notice.  Especially the Community Banks, Credit Unions, and Savings & Loans banks that are located in the communities where these facilities are located.   Banks are in the business of making loans and due to the strong performance in the Self Storage sector, many investors are being welcomed with open arms when presenting a loan request for their Self Storage projects and at favorable rates and terms.  Banks have increasingly moved away from making “speculative” loans on development projects in favor of making loans on income producing assets with a historical track record of measurable performance.  And with a solid business plan and thorough due diligence to back it up, you may be pleasantly surprised how easy it is to acquire funding for this asset class from the local lenders where these facilities are found.
When thinking of ways to upgrade Class C Facilities to a Class B facility, remember that the changes that you put in don’t necessarily have to be major.  The First place to start is on Curb appeal.   What are the colors compared to the newer facilities in the area?  Are all of the buildings weathered to the point where the roof, walls, and doors have all faded to 1 shade of “gray” or “tan”?  A color change by one of the many painting contractors specializing in Steel buildings and doors can do wonders for the appearance of your new acquisition.  Similarly, the addition of a new sign, or replacement of the existing one along with color coded flags, banners, and “bandit” signs will draw attention to your paint job and raise awareness of the changes you have made. 
         The next point to consider which has the most impact on forcing the appreciation and value of the facility has to do with the land.  The smart investor will immediately assess the highest and best use of any vacant land at the site or any adjacent land that may be available for purchase.   Hopefully, once you’ve improved the look of the facility and made some management improvements, you will be rewarded with higher occupancy and the possibility of constructing additional buildings/units at the site.  Don’t forget to look at the existing boat/RV lot as the return on constructing additional buildings on that land generally outweighs the ROI of leasing out parking spaces.  And if you’re out of room, contact the neighbors to assess whether there may be an opportunity to purchase additional land/buildings for expansion.  This is probably the greatest way to increase the value of your facility while simultaneously “scratching your development itch”.  
Now it’s time to turn our attention to the multiple profit centers that can be added to your facility.  Adding a small retail center to your site is probably the simplest and least costly way to improve the bottom line.   Next, you may want to consider if it’s feasible to offer truck rental services through a 3rd party provider or by purchasing or leasing your own truck and offering it to your clients for free or at a reduced rate.  Can you add a pack & Ship Center, Bill Boards, Vending Machines, a Business Center, perhaps temperature control units, propane cylinder exchange, Records Storage or any combination of the 40+ Ancillary income streams that can be added to your facility?  Class C Facilities will vary by site and by market, so there is some research into the feasibility of adding each, but the increase in income and the return on investment may be surprisingly rewarding.  
And last but certainly not least, is to develop a detailed marketing plan and thorough operations manual for leasing up and managing your facility.  Attention to  these 2 critical areas will determine your success in both improving cash flow while simultaneously increasing the value and forcing the appreciation of the asset.  Furthermore, it never ceases to amaze me that when occupancy is low, and traffic is down, some operators decide to actually decrease their marketing efforts; the very thing that brings customers in the door!  The most successful operators I have encountered use their marketing plan to guide their daily activities.  It has specific daily tasks that all center around the daily, weekly, and monthly goals laid out by the organization.  Results are usually measured on a monthly basis and then compared to the prior month’s activity to gauge the success of the most recent campaign.  And of course none of this can be attained without the efforts of a well trained and motivated facility manager.  
The laws for success in the self storage industry are always changing and buying Class C Facilities has quickly become a very viable addition to a successful investing strategy – especially in this time where development has slowed to a crawl.  The merits of this strategy have proven to be very profitable to many operators who have chosen this path rather than focusing solely on development.  And being one of those investors myself, this author couldn’t agree more.

About the Author

Scott Meyers, CSSM© is the President and Owner of Indianapolis Based Alcatraz Storage™.  He is also the nation’s leading speaker and educator in the field of Self Storage Investing through his company SelfStorageInvesting.com.  To reach him, or to invite him to speak, call 877-366-5773; e-mail Scott@SelfStorageInvesting.com; visit http://www.SelfStorageInvesting.com.