Find, Vet, Negotiate: Purchasing a Land Parcel for Self-Storage Development

The self-storage development landscape has changed. In fact, it’s become more complicated with greater risk. If you want to ensure a successful, long-term project, you must take a successful approach to site selection and purchase. Let’s look at some key considerations for choosing and vetting a parcel of land, negotiating the contract, and setting critical timelines to close.

Market Supply

As with any commodity, self-storage is subject to the basic market economics of supply and demand. When looking for land on which to build, finding a site in an undersupplied market with no other new or only limited facilities planned is a critical first step. Finding one in a market with high barriers to entry is also a huge advantage.

One of the biggest risks developers face is oversupply. When multiple self-storage projects are being completed in a submarket in a short period, it forces operators to offer concessions and discounts until they reach stabilized occupancy. This imbalance can push the stabilization timeline for a new facility out to year three, four or beyond and result in revenue that falls short of projection. So, developing in a market with excessive supply should be done with extreme caution.

An experienced self-storage broker or adviser can easily determine market supply by using widely available tools and resources. In many cases, they’ll provide this information free as a courtesy. If these initial numbers look good, it’s wise to engage an experienced self-storage feasibility expert to prepare a thorough report on the proposed location.

Other Key Factors

Besides supply, there are other factors to consider before moving forward with a self-storage land acquisition. These include zoning complications, environmental concerns, topography, building ordinances, deed restrictions/easements, consumer demand and others. Most will be addressed during the contingency period of a potential deal, the primary objective of which is to remove as much risk as possible; however, it requires a substantial investment in third-party examinations. In addition cost, time may be a serious concern. When negotiating a purchase agreement, it’s critical that you allow ample time to investigate all the above potential issues.

Understand that self-storage may not be an allowable use for the site you’ve chosen. Some planning authorities allow the use “by right,” meaning the municipality can’t reject it outright. However, they can still limit what can be built on the parcel by applying thousands of individual ordinances related to floor-area ratios, setbacks, parking requirements, height limitations, fire access and turning radii, and many more. Often, self-storage falls into a planning category that requires a conditional- or special-use permit and/or a variance. Some jurisdictions may even require a rezoning, which is a particularly challenging and risky process to say the least.

The Offer and Purchase Timeline

Once you’re feeling good about the supply metrics and planning/zoning issues in your proposed self-storage market, it’s time to make an offer on the parcel. In most cases, you’ll want to start by submitting a letter of intent (LOI), which outlines the general conditions under which you’re willing to acquire the site.

Allow ample time to receive entitlements before you’re required to close escrow. These are a guideline, offering some level of comfort that you can build on the property, but consider them only as a pre-approval. Closing upon receipt of entitlements still leaves uncertainty. Many departments within a planning agency will have their input before all the ambiguity is removed and a building permit is issued. Until that happens, risk remains.

Depending on the jurisdiction, receiving entitlements for your self-storage parcel could take as little as three months or up to a year or longer in complex cases. Negotiating away 100% of the risk would be ideal; however, most sellers will want to close well before that’s achieved. In the hottest real estate markets, you may be forced to close escrow with significant risk remaining. Before submitting your initial LOI, have a conversation with the seller or their hired representative about expectations.

In general, plan to include a contingency period of 90 to 120 days to conduct an initial assessment as well as complete and review third-party reports. To be safe, add one or more options to extend the period by 60 days or more. Sellers may expect compensation for these extensions, usually in the form of money released from your initial deposit. Although this can be a costly approach, closing escrow before mitigating your risks means you’ll own the land without certainty of what you can do with it!

Here’s what a typical negotiation timeline looks like:

Expect the Unexpected

Even the best laid plans may not account for the unexpected. In the event a material change to the economics occurs while your self-storage parcel under contract, your options are to walk away from the deal or attempt to renegotiate. Depending on how deep you are into your investigation, it isn’t uncommon at this stage to have invested $50,000 to $100,000 on various consultants including architects, lawyers, land-use advisers, surveyors, environmental specialists and feasibility experts.

A frank conversation with the seller may sway them to offer you more time or a significant reduction in purchase price. Enticing them to offer the latter could involve a quicker close or an additional release of funds from your deposits. Of course, establishing a good working relationship with this person may earn you price reduction without significant cost. A good real estate broker acting as your advocate can also make or break these types of negotiations.

Lean on Your Team

Building self-storage can be a highly rewarding and profitable experience with the potential to provide multi-generational wealth for those who are successful. However, as with any potentially lucrative endeavor, it can be riddled with risk. Don’t be afraid to ask questions. Be skeptical, negotiate hard on your land purchase, lean on your team and keep your eye on the prize!

Tom de Jong is executive vice president with Colliers International, a founding member of the Colliers Self Storage Group and managing director of the de Jong I Becher Self Storage Team. He’s been with Colliers, which specializes in the acquisition, disposition and financing of self-storage facilities nationwide, since 2007. He and his team have successfully completed more than $2 billion in self-storage transactions. To reach him, call 408.282.3829 or email [email protected].