The first step is to determine your particular needs. Are you going to be an active or absent owner? How will you manage the property? Will you hire a management company? What sort of return do you require? What are your investment objectives? How long do you plan to hold the property before reselling? Answering these questions will help you find the best property for your interests.

Site Selection

Youve probably heard the adage about the three most important things in real estate: location, location and location. Its one of the primary factors to consider, as its just about the only thing about a property you cant change. With a poor site, youll have to spend more on marketing to keep your units filled, and youll be at a disadvantage compared to better-positioned competitors.

But what makes for a good location? Storage facilities tend to do better in spots well-suited for retail business. A site should be convenient, visible and easily accessible to attract customers within the trade area.

Chain retailers have site selection down to a science, and their approach can work for you too. Use the following criteria to evaluate the viability and quality of a storage project. Youll rate a site on a scale of one to 10 in six categories, multiplying each score by the indicated weight. Once youve determined the number of points for all areas, add them together. If a property doesnt score at least 500, its unlikely it will be able to compete in the market over the long term.

Visibility

Visibility is among the most important characteristics of a site. As the market becomes increasingly competitive, visibility becomes more critical.

• 0-1Sign only, no view of office from street
• 2-3Large signage, no view of office from street
• 4-5Signage and office are visible from street going one direction
• 6-8Signage and office are visible from street in both directions
• 9-10Full project visibility
  (Multiply the score times a weight of 15 for total points in this category.)

Access Access is clearly a major issue, but modest compromises can be made for a site that is otherwise superior.

• 0-2Not on a main street or access is very difficult
• 3-5Access is clear but not direct
• 6-8On a main street with only right-turn options
• 9-10On a main street with a center turning lane
  (Multiply the score times a weight of 10 for total points in this category.)

Traffic Count

Drive-by traffic is an important source of business. However, excessive traffic can also inhibit access.

• 0-1On a rural road
• 2-3On a feeder road
• 4-5On a main road with 10,000 to 15,000 cars per day
• 6-8On a primary road with 20,000 to 40,000 cars per day
• 9-10On a primary road at a freeway intersection
  (Multiply the score times a weight of 9 for total points in this category.)

Site Configuration

Frontage and potential expansion are the significant issues to watch for in this category.

• 0-2Less than 2 acres, no frontage, flag lot
• 3-5No room for expansion, long or narrow site, perpendicular to road
• 6-8Room for expansion, reasonably square site, good frontage
• 9-10Excellent frontage, corner location, square/rectangular site, room for expansion
  (Multiply the score times a weight of 8 for total points in this category.)

Competition

Competition is another important issue. Properties with less existing competition or barriers to entry for future competitors are best.

• 0-2Large project next door
• 3-5Nearby vacancies, planned projects or sites under construction
• 6-8Low vacancies, no competition, no new projects planned or under construction
• 9-10Rents increasing, no vacancies, no building planned or under way
  (Multiply the score times a weight of 12 for total points in this category.)

Demographics

Higher household income levels are generally conducive to self-storage because customers can afford it. But some areas with smaller homes and no basements are also promising because customers need it.

• 0-2Lots of basements, low and declining income, population of less than 50,000 within a 5-mile radius, negative or zero population growth
• 3-5Some basements, low but stable income, population of 50,000 to 100,000 within a 5-mile radius, population growth of less than 1 percent per year
• 6-8Few basements, per-capita income of at least $25,000 per year, single-family residential backup, population of 100,000 to 200,000 within a 5-mile radius, population growth of 1 percent to 1.5 percent per year
• 9-10No basements, per-capita income of at least $35,000 per year, high-end apartment backup, population of at least 200,000 within a 5-mile radius, population growth of more than 1.5 percent per year
  (Multiply the score times a weight of 10 for total points in this category.)

Self-storage is a retail business, which is why facilities are often referred to as stores. So look for projects with good retail locations. You wont find a Wal-Mart in an industrial park, so dont buy a storage facility in one! You want a visible, accessible site in the heart of your customer base. This will be your most important marketing tool, especially if prospects can see the building itselfnot just your signagefrom more than one direction. You dont necessarily need a lot of frontage, so long as its clear to customers who you are and how to access your site.

High occupancy will serve as evidence of sufficient demand in the trade area, but if occupancy is low, you need to determine whether the property or the market is to blame. You can make changes to management, product offerings, etc., but you cant change your location. Reviewing the competition and the relative vacancies and rental rates is the best way to make the call. If vacancies are high and rental rates are declining, the demand is simply not there. If rates are stable or increasing, you can rest reasonably assured of future business.

Quality Counts

The type and quality of self-storage construction varies widely. Admittedly, a dollar of income from a low-quality project spends just as good as that from an upscale facility, but class matters in ways that count. Customers are generally more attracted to an aesthetic site, which means better occupancy and higher rents. A well-built project also requires less maintenance, which translates to lower expenses. Its generally easier to finance and insure a higher-quality project. And when youre ready to exit the investment, a better project will sell faster and for more money.

Evaluate a project with an eye toward buying the best you can afford. Lots of features and amenities can be added after a facility is acquired, so focus your audit on items that cant be readily altered. Here are a few quick guidelines:

• Concrete or brick construction is superior to metal, which can corrode or rust. Wood can be susceptible to rot, insect infestation and fire.
• Concrete drives are more durable than asphalt, but both are superior to gravel. Its best to have drives of at least 25 feet in width and turns with room for moving trucks.
• An access-control gate is practically a necessity, and its best if customers can get to the office without having to go through it.
• A project with no climate-controlled space can be at a competitive disadvantage.
• Pitched roofs are better than flat roofs. Standing-seam roofs have a long life and are low-maintenance. Screw-down roofs are good too, but the washers that make the screws watertight can deteriorate over time, necessitating replacement. Flat or built-up roofs tend to be more problematic.
• Septic systems are less desirable than municipal sewer service.
• Insulated buildings are more comfortable for customers and better protect their goods. Exterior units need a weather lip to prevent water from entering the building.

As a rule of thumb, large projects are those with at least 45,000 square feet; mid-size projects range from 30,000 to 45,000 square feet; and small projects have less than 30,000 square feet. Large projects, which enjoy a better economy of scale, are generally more desirable. This is demonstrated by the fact they tend to trade at lower cap rates. Operating expenses for small facilities tend to represent a larger percentage of gross income. With a higher breakeven point, they carry more risk.

Buying a facility with room to expand can be highly profitableprovided that authorities will allow you to build more units and customer demand is there. When you expand a project, only variable expenses increase, so a larger percentage of the additional income goes to the bottom line. Expansion can also make it possible to resell at a lower cap rate or refinance at a lower interest rate, thereby deriving additional value from the existing income stream.

Knowing what to look for in a property allows you to make better buying decisions. Seek opportunities with long-term viability. Closely examine each location, keeping in mind that storage is a retail business. Consider quality, remembering expense items such as upkeep. You may not find the perfect site, but with intelligence and a little luck, you can hit upon a property with optimal factors for value and growth.

Mark Keys is the principal of Cornerstone Realty, which provides brokerage and consulting services to self-storage owners and investors. His industry experience spans more than 20 years. You may contact him at 210.366.8817 or e-mail [email protected].

Lets begin with your sales team. First, youll find a qualified real estate broker with knowledge of the self-storage industry. Hell help set a fair market price for the property, offering suggestions to increase facility value and generally assisting you throughout the process. Once you have an idea of what the property is worth, youll consult with a tax advisor and explore the tax ramifications of the sale. He should be able to estimate how much will be left after Uncle Sam takes his share and recommend strategies to reduce or defer tax payments. Finally, youll consult your legal counsel, who will tell you how your estate will be affected.

Marketing

Once the sales team is on board, you and your broker will set an asking price. This important step will determine whether your property gets a lot of market activity in the first 30 days or sits ignored because of an inflated price tag. In addition, your agent may have recommendations to standardize or increase rents, minimize delinquent tenants, streamline expenses, and correct any deferred maintenance items, all of which will help increase value.

Before you begin marketing and showing the property, you and your broker will conduct a walk-through of the site, noting things a buyer may question or find objectionable. Youll correct as many of these items as possible, cleaning up trash, fixing dents, patching and sealing pavement, mending fences, scrubbing floors and de-cluttering the office to give the site a good as new appearance. For items that cant be remedied, youll provide a sufficient explanation.

Youll also have a meeting with staff members before putting the property on the market to let them know youre selling. Theyll figure it out as people tour the facility anyway, and its better to keep them informed so they can assist in your sales efforts.

Your broker will prepare a marketing plan, which lists the sources hell use to locate and inform the pool of buyers about your property. Hell also assemble an offering memorandum, or marketing package, which contains all the information a buyer needs to make an offer. It generally takes a week to gather the materials, and youll review several drafts to make sure the package accurately reflects the facility.

Hopefully, within a few weeks of contacting potential buyers, youll receive requests for showings. These will be conducted by your broker and possibly another representing the buyer. Ask your agent if your presence is advisable at these meetings. Some personalities mesh, and others are like oil and vinegar, so let him determine the best course.

Your broker should give you regular updates about the progress of the sale. Generally, youll be updated verbally once a week and receive a written report monthly.

Offers and Negotiations

If a buyer is interested in your property, you can generally expect an offer shortly after the showing. Offers typically come in two forms: a letter of intent (LOI) and a formal sale agreement.

Before going through the trouble and expense of submitting a formal contract, a buyer will sometimes submit an LOI, which is non-binding and lays out the major terms under which he would be willing to purchase the property. If you agree to his price and terms, hell have his attorney draft the formal version for both of you to sign. Make sure you review this document carefully, as it spells out all terms and conditions of the sale and is legally binding.

The sale agreement will generally allow for a 30- to 45-day period of due diligence. During this time, youll provide the buyer with detailed financial information and reports on the real estate and improvements, such as environmental audits and surveys. Hell use the records to ensure the property was correctly represented in the marketing materials and there are no conditions to hinder the sale. At the end of due diligence, the buyer will tell you he is satisfied with all contingencies and his deposit will become non-refundable; or hell say he no longer wants to buy, and a deposit return will be generated.

The Sale

Assuming the buyer moves forward with the sale, he will have already received preliminary loan approval from his lenderpending the presentation of a few final items. For example, a financial institution wont approve a loan without an appraisal. At this point, you or your broker will be contacted by an appraiser to schedule a physical inspection of the property. Youll also need to update your Phase I environmental audit if one hasnt been completed in the last 12 months.

During this last stage, youre expected to operate the property as usual, leasing spaces, collecting rents, etc. If anything out of the ordinary arises, you should consult with the buyer as to how to handle the situation. Sometimes this is done as a courtesy, sometimes its actually required as part of the sale agreement. After all, it will be the buyers issue shortly.

The closing is generally scheduled for 30 to 45 days after the due-diligence period ends. Your legal counsel will need to prepare a deed and other documents required by the sales agreement. Hell also need to contact the buyers attorney to work out details for closing day. He should do this well in advance, as some of the necessary items could take time to procure. Youll get a list from your broker of things you need to bring to the closing and any last-minute preparations you need to make.

Closing day is usually very exciting and just a matter of signing final paperwork and shaking hands. The signing typically occurs at the buyers attorneys office or a title company, but sometimes the parties dont even meeteverything is handled by express mail and wire transfers. In either case, if youve done your homework and worked closely with your team of experts, you should experience a smooth, successful sale.

John H. Gilliland is president of Investment Real Estate LLC, which provides brokerage, construction and property-management services in the mid-Atlantic states. He is president of the Pennsylvania Self Storage Association and serves on the board of directors for the national Self Storage Association. For more information, call 717.779.0804; e-mail [email protected].

Whether youre buying, selling, building or holding real estate, the question is whether you have the right site in the best location and if it fits the economic axiom of highest and best use. If youre leasing, the question has a twist: Does the site fairly represent value and meet your financial needs?

Highest and best use is a short way of saying revenue will support the value of the land and improvements while also meeting investment requirements. Think of it as a teeter-totter: On one end of the board is your land and improvement costs; on the other is net revenue. If the investment is too great or the profit too small, youre out of balance.

Most investors look for a return on investment in the range of 10 percent to 20 percent. The variation is a degree of risk. The majority of businesses have fairly predictable revenue streams. If you know your expenses and can control and manage them, you can accurately predict what your income will be. Taking normal fluctuations into account, you can arrive at net profit and back into an acceptable investment amount. If income meets or exceeds your criteria, youre on the right track. If it falls short, you may have chosen the wrong project.

In the car-wash business, the three main wash types (self-serve, tunnel and in-bay automatic) have relatively predictable revenue, due to an abundance of public information on site characteristics and profit. With the assistance of a qualified car-wash representative, you should be able to match a possible site to its revenue potential.

Finding the Right Property

Between deciding to become a real estate mogul and actually turning into one, a lot of decisions must be made. First, you must establish your investment criteria. Consider the following:

• How much do you want to invest?
• What is your required return on capital?
• What types of business are acceptable to you?
• How active do you want to be in the venture?
• How are you going to finance the investment?
• Will the business require staff?
• What is your exit strategy?

Once youve answered these questions, you need to find the right property. Most people seek the advice of a trained real estate professional. Keep in mind you need one who is qualified to deal in commercial properties with specialized business needs.

As the requirements for each car wash are unique, your choice of property will depend on the type you choose. If you plan to build a self-serve, youll need roughly half an acre of land. This can typically be located on a B-grade site that ranges from $3 to $7 per square foot. If you want to build an automatic wash, however, youll need to spend more. Its not unusual for A-grade properties to sell in the range of $15 to $35 per square foot.

There are several other factors to consider. Competition in the area, demographics, and traffic speed, type and quantity all play a role in the decision-making process. The fundamental demographic criterion is the number of roof tops in an area. For example, youll need approximately 1,500 people within a 3-mile radius to support each wand bay at a self-serve site. For a more sophisticated wash like an automatic, pay close attention to traffic count. Check industry estimates for the percentage of customers you should expect to capture from drive-bys, and this will help you approximate annual business.

Strategic Planning

Once youve narrowed your choice to a few promising sites, youll begin the process of economic planning. You must answer these key questions: What is the sites true usable space? What infrastructure improvements are necessary? Is the property in a growing market? What will you have to spend to conform to the wishes of the city? Are all utilities present? Is the site properly zoned and permitted?

After gathering this data, plug it into your financial model. If the return meets your goal, great! If the investment is unbalanced (think back to our teeter-totter), its time to revise the model or look for a new site. Its critical to be honest in your evaluation and ultra-conservative in your revenue estimate. Understanding your costs down to a gnats eyebrow is mandatory.

Car washing, like so many other businesses, has its own real estate quirks, rules of thumb and known performance data. Consider adding a car-wash professional to your team to help guide you through the maze and make the best investment. Happy hunting, and good washing.

Fred Grauer is president of Grauer Associates and vice president, investor services, for Mark VII Equipment LLC, a car-wash equipment manufacturer in Arvada, Colo. He has made a lifelong career of designing, selling, building and operating car washes. He can be reached at [email protected].

Many storage owners choose to manage the sales process themselves, capitalizing on their existing business relationships. But the industry has changed significantly over the last 10 years. More and more buyers have entered the market, and its no longer the tight-knit group it once was. Several years ago, approximately 20 buyers were involved in 75 percent of transactions. Now there are about 2,200 buyers actively seeking storage investments.

Furthermore, the typical self-storage buyer is a whole new animal. Not only are his expectations higher, he tends to focus on a more complicated matrix comprised of capitalization rate, internal rate of return, stabilized yield, cash-on-cash return and the FFO (funds from operations) contribution. To get the best price for your facility, you need to know the right combination of return thresholds and your propertys ability to achieve them.The Role of Broker

As the seller, your challenge is to find the right buyer in the crowd and make sure he gets adequate information about your property. If youre uncomfortable navigating the intricacies of a sale on your own, consider the services of a professional real estate broker.

You can always hire locally, but to ensure the highest exposure, consider a national firm with a local sales representative as part of its team. This will help you reach the entire self-storage market and create the best financial model. At the same time, youll know your advisor has local market knowledge and licensing issues are well-handled.

You should be assured that your broker can answer buyer questions and anticipate concerns, incorporating them into a comprehensive marketing plan. But site promotion is just part of the advisors contribution. Hell also perform pre-market due diligence to uncover potential problems, examining such items as facility rental rates, occupancy, advertising, expenses and real estate taxes.

Your broker will also help determine buyers sincerity by tracking their activities prior to making an offer. Hell pay attention to who takes property tours, who asks detailed questions, buyers existing portfolios and their overall reputations. Seldom does a seller take an offer based solely on price. His best choice will be an attractive combination of price, likelihood of closing, pre-offer due diligence and other intangibles.

Finally, the broker will help buyer and seller set realistic expectations of the sale. Rarely does a sellers trailing 12 months of income match a buyer's pro forma. It's helpful to work with a professional who understands the differences and their impact on value.

Benefits for Hire

The services of a real estate advisor dont come free. However, the benefits far outweigh the costs when you choose right professional for your team. Consider the following:

• Industry expertise is critical. Without it, an advisor will manage the transaction but contribute little else. You want a broker who can tailor his approach to the self-storage market, anticipate property-specific issues and head off problems early.
• A broker who has been recently active in self-storage is better equipped to assess the large number of current buyers, their backgrounds, ability to close, etc.
• Real estate firms should work with a local broker to ensure market- and property-specific issues are considered. Local expertise can also bring the communitys non-storage investors into the field of prospects.
• Some large firms offer capital-market execution (specifically third-party debt), which gives a seller access to more options in the capital-rich self-storage sector. If the firm plays a role on the buyers side of the acquisition, the seller enjoys greater transaction management.

A real estate advisor not only assists during the sale, he can be an invaluable resource in determining whether or to sell in the first place. Most top advisors offer initial valuations at no cost, so theyre a resource well worth using. Plus, some firms have capital-market capabilities; if the decision is between selling or refinancing, an unbiased advisor will make the best recommendation.

Without a doubt, the self-storage market is enjoying high activity. Now is an excellent time for owners to assess their position in the market and explore options.

Aaron A. Swerdlin is director and senior vice president of the CB Richard Ellis Self Storage Advisory Group, a nationwide practice solely focused on the brokerage and financing needs of the self-storage industry. In recent years, the group has bought, sold, brokered and financed more than $900 million in self-storage real estate. For more information, call 713.436.4870; visit www.selfstoragegroup.net.

Because more listing brokers include due-diligence material in their sales packages, initial property reviews tend to be more conclusive than in the past. Buyers are given a quick, accurate glimpse into the condition and performance of a property, past and present, making it easier to find the facility that best meets their objectives. The next steps are to negotiate the purchase price and terms of an offer. Once a property is under contract, facility inspection begins.

Inspector General

A well-drafted purchase agreement will identify time lines for all inspections. It will also state which documents the seller needs to provide and by what date. Both a financial and physical inspection should commence only when the seller has given the buyer everything required. Due to ever-tightening deadlines, these are usually performed simultaneously. However, a preliminary financial review is likely to occur first.

From start to finish, inspections usually run 30 to 60 days, but due-diligence periods have shortened over the past several years. Sellers are enjoying unprecedented demand for their properties due to available capital and low interest rates, so theyre demanding shorter due diligence to lessen the time their property is off the market. In addition, sales packages have become much more detailed in terms of representing a propertys true performance, so buyers can more accurately project expected returns. Finally, as a response to the highly competitive market, buyers are more willing to investigate a property before its put under contract. This means theyve completed some of the due diligence before the clock starts ticking.

However, buyers are also at the mercy of third-party reports such as appraisals and Phase I environmental studies. In a market where demand for these services is high, the completion of reports could be hindered. For this reason, buyers should negotiate a full 60 days for their inspections.

Financial Exam

In many ways, the financial inspection is the most crucial. The buyer of a commercial investment is, first and foremost, purchasing an income stream, but buyers have different goals when acquiring self-storage. Those seeking a total return (cash flow from operations and long-term appreciation) will focus on the internal rate of return over a projected holding period. Others are primarily concerned with immediate cash flow from operations. They concentrate on the return on investment, more commonly known as cash-on-cash return.

Regardless of his aim, a buyer first reviews a propertys financial situation to make sure the deal warrants further consideration. Hell examine:

• Current rent roll
• Three months of delinquency reports
• Three years of occupancy and rental-rate history (if applicable)
• Three years of profit-and-loss statements (if applicable)
• Year-to-date profit-and-loss statement
• Three years of tax returns (if applicable)
• General ledger showing recurring expenses
• Six months of bank statements and deposit slips
• Current property-tax bill
• Insurance documents and the latest premium notice
• Twelve months of utility bills

The information furnished for the audit should corroborate the data presented in the sales package. If the buyer finds discrepancies, he should enlist the help of his broker/advisor to investigate the differences and determine how operations will be affected.

Physical Inspection

Only after the financial picture is approved will a buyer proceed with a physical inspection the property. This is more of a checks and balances to confirm improvements and identify items that could limit future revenue. Important items include:

• Site plans or existing surveys including full legal descriptions
• As-built drawings, if they exist
• List of personal property included in the sale
• All vendor contracts (landscaping, security, Yellow Pages, trash removal, etc.)
• Existing title policy or commitment
• Confirmation of existing zoning and land-use permits
• Three years of capital expenditures (if applicable)
• Aerial photograph (if available)
• Flood-zone certification
• Copies of all current tenant leases
• Phase I environmental study

In addition, a complete professional inspection performed by an engineer or firm of the buyers choosing will include examination of all building components, office space, apartments, paving and drive lanes, gates, cameras, electrical and HVAC equipment, plumbing, grading, drainage, etc. The assessment should give the buyer a complete and clear picture of a propertys condition and physical attributes and point out any red flags:

• Deferred maintenance that will require additional capital
• Functional obsolescence or competitive disadvantages
• Declining market demographics
• Environmental issues
• Site encroachments

Although the inspection process is time-consuming and often overwhelming, its absolutely necessary. For instance, sufficient reserves for future capital expenditures can be determined only one way: with an accurate assessment of the improvements and their remaining expected life. No one would buy a house without an inspection, and its even more imperative for commercial property where concerns include hazardous materials and environmental contamination, zoning and land use, liens and title issues, debt service, and lender requirements.

This article provides only a condensed outline of the inspection procedure. In a real sale, every item must be examined in great detail. Shortcuts can severely jeopardize your investment objectives. A thorough and accurate inspection is the only way for a buyer to ensure he is acquiring a facility that will meet his goals now and in the foreseeable future.

Rob Schick is senior vice president of Revel & Underwood Inc. Established in 1973, the firm specializes in the disposition and acquisition of self-storage facilities. Mr. Schick has more than 16 years of experience in investment real estate sales, representing self-storage buyers and sellers nationwide. For more information, call 800.875.5439, ext. 166; e-mail [email protected].