By Bill Alter
When buying a self-storage facility, it’s important to allow adequate time to inspect the property and confirm that the assumptions made and information you received before presenting your offer are accurate. Your purchase and sale agreement should provide for a contingency period during which this audit can take place.
There are two important elements of an inspection-period provision: What can you review and how long you have to review it. Let’s look at the details of these important due-diligence aspects.
What Can You Inspect?
The purchase contract should specify the property inspections that are anticipated. Ideally, you’ll be allowed to scrutinize the buildings and other physical improvements on at least one or more occasions. The onsite examination might include soil tests, environmental studies and engineering (roof, plumbing, HVAC). It may also be necessary to review any existing survey or complete a new survey. A new survey can take as long as three weeks, so an early start is essential.
Time must also be allowed for a review of financial records and other information. This can take place onsite or off. Records to be inspected would include any previous environmental studies or engineering reports, utility bills, tenant leases, and correspondence. Financial documents to be examined include three years of profit-and-loss (P&L) statements, bank statements and cancelled checks. These should be audited to confirm that actual rental income shown on the P&L statements was deposited in the bank and there are no unreported expenses.
Your purchase agreement should include a representation from the seller similar to: "The seller certifies the information provided to the buyer is true and correct." Not only is this certification important to you as the buyer, it’s critical if you hope to secure financing because lenders must also rely on this information.
How Long Do You Have?
The length of time needed for due diligence varies depending on whether the property is vacant land or improved with buildings. If it’s vacant, you may easily do your inspection in 15 to 30 days. If it’s an existing self-storage facility, 30 days is the minimum, with 45 or 60 days being more typical.
If your purchase contract doesn’t provide for a separate "financing contingency" that allows you to terminate the contract if financing isn’t obtained, then any financial approvals must be obtained during the inspection period. In this case, 60 days is recommended. This gives you 15 to 20 days to inspect and verify, with an additional 45 days to obtain financing approval and be ready to close the transaction.
Final Thoughts
The purchase agreement should allow you to extend the inspection period if you run into scheduling issues or your lender is unable to commit to the loan as quickly as anticipated. It’s easier to negotiate and include an extension in the beginning than to try and do so on the last day when the seller knows you’re up against a wall.
The language would be similar to this: "Buyer, at its option, may extend the inspection period 30 days by tendering an additional $25,000 earnest money and written notice of extension to the escrow agent at any time prior to the expiration of the inspection period." Some sellers will want more earnest money or require it be released to them as opposed to remaining in escrow. In either case, it’ll be applied to the purchase price at closing. Having the ability to extend this timeline is a great advantage in today's environment when all parties are incredibly busy and schedules are unpredictable.
The purchase and sale agreement is more than a letter of intent. It’s an important document that states the rights and obligations of the parties to a transaction and makes clear their respective expectations. It sets the stage for a multi-million dollar transaction and will control the next several months of your life. Have a qualified attorney or real estate professional review the contract before you sign it, so your interests are expressed and your options preserved.
Bill Alter has been a self-storage sales specialist with Rein & Grossoehme Commercial Real Estate since 1986. He’s been responsible for the sale of 140 facilities totaling more than 7,500,000 square feet and $300 million. For more information, e-mail [email protected]; visit www.rgcre.com.
