By Chris Hitler
This year has seen an active market for self-storage acquisitions. Interest rates are at historic lows, and buyers and sellers are coming together on price. If you're interested in acquiring an existing self-storage facility, here are five factors to consider as you evaluate a particular opportunity.
The single most important attribute of a self-storage facility will always be its location. Although the Internet has substantially changed the way facilities are marketed to and evaluated by prospective tenants, it cannot correct a bad site position.
The ideal location is at a city center on the corner of two important cross streets, where vehicles can see and access the facility from both directions. Unfortunately, zoning and other city-planning approvals make this type of location nearly impossible for storage, but it's still critical to understand these aspirations. When evaluating a potential location, here are few questions to ask:
- How visible is the site? Is it easily seen by drive-by traffic or tucked far from view?
- How many cars pass the location each day?
- How easy is the access? Can you turn into the facility from the main thoroughfare, or does entry require navigation through side streets?
- How effective is the facilitys signage? Can information be easily read from a moving vehicle?
As you evaluate your targets location, also assess it relative to the competition. Although 10,000 cars may pass by the facility each day, if a competitor sees 15,000 per day, you'll likely have to work harder and spend more advertising dollars to generate the same amount of new business.
In addition, understand how your target facilitys rental pricing and unit mix compare to the competition. Do competing facilities charge more or less? Do they have more or fewer unit sizes and types, for example climate-controlled, conventional, outdoor, etc.?
Check the amenities the facility offers such as security cameras, an office/showroom, the managers apartment, access gates, etc. Carefully inspect the property to determine whether the current owner has been keeping up with repairs or the facility has some deferred maintenance.
How old are the roofs? Are they screw-down or standing-seam? Are doors easy to open? Are latches new or rusted? If you find some substantial problems such as roof leaks or cracking pavement, get some estimates on the cost to correct them to ensure the acquisition financing or cash flow generated by the property can cover the expense.
Confirm the information provided by the owner or broker is consistent with your first-hand analysis and conduct a facility audit. Do all of the occupied units from the occupancy report have locks on them and leases attached to them? Audit the leases to verify the rental amounts are consistent with what is reported by the owner.
Request copies of the past three years of federal tax returns. Are the income and expenses the same as the financials you have received? If not, is there a reasonable explanation for the difference, for example, one-time expenses on the tax returns that were excluded from the facilitys net-operating-income calculation?
Review the latest rent roll. Are tenants current on their rent? Do they have a security deposit? Is the amount consistent with the lease? How many tenants are pre-paid? How many are on auto-pay? Answering these last two questions will help you evaluate your tenant quality and whether collecting rent will be as easy as the owner or broker tell you.
If your target property is listed, a good broker will provide ideas on how to improve the facilitys performance and formalize it in a pro forma financial statement. You may also have your own ideas. Either way, determine if you can realistically reduce expenses or raise revenue because these changes can often dictate whether the property generates the expected investment return.
Potential ways to reduce expenses may include using more efficient labor practices, changing insurance coverage, using new marketing tactics, and bringing in-house some of the activities that have been outsourced such as maintenance and lawn care. Opportunities for raising revenue may come from ancillary products and services, rent increases, the enforcement of late fees, and the better capture of late fees and other charges through tougher management.
Acquiring a storage facility is a serious undertaking. It requires thorough research of the acquisition target and the competition to ensure the financial return justifies the investment risk. Although it's difficult to research everything, the above referenced areas should address the critical factors and give you and your lender confidence the facility will be a sound investment opportunity.
Chris Hitler is a self-storage broker with Investment Real Estate Specialists LLC and the founder of Rummage Marketplace, a website that promotes storage auctions. He can be reached at 312.404.7933.