An Overview of Self-Storage Exit Strategies: Careful Planning for Leaving a Business

John E. Barry Comments
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Tax Planning

Knowing the value of your facility annually will help you minimize your tax liabilities. Along with an understanding of the political landscape and your best guess on the direction and timing of future tax legislation, you can plan strategically to pass on your investment to others or sell the whole asset.

Given the economic recession, the shallow recovery expected, and the budget deficits at all levels of government, you can be sure that anything and everything that can possibly be taxed will be under consideration.

The long-term capital-gains tax rate of 15 percent is at its historically lowest level. When you combine this with capitalization rates on self-storage of between 8 percent and 10 percent, self-storage has still maintained good historic valuation. If you can receive several years of cash flow today in the form of long-term gains, which are taxed at 15 percent vs. the same cash flow at higher ordinary income-tax rates, then selling may be your best option.

Sale/Disposition

If you’ve done your estate and tax planning and come to the conclusion that it’s time to sell your facility, then it’s time to prepare for the sale. For a moment, pretend you’re the buyer. When you drive onto the property, is the landscaping maintained? Is the pavement in need of repair? Do the roofs leak? Do any of the buildings or doors need paint?

During your ownership of the property, did you take out all the cash, or did you reinvest some proceeds so it shows well and a buyer can come in and run things without having to put time and money into deferred maintenance? Like the old Purolater commercial goes, “You can pay me now or pay me later.” In this case, a few dollars to shine up the place should garner you a higher sales price.

In addition, have your financials in order. Orderly statements by month, preferably in an accounting system such as QuickBooks, plus operational reports from your self-storage software will improve your chances of a smooth sale. Most buyers want to see 12 to 24 months of income statements so they can see the cash flow and look for trends. Having this critical information at the ready gives you tremendous credibility as an engaged owner.

Prepare all the due-diligence items buyers may want to review immediately after you sign a sales contract. This includes two years of financial statements, rent rolls, delinquency reports, occupancy reports, property-tax bills and utility bills. Other items include site plans, approvals and permits, insurance policies, title reports, environmental reports, a sample lease, service contracts, and loan documents if the buyer is assuming the loan. Marketing the facility with an attractively structured assumable loan or seller financing never hurts, especially today.

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