Aiming for a Sale

Preparing your facility for market involves making the property appeal to the broadest range of buyers for an expeditious and profitable sale.

Until the recent real estate slowdown, self-storage owners and investors in many parts of the country saw property values rising dramatically. A combination of record-low interest rates and rapid price appreciation turned many into serial buyers or sellers.

But dont forget, the self-storage investment market, like any economic market, is cyclical. Periods of robust activity are followed by periods of sluggishness.

Now that the real estate market has softened in many areas, its time to seriously reassess the curb appeal, interior appearance and integrity of your facility if youre considering a sale. Self-storage investors are shopping properties with a longer term in mind. Theyre also cautious to avoid catching a falling knife.

Ready, Steady, Aim

The first thing is to get inside the mind of potential buyers, wholl be trying to envision themselves owning and operating the property. They cant do that if theyre distracted with inferior construction, obvious deferred maintenance, damaged or faded paint, and accounting hardware and software that fails to work.

Curb or street appeal is the most important factor drawing buyers to view your facility. Buyers often do a drive-by prior to a formal onsite inspection, and if they like what they see, theyll request a viewing. If the exterior of the facility looks dreary and in need of maintenance and repairs, buyers assume the interior will tell the same story. Is that the message you want them to hear?

First impressions really count. In fact, at least 80 percent of a buyers decision is made from the drive-by. In a minute theyll decide if your site is worth a visit. Shoppers are critical and tend to focus on all the things that could give them an excuse to present a lower offer. Their first choice will be a facility that needs little to no work.

Knowing this, youll want to make all minor repairs a top priority. Visible faults convey a message of neglect and send off alarms to buyers. Theyll think if the paint is peeling, maybe the electrical and plumbing has also been neglected.

They also tend to overestimate the costs involved in getting a property to their liking, leading them to skim money off the asking price. It pays to spend a reasonable amount of money upfront to take away all the unknowns in a buyers mind.

The purchase or sale of commercial real estate is usually more complex than a home sale. Commercial transactions involve zoning, environmental, tenant-related and tax issues that require a buyer to conduct timely, comprehensive due diligence. Further, with the sub-prime lending market in overdrive, property acquisitions have become more complicated due to stricter bank requirements.

If youve made the decision to sell your facility, follow the checklists below to aim high and get a bulls eye. No one should post a for sale sign without carefully planning a comprehensive marketing and selling strategy.

Marketing and Brokerage

The first step is to locate an experienced self-storage broker with a track record and reputation that reflects verifiable industry experience. Countless residential agents are flooding the commercial brokerage market because home sales have slowed. Some may be representing themselves as experienced and seasoned self-storage brokers when, in actuality, they can cost a seller time and money as they work their way through the learning curve.

Any transactional or legal missteps made during the process can be costly and often unalterable. Since the commercial lending process has become trickier, ask your broker to contact potential lenders for the property. This will expedite the loan process and circumvent any initial problems a buyer may have in qualifying and securing a loan.

A first-class broker is worth far more than any reasonable brokerage fee associated with the transaction. Sales experience can maximize profits and provide peace of mind.

Legal Review

Buying and selling commercial property involves legal issues best handled by a skilled real estate attorney, who reviews documents and assists in the due-diligence analysis of the property. Your attorney will also draft the formal purchase agreement prior to coming to terms with the potential buyer. Having this document prepared and in hand allows you to control the terms and conditions of the sale.

Market Value

Your broker can help you calculate the market value of your property, derived from cash-flow calculations and marketplace conditions, and computed via capitalization rate of net operating income. Other factors affecting property value are as follows:

• Recent appraisal 
• Lender requirements 
• Age and type of construction 
• Local competition 
• Availability of developable land 
• Area demographics 
• Comparable rental rates

Compile all due-diligence documents in a presentable format. If possible, create a CD or binder with the documents, photographs, reports, etc. This expedites the selling process by providing buyers with immediate, comprehensive documentation. The package should include the following:

• Bank statements (two years) 
• Real property-tax invoices (two years) 
• Utility bills 
• Profit-and-loss statements (two years) 
• Occupancy reports (two years) 
• Outside service agreements 
• Environmental reports 
• Preliminary title report 
• ALTA survey 
• Business license 
• Certificate of occupancy 
• Architectural plans 
• Soils report 
• Hazard disclosure report 
• Recent major repair invoices

A pre-marketing checklist should be developed with your broker to make certain the property is clean and deferred maintenance concerns are addressed. If the facility looks rundown, potential buyers may suspect other disguised problems. Be prepared to correct, repair or discuss any issues that may arise. A basic pre-marketing checklist should account for the following:

• Pressure wash and clean the facility driveways.
• Paint wood, block and stucco where necessary.
• Replace street numbers.
• Check replace/repair all signage.
• Number each hallway and staircase.
• Check facility ingress and egress.
• Beautify landscaping.
• Repair fencing, lighting, gates and elevators.
• Eliminate onsite water-retention areas.
• Check storm-drain integrity.
• Ensure the computer can generate facility reports.
• Prepare managers to answer questions.

Comprehensive and efficient property exposure is a primary function of the real estate broker. The property must be marketed reflecting its best qualities. An experienced broker with a financial background will draft a marketing brochure and distribute it to the investment community. The general items that are typically discussed in the marketing brochure include, but are not limited to:

• Investment summary and financial analysis 
• Loan/cash-flow analysis 
• Unit mix and income schedule 
• Location map with facility photographs 
• Facility features 
• Rent survey 
• Demographics 
• Competition map and analysis

To promote a property for sale, you need to know how to reach potential buyers. Who are the investors likely to be interested in your facility? Expertise in identifying the potential buyer is a critical brokerage function. Remember, exposure is necessary to selling the property. The marketing brochure needs to be exposed through the following basic venues:

• Direct phone contact and mailing 
• Industry conventions 
• Newspaper and magazine advertisements 
• Internet real estate websites 
• Broker network

Intelligent and competent buyers establish their financial goals long before a purchase agreement is executed. Be prepared to thoroughly review all aspects of your property with potential buyers. Heres what theyll be looking for:

• Confirmation of occupancy, rental rates and late fees 
• Physical inspection with a building inspector 
• Discussions with city planners to evaluate any future development of self-storage projects 
• Evaluation of delinquencies and auctions 
• Review of local Yellow Pages ads 
• Verification of fixed expenses 
• Certificate of occupancy 
• Other related city/county documents 

With any commercial real estate investment, the property value is based on economic occupancy, expenses, cash flow and net operating income. Certainly construction, rentable square feet and parcel size play a factor as well. Essentially, the amount of income that flows to the bottom line is the target for establishing market value. Steady your aim and your sale should be straight as an arrow. 

Stephen I. Grossman is the managing director and senior vice president of Lee & Associates Self Storage Investment Group, Newport Beach Inc. He has been responsible for the sale of more than 800,000 buildable square feet of self-storage and the sale or escrow of more than 2.5 million square feet of existing self-storage facilities. For more information, call 949.724.4709; e-mail [email protected].