By Bill Alter
It isn’t easy to be a buyer of self-storage facilities these days. This exuberant market makes it especially difficult to purchase a property that’ll be profitable to operate and relatively simple to exit. The task becomes even more challenging when there are multiple offers on the facility you’d like to buy. To succeed in these situations, you must establish yourself as the seller's best choice. (Sometimes it’s even more important to be the listing broker's best choice. How to accomplish that feat will be addressed later in this article.)
Sellers choose the buyer with whom to negotiate and to whom to ultimately sell their property based on price and several other criteria. The best way for you to establish credibility is to have a track record of closed transactions. It’s powerfully persuasive to have a previous seller tell the current one how great it was to work with you. It assures the new seller that you’ll close his sale if everything about the property proves to be as represented.
Absent a recommendation—for example, this is your first deal—a seller will evaluate your offer based on other standards, including:
- The format and attention to detail in the offer you present. Short, sweet and to the point—addressing every key deal point, but not too detailed—is the way to go.
- The length of the requested inspection period, and the list of due-diligence materials and financial records that’ll be requested from the seller.
- The amount of the earnest deposit offered. Large deposits can trigger a seller’s interest in your offer because it indicates you’re serious about the deal.
- What happens to the earnest money after the inspection period is concluded. Will it be increased? Will some become non-refundable?
- The specificity of your finance contingency, if any, and what happens to the earnest deposit at the expiration of the finance contingency. Let the seller know you seek realistic and readily available loan terms.
- How long it will the deal take to actually close escrow. Consider that you need 30 days for inspections, 30 more for the loan and 15 days to close.
- Additional documents, such as references from other lenders, letters of credit, proof of sources of funds, and perhaps even a commitment letter from a lender for the property in which you’re seeking to buy.
- Whether you’re professionally represented. A seasoned self-storage broker will work with buyers (a lazy one may not), so ensure you have the most experienced broker on your side to provide guidance.
To be a successful buyer, you must understand these criteria and be prepared to address each one with the seller to the best of your ability. A seller wants to know the buyer can and will close the deal. Tell him your due diligence will consist of a series of investigations in search of reasons that support the purchase rather than a search for reasons why you shouldn’t make it.
The Investigation Period
Now that you have the seller's attention, it’s important to maintain focus on getting your offer accepted, a contract drafted and signed, and escrow opened. Until the contract is signed, you have nothing. I can't tell you how many times a transaction appears to be progressing only to have another more aggressive buyer swoop in at the last minute and steal the deal. This is a high-stakes business, and there are no holds barred in the competitive acquisition process.
After the opening of escrow, the due-diligence clock begins ticking. During this period (usually at least 30 days) you’ll:
- Audit the financial records of the business to verify the current occupancy and income are as represented.
- Investigate to determine what direction the business is headed. You’ll need to decide if the operation is getting better, declining or holding steady.
- Carefully conduct a property analysis to determine how competitors’ rental rates compare to those of your desired property and, if possible, how occupancy rates compare as well. You and your broker should research the market for new properties that are under construction, planned or being contemplated. This’ll take a lot of time, but it’ll be invaluable in your analysis of actual and potential competition.
- Compare the quality of competitors' managers, marketing programs, online effectiveness and amenities with those offered or being considered for your desired property.
These investigations will help you understand how much you can reasonably expect to increase your return on investment once you own the property and begin operating it. An experienced storage broker can assist in all of the above.
Now What?
Being a commercial real estate buyer means you must have a detailed and strong acquisition strategy, operational asset-management strategy and a few strategic disposition strategies. Often, a new buyer enters a new product type or market, successfully purchases a property, and then asks, “Now what?”
Prior to the acquisition, and even before writing an offer on the property, a buyer should have a strong operational asset-management strategy. At a minimum, this should involve knowing the answers to the following questions:
- Will you manage the property yourself, or will you hire a third-party management company to oversee day-to-day operation?
- What type of software will be used for access, accounting and operation?
- How many and what kind of employees will be needed? These include full- and part-time managers, maintenance and landscaping staff, security, etc.
- Which services will be conducted in-house and which will be contracted with third parties? These can include advertising, landscaping, maintenance, marketing and security.
In addition, you’ll need to closely monitor your in-place financing. Buyers sometimes think that making payments is all that’s required with debt and neglect the operational requirements of financing. You need to watch your debt-service payments, debt-to-income ratios, required documentation submittals to lenders, and balloon-payment requirements and due dates. You also need to supervise your improvement holdback and release requirements; you shouldn’t want the lender to control holdbacks any longer than legally necessary.
Finally, as a buyer, you should always be cognizant of macro-market conditions or anything else that might trigger the execution of your exit strategy. Constantly perform a hold vs. sell analysis. Being a buyer means always planning and fine-tuning your acquisition, asset-management and disposition strategies.
Bill Alter has been a self-storage facility sales specialist with Rein & Grossoehme Commercial Real Estate since 1986. He has been responsible for the sale of 140 facilities totaling more than 7,500,000 square feet and more than $300 million. To reach him, call 602.315.0771; e-mail [email protected].
