If you’ve seriously targeted a self-storage property to purchase and both you and the seller are close to executing a Purchase and Sale Agreement (PSA), you’ll be staring down the barrel of an intense process called due diligence. This period allows you to investigate the investment to confirm its worthiness. Though the practice isn’t unique to self-storage (it’s part of all real estate transactions), any commercial acquisition can be quite involved, even when it seems straightforward.
Due diligence was established to minimize risk and create a method for buyer and seller to clearly know the pitfalls and rewards of the deal, all within a practical timeframe. Essentially, it’s your opportunity to exercise reasonable care and prudence with respect to three key components:
- The condition of the property (physical and intellectual)
- The business’ financial records
- The local market
In short, know what you’re buying! It’s just good sense. Also, the data collected during this period will often be required by any third-party lender.
Due diligence is your opportunity to sidestep future problems. For example, an examination of the property might reveal an environmental issue. If remediation comes at a significant cost the seller is unwilling to cover, then you can terminate the PSA at no penalty and regain the deposit —as long as it’s prior to the end of the inspection period. In most instances, once due diligence is complete, any initial deposit becomes nonrefundable.
What’s Your Timeframe?
Usually, the due-diligence period is negotiated as part of the PSA. While some agreements call for as long as 60 days, most fall within 30 to 45. If the process can’t be completed within the stated time, attorneys for each party must generally get involved to create addendums and extensions.
The passage of too much time can kill a transaction, and you don’t want that to happen. As the buyer, you’re eager to close the deal, and the seller doesn’t want their property off the market too long, unavailable to other buyers. To avoid a lapse, the seller should work with their onsite team to ensure the agreed-upon materials are ready to share and accessible to those who need to review them.
During the due-diligence phase, there are many items you should examine. You’ll have the ability to review the physical self-storage property and its financial records. Below is a list of key documents and information. Sellers should be prepared to share these and other essential items. Access to this material is critical to properly evaluate the business, and cooperation between parties is key.
- Complete rent roll with tenant names, unit numbers, unit types and sizes, monthly rent, security-deposit amounts, and paid-to dates
- End-of-month reports for the past year and current year to date (YTD)
- Income and expense statements (profit-and-loss statements) for the past year and current YTD
- The tenant lease
- A list of personal property to be transferred to the buyer as well as items specifically excluded from the sale
- All service and other written contracts relating to the property, such as pest control, landscaping, snow removal, website hosting, etc.
- The last three years of tax returns
- The last two years of property-tax bills
- The last 12 months of all utility bills
- Repair and maintenance records
- Manager’s employment contract or an outline of current compensation including name, pay rate, bonus/commissions, approximate work hours, and hire date
- All permits in the seller’s possession for any aspect of property operation
- Agreements for ancillary profit centers, such as cell towers and billboards
- Site and/or building plans
- Certificates of Occupancy for each completed building
- The insurance policy and last invoice
- The last title search (if any)
- The environmental phase 1 and soils reports (if any)
- Insurance-loss reports for the previous three years
Along with the facility’s physical assets, pay attention to the intellectual property. Goodwill associated with a business name is often accompanied by registered and common-law trade and service marks that should be made a part of the transaction.
Frequently, a business will license software and other technology that may or may not be assignable when it changes ownership. Review all non-storage agreements for termination-notice requirements and assignability.
You should also get an accurate assessment of the local market. Understanding existing and future competition, demographics, and business development in the area are all a buyer’s concern. Occasionally, the data reveals that the seller wasn’t overly aggressive in adjusting rental rates to suit market conditions or didn’t take full advantage of ancillary revenue streams, such as tenant insurance and retail sales. Knowing there’s room for improvement can change the value of the property.
Though the PSA may include a broad description of what you’re permitted to inspect or a list of specific items, there are no hard and fast rules for what a self-storage buyer can or should consider when evaluating a transaction; so, look at everything you can! You need to be satisfied that you’re gleaning all the information you need to make a smart decision. A well-prepared seller will expedite the due-diligence process and gain the fast track toward a successful closing and sale proceeds. When this occurs, everyone wins!
Having a successful exchange of data is key to navigating the self-storage transaction and closing the acquisition and financing. If you’re planning to buy a property or sell an asset or portfolio, getting a firm grasp on expected due-diligence materials will put you on the right track toward a smooth settlement!
Rick Hansberry is director of acquisitions for Investment Real Estate LLC, which brokers the sale of self-storage facilities in the Northeast and mid-Atlantic. He’s also responsible for handling the acquisitions and operational matters for Moove In Self Storage. In addition, Rick is a screenwriter with more than 14 short and feature films to his credit. For more information, call 717.779.0804; email [email protected].