By Bill Alter
For owners and investors who are new to buying or selling self-storage properties, the sales-transaction process may be intimidating. Solid preparation makes the difference between smooth sailing or a bumpy ride. Following are tips to ensure the former.
Selling a Facility: The Loan
So youre thinking of selling your self-storage facility. Now what? While comparing your sell vs. hold options, start gathering financial information and reviewing it for completion, making sure profit-and-loss statements are accurate and you can easily discuss the propertys operating history. Do you think you want to do a tax-deferred exchange? Have you taken the maximum amount of depreciation allowable? This is the time to have a conversation with your attorney and tax accountant about your desire to sell to ensure there are no surprises. Here are seome other things to consider as you move through the process:
Financing. Know whether your sale will require the buyer to assume your existing financing or secure a new loan. You may want to require your buyer to demonstrate his ability to actually obtain the financing needed to close the deal.
Cash vs. buyer loan. Consider whether to accept a lower offer if its all-cash or the buyer can prove his ability to get a loan. If theres an existing loan that can or must be assumed, find out what it will take to accomplish that, and be prepared to share the information with the buyer.
You or your broker should contact a number of prospective lenders so youre prepared to provide whatever documentation a lender may require to process the buyers loan application as quickly as possible. The process of assuming a securitized loan is also difficult and expensive. Find out whats involved and communicate it to the buyer. If theres an existing loan that will have to be paid off, you should be prepared to deal with that and know what it will cost.
Facility Value and Marketing
Once youve decided to sell your self-storage property, a valuation will need to be determined. By setting the asking price too high, you run the risk of not selling at all, thus missing the opportunity to achieve maximum value. By setting it too low, you run the risk of leaving money on the table. Most important, you should understand current market conditions and know if values are trending up or down. With this knowledge, the asking price should be set ahead of the trend, whichever direction its going.
Before the official marketing of the property commences, talk with your facility manager about your intentions. Nothing is more painful than when your manager accidentally finds out youre planning to sell and didnt tell him. An honest discussion thats encouraging and potentially incentivizes him is usually the best option. Cooperation on the part of the manager is beneficial for the sale price and often results in the staff being retained by the new owner.
Marketing a self-storage property can take just a few weeks if the conditions are ideal, its priced right, the existing loan can be easily paid off or assumed, and the operation is well-documented. However, it can take several months if the property is priced too high or there are conditions in place that take buyers longer to understand.
The Sellers Due Diligence
Once youve determined which offer is best, focus on the buyer's qualifications and track record. What transactions has he closed recently and does he have the financial strength to close this one? Does he have financing readily available? Request some proof that the funds needed to close are obtainable. Google your buyer. Yes, use a search engine to find out more about him! Check for lawsuits and criminal activity. If there are skeletons in the closet, you want to find them now, not 30 days from now.
The due-diligence period will be shorter if the required materials are gathered ahead of time so theyre easily deliverable to the purchaser once escrow is open. Typically, buyers will ask for historical financial statements, rent rolls, environmental studies, surveys, service contracts, appraisals, real estate tax bills, and even copies of invoices for expenses paid. Organize all of these documents as soon as possible so they can be delivered quickly to the buyer and get the transaction off to a smooth start.
Additionally, your buyer will be more comfortable with the property if its owner is meticulously organized. He may even agree to a shorter due-diligence period if records are available quickly.
Buying a Facility: First Considerations
Purchasing a self-storage facility can be intimidating. There's so much competition from other investors and so few properties available that actually make economic sense. But even under these conditions, opportunities do exist if you know how to find them and what to look for.
The first thing to do is decide where it would be best to own a self-storage facility. Consider things like:
- What are the growth markets?
- Will you manage the facility yourself?
- Will you hire an offsite company to manage it for you?
- How often will you visit the facility?
To be competitive, be prepared to offer a fair price. Offer the largest possible earnest-money deposit and the shortest possible due-diligence period. You can only do these things safely if youve already researched and understand the local market.
By this time, youve likely contacted several self-storage lenders to know what loan programs are available so your financing contingency, if any, is realistic. Available properties often have existing loans that must be assumed. In those instances, know whats involved in qualifying for the assumption. Sometimes loan assumptions can be more difficult to accomplish than originations.
The Inspection
When buying a self-storage facility, its important to allow adequate time to inspect the property and confirm all your due-diligence information. Your purchase and sale agreement should contain a provision allowing a due-diligence period during which these inspections and audits can take place.
An onsite inspection may involve soil tests, environmental inspections and engineering inspections for improvements such as roof, utility and HVAC equipment. It may also be necessary to review existing surveys or complete a new one. This may take up to three weeks, so an early start is essential.
Financial and other records to be inspected may include any previous environmental studies or engineering reports, utility bills, tenant leases and correspondence, profit-and-loss statements, bank statements, and cancelled checks. These should be reviewed so you can confirm that actual rental income shown on profit-and-loss statements were actually deposited in the bank and there are no unreported expenses. Ask the seller to certify the material is true and correct. If youre obtaining financing for the purchase, this seller certification is important because the lender will require the same from you.
The length of time needed for inspection varies depending on whether the property is vacant land or improved with buildings. If its vacant, you may easily do your inspection in 15 to 30 days. If its an existing storage facility, 30 days is a minimum with 45 or 60 days being more typical. If the purchase contract you and the seller sign doesnt provide for a separate "financing contingency," allowing you to terminate if financing is not obtained, then any financial approvals will need to be obtained during the inspection period. In this case, 60 days is a recommended time frame because this gives the buyer 15 to 20 days to do physical inspections followed by another 45 days to obtain financing approval.
The Buyers Due Diligence
Buyers also need to be prepared to do their own due diligence. Study the financials with a fine-tooth comb. When preparing your pro-forma financial analysis, make sure to do a sensitivity analysis. What will the return on investment be if rents are slightly higher or lower than anticipated? Whats your exit strategy? What are markets likely to be then? Know what youre looking for and there will be fewer surprises in the purchasing process.
Whether youre a seller or a buyer, good preparation makes the difference between smooth sailing or a bumpy ride during the sales-transaction process.
Bill Alter has been a self-storage specialist with Rein & Grossoehme Commercial Real Estate in Arizona since 1986. He has been responsible for the sale of more than 120 self-storage facilities, totaling more than 6 million square feet and more than $250 million To reach him, call 602.315.0771; e-mail [email protected].