10 questions you need to ask about third-party management

July 31, 2015 1
10 questions you need to ask about third-party management

Hiring a professional management company might not be the right move for every self-storage facility. But for those owners who are looking at enlisting a third-party manager, here’s a cheat sheet of what owners and operators should know before handing over the keys.

1. What are the standard fees?

The fees that third-party management companies charge are fairly consistent, falling between 5 percent and 7 percent of a facility’s gross revenue. It’s typical for new facilities to charge a minimum monthly fee covering properties that still are in the lease-up phase. Owners usually cover fixed expenses, as well as payroll for on-site staff.

2. What does it really cost?

One area where the fees that third-party managers charge differ is tied to the costs that a manager assigns directly to a property. Owners do need to pay close attention to the expenses layered on top of the base fees. For example, some third-party management companies will hire on-site personnel at a certain pay rate, while another company might hire someone at three times that rate. Both are site-level expenses that come out of the owner’s pocket.

In addition, some third-party managers sell tenant insurance and keep all of the proceeds from those sales, while other managers sell insurance but the proceeds go to the owner.

3. What’s the ROI?

Most third-party management companies will argue that they deliver more value to an owner in terms of reduced expenses and higher income to more than make up for their fees.

“Unfortunately, too many people in this business look at one thing, which is, ‘What are you going to charge me?’ What they don’t look at is what are they going to get for that cost and what is the upside,” said Ken Nitzberg, chairman and CEO of Devon Self Storage, a storage owner and third-party manager.

ROI

Third-party managers often leverage economies of scale and buying power. Management companies can spread out some expenses over a larger base. For example, call center and Internet costs become cheaper on a per-store basis across a larger portfolio.

“So, the more we can get under our brand, the more it benefits everyone,” said Noah Springer, vice president of business development at Extra Space Storage, which manages more than 300 facilities for other owners.

In addition, third-party managers also can access more data. “The more units we have in the system, the more data we have in the system, and the better we can do on a pricing and marketing basis,” Springer said.

4. Who are the key players?

Extra Space, CubeSmart and Sovran Self Storage (Uncle Bob’s) are the big national players involved in third-party management. Springer said third-party management generates revenue for Extra Space and strengthens the company’s buying power for its own properties. At times, managed facilities might go into the company’s acquisition pipeline, he said.

Dozens of regional and local companies also provide third-party management, including Devon, Universal Storage Group, Synergy Storage Group, Storage Asset Management, Absolute Storage Management, Southeast Management, Storage Investment Management and Storage Solutions.

5. Is bigger better?

Certainly, the larger players would argue that, yes, they bring more to the table than smaller players do. But Nitzberger said that while Devon “can’t compete with Public Storage on the money we spend on our web marketing activity, but compared to the guy with three stores, we kill ’em.”

Extra Space has employees on Google’s customer advisory board and meet with Google quarterly to discuss tools, tests and trends. “Those things provide us opportunities that others just aren’t big enough to do, and all of our partners benefit from that,” Springer said.

6. What about data?

data

These days, the business world is increasingly driven by key performance indicators (KPIs) and a philosophy that you can’t manage what you don’t measure. To that point, many third-party management companies have access to mounds of data.

“Because we have more stores and because we’re bigger, we have an opportunity and a data set that other people don’t,” Springer said. “We can look at any market, and we know how that market is going to respond to a new property on our platform.”

7. What’s on the menu?

Although many third-party management companies offer “a la carte” services, most of them focus on full-service packages that include Internet, call center, HR, accounting, legal and tax services.

8. What should you look for?

One of the most important things for operators to look at when choosing a third-party manager is its track record. How long has the company been in business? What kind of success has it achieved? Other key points to consider include the size of the staff, the services and resources that are available, and the fee structure.

9. How are conflicts of interest managed?

Hiring a third-party manager that also serves a competitor isn’t necessarily a deal breaker. It depends on how that company manages conflicts of interest.

In the case of Extra Space Storage, all of its owned and managed facilities are branded as Extra Space. This provides for stronger brand identity and a bigger presence on Google. It also lets management be completely “color blind” regarding its owned and managed properties, Springer said.

“It’s very important for us acting as a fiduciary for our partners that we manage for that we are giving them the best service,” he said, “and we are not compromising or pushing customers from their stores to our stores.”

10. Does an owner need a third-party manager?

The answer to that question depends on your circumstances. Would you rather not bother with day-to-day management? Then a third-party manager might be right for you. If you love the nitty-gritty of operations and your facility is performing well, then third-party management might not make sense.

To learn more about when to hire a third-party management company, visit blog.selfstorage.com/self-storage-operations/third-party-management-3100.

“The day is coming where it is going to be very hard for you to compete if you don’t have professional management abilities—whether you grow it internally or hire it externally—and for small operators, growing it internally is almost cost-prohibitive,” Nitzberg said.

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