Buyers, developers and investors who are new to the self-storage industry often begin their conversations with consultants by asking if they perform feasibility studies, how much a study costs and how soon one can be completed. Though these seem like simple, direct questions that should elicit simple, direct answers, they’re fundamentally dangerous.
Many assume that requesting a feasibility study is like ordering an appraisal. With the latter, an appraiser provides a cost and time frame, and the buyer simply waits until the document arrives. Then he’ll immediately look for the summary page and a bottom-line value.
That’s all well and good, but self-storage is a complex business, one that requires the absolute best information to make appropriate financial decisions. This is true whether you’re purchasing an existing facility or developing a new property. When ordering a feasibility study, you’ll make a seriously flawed determination of whether to proceed if you rush to find the executive summary with a “yes” or “no” answer.
Whether you’re buying or building, really dig into your feasibility conversations with consultants. It’s critical to ask the right questions up front. When the study is returned, don’t just look for a green or red light. The more important questions are “Why?” or “Why not?” Why might this be a successful investment, or not?
Before contacting anyone about feasibility, prepare questions that are open-ended and require thoughtful feedback. Seriously consider the purpose of the study. By doing so, your conversation will be much more informative.
Acquisitions
If you’re buying a property, I’d recommend this approach: “Our group is considering the acquisition of an existing self-storage asset. As a recommended professional in the industry, please share the process of helping us make a wise investment decision. What steps would your organization take to help us?”
Listen carefully to what’s said in response. Scrutinize even more carefully what isn’t said. Instead of looking for affirmation, seek confirmation. Self-storage experts can give long lists of why they love a deal; that’s affirmation. Confirmation is when the person offers a list of reasons not to buy an asset.
Moreover, a knowledgeable consultant will be able to provide a detailed plan of action for the first 30, 180 and 365 days of ownership. His job isn’t to paint a pretty picture. To help an investor make the best possible decision, his role is to illustrate the move from asset purchase price to the real cost and true projected returns.
Let’s say the price of a property you’re interested in acquiring is $1.5 million. During a site visit, it’s abundantly clear the facility needs new doors, new paint and a complete rehab of the office space, which is third-world in nature. The gate hasn’t worked in years and the fencing is all but lying in a creek.
During the inspection period, you need to determine what repairs, upgrades and expansions will need to be added to the purchase price to make the property fully operational. It’s common practice to create a capital-investment worksheet as part of the due diligence, which will include things such as security-system upgrades, office upgrades, door replacements and paving repairs. These increase the cost to much more than $1.5 million, which impacts your calculated returns. This is no joke. You would ultimately lose everything. Again, it’s critical to listen for what’s not being said when determining the best avenue in an acquisition.
Developments
Development is far more complex. Again, a feasibility study isn’t an appraisal. It isn’t a 100-page document that paints a picture with flowers and fluff. It should be a brutally honest report that provides the best possible information and offers the strictest warnings. Most important, a feasibility study cannot be completed in three weeks. It’s an evolution of information that’s modified dozens of times.
Again, carefully consider the study’s objective before contacting a consultant. If you ask if he performs feasibility studies and how much they cost, the answer you’re likely to get is, “Yes, they can run upward of $6,000.” Instead, here are some types of questions that empower the decision-making process:
- “We own 3.5 acres of land in ABC County. We’re considering building self-storage on it. Can you please share the process of helping us make the best possible investment decision?”
- “We own four storage facilities and have been asked by our bank to have a third-party review our business plan. If we were to choose your company, what’s the process of confirming the viability of this development and providing assurance to a lender?”
- “We’re under contract to purchase 2 acres in XYZ City. This is our first self-storage development. What are some things we can expect to encounter, and what would your company do to protect us in making the best short- and long-term decisions associated with this proposed development?”
- “My spouse and I have $200,000 to invest, and we hear that self-storage is one of the top performing real estate types in the country. Can you give us some counsel on where we might start, or how best to become a part of this community?”
Note the words “feasibility study” don’t appear in any of these examples. The term can be dangerous because it suggests that all you want is a document and fast answer. Simply asking for a feasibility study without discussing your objectives is like walking up to someone on the street and asking if they can invest your money.
A feasibility study is a complex business plan. It requires information about the local market, competition, municipality, product type and unit mixes, development or acquisition costs, and projected operating expenses. It surveys the industry and helps an investor navigate the pitfalls of an asset. It becomes an investment package or a lending document.
Most important, it’s the single most important tool to help you make the best possible decision. It will take time to get it right. Ask the right questions, listen carefully to the answers, and hear what isn’t being said. Don’t fall in love with a deal for the sake of doing a deal. Take your time and enjoy the process.
Donald Jones is president and CEO of Donald Jones Consulting & Service LLC, which provides support for self-storage management, consulting, acquisition, feasibility and development. He has 25 years of experience in the industry. For more information, call 817.676.5574; e-mail [email protected]; visit www.donaldjonesconsulting.com.
