Proactive Steps Self-Storage Owners Can Take to Prepare Their Facility for Sale
Copyright 2014 by Virgo Publishing.
By:
Posted on: 02/23/2013



 

By Bill Alter

You’ve received dozens of inquiries over the years from brokers and so-called “buyers” wanting to list or buy your self-storage property. You’ve read other articles like this one, so you know capitalization (cap) rates are down, real estate investment trusts (REITs) are buying, and financing is available for qualified buyers. After weighing the positive reasons for selling now against the challenges and risks, you’ve decided now’s the time. Now what?

The first thing to do is decide whether you’re going to sell your property yourself or enlist the help of a broker. All the recommendations and suggestions made here assume you’re hiring a broker. If you’re going to sell your property on your own, you should transfer all the responsibilities I’ve assigned to the broker in this article to yourself.

If you do decide to use a broker to represent you, select the right one. By the "right" broker I mean somebody who knows the self-storage business and your local market in particular. This will be a professional with a track record of helping other owners market and successfully sell their facilities. There are a lot of risks in this market. Don’t let your choice of broker become one of them.

Set a Realistic Price

First, you and your broker have to establish realistic expectations of what the property will ultimately sell for and set an appropriate asking price to increase the likelihood you achieve that goal. By setting the asking price too high, you run the risk of not selling at all, thus missing the opportunity to achieve optimum value. When setting the asking price too low, you run the risk of leaving money on the table.

Most important, you must understand current market conditions and know if values are trending up or down. With this knowledge, be prepared to set a price that’s “ahead” of the trend, whichever direction it’s going.

Address Maintenance Needs

The right broker will advise you as to which, if any, deferred maintenance issues should be dealt with before putting the property on the market. Unless your facility is new, the buyer should not expect it to be in “like-new” condition. Therefore, it may not be necessary to spend very much money improving the property’s physical condition prior to sale.

Take time to replace burned-out light bulbs, fix minor damage to doors and metal-building corners, replace faded or missing unit numbers, and generally clean up the appearance of the property. Apply a seal coat if the asphalt is showing signs of deterioration. If some aspect of your property might enhance the marketability of units or the amount of rent that can be charged, then that condition should have been addressed long ago. It would probably not be cost-effective to address these issues now.

In other words, property value is mostly a function of current income not what the income could be if you repainted all the doors, installed new landscaping or remodeled the office. Spending a lot now on issues like these will probably not translate into a substantially higher sales price because it takes time for these kinds of capital expenditures to show up as increased revenue. The most cost-effective way to achieve optimal value for your property is simply to be sure it’s clean. The most you should have to do is a sealcoat on the asphalt.

The bottom line is your property’s income is achieved either because of or in spite of its appearance. There are many buyers who look specifically for properties that can be improved. They believe by purchasing such a property they have a better chance of growing the income than they would if they purchased a newer property in perfect condition.

Inform the Onsite Manager

Sellers are divided on the subject of whether to inform their onsite manager that the property is for sale. Those who choose not to inform management are either afraid the manager will begin looking for other employment or simply don’t want to unnecessarily upset them.

You can’t expect to keep your manager in the dark for very long when countless buyers, brokers, lenders, appraisers, insurance representatives and engineers visiting the property pretend to be interested in renting units and never actually do so. The fact is your manager will figure it out sooner or later and it’s best it comes from you. By doing so at the beginning of the marketing process, you can also enlist your manager’s help in accomplishing a sale by making sure the property is presented in its best possible light.

You can assure your manager that the great majority of buyers will want to keep him, and if he’s not retained, you’ll provide a severance package that will allow him time to secure new employment. It’s much better to have your manager on your sales team than to keep him in the dark and run the risk that he could actually harm a potential sale.

You should, however, instruct your manager to direct any and all prospective buyer’s questions concerning financial aspects of the property to you or your broker. You should also tell him to be completely honest when answering questions concerning the physical aspects of the property.

Prepare for Due Diligence

Negotiating contracts can be time-consuming and expensive. Therefore, you should be prepared to respond to any offer you receive with a contract you’re familiar with and prepared in advance by your attorney or broker. That contract should allow for minor changes to be made to fit the particular counteroffer you’re making to the buyer, and you should request that the buyer use that contract if negotiations are to continue.

Your (or any) contract will include a list of items to be delivered to the buyer for review during the contingency period. Those items should be gathered and prepared in advance for delivery to the buyer quickly to minimize the length of time required for due diligence. The following items are typically included:

  • Last two years and year-to-date income and expense statements
  • Most recent real estate tax bill and notice of valuation
  • Current rent roll
  • Most recent ALTA Survey and Phase I environmental report
  • Building plans, if available
  • Service agreements and contracts including Yellow Pages, insurance, computer service and any other agreements with outside companies
  • Preliminary title report
  • Copy of loan documents for the existing financing

If you don’t have the most recent ALTA survey and Phase 1 environmental report, you should complete them before marketing begins. This comes with an understanding with each respective engineer that the  reports will be updated for the benefit of the buyer for a nominal charge.

Arrange 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. You can accept a lower offer if it’s all cash or if the buyer can prove his ability to get a loan.

You or your broker should contact a number of prospective lenders so you’re prepared to provide whatever documentation a lender may require to process the buyer’s loan application as quickly as possible. The probability of a smooth and timely closing will be improved if you can provide your buyer with specific lenders’ names and phone numbers.

If there’s an exiting loan that can or must be assumed, you should know what it takes to accomplish that and be prepared to share that information with the buyer. The process of assuming a securitized loan is very difficult these days. Find out what’s involved and make sure your buyer knows, too. If there’s an existing loan that will have to be paid off, know what it will cost to do that, if anything, and be prepared to deal with that as well.

Although there may have never been a better time to sell a self-storage property, it’s still important to plan your work and work your plan.

Bill Alter has been a self-storage specialist with Rein & Grossoehme Commercial Real Estate in Arizona since 1986. Along with business partner Denise Nunez, Alter has been responsible for the sale of more than 100 storage facilities, totaling more than 6 million square feet and $225 million. He can be reached at 602.315.0771; e-mail w.alter@comcast.net.