10 THINGS YOU NEED TO KNOW ABOUT GETTING INTO SELF-STORAGE
ANSWER: There are several sources for leases. Obviously, it is in your best interest to hire an attorney to prepare a proper customized lease for your facility based on your state laws and your individual facility needs and goals. If you are going to have a management company operate your facility make sure that you know the source of their lease and that it has been professionally reviewed and approved for the state in which your facility is located.
Some state associations offer form leases. State association leases are often a wonderful place to start, but not a good place to end. State association leases tend to be overbroad or try to be something to everyone and end up leaving you with a section of your business not covered while you have sections of the lease that are not applicable to your business. For example, few state association leases address vehicle storage or temperature control. This is going to require you to draft addendums to cover these portions of your business. By the time you are done drafting that many addendums, it may have been more economical to have your lease drafted by an attorney based on the state’s lease.
There are also vendors who sell lease packages. Be careful to understand what you are buying. While a lease may have, at one time, been reviewed by an attorney, changes in the industry are so rapid now, that if the lease has not been updated or recently reviewed by an attorney it may not be worth purchasing. Also, packaged leases normally come with a purchase plan requirement or have a limitation built into the software of the number of times you can use the lease before you have to renew your “subscription” to the lease package.
The absolute worst thing you can do is borrow a lease. You do not know where the lease came from, who developed it, or how many other people have had their hands on it before you get the lease. When we see leases in our office that are borrowed, there are often ambiguities, inconsistencies, repetitiveness and large important issues missing.
Contact us to discuss a lease.
What type of entity do I need to form?
ANSWER: Depending on your state law most self-storage owners elect to form some kind of corporate “entity.” The worst thing you can do is leave your million dollar investment in a sole proprietorship or partnership with no corporate “protection.” Many operators opt to form a limited liability company or make corporation and put the asset into the corporation or company. Sophisticated operators often break up the land and the building into separate entities and the most sophisticated operators form a separate entity above and beyond all of the others for management of the business.
Formation of the entity, corporation or limited liability company is not a panacea. If something happens at your facility, such as a slip and fall, a theft, or other issue, your personal assets and other businesses would generally be protected from any claim made by the tenant or visitor to your facility who suffers an injury or a loss. However, if something happens in your personal life resulting in a personal judgment or if you commit certain acts for which there is no corporate protection, such as a criminal act, your entities are never protected just because they are in a corporation or other entity.
There are some requirements to keep your entities up-to-date and registered with your state. In recent history more and more lawsuits try to “pierce the corporate veil” because of sloppiness in maintaining an entity, for example in a corporation keeping a corporate minute book or failure to properly execute documents in the entity name. Consult with an attorney to make sure you are not only properly forming entities, but that follow through on the proper operation, and that you understand what putting an asset into an entity does and does not protect. Finally, make sure you keep up with the necessary paperwork for your entity so that you do not get a rotten surprise later.
48 states have a separate individual Self-Storage Acts. A chart attached with these materials gives you the state citation of where your Self-Storage Act begins. Be extremely cautious. Many of these state statutes reference other state statutes. For example, California references three other codes that govern sales of vehicles, vessels, and other items as part of the code. Do not ignore these references to other sections of your state code as they are equally important. At a minimum you should be familiar with the requirements of your state Self-Storage Statute. If you are developing in a state where a self-storage statute does not exist, extra care should be given to your rental agreement because that is going to be the contract that defines all of the terms, conditions, and rights in the event of a default by the tenant. Although these statutes all appear to be short reads, the statutes are loaded with important terms. You must read them carefully, or better yet meet with an attorney who can explain your statute to you. For example, when discussing a sale, there is a difference between a public sale, a private sale, and other disposition. If your statute calls for a public sale, this is different from a private sale or other disposition and you need to make sure you understand what these nuances and differences are before you make a mistake. Also there are legal terms of art in these statutes which you may not recognize, for example an auction in most states is a defined legal term. In another section of your state statute there is a definition of what the term “auction” means. Just because your state self-storage statute does not define the term auction, does not mean it that it does not have the same meaning as in the auction statute. As an example, an auction generally requires a licensed auctioneer or a licensed auctioneer apprentice to be called an auction. You can not simply ignore the term “auction” if that is what is called for in your state statute, and hold a public sale.
What happens if my tenant does not pay rent?
ANSWER: The self-storage statute in states where they exist provides that you have a lien on property, either arising when stored or after the event of default. The lien may not supersede all other liens; however it generally supersedes most liens (except when a vehicle is stored). With your lien there is a procedure in most state statutes that allows you to exercise your lien rights by selling the stored property to (a) get your space back, and (b) to pay yourself from the proceeds to satisfy your lien. Many state statutes further discuss what happens if there is an abundance of proceeds beyond what you are owed. Be careful, many state statutes define what you are entitled to recover from your lien sale. These are not always the expenses you think you are entitled to. For example, West Virginia only gives you the right to recover the rent, the late fees and the cost of certified mail, not sale expenses, advertising expenses, lock cut expenses, and etc. Again, it is necessary to carefully read and understand your statute to know what you are entitled to recover and not every state self-storage statute says specifically what you are entitled to recover. For example, many statutes say you are entitled to recover your “reasonable expenses.” This may be a term defined elsewhere in your state statute. In states where you do not have a self-storage statute your contract must carefully govern what happens in the event of a non-payment and what you are entitled to recover if you have to exercise your contractual (as opposed to state self-storage statute) lien.
Do not forget that you may have other options, other than a lien sale, that may be simpler or less expensive or less time consuming, as an example – a Forcible Entry and Detainer/Eviction action.
Should I get into other areas or specialty areas of storage, such as vehicles, wine, or records?
ANSWER: Self-storage in itself is not a terribly complicated business. While no one likes the lien sale and some of the other complications that go with the industry, all in all it is not complicated compared to many other businesses. However adding ancillary services, such as wine, or records storage can muddy the water. Your state statute will often define what self-storage is and it is generally a building or facility designed for the purpose of storage and removal of property on a self-service basis. When you begin to add records or wine and receive or remove and deliver records or wine to a customer you are no longer really a self-storage operation. While you may want to be in this business, you need to understand the differences between the two businesses so that you can properly draft a rental agreement that protect you and so that you buy the correct insurance and understand your liabilities for loss or damaged property. Vehicle storage in itself is probably the most like self-storage, however, because of the expense of the vehicle compared to what is normally put into self storage, additional precautions, additional provisions to your rental agreement, and additional rules and regulations must be inserted in the rental agreement in order to allow vehicle storage.
Do not forget vehicle storage, even if you do not anticipate having it, vehicle storage may be occurring in your units. Even in a building with elevators and no ground floor access you could have motorcycles, jet skis, or other type of vehicles and/or gas powered appliances such as a lawnmower and you must deal with these issues.
What can go wrong in self-storage?
ANSWER: While there are certainly many things that we could list that could go wrong in self-storage, the most common types of things that go wrong are (a) wrongful sales, i.e. you sold property in a unit that you should not have sold because either it was not in default or you sold the wrong unit and (b) damage, theft, or loss of property while stored in a self-storage facility. While you are generally not liable for loss or damage of property while stored, the occupant certainly believes you to be liable. You must approach these situations with great caution and be ready to deal with the unexpected roof leak or break-in. To help protect you, you should not have keys to the unit.
What kind of insurance do I need?
ANSWER: Make sure you are buying insurance from a company who specifically sells policies designed for self-storage property protection and liability. Self-storage is a dramatically different business than other types of commercial rental real estate like apartments or shopping malls, because you do not know what is going on behind the door and you have no way of proving what is actually stored in the unit, if there is loss of damage. Properly written self-storage insurance from a reputable self-storage insurance company covers the types of losses that might occur in a self-storage environment.
Further there are certain coverages or additional riders you must buy when operating a self-storage facility, these are not customarily part of a self-storage insurance policy:
1. Wrongful sale and disposal insurance.
You must remember that the most common lawsuit, although not the biggest dollar lawsuits, are for wrongful sale and disposal. If you are wrong you will be held liable for the sale of someone’s property. This is an emotionally charged issue which tends to raise the damages claimed exponentially. You want to make sure you have insurance coverage that provides both attorney fees for representation and coverage for wrongful sale or disposal, otherwise even if you have very good insurance, the most common type of lawsuit will not be covered.
2. Business interruption insurance.
Self-storage is different than most businesses in as much as you will have between 100 and 400 + individual tenants. If business is interrupted and you lose 100 tenants because of a fire or other problem it takes much longer to build up that 100 tenant base than it takes to find 2 or 3 larger tenants because there is constant turnover of your tenants. That is you may fill 3 units this week but lose another tenant on a month-to-month lease and have only a net of 2 tenants gained in a week. Thus the length of interruption in storage can be much longer.
3. Hazardous clean up, removal, remediation insurance.
Unfortunately, lots of people use self-storage as a hazardous waste dumping ground. The expense of removing hazardous waste, even tires and light bulbs, will cause you unexpected, unbudgeted large expense. Inexpensive hazardous waste remediation insurance is available for this industry and is state-pooled so that even one claim by you should not raise your rates in an on-going forward basis.
How much security do I need?
ANSWER: While I am not big fan of the word security, the amount or type of security is determined based upon your location and your competition. You do not want to open a facility that is not as technologically “secure” as your existing competition. While this may seem like a game of one-upmanship for you to build a facility without an electronic gate, cameras, door alarms, and etc., when your competition has these it will cost you more in net rate of rent than you will be expecting. While none of these devices provide perfect security, i.e. freedom from crime, a modern day self-storage facility has at a minimum an electronic gate with individual gate access and strategically positioned cameras attached to a large hard drive DVR. Individual door alarms have been popular and are successful for several reasons, not the least of which is to prove you, the operator, did not enter the unit if someone alleges goods are stolen from a self-storage unit. Some facilities install hundreds of thousands of dollars worth of security right down to biometric recognition of retinas to admit you into a building. This may be overkill, but in some markets with expensive boats or RV’s stored, this may be the minimum security that you might have to provide. In any event watch your words, such as security. The definition of security implies freedom from criminal activity. That is not what you are providing. Make sure your lease discloses that while you may have these devices they are for the protection of the property and the facility, not to guarantee protection or safety of your individual units or goods stored in units.
When do I create a bailment?
ANSWER: A bailment is “The transfer of possession but not ownership of personal property (as goods) for a limited time or a specified purpose (as transportation) such that individual or business entity taking possession is liable to some extent for loss or damage to the property. Typical elements of a bailment are delivery of the personal property, acceptance of the delivery, and possession or control of the property. – Miriam Webster’s Dictionary of Law.
The last thing you want to do in self-storage is create a bailment by having care, custody, or control over a tenant’s goods. By having that care, custody, or control you have increased your level of responsibility, on in legal terms – duty, to safeguard the property. When you have no bailment and the unit is loaded self-serviced and locked with the tenant lock, the tenant has the key, you really do not have much of a duty to know about property becoming moldy, getting wet from a roof leak, and etc., until you know you have a problem within the building, at which point you may have to inspect. However, if you have a key to the door or a master key lock system you are accepting more duty to care for the property than you should and this is outside the parameters of where you want your business to operate. If you have keys to a vehicle, wine lockers, and/or record storage rooms, and are picking up or delivering servicing or otherwise have the ability to move or touch the goods, you have created a bailment and increased your liability.
What is the difference between storage and warehousing?
ANSWER: Warehouse is a specifically defined term in all state statutes requiring, among other things, that goods be taken by the warehouseman and stored in a common or grouped area where you, as the warehouseman, issue what is called a bill of lading. This is a receipt that would allow the owner of the goods to come and claim them upon proper notice and payment of warehousing charges. The warehouseman statute also often requires that the warehouseman maintain a certain level of insurance on the stored goods as well as fire suppression. There is also the bailment “duty of care.” Warehousing is clearly a bailment. You have a duty to inspect and care for the goods while they are in your care, custody and control. Whether this means making sure that the goods are not getting dusty or disturbed or whether or not this means you have to make sure the goods are not getting wet from a leaky roof, you have this duty. This type of duty does not exist in self-storage as described above. If you want to be a warehouseman and take care, custody, and control of the goods, that is fine; build a warehouse, read your warehouseman statute, and understand what the differences are. If you are going to be in self-storage, you want to avoid the term “warehousing” in your title, in your documents, etc., and not use warehouseman type lease documents or rely on the warehouseman’s statute to avoid imputation of a warehouseman’s duty.