This is the true story of a self-storage property placed under contract not once, not twice, but three times within 12 months before it finally closed. It is a case study where everyone had the best of intentions and the property continued to lease up according to the industry norm during the entire period.

This sale was a true test of character for the seller and his listing broker. It was September 2000, and the owner had developed a 37,000-square-foot, single-story self-storage facility, which was a carbon copy of another he developed and sold two years earlier. The owner called and asked his broker's opinion as to the viability of selling this facility during lease-up. The property was renting at the same monthly rate as the one that sold previously, and rental rates had been raised in month five of operation from those that were 5 percent to 10 percent below market up to current rents.

His broker reworked his operating statement on a pro forma basis to reflect the new rents and confirm the expenses prepared for the original appraisal of the project. The pro forma indicated the new project could be listed for sale at an acceptable price for the owner, while still leaving room for a buyer to have good upside potential. The broker's opinion of value was close to the owner's expectations of a sales price.

Marketing packages were prepared and sent out simultaneously to a targeted list of 12 to 15 potential buyers. The broker explained the project would probably not attract the attention of the top four industry players because of certain parameters in which they were working, but packages were sent to them anyway. This was a second-tier location/market, and it was the broker's opinion the facility should sell to a buyer whose base of operation was within a one- to three-hour drive of the property for sale.

No one was more surprised than the broker when one of the REITs expressed a strong interest in the property and made an offer after visiting the site. The owner made a counteroffer, which was ultimately accepted through a letter of intent with terms and conditions acceptable to all parties. The buyer's due-diligence process was to take 60 days and was unconditional in his right to cancel the agreement for any reason. The buyer proceeded with his due diligence but cancelled his contract on day 59. The reason given was "the facility was not continuing to lease up at the rate anticipated." Translation: The buyer needed to purchase "stabilized" properties instead of properties in lease-up.

Second Attempt

The winter holidays came and went, and the owner and broker again teamed to list the property for sale at the same original price. Marketing packages were prepared and distributed with updated materials, including actual financials for the 2000 calendar year. These new packages were sent to some of the original potential buyers as well as several new ones--some of whom had seen the facility listed on the Internet.

This time, the broker was able to create a sense of urgency in the solicitation, which produced three bona fide written offers by the posted deadline. All three offers were within $125,000 of the owner's asking price, and he decided to accept an offer from the largest of the competing companies. Although the offer was for $50,000 less than one of the others, it was not subject to any financing. The owner now had to wait 60 days for the buyer's due-diligence process, and the property continued to improve its occupancy to 75 percent after being open for 15 months.

The broker sensed the second buyer might run into some trouble, as due- diligence requires approval from the financial partner. He kept the other potential buyers informed of the process to keep their interest in making another offer should this contract fail. This time, the buyer cancelled his contract after only 30 days, stating his financial partner didn't like the second-tier market in which the facility was located. The facility also did not meet their minimum criteria for acquisition, i.e., traffic count, population, etc.

Third Time's a Charm

Of the two other potential buyers, the owner now chose the one who appeared to be better qualified and able to close. The facility was placed under contract--again--at the same price as the earlier contracts. The next 60-day period saw the buyer moving quickly to perform his own due diligence, including bringing his own banker to the property right away. The current manager was interested in remaining at the facility as she lived 10 minutes from the site. The owner even agreed to rent the vacant upstairs office from the buyer for six months. Finally, success! The property closed on time and everyone was quite pleased.

Could this sale have been handled differently? Should the owner have executed contracts with smaller buyers instead of large operators? The answer to these questions is no. The first two buyers were legitimate and qualified, and came to the transaction with a very significant difference in their contracts from those of smaller, local buyers: no finance contingency. This facility was a second-tier property still in rent-up, and its current income could not carry a 75 percent loan-to-value mortgage with all of the operating expenses, let alone begin to yield a profit.

The owner was kept informed of the marketing process during the listing period, with all prospective buyers being registered with the owner and their comments relayed back to him. The broker worked his hardest to get two local owner/operators to purchase the facility, as it made more sense because of their proximity and the potential increase in coverage and market share within the county. It was their lost opportunity, as these types of properties don't become available for sale that often.

This facility did not sell earlier for a lack of interested buyers, not because of its location, age, competition, traffic count or demographics. It was a classic case of finding the right buyer at the right time. While "location, location, location" is still very important, timing is, too. The owner and broker concluded a successful sale to a ready, willing and capable buyer. And in this particular case, the third time was the charm.

Nick Malagisi is president of Storage Realty Advisors, a commercial real estate brokerage firm specializing in the sale of self-storage facilities, primarily in the Northeast. Malagisi has participated in the sale of more than $93 million worth of self-storage properties since 1993. He also prepares feasibility studies for new projects. For more information, call 716.633.9601; e-mail [email protected].