- Personal issues —Retirement, estate planning, partnership problems and divorce are just a few things that may stimulate a self-storage sale. Time and energy are necessary to make a facility competitive. If personal issues are affecting your ownership, it may be time to move on.
- Rising cap rates —A 2 percent increase in cap rates could negatively impact your equity by as much as 80 percent. This may be a good reason to sell now as opposed to three years from now.
- Competition —In some markets, competitors can have a dramatic effect on your occupancy and cash flow.
Determining if and when you’re a “real” seller is the most important step in the sale process. You need a clearly defined objective and must be willing to price your property at a level conducive to the market. You should get a fair value for your investment, but the buyer also needs a fair return; so serious buyers want serious sellers. If you aren’t truly ready, you’ll offend your best prospects—and they will remember!
Creating and Extracting Value
A serious seller understands that the sale process does not create property value; the value is already there, created by cash flow. The trick is to find a buyer who recognizes that existing worth and is capable of a purchase.
Today’s market has many buyers and few sellers, but that doesn’t mean properties can be sold at any price. Most serious buyers are storage owners or experienced real estate investors. They understand how facilities are valued and will generally not overpay. These buyers are cautious, and their lenders are even more vigilant. Attempting to find a “greater fool” who will pay a substantial premium to market value is not only unrealistic, it can negatively affect a property’s marketability.
Overpricing has several repercussions. First, many potential buyers won’t take the sale seriously. Most are earnest about wanting to own and operate good projects and don’t want to engage in unproductive negotiation with an impractical seller.
Second, it may actually invite low-ball offers. Buyers generally have a reasonable formula on which they base a purchase, but some consider the negotiation process a “sport.” They’ll make an offer at a substantial discount to counter the high asking price. They know they won’t have to compete with serious buyers, who will pass the property by. If the seller is in distress because he hasn’t seen any sensible offers, he just might take the deal.
On the other hand, you don’t want to under-price your facility. Ask your broker for a written evaluation of the property, and get him to explain it in detail. He should clarify cap rates, expense adjustments, comparable sales, market rates, financing and other important items. If you don’t feel his estimate is right, get a second opinion from a real estate appraiser with self-storage experience. The consultation may cost a few hundred dollars, but the peace of mind is well worth it.
If your broker’s price is well above the appraiser’s, it is not cause for joy. A significant variance in the estimates may indicate your broker doesn’t understand value or your objectives. In either case, be wary. You should also be cautious if the broker gives you a price over the phone or before he has looked at all the relevant information. There are too many nuances to a valuation to shoot from the hip.
Keep Managers in the Loop
A serious seller will not keep his managers in the dark about a sale, as this is usually counterproductive. Most employees will quickly figure out what is going on and react negatively to being excluded. If they feel unfairly treated, they may start pursuing other opportunities or leave abruptly, which can damage the site’s profitability.
Instead, be forthcoming with staff and consider offering a bonus upon closing of the sale. If employees won’t be retained by the new owner, a severance package is a productive way to ensure they stay on through the sale process. Most managers understand that sales happen, and they’ll respect your decision if they are treated fairly.
More often than not, employees can be an owner’s greatest ally in a sale. Their intimate knowledge of the property is often helpful in the process. In fact, a positive team can add credibility and value to the site. Most buyers are in the market for good managers and prefer to hire existing staff rather than disrupt the operation.
A Serious Team
A serious seller will assemble a team of professionals to assist with the sale. In addition to his facility staff, he’ll enlist the support of his accountant, an experienced real estate broker and legal counsel. At the very beginning, he’ll meet with this group to identify all the tasks necessary to get the project sold, assigning priorities, responsibilities and deadlines for each.
Monitor the schedule and plan regularly throughout the sale process. You’ll need to juggle a massive amount of information to persuade the buyer, convince his lender and complete the due diligence. Your manager and accountant are going to be very busy, so prepare them in advance. Your attorney should also be invited to the party early. Not only will he prepare the documents for the contract and closing, he can give you good ideas and support during the negotiation.
Facilitate the Closing
A serious seller will do everything in his power to facilitate the closing. Completion of this step is highly detailed and can be frustrating. The best way to ensure a smooth transaction is to be prepared and address any issues as they arise, long before you get to the closing table. Resolving conflicts in advance will ensure you don’t have to cave on important items to save the sale.
Your escrow agent can be extremely helpful. He knows how closings work and can streamline and organize the proceedings. But remember he’s only human and will make mistakes, so keep on top of everything he does, and make sure you understand all aspects of the deal.
As a serious seller, your ultimate goal is “value realization”—for you and your buyer. Here’s an overview of the process that will help you both get the most out of the sale. Many of these tasks will be facilitated by your broker.
Determine your objectives.What’s the purpose of the transaction? Decide how you will handle the following:
- Tax considerations
- Reporting requirements
- Necessary contacts
Gather information. Your buyer will need the following facility and market information:
- Financial history
- Environmental studies
- Site plans
- Competitive review
- Zoning permits
- Tax records
- Traffic counts
Set a price. Determine a value for the facility by examining your:
- Local market
- Physical aspects of the property
- Marketing strategy
- Pricing strategy
Market the facility. Promote the property to a qualified pool of buyers. In addition to the listing agreement with your broker, consider:
- Internet advertising
- Property presentation
- Print advertising
- Industry events
Negotiate the sale.As part of the negotiating process, you’ll need to:
- Contact and qualify prospects
- Respond to inquiries and objections
- Review offers and present counteroffers
Facilitate the closing. To make the transaction as smooth as possible:
- Assist in due diligence
- Provide all necessary documentation
- Recommend solutions to any problems
- Verify financing
- Assist in the asset transfer
As a serious seller, be realistic and prepared. If your property is reasonably priced and properly marketed, it will sell in good time and at a good value. Once you’ve made it through closing, all that will remain will be to have a very good lunch!
Michael L. McCune has been actively involved in commercial real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In 1994, he created the Argus Self Storage Real Estate Network, now the nation’s largest network of independent commercial real estate brokers dedicated to buying and selling self-storage facilities. For more information, call 800.55.STORE; visit www.selfstorage.com.