By this time, you’ve likely contacted several self-storage lenders to know what loan programs are available so your financing contingency, if any, is realistic. Available properties often have existing loans that must be assumed. In those instances, know what’s involved in qualifying for the assumption. Sometimes loan assumptions can be more difficult to accomplish than originations.
When buying a self-storage facility, it’s important to allow adequate time to inspect the property and confirm all your due-diligence information. Your purchase and sale agreement should contain a provision allowing a due-diligence period during which these inspections and audits can take place.
An onsite inspection may involve soil tests, environmental inspections and engineering inspections for improvements such as roof, utility and HVAC equipment. It may also be necessary to review existing surveys or complete a new one. This may take up to three weeks, so an early start is essential.
Financial and other records to be inspected may include any previous environmental studies or engineering reports, utility bills, tenant leases and correspondence, profit-and-loss statements, bank statements, and cancelled checks. These should be reviewed so you can confirm that actual rental income shown on profit-and-loss statements were actually deposited in the bank and there are no unreported expenses. Ask the seller to certify the material is true and correct. If you’re obtaining financing for the purchase, this seller certification is important because the lender will require the same from you.
The length of time needed for inspection varies depending on whether the property is vacant land or improved with buildings. If it’s vacant, you may easily do your inspection in 15 to 30 days. If it’s an existing storage facility, 30 days is a minimum with 45 or 60 days being more typical. If the purchase contract you and the seller sign doesn’t provide for a separate "financing contingency," allowing you to terminate if financing is not obtained, then any financial approvals will need to be obtained during the inspection period. In this case, 60 days is a recommended time frame because this gives the buyer 15 to 20 days to do physical inspections followed by another 45 days to obtain financing approval.
The Buyer’s Due Diligence
Buyers also need to be prepared to do their own due diligence. Study the financials with a fine-tooth comb. When preparing your pro-forma financial analysis, make sure to do a sensitivity analysis. What will the return on investment be if rents are slightly higher or lower than anticipated? What’s your exit strategy? What are markets likely to be then? Know what you’re looking for and there will be fewer surprises in the purchasing process.
Whether you’re a seller or a buyer, good preparation makes the difference between smooth sailing or a bumpy ride during the sales-transaction process.
Bill Alter has been a self-storage specialist with Rein & Grossoehme Commercial Real Estate in Arizona since 1986. He has been responsible for the sale of more than 120 self-storage facilities, totaling more than 6 million square feet and more than $250 million To reach him, call 602.315.0771; e-mail firstname.lastname@example.org.