The recent influx of buyers to the self-storage space has led to higher transaction volume. Owners who are unfamiliar with the sales process may have questions about procedures and tactics that will help them achieve maximum asset value. With this in mind, let’s examine some of the less obvious parts of a real estate deal, looking not only at the activity but the strategy behind it.
Pricing
In the world of real estate transactions, the market usually has a relatively narrow band of values. The reason is if prices were any higher, there wouldn’t be any buyers; and conversely, if prices were lower, there wouldn’t be any sellers.
Quality brokers are focused on a price buyers and sellers can agree on to conduct a deal. Without an agreement, there’s no transaction! Owners often think about only what price would make them ecstatically “happy” and not the price someone would actually pay. But overpricing is not harmless! Most qualified and capable buyers won’t consider an acquisition if the facility is overpriced, which greatly hinders the property’s value and liquidity.
If you’re a seller, use a qualified and experienced real estate broker to properly assess the value of your property. He’ll apply the income approach along with market-sales comparisons to arrive at an appropriate value that’ll allow you and the buyer to agree on the purchase price.
Marketing
When taking a self-storage property to market, it’s important to note that quality and risk are often very subjective. For example, a relatively low occupancy might indicate a poor performing facility or, alternatively, a great opportunity to increase occupancy and revenue. For this reason, it’s extremely important to market to a wide audience to find the buyer who has the most optimistic view of your asset. Always beware of the broker or colleague who says, “I have the right buyer for you. We don’t need to market the property.”
To maximize your value, look for a buyer who sees the glass as half full, not half empty. This will help you achieve the maximum sales price. The more qualified prospects who are exposed to your property, the better chance you have of maximizing your value.
Deal Structure
It’s important to understand that the structure of a deal can be as important as the purchase price. Too often, the parties focus only on the price and glaze over the structure without considering the financial implications of the non-financial aspects of the transaction.
There are two main deal structures that are typically used when buying or selling an entity or its assets. Specifically, these are an asset purchase (real estate contract) or an entity purchase (limited liability company or stock purchase). Below is an outline of some pros and cons associated with these two structures, although it’s important to note that I’m neither an accountant nor an attorney. Please seek tax and legal advice from your counsel when structuring a deal.
Asset purchase. When structuring a deal as an asset purchase, there are two significant advantages to the buyer. First, he maintains a “step up” cost basis for tax treatment for all purchased assets, which allows him to enjoy full depreciation. Second, he can choose what assets he wants to purchase and avoid contingent and unknown liabilities, which are often costly and burdensome.
The main disadvantage to the buyer is an asset purchase may trigger a reassessment of real estate taxes after the sale is complete. With the very aggrieve valuations self-storage properties have been receiving, this can be detrimental to the investment’s ongoing yield.
Entity purchase. When structuring a deal as an entity purchase (stock purchase), the overriding benefits for both seller and buyer are simplicity and convenience. However, this type of structure isn’t the norm in self-storage real estate. The buyer receives all of the company’s assets and liabilities, eliminating the need for title transfer, reducing number of third-party consents (except where there are change-of-control restrictions), and minimizing the vast transactional cost associated with an asset purchase.
For the buyer, the two main disadvantages of an entity purchase are increased exposure to liability and the loss of tax benefits. Although a thorough corporate and contract review can help him mitigate any go-forward liabilities, he’ll need to be OK with an increase in liability. Additionally, he’ll need to talk with his accountant to see what tax strategies can offset and mitigate the loss of tax benefits.
There are many factors to be weighed when determining how to structure a deal that will realize the maximum value of your self-storage property. Prior to drafting a purchase agreement or marketing the asset for sale, it’s crucial to give proper consideration to all aspects of a potential transaction. Early planning and preparedness can prove to be beneficial to both parties and substantially cut transactional costs and attorney fees.
That said, the information above is generic and shouldn’t be construed as advice for any specific deal. I strongly recommend you seek advice from your local broker, attorney and tax professional before proceeding with a sale or acquisition.
Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self-storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. It also offers panel discussions in which brokers from around the country share their insights on self-storage market fundamentals and economic trends in their regions. To access recordings, visit www.argus-selfstorage.com/presentations.html. For more information, call 800.55.STORE; e-mail [email protected].