How Big a Gamble Are You Prepared to Take?
By Andrew Donaldson
Las Vegas, the gambling capital of the world, makes its money against 50/50 odds. If you were at the Inside Self-Storage Expo in Las Vegas this year, don't lose too much money gambling--Europe's self-storage marketplace offers far better odds for success! But you can only pick the right numbers if you're an educated player. If you're not experienced in the European arena, the new hot marketplace will only give you 50/50 odds at best.
Let's look at calculated risk in the European marketplace. The psychological distance created by the expanse of the Atlantic is your biggest hurdle. It means you have to have someone in Europe with the necessary business experience. You must be able to trust your representative to set up and run the business for you. You need to have plenty of cash, lines of credit or funding, a leader or strong team, and a quality business plan. With this as a start, you've increased your odds of success. Now, there is only one major obstacle left to overcome before you can get going--available property. This is the largest barrier to entry into the marketplace, even for locals.
Let me give you an example of how long it can take to secure the almost perfect drive-by location in Europe. I have recently been involved in a deal that took 12 months from the date of first offer on a leasehold building. In the year prior to the offer, the buyers looked at the building several times. So why did it take so long, and is this par for the course?
In my opinion, this timescale is normal for leasehold premises. In Europe, the current available property split for potential conversions to self-storage buildings is roughly 50/50 freehold and leasehold. The leasehold option is becoming increasing popular because it is less capital intensive. But with leaseholds, there is generally a lease in place and a tenant who wants to get out of his commitment, which complicates things from the start. However, this situation has one key benefit to the would-be operator: The current tenant may well offer an attractive initial rent-free period at the start of the term to encourage you to take on his liabilities.
The above-mentioned deal consisted of a tenant with 23 years remaining on a 25-year lease. He had never occupied the building since its completion two years ago. You would have thought, under such circumstances, the deal would have taken far less than 12 months. So, why didn't it?
The first six months were spent haggling over the rent-free period with the current tenant, who was paying for an empty building. As each month passed, the tenant had fewer options. The risk of losing the deal to a competitor declined and the strength of his hand decreased. When the final rent-free period was finally agreed upon--18 in the first 24 months, giving the buyer $650,000 in free rent--the hard work really started as the legal process began.
The landlord had to agree to a new sub-lease. A license to alter had to be agreed for the tenant's improvements, a guarantee had to be put in place, a rent bond had to be agreed, covenants had to be considered, and the current tenant's half-completed works in his license to alter had to be considered. These were just the basics, without even considering the amount of work needed to put all parties together to meet the same goal.
So, that's how painful the whole getting-started process can be. Then, in Europe's uneducated consumer marketplace, the real work starts--generating occupancy. In perspective, the 12 months spent obtaining the site is easy compared to filling the place. This European game is only for the brave who have good local knowledge and fairly deep pockets. If you don't have all these cards in your deck, you're far better off sticking with Vegas odds. Enjoy the show and feel comfortable in the knowledge that when you've lost your stake at the proverbial poker table, you can just walk away