Purchasing Self-Storage

You think you would like to buy a self-storage facility and are getting emotionally ready to make what could be the biggest purchase of your career. But unless you have bought and sold several facilities, you are walking into territory about which you know very little. This means you are at risk of missing important pieces of information you will need or misinterpreting information you are able to gather.

SELF-STORAGE IS NOT BRAIN SURGERY. COMPARED TO MANY BUSINESSES, the cost structures, labor involvement and customer interactions are very simple. How complicated is the expense structure? You have utilities, management payroll, some advertising and maintenance. You collect rent on the units--end of story. If you can keep ahead of your breakeven point, you are making money. Of course, the devil is in the details; and it is the details that determine whether you can make a purchase work financially.

What Are You Looking for?

Before you even look at your first property, ask yourself how this purchase is going to fit into your life. Are you going to run the property yourself? Are you going to be an active or absent owner? Will a management company run the store for you? What sort of a return on your investment would you like to make? Are you buying to hold? Are you buying to prep the property for sale? These questions and others will tell you what you have to look for in a potential return. It will also tell you how you will manage the property.

Once you know a little more about your particular needs, start looking at properties. There are several brokers who specialize in self-storage. They can help you find facilities for sale. You can also visit self-storage facilities in the area and see if any owners are interested in selling.

Once you have an interested seller, stop and slap yourself in the face. Take a reality check. Look in the mirror and see if your face has the word "sucker" written all over it. The self- storage business has been a good one for many years for people who have an excellent location or a firm grip on expenses. Lots of people have wanted to break into this business. The fact that you want in may mean someone out there will try to play you like a fiddle.

Don't Be a Sucker

Many years ago, I was involved in dog training and breeding and bought many dogs. It would crack me up to see some of the things people would do to pass off a dog as more than it was. For example, Doberman pinschers should not have any white on their chests. One of the things I would have to do when buying a Doberman was check for hair dye or mascara covering a white spot on the chest. Rottweilers should have deep red rather than pink pigment in their mouth and lips. There were a few times I rubbed food coloring off of a rottweiler's mouth when evaluating it for purchase. If people resort to this kind of silliness over a dog worth a few thousand dollars, imagine the temptation when unloading millions of dollars of storage.

Knowledge is your best defense. Know the local self-storage market, including rental rates in the area. Know the tax structure and land-use policies. Know local consumer habits. Know the weather. Know the labor market. If you carry this knowledge into negotiations, you will not shoot yourself in the foot.

The ways in which you can let yourself be fooled in a self-storage purchase are not that different from those in any other business acquisition. You may see misstated earnings or expenses, inaccurate occupancy rates, unrealistic estimates of good will and brand value, untrue reports of the condition of structures, omissions in descriptions of land-use policy and outright lies about environmental risks.

What is the seller's motivation to sell the property? You may never know the truth. Is it possible when the lock was cut on unit 135 to inventory it for auction, the manager found an unidentifiable barrel of stinky, smelly, goopy gunk? If the purchase of your new facility means the EPA will quarantine your site for months while cleaning up toxic sludge, you won't be happy. Environmental risks are real. Make sure you have an environmental consultant look the place over carefully. Make sure your contracts cover you in case you do buy a barrel of toxic waste.

Maybe the seller wasn't making any money. This is not a bad thing. Many times, a change in management and a fresh coat of paint is all that is needed to turn a store around. But protect yourself from paying too much for a sinking ship.

Sellers may misstate earnings by doing several things. A "pay one month, get two months free" promotion will make month No. 1 look pretty good and boost occupancy rates, but it could be used to fool a buyer into believing occupancy rates and earnings are much higher than in reality. It would take very little time and effort for a seller to create phantom tenants. Some current tenants may not be real people at all and may have had the first month's rent paid in cash by the owner. Unless you check leases and call tenants, you will not know how many are real and how many fictitious. You will also not know how many tenants are the owner's siblings, cousins and in-laws.

Misstated Earnings and Expenses

How do you protect yourself against misstated earnings? Get a good estimate of rentable space. Do it with a tape measure if you must. Assume some units may be unrentable. If you know what the high and low rents and occupancy rates are in this market, you can do your own calculations on what the rent roll would be. Work out several scenarios. If you can still make the return on investment in the worst-case scenario, you have an excellent purchase before you. Use the numbers the seller gives you as a test as well. If the numbers are way higher or lower than your research has shown you, ask the seller to explain.

A seller can also misstate expenses. Some sellers are involved in other businesses and may have begun charging the facility's expenses to another business in anticipation of the sale. He may have cancelled service contracts or advertising in preparation for the sale. He may have been paying some payroll off the books, or paying some expenses with cash to hide the items. Regular expenses may have been stated as capital expenditures. Does this remind you of recent events in big business?

Protect yourself from misstated expenses with good knowledge of what it will take to run the store. You should be able to get accurate utility and tax costs from the local government and utility offices. Calculate the rest on your own with the knowledge you have of the local storage market. Can you make your investment work using low-, middle- or high-expense calculations? Where does the seller's expense estimate fall into play?

Anticipate Costs and Obstacles

What is the condition of the property? What is going to soon need replacing? What can be spruced up with cleaning and painting? What warrantees have expired or will expire soon? Not anticipating the replacement of 40 roll-up doors could put a big cramp in your first-year income projections. Here again, use your newfound knowledge of storage to estimate the maintenance, repair and replacement costs. Get some help. Contact builders and suppliers of the type of structures you have and learn all you can from them. How does the seller's estimate compare with your figures? You have probably all seen the Tom Hanks movie "The Money Pit." No new owner wants to remake that movie at his storage facility.

Ask yourself what system improvements will you have to make. Will you need new computers, gates or management software? These are expensive to replace and time-consuming to integrate into operations. Also ask what it will take to hire, train and empower a new management team.

What will take satisfy and entice local consumers? How much are you going to have to spend to fill up the store? If the seller has over-inflated the goodwill the store has in the community, you may have a tough job on your hands. He may have been so unpleasant to do business with consumers have a bad association with the store. It may also be once the "under new management " sign goes up, the neighbors will be happy to give you a chance.

Pay particular attention to the location and accessibility of the store. If the location is difficult, you may never be able to overcome it. Every community has some commercial locations that never succeed. The access isn't right, or the visibility is poor. If the facility you are considering is on one of these accursed spots, think carefully about the purchase before you make it.

Have you learned all there is to know about land-use policy in the area? The seller may brag there is room for 800 more units on the lot behind building No. 2, but if the city has banned all new storage construction, it is of no value to you. What are the municipality's long-range plans and how will they affect you? If the state plans to build a new interstate exit by your property in 10 years, is that going to be good? Maybe or maybe not, but you need to know about it.

What weather considerations are there? The old-timers used to say you should buy wet and sell dry. There is a lot of truth to that. Does building No. 1 take on 2 inches of water every time it sprinkles? Do tornadoes strike this side of town twice every spring? Any information like this is valuable.

Seek Help

You may want professional help to make a good buying decision. There are many people in the industry who offer services to buyers. If you read through this publication, you will find people who have developed, bought and sold many properties, as well as consultants who can help every step of the way. It is well worth the money to have someone knowledgeable assist with the evaluation and examination of a self-storage property. A professional can do three things:

1. Stop you from making a bad purchase. This could save you hundreds of thousands of dollars in grief.

2. Help you negotiate a better price and terms. This could make a deal work for you.

3. Assure you that you are making a good purchase. Sometimes a good purchase may not be totally obvious to the inexperienced.

In Sum

Don't let the "sucker" sign on your forehead get you into trouble. Learn everything you can about the local conditions effecting the store that interests you. Get professional help. Run the numbers again and again until you are satisfied you have covered the most likely scenarios. If you make a good purchase, you can successfully open your store and start making money.

Tron Jordheim is the director of the PhoneSmart Call Center, which serves the self-storage industry as a rollover off-site sales force. He has started several successful businesses from scratch and assisted with acquisitions as general manager of the Mid-Missouri Culligan Bottled Water franchise. For more information, call 866.639.1715; e-mail [email protected].

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