Management Matters: How to Make Cents of Third-Party Management

Written by: Shawn Hill Posted: 2/28/2018
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Increasingly, many first time owners and small operators in larger markets are choosing to use third-party managers under the theory of “if you can’t beat ‘em, join ‘em”. Many of the largest operators now offer robust third-party management platforms, charging 5 - 6% of the effective gross revenue generated by the facility on a monthly basis. Although this may seem like a significant expense for small operators, these third-party managers have the tools and technology necessary to increase revenue and add significant value to your asset.

At the most basic level, third-party management provides smaller operators with access to the embedded benefits of the large operators, including their scale economies, advertising and sophisticated revenue management platforms. As part of the larger operator’s website, smaller operations benefit from their online marketing strategies and SEO tactics. Other benefits may include cost saving measures related to back office expenses, insurance and repair and maintenance expenses through a larger operators national contract with vendors and other important relationships.

Another embedded benefit of utilizing third-party management is the creation of an embedded exit option for investors who will inevitably considering selling their facility at some point in the future. Many large operators in the third-party management business, such as the REITs, are natural buyers and these large and well capitalized buyers often find that managing assets is a good way to get to know the property before making a determination of whether or not it would be a good fit for their portfolio. Once that determination is made, having the buyer already in place managing the facility could make for an ideal and easy acquisition partner.

Perhaps the most compelling reason to utilize third-party management, however, relates to financing. Lenders are increasingly aware that self storage is an operational business and they are often reluctant to bank a first-time investor or smaller owner competing in a larger market dominated by institutional players. Third-party management can help new investors secure financing by assuaging your lender that you are equipped to compete.

There is little doubt that lenders base their real estate credit decisions on the strengths and weaknesses of a transaction, which ultimately translate into calculated risks and returns. A lender may have great appreciation for the self storage industry and be very comfortable with the physical real estate, but a lack of comfort with a particular sponsor's experience can mean, at best, a higher cost of funds and at worst, a decision not to provide financing.

An easy way for a first-time investor to overcome this obstacle is to propose the use of an experienced third-party management company to drive the operation. This may give the lender the additional level of comfort necessary to push the loan through approval.

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