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Know What You’re Buying! Information to Process During Self-Storage Due Diligence

Signing a purchase agreement for a self-storage facility may seem like a big step, but it’s really just the beginning of your acquisition journey. The due-diligence period is a critical stage during which you’ll decide whether to push forward or move on. Learn about the information to be collected and scrutinized during the process.

Brandon Robinson

December 8, 2022

6 Min Read
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So, your offer to buy a self-storage facility was accepted. You’ve signed a purchase agreement and have entered escrow. Congratulations are in order … right?

Well, maybe. Though you may feel like you’ve come a long way in your journey to acquire a property, in reality, the contract signing is just the beginning. Once escrow opens, it’s time to conduct due diligence to ensure the asset is in the physical and financial condition you expect, with a minimal or acceptable level of risk.

Due diligence is a crucial phase in any real estate transaction. It requires a detailed, careful analysis of key documents and inspections to ensure you’re making a sound investment. This is your opportunity to look for red flags that could make you back off the deal as well as value-add opportunities that might enhance it. Let’s discuss some of the items you’ll want to collect and inspect during this 30- to 90-day period.

Business Records

The initial stage of due diligence involves reviewing the self-storage facility’s financial records. These disclosure statements, provided by the seller, should document the history of the property from the owner’s time of purchase (or development) to present day. This is also when the seller should disclose any necessary repairs or outstanding maintenance.

Though there’s a lengthy list of documents that can be collected, the most common ones to review include:

  • Bank statements (proof of income) for the last 12 months

  • Profit-and-loss statements for the last three years

  • Property-tax bills for the last two years

  • Utility bills for the last 12 months

  • 12 months of other expense invoices

  • Copies of service contracts

  • Breakdown of facility unit mix

  • 12 months of management-summary reports

  • Current rent roll

  • Copies of rental agreements

  • Delinquent-tenants list

  • Occupancy reports

  • Payroll documents

  • List of personal property used at the site

  • Documentation regarding any potential lawsuits

  • Copies of all government correspondence

  • Two years of tax returns for the ownership entity

Also, if the current owner uses a third-party management company, request a copy of the management agreement.

You want to get an accurate sense of the money that’s been flowing in and out of the property as well as how the facility has been managed. Scrutinize for signs of shortfalls and gaps in reporting as well as any inaccuracies. For example, check tenant leases against the current rent roll to verify the operating statement. Compare bank deposits and management reports against income statements to ensure there are no inconsistencies. In addition, look for trends that indicate areas of potential improvement and any missed opportunities, such as ancillary profit centers, that you’ll be able to leverage to boost performance.

Local Records

Next, conduct a public-records search in the town where the self-storage property is located. This will require you to go to city hall and speak with the city planner or clerk to obtain a copy of the facility’s public file. This should include building permits, site plans and the Certificate of Occupancy. It’ll also identify any code violations, citations and nuisances the property may have caused.

Physical Inspection and Reports

The third stage of due diligence should include a physical inspection of the site as well as an examination of property-related and environmental reports. Buyers looking to purchase a facility of less than 40,000 square feet often choose to examine the property themselves; however, if you’re acquiring a larger asset, it’s highly recommended that you use a professional inspector. They’ll use their trained eye on the entire site and provide a detailed report of their findings. Either way, it’s helpful to have the seller provide a list of recent capital expenditures and deferred-maintenance items prior to the walk-through.

The inspection should examine all site structures and equipment including doors, roofs, fencing and gates, security systems, lighting, HVAC, etc. Use the seller’s list of recent projects to review the quality of work as well as to ensure that any necessary permits were obtained and the improvements adhere to local building codes, zoning and setbacks.

On occasion, an American Land Title Association (ALTA) survey may be required by your lender to verify property lines and boundaries. You should also receive a copy of the title report and the hazard disclosure, which states whether the property is in a flood zone or a natural-disaster area.

This is also the time to check for any environmental concerns via a phase-one site assessment. For this report, a professional firm will perform a detailed historical-records search to determine if any hazardous waste may be present at the property. Depending on the findings, a phase-two assessment may be needed in which soil samples will be pulled and tested for contaminants.

This part of the process can require a fair amount of investment. Here are some associated costs of which you should be aware:

  • Property inspection: $2,000-$5,000

  • ALTA land survey: $2,000-$5,000

  • Phase-one environmental report: $6,000-$10,000

  • Phase-two environmental report: $12,000-$15,000

Market Review

The due-diligence period should also be used to assess the immediate market area. Review the demographics—number of households, average income, population growth, etc.—to understand local economics and gauge the stability and growth potential of the market.

Next, survey local self-storage competitors to learn their rental rates, occupancy, site amenities and condition and see how your asset compares. You also want to know what new facilities or expansion projects may be in the works that could impact demand as well as future rates, occupancy and service offerings.

Appraisal and Loan Underwriting

The final stages of self-storage due diligence include a property appraisal and the underwriting process. To come up with a fair market value for the target asset, an appraiser will inspect the facility, review its financials and compare it against other similar properties in the area. The appraisal report, which generally costs $3,000 to $5,000, will be provided to you and your lender, who’ll review all buyer- and property-related documentation to approve or deny financing.

Final Thoughts

As you can see, conducting due diligence on a self-storage acquisition can be lengthy and expensive. Thus, it’s important not to get tied up in a property you aren’t serious about purchasing. Give yourself enough time to sift through and analyze all of the necessary documents, reports and inspections to decide whether to move forward. For the most seamless transaction, hire a trusted real estate professional to help guide you through the process.

Brandon Robinson is the president and a broker of Calvary Realty Inc., where he and his team have worked with several leading self-storage operators and facilitated contracts ranging from small transactions to multi-million-dollar deals. He has more than 16 years of self-storage experience including all-cash, seller-financed and off-market deals as well as lender-owned properties, short escrows, short sales and trustee sales. To reach him, email [email protected].

About the Author(s)

Brandon Robinson

President, Calvary Realty Inc.

Brandon Robinson is the president and a broker of Calvary Realty Inc., where he and his team have worked with several leading self-storage operators and facilitated contracts ranging from small transactions to multi-million-dollar deals. He has more than 16 years of self-storage experience including all-cash, seller-financed and off-market deals as well as lender-owned properties, short escrows, short sales and trustee sales. To reach him, email [email protected].

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