Self-storage is possibly the most unique sector of commercial real estate. Unlike office, retail, industrial or multifamily investments, it primarily operates by occupants leasing space on a month-to- month tenancy. The lack of tenant improvements needed to lease space and the diversity of facility ownership further separate self-storage from the other asset classes in commercial real estate.
A successful broker who specializes in self-storage understands the nuances of this industry and how they relate to buying and selling self-storage properties. Using the services of a broker will maximize the exposure your property receives, which correlates with more interest and, ultimately, higher sale prices. For these and many other reasons, an experienced owner will seek out an accomplished broker who has successfully specialized in this unique field.
When you have determined you are ready to sell and will be using the services of a real estate broker, you will need to locate the best person for your specific needs. When deciding which broker with whom to contract, you must first determine each candidate’s:
- Track record in terms of sales
- Ability to produce an accurate valuation
- Marketing plan
- Experience in the overall transaction process
You must be able to determine the overall reputation of the broker you are considering. If he specializes in self-storage and has numerous references from satisfied sellers, it is likely he has successfully met the above criteria. You must also ask yourself: If you were a buyer, would you feel comfortable consummating a transaction with this individual? Finally, if the prospective broker meets the criteria to your satisfaction and you feel you will work well with this person, he is probably a very good choice.
After you have selected a broker and have set a listing price, I strongly suggest you consult with your tax advisor to determine your total tax liability. The impact of depreciation recapture at 25 percent, plus the combined federal and state tax owed, can result in a sizable tax bill.
Participating in a tax-deferred exchange can be a very attractive method of deferring your entire tax obligation. This is accomplished through Section 1031 of the Internal Revenue Code, commonly referred to as a 1031 Exchange. You will need a qualified intermediary to assist you with the entire process. Your real estate broker isn’t permitted to act as your intermediary, but he should be able to explain the general concept and refer you to several qualified candidates.
A 1031 Exchange is a great way to defer taxes and leverage into a more valuable property. But even if you don’t intend on reinvesting your equity in real estate, the good news is the long-term capital-gain tax rates for investors in the top tax brackets have been reduced to 15 percent from 20 percent effective May 28, 2003. Again, a consultation with your tax advisor should clarify exactly what your plan will be after you sell your facility.
The Sales Package
One of the very first things you and your broker will work on is your facility’s sales package. You will need to supply much of the information, and your broker will compile it in a logical and informative format. A good sales package will highlight the strengths of the facility, how it ranks with competing facilities in the immediate trade area, its current performance, and the future potential during new ownership.
Areas that are universally considered strengths in the industry are: road frontage and/or good exposure, a wide variety of unit sizes, climate control and outside parking spaces (depending on geographic location), wide aisles between buildings, and up-to-date security and entry systems. A rent survey and occupancy report of competing properties in the trade area will highlight your property’s position in the market.
The current performance of the facility can be documented with the previous year’s and current year-to-date income and expense statements, along with a current occupancy report listing the number of vacant and occupied units of each size. Future performance can be shown via a pro forma income and expense statement. This statement may reflect a continuation of the current occupancy trend, combined with historical rental-rate increases. It may also address a possible expansion of the facility if there is vacant land that will transfer with the sale.
Once a sales package is finalized, it will be your broker’s responsibility to begin marketing your facility in earnest. He will highlight it on multiple listing services, through trade magazines, and through direct mailings to self-storage and business owners in the market area.
Probably the most important factor in marketing your facility will be your broker’s ability to directly contact the greatest number of potential buyers via phone, fax, e-mail, etc. A seasoned broker will have an extensive database of potential buyers for every type and location of self-storage property. A broker earns his money by securing interest from the greatest number of prospects, thereby enhancing the possibility of obtaining your target price.
During the marketing process, you will need to continually update your broker with monthly income and expense reports, up-to-date occupancy reports, and any significant changes to expenses such as taxes, insurance, etc. This will give your broker the ability to promote your facility with complete accuracy. It will also greatly reduce the probability of a buyer attempting to pare down the agreed price after a purchase agreement has been signed. The more information you can provide throughout the sales process will expedite the sale and reduce surprises on both sides of the transaction.
The Offer and the Sale
When you do receive a letter of intent to purchase from a prospective buyer or an actual purchase agreement, your broker will review it with you line by line so the offer can be accurately assessed. There are a number of areas in a contract besides the purchase price that can affect how much money you earn at the closing table. If you receive two offers, it is quite possible the offer with the highest purchase price may not be the best. By working with an experienced self-storage broker, you will have the ability to discern which offer is the best for you and your specific circumstance.
After an offer is accepted, your broker will continue to work through the entire due-diligence period, which can typically take between 60 and 90 days. Your broker will assist you in dealing with any adverse inspection issues, physical and financial. Your goal should always be to get to the closing table with little or no concessions to the buyer for any issues associated with the inspections. Again, with this goal in mind, it is imperative you keep your broker informed of any material changes to the operations of your facility.
A broker’s primary job is to obtain the highest possible price for your self-storage facility. He is also responsible for guiding you through the entire process and to provide his knowledge and experience to help the transaction stay on course. When you work with a good self-storage broker, you will have the benefit of someone looking out for your best interests every step of the way. There are usually a considerable number of issues that will come up during the sales process after an actual purchase agreement has been signed. A good broker will be able to assist you with whatever obstacles arise.
Keeping your broker informed and monitoring the sales process will help you achieve your goals and produce a smooth transaction. A smooth transaction is a successful transaction!
Rob Schick is senior vice president of Revel & Underwood Inc., which was established in 1973 and specializes in the disposition and acquisition of self-storage facilities. Mr. Schick has more than 14 years experience in investment real estate sales and represents self-storage buyers and sellers throughout the United States. For more information, call 800.875.5439, ext. 166, or e-mail firstname.lastname@example.org