Whether you’re an experienced self-storage owner or just entering the industry, a review of the elements to consider when acquiring a facility will make for an orderly approach to the decision-making process. This article will not cover every conceivable item, but rather serve as a framework to help you make the best investment. 

Your Goals

The first step when considering a self-storage acquisition is to look not at the property, but at yourself. What are your goals, time frames, budget, resources, location and experience? Is it important to find a property that’s close to home? Do you plan to perform the onsite or offsite management duties or will you hire a third-party management company? What is your cost of capital, both debt and equity? Will you have other investors and, if so, how will their requirements factor into your approach?

The list is long and should be specific to your situation, but the key is to understand your objectives first, and then start the process of determining if a property matches. Bottom line: know thyself.
The second step isto know, not guess, what you can do. What are the strengths and skills you intend to bring to the project? What can you do to achieve the goals and objectives you have set? Is your skill in finance, management, marketing, construction or site selection?

An often overlooked aspect of “what can you do” revolves around capital. Many potential buyers fail to have an accurate or realistic plan for financing a contemplated acquisition. In the current environment, knowing what you can do includes knowing what you can finance (unless you’re a cash buyer). Lenders have become much more conservative in their underwriting. As a result, potential buyers should discuss financing options with lenders prior to spending time and money on investigating properties.

Finding a property that matches your personal criteria is the next step. Everyone wants a PRIME property, but what qualifies? Let’s break it down as an acronym, with each letter representing an element of the process to determine if the self-storage property meets a buyer’s specific criteria. Keep in mind this isn’t meant to be an exhaustive outline but an overview. 

P = Property

This may seem obvious, but an examination of the physical property and the surrounding area is critical. While some of the in-depth investigation may be reserved for contract due diligence, an adequate initial examination should be conducted prior to entering a purchase agreement. As a buyer, consider at least the following:

• Location: Is the property in a retail setting? Is it conveniently located to its market?
• Visibility: Does the property have good visibility on a road with adequate traffic counts?
• Building layout: Are the drive aisles adequate? Is the layout customer-friendly?
• Unit mix: Are the units of the proper number and size? If not, can they be changed?
• Rental office: Is it of adequate size and layout? Can and should it be modified or relocated?
• Onsite apartment: Is an apartment needed? If not, can the space be converted?
• General condition: Is the appearance attractive? Are the buildings in need of repair? Is the roof sound? Is the pavement in good repair? Are there any apparent water issues?
• Expansion: Can the facility be expanded? What value should be assigned to expansion land?
• Appearance: How does the property rate overall?

R = Records

A review of the records is like a blood test for a patient—it reveals the health of the facility. Look for trends in occupancy, income and rental rates for the past three years, if available. Consider the following:

• Occupancy: Review economic, physical and unit occupancies to determine trends and opportunities.
• Revenue: Review current and recent revenue. Is all the revenue recognized? Are there additional opportunities for revenue?
• Expenses: Review current and recent expenses. Can expenses be reduced? Are the reported expenses realistic?

I = Income and IRR

How does this self-storage facility perform as an investment? In other words, will it provide an adequate return given your contributions (financial and non-financial) as compared to alternative investments such as corporate bonds, stocks, other real estate, etc.?

Most buyers focus on current income and attempt to determine a value by applying a cap rate. While that may be a useful exercise, it’s a bit like driving forward looking in the rearview mirror. Yes, it’s important to review income trends, but it’s more important to use all the information gathered to project future income and returns.

Basically, the only reason a buyer cares how the property has performed in the past is to project how it will perform in the future. It’s essential to prepare and carefully review an internal rate of return (IRR) analysis, which will take into consideration all future cash flow. Consider the following significant items:

• Revenue and rates: Can rates and revenue be realistically increased and, if so, when and how often?
• Real estate taxes: Will they increase based on the sales price, and when?
• Payroll: Will it remain at the same level?
• Repairs and maintenance: Is there deferred maintenance? Will the future expense be greater as the property ages?
• Advertising: Will the budget increase or decrease?
• Financing: What are available financing terms and conditions?
• Sale: What will be the future value of the property?  

M = Market, Management and Demographics

Many in the self-storage industry believe demand should be estimated based on available square feet per capita. Others feel it’s related to households. Each market is different, but whichever indicator you use, it’s useful to look at current demographics to determine the drivers of demand. Some key parameters include:

• Housing units
• Housing type—rental, single-family, multi-family
• Household size
• Household income
• Percentage of renters   
• Home and lot sizes
• Retail activity levels

Those parameters should then be considered in the light of projected demographic trends. Will there be population growth over the next five years? Will there be income growth? Does the average income or net worth in the marketing area support self-storage rentals?

Consider the nature of the competition, including location but, more important, their practices. Do they cut rates dramatically and quickly to build occupancy or strive to maintain rates? Are the properties comparable or less visible and less appealing? Are there significant barriers to entry in the market? Barriers could be financial such as the cost of the land, availability of sites or community attitude as reflected in zoning ordinances. A call to the local planning and zoning authority will provide information as to future competitors.

As our industry becomes more competitive, management is a key element of success. As a buyer, consider what changes, if any, should be made in the management structure. If the onsite team falls in the category of caretaker, there may be a significant opportunity to install a customer- and sales-oriented team who could build occupancy and income. While location, visibility and other elements may be impossible or cost-prohibitive to change, management can be addressed promptly and efficiently. It may be one of the most significant contributors to success. 

E = Expectations and Exit

This is probably the most overlooked aspect of the analysis by a buyer. Unless a buyer defines expectations, how can he know if the property will meet them? Identify, in writing, expectations with regard to budget, cash contributed over the life of the project, acceptable rates of return, growth, expansion, involvement, etc.

Most buyers spend a great deal of time considering their entry to a specific industry or market but little time contemplating an exit. Target how long the property will be held as defined by time, occupancy, income or other parameters. When considering a property and its characteristics, a buyer is well served to consider how those parameters will impact the property’s eventual disposition. Additionally, assumptions necessary to calculate the above mentioned IRR analysis will include those many associated with the planned exit.

As you can see, the last element of PRIME brings us back to the first step—your goals and objectives. It’s where the investigation and buying process begins and ends. Buying a self-storage facility is much more about the buyer’s goals, objectives and expectations than the property itself. The buying process should compare the characteristics of a facility to the specific criteria of the buyer to find a probable match. It’s when a compatible facility is found that a PRIME property should be aggressively pursued.

Dale C. Eisenman is the president and broker in charge of Midcoast Properties Inc., as well as a licensed real estate broker in Georgia, and North and South Carolina. In addition to being a professional pilot early in his career, Eisenman has practiced law, owned and operated several small businesses, and been an active commercial real estate investor for more than 20 years. He now specializes in the self-storage industry as an investor and broker. To reach him, call 843.342.7650; e-mail [email protected]; visit www.midcoastproperties.com.

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Sue Haviland has joined the self-storage management solutions firm Self Storage 101 as the lead partner responsible for the continued growth of its West Coast operations. 

Haviland is the former vice president of operations for such companies as Price Self Storage and Extra Space Storage, and  former district manger for LAACO Ltd. She brings her skills, talents and insightfulness to Self Storage 101. 

“Sue joining our firm as a full partner immediately brings depth to our auditing, turnaround management and operation improvement practices,” says partner Bob Copper.  
 
With 20 years of experience, Haviland has provided operational leadership, led dozens of employees to attain growth in several venues, has held P&L responsibilities and successfully rebranded acquired stores. 

“Self Storage 101 is one of the few solution firms that has demonstrated growth year over year. I’m excited to be on the delivery side of processes which I personally know work,” Haviland says.  

“Ours is an industry with good-hearted owners and managers who lack consistent and duplicatable operational systems," Copper says. "Sue has a perspective that all will benefit from.  Her commitment and knowledge along with incorporating our methodologies will only mean sustainable growth for our clients.”
 
Self Storage 101 is a full-service self-storage management solutions firm with offices in Alabama, California and Texas. The company has managed, owned and consulted with hundreds of owners in the areas of business startups and expansion, operations improvement, training and people systems including recruiting and staff assessment.  

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After a year of roller-coaster performance, the real estate investment trusts are ending the year on a high note; but investors shouldn’t expect as much excitement in 2010, according to The Wall Street Journal. One of the few REITs that may perform well next year is self-storage, as it isn’t dependent on job creation.
 
Early in 2009, REIT investors were discouraged by tight credit and overall stock volatility. But many REITs survived the year by selling stocks to pay down debt, cutting dividends, and paying dividends with stock instead of cash. The hotel REITs were the most successful this year, with the sector jumping 69 percent.
 
The outlook for 2010 is still pretty grim, as REITs carry too much debt and are expensive relative to other stocks and bonds, according to Mike Kirby, chief analyst for real-estate research firm Green Street Advisors. Other analysts say not many REIT sectors have much upside left.
 
Chris Lucas, a senior analyst at Robert W. Baird & Co., expects the self-storage, industrial and student-housing REITs to outperform. 

Source: The Wall Street Journal, REITs End Roller-Coaster Year on a High

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StorageSeeker.com, a self-storage search website, now allows its subscribers to post printable, customized coupons to their properties’ premium-listing pages. When a customer visits a subscriber’s premium listing, which includes facility contact information, features and pictures, he can print a coupon to bring to the facility. To view or print the coupon, the customer must enter his name, phone number and e-mail address into a form that is sent via e-mail to the storage property and the StorageSeeker account holder.
 
Facility owners or managers are able to customize the specials offered on the coupon as well as the background image. For those with multiple facilities, the same specials may be offered at several properties, or a different special can be customized for each.
 
StorageSeeker.com lets prospective self-storage tenants search, map and compare self-storage facilities nationwide.

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An essential part of real estate investing is the purchase of property for profit, but the risks involved may not be readily apparent. Buyers, lenders and sellers must identify the associated hazards and opportunities. It can also help if they understand the strengths and weaknesses of their position pursuant to deal-negotiation.

Conducting effective financial due diligence will help buyers and lenders structure a strategic transaction and avoid costly mistakes. Real estate purchases that look good on paper sometimes have hidden problems that are only brought to light when you plow below the surface.

Due diligence is basically the process of digging out any problems that may occur by doing your homework and scrutinizing every aspect of the real estate transaction. Moreover, it provides important data to identify future growth opportunities and post-acquisition strategies.

Due diligence can often be an expensive, time-consuming and complex. How well you perform the due diligence during a real estate purchase can be a key component of the investment’s future success. This article gives an overview of due diligence from the seller’s point of view, and outlines key tips you can use in your next investment.
 
Review Records

Every property has individual and unusual features. Be ready to review your property with the buyer to conduct a thorough due diligence. Compile documents in a three-ring binder for easy review. Also, scan the information to create an electronic file for ease of transmission to interested parties.

The binder should contain all the necessary documents a potential buyer and lender will need during the evaluation period. This procedure will expedite the document-review process and wash out out likely problems. A due-diligence checklist of information that may satisfy a prospective purchaser’s needs includes: 

• Bank statements (two years) 
• Real property-tax invoices (two years)
• Rent roll including term and payment history
• Tax returns (three years)
• Insurance policy (including riders, risk assessments and carrier affidavit)
• Deed
• Bank statements (12 months)
• Personal property
• Utility bills
• Income statements (current yield-to-date and last two full years, both detail and summary information)
• Occupancy reports (current yield-to-date and last two full years, both detail and summary information)
•  Service agreements (cancellation rights/penalties)
• Environmental reports and surveys (phase one)
•  Preliminary title report and legal description
• Site plan
• Lot size and zoning information
• Architectural drawings
• Narrative sections of the most recent appraisal
• Capital expenditures (detailed of last three years, current and planned)
• Government inspection reports (description and status of any violations)
• Licenses (description and name of licensed entity)
• Lease(s), sublease(s) and/or operating agreement(s)
• Natural hazard disclosure report
• Ground lease (if applicable)
• Key contracts
• Employment agreement
• Litigation-related documents 

Confirmation Checklist

As with any real estate transaction, unnecessary holdups or information gaps cause deals to be delayed or cancelled. The potential buyer needs to be provided with all due-diligence info promptly and within the time frame documented in the purchase agreement. This will ensure the property doesn’t remain off market for an extended time in the event the buyer decides not to proceed with the transaction.

It’s useful to provide the buyer with a detailed checklist of documents provided. Include a short description of each item and the source of the information (public records, tax assessor, court, etc.), as well as contact information, such as e-mail addresses and phone numbers. In the event a document is excluded, provide an explanation. This procedure should prevent unnecessary delays during the buyer’s review period.

Remember, any errors in the information provided may cast doubt on the transaction and lead to greater reservations about the property. Increased uncertainty with the buyer may equate to further acquisition risk and negotiation, with a possibility of a reduced selling price or cancellation of the transaction. Make sure you’re prepared for questions and requests particular to your property.

A prudent and experienced investor will be looking for errors or lack of information. Unsurprisingly, inaccurate or incomplete disclosures result in the buyer spending more time evaluating the property. The additional review could exert downward pressure on property value as well as delay closing. Notwithstanding, with the lending market in partial paralysis, the buyer’s loan may be jeopardized in the process.

It’s always a sensible and practical policy for the seller to disclose all aspects of the property. Not doing so could lead to post-closing issues including but not limited to potential legal action.  
 
Building Inspection

Carefully walk the exterior of the building with a certified building inspector and note any unusual items in need of repair. If any construction deficiencies are detected, contact a professional who specializes in potential construction defects. Any construction that may not meet current building codes needs to be addressed and, if required, corrected.

Other general mechanical items that need to be examined include elevators, fire sprinklers, HVAC, security and telephone systems. Get a copy of the roof warranty to verify the remaining life. If the document isn’t available, have the roof professionally inspected.

Your due diligence should also include a thorough interior inspection. Look for any problems that will need to be fixed in the coming years. Watch for water or fire damage, or vector issues. Some fire departments will conduct a free inspection to verify the building meets current municipal codes. In short, leave no stone unturned.

The primary and most important result of a thorough due diligence is a smooth and uncomplicated inspection, financing and closing of the property. A secondary benefit will be your industry reputation. When you go to market with your next property, your track record will speak for itself, and investors will have a level of comfort with the information you provide. Finally, the seller and buyer should consult with legal and financial advisors to confirm due documentation is acceptable for either party.
 
Stephen Grossman is a senior vice president with NAI Capital Commercial Real Estate Services, Worldwide, and The Self Storage Investment Group in Newport Beach, Calif. He has been responsible for the sale of more than 850,000 buildable square feet of entitled self-storage land, and the sale or escrow of more than 3 million square feet of existing self-storage facilities. For more information, call 949.468.2394; e-mail [email protected].   

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Fire crews responded this afternoon to a two-alarm blaze at Highland Self Storage in Salt Lake City. According to officials, between 20 and 25 units were burned, but no one was injured. A man was working on a motorcycle in one of the units where the fire started.
 
The blaze was contained by Murray City Fire, South Salt Lake Fire and Unified Fire Authority.
 
Source: Salt Lake Tribune, Fire burning at Highland Self Storage unit in Salt Lake County

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More than $70,000 worth of celebrity-signed guitars was stolen from an Uncle Bob’s Self Storage facility in Garland, Texas, over the Christmas holiday, hurting a local charity that would have benefitted from their sale.
 
Brian Hughes, who spearheaded the Friends of Purtis Creek State Park charitable organization, spent the past four years collecting 67 guitars signed by stars such as country singer Taylor Swift and stock-car driver Tony Stewart. The instruments were to be auctioned off at between $1,000 and $3,000 each to raise funds for kids’ activities at the park, such as Fishing Day.
 
Hughes was contacted by the storage facility on Christmas Eve and asked to check his unit for missing items. It was completely empty.
 
Hughes is seeking help from the general public. He asks that anyone with information about the guitars contact the Garland Police Department. In the meantime, he’ll start over with collecting guitars and signatures.
 
Source: WFAA-TV Dallas/Fort Worth, Guitars with celebrity signatures stolen in Garland

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The operation of a self-storage facility involves legal risk relating to wrongful sale and disposal, customers’ personal information, bankruptcy and other critical issues. Facility owners and managers who want to ensure they’re doing all they can to avoid liability can get the information they need at the Inside Self-Storage World Expo in Las Vegas, March 1-3.

On March 2, self-storage legal expert Jeffrey Greenberger will present a four-hour “Legal Learning Live” workshop addressing the self-storage industry’s most prevalent legal challenges: lien sales, abandonment of goods and documents, protection of tenant information and vehicle storage. Attendees will learn in detail about the lien-sale process, including steps to follow to be prepared in the event of a sale-related lawsuit. They’ll also learn best practices for handling customers’ personally identifiable information in compliance with state law; how to deal with situations involving abandonment and avoid exposure to litigation; and proper practices for gathering and retaining information relating to the storage of vehicles. 

Greenberger’s seminar includes a comprehensive workbook and a series of sample forms attendees can reference in relation to their self-storage operation: a complete lien-sale checklist, a list of sale rules, a release for sale participants, a mutual-settlement agreement, vehicle-storage clauses to add to a lease, and forms to collect information for vehicles in storage.
 
In addition to Legal Learning, expo attendees can get legal information as part of the standard Education Package. The show’s “Finance, Insurance & Legal Issues” seminar track includes topics such as lien sales and tenant and corporate bankruptcy.

Created for self-storage industry owners, managers, developers, investors and suppliers, the ISS Expo comprises three days of educational seminars, product and service exhibits, and networking opportunities. It will take place at the Paris Hotel & Resort, March 1-3. The event focuses on strategies for generating revenue and perfecting business branding in a demanding economic environment. 

For details and to register, visit www.insideselfstorageworldexpo.com.

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