So you have an opportunity to purchase an existing self-storage facility. You need a checklist of what to look for, and what to look out for in your purchase decision. With so much riding on this important choice, its easy to overlook some of the critical points on which you should focus. To ensure you cover all your bases, try breaking down the assessment into these four key areas: financial statements, site inspection, management team and location metrics. (Note: This article assumes the buyer will be represented by independent advisors during the purchase and final acquisition of any self-storage site.)
First, youll want to obtain the past three years of federal tax returns for the property. You should also obtain internal reports such as a current rent roll, rate and occupancy report, the unit listing, and the unit-mix reports.
Examine the income numbers to see what amounts are actually coming from the rental of self-storage units vs. other facility revenue such as truck rental or the sale of boxes and locks. Break out the rental income and compare it to a rent roll. For discussion purposes, let's say our target property has 350 units and brings in a total of $375,000 annually. Roughly $360,000 is generated from rental income, with the sale of boxes and locks making up the remainder.
You should be able to tie into the income numbers with a current rent roll and feel confident about the income stream. After all, that stream is what youre really purchasing. If you can't tie into these numbers, dig deeper so you can understand exactly whats going on financially at the store.
Next examine, on a cash basis, what it costs each year to operate the facility. Management salary, insurance, property taxes, utilities and maintenance are the big items. Does anything stand out? Are the total operating-expense numbers between 25 percent and 35 percent of net rental income? If they're above 35 percent, you need to determine why. Has the owner neglected to increase rental rates? Did property taxes increase? Was there an unusually large maintenance expense? You need to understand these numbers as well.
Finally, look at the income and expense trends over the past three years. If the store is newer, perhaps its still in lease-up and a large income increase is expected. If its an older store, the annual rental increases are smaller.
Obtain the current tax value on the property from the local taxing authority. If the owner has an appraisal, thats helpful as well. Check for any property-tax surprises coming down the road or any special assessments. Remember, youre buying an income stream. You want to maximize potential income items while minimizing any future surprises in terms of operating expense.
First, drive by the self-storage facility to get an overall curb appeal feel for the store. Next, visit the store and look for more detail on the physical layout. Sometimes I mystery shop the store, and sometimes I directly inspect as a potential future owner. My list includes, but is not limited to:
- How old is the store?
- How many owners does it have?
- Are the drives in good shape, or are there many cracks with broken asphalt or concrete?
- How do the doors look? Are they warped, discolored and non-operational? Do the latches need replacing?
- How many damaged or discolored columns are there?
- What type of roof system does the facility have? Is it standing-seam or something else? How old is it?
- What does the office look like? Is it clean and neat?
- How does the landscaping and exterior signage look?
- Does the facility have a CCTV system and a modern gate system?
For the most part, the above items are cosmetic in nature. They can sometimes be corrected with only minor effort and cost. My caveat is if there are too many deferred maintenance items, the costs can escalate rapidly, and the store may be one to simply avoid purchasing.
Youll want to meet the key operating personnel of the store. This is normally the manager and possibly a weekend-relief person. Your goal is to retain good employees. Make sure you understand how important the managers are to the success of the existing operation.
Are they involved in the local community? Have they been managers for a number of years with good occupancy and revenue numbers or less than stellar? If the managers are great, you need to make sure they continue in your employment during the change in ownership. The loss of a key employee through a change in ownership can result in a dramatic decrease in occupancy and revenue.
You need to understand the location metrics of a self-storage store, since its virtually impossible to change. There are several items that really cant be corrected, such as if the store was built on a flood plain, has environmental issues, lacks expansion possibilities, has limited visibility from the major thoroughfare, has poor layout and design, or deteriorating demographics and excessive competition in the area. These are deal-killers, the types of items money cannot fix.
Finally, note if the potential acquisition target is in your existing market area. You need to have some additional pricing leeway in consolidating a competitor in your market.
Go or No Go
No-go items are the things you cannot fix, for example, a store thats built in a flood-prone area, or the layout is such that it would be inconsistent with achieving a healthy future return. Pass on these potential acquisition targets.
Go items with corrections are those you can fix with some effort and expertise. These may include minor store renovations or cleaning, improving the marketing, and making a manager change. Of course, give some additional leeway if youre acquiring a competitor in your existing market.
Time for a final gut check. Youll probably never see the perfect store available for purchase, so try to be the best informed buyer you can be, and exclude the stores that have obvious no-go items or too much deferred maintenance. If the acquisition target is in the gray area, its probably worth skipping as well. Only when you feel confident in your analysis that you have minimized the downside risk of acquisition should you move forward with your purchase decision. The best of luck to you!
Jeffrey Turnbull is president of Kodiak Mini Storage LLC. He has been involved in the self-storage business as a developer, owner and operator for more than 17 years. He currently owns two stores in the Charlotte, N.C., market. Hes a licensed attorney in North Carolina, a licensed real estate broker in North and South Carolina, and a past president of the North Carolina Self Storage Association. Hes also a frequent contributor to Inside Self-Storage and a speaker on various self-storage industry issues. He can be reached at [email protected] .