The Big Decision

By Mel Holsinger

You're the proud owner of a self-storage facility and have been for several years. But now you have reached a point in your life where you are contemplating the luxury of living off the fruits of your hard work and investment. You are faced with the critical question: Do I or don't I sell my facility? Each of us who participates in the ownership of a self-storage facility will at some time be faced with this decision. How and when we approach it may determine the highest value we will be able to receive for our operation.

So, when is the best time to sell? Is it when your property is running at high occupancy? Is it when you have been unable to achieve high occupancy? Should you sell when interest rates are low and financing more easy to obtain? Do you wait until all the new competition around you has filled up? What will you do with the money from the sale? Do you have a place and/or the ability to invest your money and avoid capital gains? These among other questions all need to be considered when the time comes.

The first decision that needs to be made is whether or not to use a qualified broker. In most cases, the answer is absolutely, positively, "yes." Note that I said "qualified." This is important because there are a lot of brokers who know and understand self-storage and, in many cases, that is the only property type they deal in. They are by far the most qualified to find the right buyer for your property. (For more information on this subject, refer to the November 1999 issue of Inside Self-Storage, "Self-Storage and Brokers and Sales," by Maurice Pogoda. See also this month's article by R.K. Kliebenstein and Neal Gussis.)

Potential Sales Outcomes

Now, let's talk about your property. Using the following as an example, you can insert your own numbers and get a feel for where you may fall in terms of value. For this discussion, we are going to assume that your property is 10 years old, has 50,000 square feet of rentable space, has averaged 85 percent economic occupancy over the past year, and averages $.50 per square foot in rent. You have a mortgage balance of $1 million at 9 percent interest, which has no prepayment penalties and is assumable to a qualified buyer. The income from rents averages $21,250 per month or $255,000 per year. We would be able to get some value from fees and other income but, to keep it simple, we are going to use only rental income for this example. Let's also assume your expenses are $90,000 per year including off-site management services. Thus, your net operating income is $165,000. At a 10 percent capitalization rate, your property would be worth $1.65 million. You have agreed to pay your broker a 5 percent commission on the sale. Therefore, if you sold your property for your asking price, you would receive the following:

• Sale Price: $1.65 million
• Less Commission: $82,500
• Less Mortgage Balance: $1 million
• Net Proceeds: $567,500

Without calculating the taxes you will have to pay (please see your accountant for that information), you may end up with as little as half of the proceeds, or you may be able to keep all of them.

Let's change the scenario a bit. Let's say you decide to hold on to your property for another year, become aggressive in the marketing of your facility, and are able to increase the economic occupancy to 92 percent and increase rental rates by 7 percent, only spending an additional $5,000 in the process. Now you have a property collecting $298,080 per year in rent. Your expenses are $95,000; your net operating income is $203,080; and your property is now worth $2,030,800 on a 10 percent capitalization rate. Let's look at the new results:

• Sale Price: $2,030,800
• Less Commission: $101,540
• Less Mortgage Balance: $1 million
• Net Proceeds: $929,260

You can see that by increasing occupancy by 7 percent, increasing prices by 7 percent and spending a little more money to get there, you can effectively increase your net profit by $361,760--in addition to realizing the cash flow from an additional year of operations.

Perhaps you're thinking, "But I've been unable to get my occupancy up and increase my prices over the past year. How do I do that now?" There are several ways to accomplish this:

• Hire a management company to help you if you aren't already using one.
• Give your managers an incentive-bonus program.
• Work with an advertising agency.
• Look at what has already been successful in your marketing efforts and duplicate it.
• Consider a potential change in managers.

In other words, there are solutions. You just need to identify which one is best for you.

The Information Package

Let's assume, for the sake of argument, that you have followed our second example and are ready to sell. The following is some of the information you should expect to impart to a potential buyer. I would put this package together before you see your broker:

• Two years of financial history (balance sheet, income statement, tax return)
• Two years of operational history

  1. Move-ins
  2. Move-outs
  3. Occupancy (by unit sizes)
  4. Rate increases
  5. Number of units auctioned
  6. Dollars collected on delinquent accounts, including late fees
  7. Other income collected (locks, rental trucks, administrative fees, etc.)
  8. Tenant listing and copies of tenant agreements for current period

• Itemized tax bills (property, sales, personal property) for the last two years
• Repair and maintenance bills for the past two years
• Utility bills for the past two years
• Insurance bills for the past two years and a letter from your insurance provider concerning any filed claims
• Any service agreements and/or contracts for services
• Employee W2s for the past two years
• Pictures of the property--inside office, all outside areas, aerial (if available)
• Phase I environmental study
• Environmental impact study, registration of dry wells, etc.
• Letter stating compliance with ADA regulations
• Itemization of personal-property assets (golf cart, computers, etc.)
• Title-insurance policy
• Letter from the owner stating there are no lawsuits pending against the property.

Once this is prepared and the buyer has the property under contract, expect the buyer to conduct the following:

• A market study, including all competitors within a five-mile radius:

1. Verification of occupancy, rates, fees charged, security systems, etc.
2. Physical visit to each property
3. Pictures, if permissible

• Visit city offices and investigate new building permits for projects under development
• Physical inspection, including verification of rented and delinquent units rented, etc.
• Physical inspection with contractor
• Physical inspection of personal-property items
• Interview with managers
• Physical visitation to local real-estate offices
• Physical visitation to local commercial businesses
• Physical visitation to area retail stores
• Call to Better Business Bureau for references
• Order and receive demographics report
• Get copies of local or national Yellow Pages advertising representing the facility

A prudent buyer will then do the following:

• Projection of income based on occupancy expectations
• Projection of fees based on experience
• Projection of expenses based on historical experience
• Store evaluation
• Prepare wish list of major repairs/capital items not updated (i.e., security system, new roofs, doors, paint, asphalt repair and seal coating, etc.)
• Prepare business plan
• Prepare sales contract
• Prepare lender's package.

Ready to Sell

Once you decide to sell, you'll need to have your property ready to change hands in a time period that may take as long as the following:

1. Listing with a broker: one week to one month
2. Receiving and negotiating an offer: one to three months
3. Buyer due diligence: one to two months
4. Lender approval: one to two months after buyer acceptance of due diligence
5. Close: one month after lender approval

It is difficult in such limited space to go through all the steps and decisions involved in selling your facility. This article is merely a summary of a few of the most important considerations. In addition, you should read the industry trade journals, talk to several brokers and speak to management companies that have been involved with buying and selling self-storage facilities. You should also talk with your accountant and legal counsel who have experience in these types of transactions as well as other owners who have sold their facilities.

All in all, the decision to sell is a tough one. The more information you can gather on the subject, the better off you will be at making that critical decision. Good luck.

Mel Holsinger is the executive vice president of Executive Self Storage Associates Inc., with offices in Tucson, Ariz., and Denver. Over the past 13 years, both Mr. Holsinger and company President Joe Niemczyk have assisted numerous clients in acquiring, developing, managing and selling self-storage properties. The company currently manages more than 50 self-storage properties throughout the country.