Due Diligence: Critical to Obtaining Self-Storage Financing

Stephen I. Grossman Comments
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Organizing and professionally presenting your due diligence documentation always enhances the probability of consummating a sale. Excluding the buyer’s review process, lenders and appraisers more than ever are scrutinizing and analyzing all aspects of the due diligence documentation.

The current lending problems created by Wall Street and the subprime loan industry have virtually shut down the usual and customary lending practices. In the past, sellers and brokers could put a “happy face” on due diligence records and projections. This practice is no longer acceptable and does not work.

At a minimum, financial records for self-storage investment properties must corroborate and confirm adequate cash flow, market strength and historical financial stability. Without these general factors intact and verifiable, the probability of securing traditional bank financing is limited if not impossible. Therefore, absent of seller financing, accurate due diligence documentation will “make or break” the deal.

The Right Documentation

Every property has distinctive, idiosyncratic features. Be prepared to review your property with the buyer in order to conduct a thorough due diligence. The creation of a due diligence document binder is a critical step in the process. If possible, the information should be saved electronically for ease of transmission to interested parties.

The binder should contain all the necessary documents a potential buyer and lender will need to review during the evaluation period. This procedure will expedite the due document review process and flush out potential problems. A non-exhaustive list of information that may satisfy a prospective purchaser’s information needs includes:

  • Bank statements (two years)
  • Real property tax invoices (two years)
  • Rent roll including term and payment history
  • Tax returns (three years)
  • Insurance policy (including riders, risk assessments and carrier affidavit)
  • Deed
  • Personal property
  • Utility bills
  • Income statements (current year-to-date and last two years, both detail and summary information)
  • Occupancy reports (current year-to-date and last two years, both detail and summary information)
  • Service agreements (cancellation rights/penalties)
  • Preliminary title report and legal description
  • Site plan
  • Lot size and zoning information
  • Architectural drawings
  • Licenses (description and name of licensed entity)
  • Lease(s), sublease(s) and/or operating agreement(s)
  • Natural hazard disclosure report
  • Ground lease (if applicable)
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