By Ryan N. Clark
A critical point of any self-storage real estate transaction is the due diligence. During this time, the buyer investigates whether a property is worth the money and risk involved. If you’re interested in acquiring a facility, you can benefit from knowing more about the process because, if handled improperly, it can be a deal-breaker.
Most due-diligence periods range from 30 to 45 days. Your evaluation should consist of numerous inspections, audits and third-party reports to verify the property is a suitable investment. It begins with the verification of the financial information provided by the seller, but it doesn’t end there. You should also conduct a physical and environmental audit. Following are other things to keep in mind.
Legal Representation
First, have a transaction-making attorney on hand to review the legal documents and investigate pertinent issues with regard to the property. This can include the purchase-and-sale agreement, title-insurance binder, zoning compliance and environmental reports. You’ll also want this person available at closing, typically on the day of escrow, when the deeds are filed, funds are received, etc.
The key is to have legal counsel who understands the self-storage industry. A representative can kill a transaction if he doesn’t understand the nuances of the business.
Deadlines
Make sure everyone knows and is in agreement on all contract deadlines. People often mistakenly assume that all interested parties are “on the same page,” but contracts can include legal language that specifies how dates should be counted. Someone involved in the transaction should ensure everyone is in accord and all deadlines met.
Property Condition
Evaluate the property’s physical condition. Unless the facility is new, expect some needed maintenance; however, large deferred-maintenance items should be taken care of by the existing owner. Some buyers specifically look for properties that can be upgraded so they have potential upside in the purchase.
When you conduct a site visit, pay particular attention to the state of the air-conditioning and heating units, asphalt, fire-sprinkler systems, roofs, and unit doors. These are the components that will cost the most if they need repair or replacement.
Documentation
Another important step in the due-diligence process is to review the documentation provided by the seller. While you should underwrite the property prior to writing a formal offer, there are many documents that can be reviewed once it’s under contract. Buyers commonly examine:
- Prior two years and year-to-date operating statements (income and expense) and balance sheets
- Prior two years and year-to-date monthly management-summary reports
- Current month-to-date bank deposits
- Service contracts (lawn maintenance, security system, trash removal, etc.)
- Existing surveys (if available)
- Property-tax invoices/bills with parcel identification numbers
- Personal property listing
Always conduct an in-person, onsite lease audit as well. Make sure you have all the documentation you require and extensively review it before the due-diligence period ends. Once it expires, you’re likely on the hook for a deposit, at the very least, if you decline to move forward with the transaction.
Financials
Finally, you need to investigate the financing of the sale. Will you have to assume the current financing or secure a new loan? You may have to demonstrate your ability to obtain the funding required to close the deal. If you need to finance, then you or your mortgage broker should contact several prospective lenders and provide whatever documentation required for a lender to process your loan application as quickly as possible.
Don’t let financing delay the transaction. Begin working with a quality bank or mortgage broker prior to making an offer. Look for an individual or institution with a track record in self-storage, as our industry is different from other commercial real estate sectors.
While due diligence involves many tasks, completing them in detail and on time will help you enter a real estate transaction with a clear understanding of the property. It can also save you from making a bad investment.
Ryan N. Clark is a senior vice president in the Midwest office of SkyView Advisors, where he assists self-storage owners and sellers through a range of advisory services, including acquisition, disposition and recapitalization, asset valuation, joint-venture structures, and debt and equity financing. He prides himself on taking a client-centric approach, with a focus on building long-term relationships and developing a strategy to best serve each customer’s unique needs. For more information, call 813.579.6363; visit www.skyviewadvisors.com.
