During the past two years, there has been a significant curtail in transaction activity in all types of real estate sales, including self-storage. More recently, however, we find there’s a substantial improvement in the capital markets, particularly for the largest self-storage companies. This will continue to drive demand on behalf of industry companies that wish to grow through acquisition of existing facilities.
By historical standards, interest rates are low, which allows buyers to pay relatively aggressive prices for self-storage properties. Many economists presently fear the increased money supply and government deficits brought on by economic-stimulus programs will surely lead to increased interest rates, higher taxes or, most likely, a combination of both. As mortgage and tax rates increase, values on all real estate may face additional downward pressure. For these reasons, the possibility of selling their facilities has once again surfaced in the minds of many storage owners.
Are You Ready to Sell?
There are a number of practical and rational reasons an owner may wish to sell including:
- Estate and tax planning
- Business decisions relating to the ability of your property to stay competitive in the marketplace
- The desire to take advantage of a favorable real estate market or current tax rates, or an interest in diversifying
- Taking advantage of other financial opportunities that may present themselves
These financial decisions are objective and can be analyzed using common business sense and simple calculations.
A knowledgeable self-storage real estate broker can assist you in preparing your facility for sale by determining the best practices for maintaining good records and files, sprucing up the property cosmetically, and improving rent rolls. The more difficult decisions are often of a personal nature since selling presents certain emotional criteria that are harder to analyze.
Invariably, there are strong emotions attached to moving on. Perhaps one of the most overlooked elements of selling a property is your own personal reasons. Preparing a facility for sale involves making the decision to sell. We’ve all heard of seller’s remorse. Sellers who can portray to a prospective buyer a genuine intention to sell will receive the greatest amount of attention, which will increase your chances of carrying out a successful sale at an optimized price.
While the market has improved, gone are the days of “If I get the right offer, I may consider selling.” Before putting your self-storage property on the market, take some time to make a firm assessment of the reasons you wish to sell. Look not only at the objective rational elements of the decision but the personal ones as well.
Preparing Your Manager for the Sale
In addition to preparing yourself for a sale, preparing your manager is also of critical importance. Should you inform your manager that you’re considering a sale? Yes, and for several reasons. First, it’s the right thing to do in fairness to a loyal employee. Second, the manager will likely learn of the impending sale, particularly if it’s aggressively marketed.
The manager’s cooperation can also be a great asset in the sale process. A good manager who knows the store and customers is a value-added feature and makes the property more attractive to a buyer. More often than not, a sale isn’t a threat to the manager.
While some new owners may hire a third-party management company or plan to hire a new manager, most will accept the current staff. Self-storage is a local business, so particularly for national or regional buyers, keeping existing employees makes sense. And only in rare occurrences do the new owners choose to operate the property themselves.
More often than not, the manager will become the buyer’s new employee. During the due diligence prior to closing, both the manager and prospective owner will get to know each other. The owner could also consider paying the manager a bonus upon closing the sale. This not only acts as an incentive to the manager but rewards him for his hard work.
Advanced planning is essential to the sale of your self-storage facility. If you’d like to show prospective buyers better operating revenue by raising rents, do so several months before putting your facility on the market. This will give a buyer more confidence in the numbers than if you raise rents only when you decide to sell.
Improved operating income can also be achieved through better collections and lien-sale efforts. Some owners may be reluctant to remove delinquent tenants, fearing this action will temporarily decrease physical occupancy. Keep in mind that buyers are purchasing income and not pure occupancy. The goal is to not only collect more income through collection but to replace non-paying tenants with paying ones. Again, this process can take time to accomplish, and a successful collection campaign is far better than the promise that the buyer can collect delinquencies once he takes over the business.
Another important planning element may relate to your real estate taxes. Since this can be one of the largest expense factors in your profit-and-loss statement, it’s a major contributing factor to your net operating income, which, in turn, will determine your final sales price.
In today’s challenging times, taxing jurisdictions continue to be busy identifying sources of revenue. During the past several years, during which we’ve had some impressive sale prices for self-storage facilities, taxing authorities have taken notice and responded with some substantial increases to industry tax assessments. Buyers have recently been burnt by surprises in real estate taxes after they have purchased a facility for a price higher than the underlying market value used by the taxing jurisdiction to derive assessed valuations for taxing purposes.
Telling a buyer he can appeal the taxes isn’t nearly as persuasive as taking the initiative and appealing your taxes successfully prior to a sale. In most cases, the tax-appeal process needs to be undertaken at prescribed times during the year and in accordance with a formalized schedule of applications and administrative or judicial proceedings, so planning in advance can pay off handsomely.
Operating your business with the right focus—even if you’re not immediately planning on selling—makes a great deal of sense. Such focus will result in better operating results each year until the time that you want or need to sell. The best time to prepare is before the sale.
Jeffrey Supnick is the president of Supnick Real Estate Co., a full-service firm devoted to self-storage brokerage, consulting and property-management services. A 25- year veteran of the self-storage industry, he formerly served as a real estate officer for Public Storage Inc. and Storage USA. During his career, he’s been responsible for the development of more than 40 self-storage sites. For more information, call 856.722.1414; e-mail [email protected]; visit www.supnick.com.