By Jeffrey B. Turnbull
So you have an opportunity to purchase an existing self-storage facility. You need a checklist of what to look for, and what to look out for in your purchase decision. With so much riding on this important choice, it’s easy to overlook some of the critical points on which you should focus. To ensure you cover all your bases, try breaking down the assessment into these four key areas: financial statements, site inspection, management team and location metrics. (Note: This article assumes the buyer will be represented by independent advisors during the purchase and final acquisition of any self-storage site.)
First, you’ll want to obtain the past three years of federal tax returns for the property. You should also obtain internal reports such as a current rent roll, rate and occupancy report, the unit listing, and the unit-mix reports.
Examine the income numbers to see what amounts are actually coming from the rental of self-storage units vs. other facility revenue such as truck rental or the sale of boxes and locks. Break out the rental income and compare it to a rent roll. For discussion purposes, let's say our target property has 350 units and brings in a total of $375,000 annually. Roughly $360,000 is generated from rental income, with the sale of boxes and locks making up the remainder.
You should be able to tie into the income numbers with a current rent roll and feel confident about the income stream. After all, that stream is what you’re really purchasing. If you can't tie into these numbers, dig deeper so you can understand exactly what’s going on financially at the store.
Next examine, on a cash basis, what it costs each year to operate the facility. Management salary, insurance, property taxes, utilities and maintenance are the big items. Does anything stand out? Are the total operating-expense numbers between 25 percent and 35 percent of net rental income? If they're above 35 percent, you need to determine why. Has the owner neglected to increase rental rates? Did property taxes increase? Was there an unusually large maintenance expense? You need to understand these numbers as well.
Finally, look at the income and expense trends over the past three years. If the store is newer, perhaps it’s still in lease-up and a large income increase is expected. If it’s an older store, the annual rental increases are smaller.
Obtain the current tax value on the property from the local taxing authority. If the owner has an appraisal, that’s helpful as well. Check for any property-tax surprises coming down the road or any special assessments. Remember, you’re buying an income stream. You want to maximize potential income items while minimizing any future surprises in terms of operating expense.
First, drive by the self-storage facility to get an overall “curb appeal” feel for the store. Next, visit the store and look for more detail on the physical layout. Sometimes I “mystery shop” the store, and sometimes I directly inspect as a potential future owner. My list includes, but is not limited to:
- How old is the store?
- How many owners does it have?
- Are the drives in good shape, or are there many cracks with broken asphalt or concrete?
- How do the doors look? Are they warped, discolored and non-operational? Do the latches need replacing?
- How many damaged or discolored columns are there?
- What type of roof system does the facility have? Is it standing-seam or something else? How old is it?
- What does the office look like? Is it clean and neat?
- How does the landscaping and exterior signage look?
- Does the facility have a CCTV system and a modern gate system?