When a person decides to buy or sell a self-storage property, sometimes the real estate broker forgets the transaction details may be unfamiliar to his client. With this in mind, I’m going take you through some of the behind-the-scenes aspects of a real estate transaction, focusing on the due-diligence requirements. When buying or selling self-storage, the devil is in the details, and due diligence can separate the winners from the losers.
Property-Level Due Diligence
The buyer and seller should work together to collect all the required documents and move the transaction through the due-diligence process. The seller should start organizing the necessary documents well before the property is taken to market, and the buyer should provide the seller with a list of requested items when he submits his offer.
Be prepared to be overwhelmed with requests for information and paperwork, as the days of little- or no-documentation loans are a thing of the past, even for the strongest buyers. Below is a list of the basic property-level documents to start the exchange. However, there are always deal-specific papers that can cause some craziness, as they’ll prove to be difficult or impossible to track down.
- Two years of profit-and-loss statements (broken down by month, if possible)
- Two years of property-tax statements
- 12 months of management-summary reports (by month)
- 12 months of occupancy-statistics reports (by month)
- 12 months of utility bills (by month)
- Three years of tax returns for the ownership entity
- Copy of your certificate of occupancy from the city
- Copy of the management agreement
- List of all personal property on site
- Copy of your rental lease
- Phase I environmental studies
- Site survey and all municipality documents
- Photos of the property (preferably in sunshine!)
The amount of time needed for due diligence is outlined in the purchase and sale agreement. This is arguably the most important aspect of the agreement, as both parties will agree to work exclusively with each other to arrive at a closing.
During the due-diligence period, the seller agrees to remove the property from the market and assist the buyer (and possibly the buyer’s lender) in understanding the details of the facility. The buyer agrees to spend the time necessary to engage consultants who will provide appraisal, environmental studies, property-condition assessment, zoning-compliance report, title commitment, etc., to satisfy the his understanding of the property and possibly arrange for a loan to acquire it.
Depending on the buyer’s level of experience and the overall complexity of the deal, the due-diligence timeframe can range from 30 to 90 days. However, it’s important to remember the vast majority of due-diligence language in purchase and sale agreements will allow for the buyer to approve all items at his sole and absolute discretion and even to terminate the transaction without penalty. As a seller, working with a professional self-storage broker will allow you to tighten up the due-diligence language and, most important, alert you to who the good and bad buyers are in the market.
The Devil Is in the Details
As you dig into the details of the property, you must understand that not all buyers and sellers are created equal. Sometimes the transaction may result in some undue consequences, as the property changes hands from one person to another. For example:
- If you’re purchasing a property from a large or experienced operator, he may be enjoying a discount on certain products, such as insurance, because of economies of scale. Once you purchase the property, the premium may increase dramatically.
- When you have a change of ownership, some vendors will readjust their service contract to market rates. This can have a meaningful impact on cash flow.
- Most important, pay special attention to property taxes. Most municipalities are aware of the success of the self-storage market, and a revaluation could lead to a tax increase.
A few issues may pop up during due diligence, but if both buyer and seller are committed to working together, you’ll arrive at a successful closing. Due diligence is all about dotting your I’s and crossing your T’s!
Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self-storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE; e-mail [email protected]; visit www.argus-selfstorage.com.