(this article orginally appeared in the the Daily Business Review)

BOYNTON BEACH, FL-Bob Gaudio is not buying into the long-held notion that self-storage facilities are recession-proof investments — at least not after the Boynton Beach facility he manages became another in a growing number of such properties in foreclosure.

Gaudio said the property he runs, Space Plus Storage near Congress Boulevard and Woolbright Road, went from being almost fully rented to nearly half vacant after the economy tanked.

Glenn Friedt, the 86-year-old owner of the property, defaulted on the $3.5 million mortgage after he quit borrowing about $20,000 each month from a credit line to subsidize the $34,000 monthly mortgage payments, Gaudio said.

“We had people who had been customers since 1978, when we opened, and many of them left because they couldn’t afford to pay the $15 to $40 a month anymore, or they finally realized the properties they were storing weren’t worth the money.”

The 10-acre facility — which also rents small industrial space to businesses and parking spaces to owners of boats, trailers and recreational vehicles — started to struggle a few years ago when a zoning change forced some industrial tenants out of the building, Gaudio said. But it wasn’t until the recession that the business started to lose money.

“The boat/trailer/RV portion of the business evaporated, and on the storage side, our occupancy went from about 85 to 95 to about 54% ,” Gaudio said.

Self-storage foreclosures were almost unheard of until recently, said Michael Mele, senior director of the Marcus & Millichap national self-storage group in Tampa.

“Now, 60% of what we are doing is distressed [self-storage properties] at this point, he said. “We’ve closed six deals this year, two of them were bank-owned and we have another bank-owned property under contract. Of the nine listings I have now, two are bank-owned and four are distressed properties, where the owner is in a financial situation [and] they just have to sell it.”

And Mele said this is just the “tip of the iceberg.”

“I talk to a lot of asset mangers and they tell me they have an enormous amount of [self-storage] properties where they are trying to work something out on the loan. There are a ton of these we haven’t seen yet.”

Gaudio said he has been trying unsuccessfully to work out a deal with the servicer on the loan, Berkadia Commercial Mortgage of Horsham, Pennsylvania, since last year.

“There hasn’t been any true negotiations,” he said. “All they’ve done is deny, deny, deny, to the point where [Friedt] had to default.”

Gaudio said he has hired attorney Brian Deuschle to fight the foreclosure and counter-sue lender Bank of America, which is a trustee on the loan originated by Bear Stearns Commercial Mortgage Securities. Gaudio said the lender is violating Florida antitrust laws by “keeping us out of the open [lending] market.”

According to Gaudio, the lender has rejected his requests to seek financing elsewhere. Deuschle said the property is worth about $6.5 million and could easily be funded.

“But the text of the mortgage restricts and prohibits the owner from being able to refinance,” he said. “You can’t mortgage, sell or transfer any interest in the company without their consent. We believe it’s an opportunistic position for [the lender] if they can get a $6.5 million property for $3.5 million.”

Bankruptcy Filing

Other local self-storage owners also are trying what they can to keep their properties.

Tropical Storage-Miramar, a company that owns Tropical Storage, a 95,000-square-foot property in Miramar, filed for bankruptcy earlier this year after it was hit with a $7.5 million foreclosure judgement. The loan’s principal is $6.9 million, according to Broward County property records.

Regions Bank was the original lender but after the loan went into default, it sold the note for an undisclosed amount to an entity owned by Cincinnati-based Great American Life Insurance Co., which took over the foreclosure suit. Tropical Storage-Miramar, which is managed by James LaBonte, built the units in 2007. LaBonte said the bankruptcy put the foreclosure on hold, but he declined further comment until the litigation is resolved.

Mele said properties that were built or purchased during the height of the self-storage market between 2007 and 2008, now carry excessive debt compared to their market value.

“The new [facilities] that are not filling up and losing money, the banks are running out of patience and starting to take those back,” Mele said.

Newly developed self-storage properties that normally would be fully occupied in 24 to 36 months, are now taking 36 to 48 months to fill, said David Blum, who works as a consultant and manager for developers and owners of self-storage facilities.

Since the peak of the market in 2008, storage rental rates have dropped an average of about 20% , according to Blum.

Scott Frank, an attorney at Arnstein & Lehr in West Palm Beach, who represents developers, owners and lenders in the self-storage segment, said part of the problem is that many developers with little or no experience in operating storage facilities built them thinking it was going to be “the next hot thing.” They ended up stuck with a property they don’t know how to manage and the recession made things worse.

“They had a dual strategy,” he said. “They thought, ‘I’ll build this and make money or I’ll sell it to a national operator.”

Debt Factor

Today, while there are buyers interested in the properties, sellers aren’t receiving offers lucrative enough to pay off the debt on their property.

Owners of older properties, who refinanced during the height of the market, also have been struggling with foreclosures, Blum said. Not only did they overleverage the properties, they also face pressure to lower rental rates because of fewer renters and the competition from newer properties.

Blum said competition may have been one of the contributing factors to Space Plus’ problems.

“They had a brand new competitor built right in front of them,” Blum said.

Gaudio said they have been affected by the increased competition. But until the recession, competitors — including four nearby properties — were not a problem.

As he sees it, the problem is the lender’s unwillingness to lower his 8.5% annual interest rate to help the business get through the downturn.

A Berkadia spokeswoman said the company does not comment on specific accounts. Lee Mackson, a Miami attorney who represents Bank of America, declined comment.

Part of the difficulty is that Storage Plus’ mortgage is part of a commercial mortgage-based securitized loan portfolio, which makes it tougher to negotiate.

Refinancing for storage facilities is still available, Frank said, but only for properties with strong cash flow and occupancy where the owner has a considerable amount of equity.

“If you want a 60% loan-to-value, you will need at least 70 percent occupancy,” he said. But that’s just an average and would really depend on the cash flow because, unlike in other commercial sectors such as retail, tenants are mostly on a month-to-month lease, income fluctuates constantly.

Big Players

The large storage companies also have seen their revenue drop but those companies seem strong enough to weather the recession and even expand their holdings as values drop.

In April, Public Storage, a Glendale, California-based company, acquired about $189 million of properties, assuming $126 million in debt, despite reporting a first-quarter rental income decline to about 331.2 million from $339.4 million in the same period of 2009.

As bad as the sector may seem, Blum said self-storage properties are still good investments and are faring better than the rest of the market. REITS specializing in self-storage also are holding up, he said.

Self-Storage REITs delivered a 15% preturn in the first five months of 2010, according to the National Association of Real Estate Investment Trusts.

There are signs of decline. For the month of May alone, the self-storage REITs reported losses (negative returns) of 3.86%.

Still, “in terms of comparing it to other types of commercial properties, the percentage of storage facilities in foreclosure is considerably less than in any other sector,” Blum said.