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Why So Many Dang Documents? Understanding the Self-Storage Due-Diligence Process

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Due diligence can feel invasive for the seller during a self-storage property sale, but it’s a critical stage of the transaction. Learn about the process and why buyers need all those darn documents.

If you’ve recently decided to sell or purchase a self-storage facility, then “due diligence” should be a familiar topic. In plain terms, it’s the process of taking reasonable steps to ensure the terms and conditions of a transaction meet a particular standard before you proceed. The analysis can be superficial, like walking around a used car and giving the tire a sturdy kick, or more of an in-depth, investigative audit. For a self-storage property, the complexity of the procedure will usually fall somewhere in between.

Due diligence is often a misunderstood phase in the purchase/sale transaction, so let’s shed some light on the subject, looking at requirements and best practices.

Establishing Cooperation

During the due-diligence period, the buyer and seller agree to work together toward a common goal: a successful closing. The seller stops actively marketing the facility to other prospects, giving the buyer a chance to examine the property and determine if it’s prudent to move forward. Ideally, both parties will have given some thought to the process before contract negotiation begins.

First, the details of the due-diligence phase need to be settled and spelled out in the purchase-and-sale agreement. The buyer and seller must agree on what is often a lengthy list of documents to be provided to the purchaser as well as timing. Generally, the review period lasts 30 to 90 days, depending on the buyer’s resources and the scope of the deal.

Understanding the Requirements

Due diligence can feel invasive to a seller. Not only does he have to provide a wealth of information, he needs to provide site access to a number of third-party consultants for things like environmental testing, property-condition assessment, appraisal, land surveys and more. However, most visits don’t cause any significant interruption or undo strain. The seller should just adhere to his normal business practices during this time, focusing on rentals, facility maintenance, marketing, etc.

The buyer will request a lot of documents. Some are mandatory due to bank requirements, while others may be negotiable. Before the terms of the purchase-and-sale agreement are set, the seller has some leeway in determining what will be provided to the buyer and when. Here’s a sample list of due-diligence documentation provided during a self-storage facility sale:

  • Tax returns (three years)
  • Income statements by month (three years)
  • Balance sheets by month (three years)
  • Tax bills (one year)
  • Utility bills (one year)
  • Management summaries by month (one year)
  • Occupancy statistics by month (one year)
  • Copy of the rental agreement
  • List of all current leases
  • List of major improvements with their value
  • Pertinent permits and licenses
  • Environmental reports
  • Surveys
  • Certificates of Occupancy (all buildings)

The buyer uses all these reports to recreate and simulate the current state of the business and make high-quality projections about future income. It benefits both parties when those projections are based on plenty of reliable data points that account for seasonality, changes in demographics and development in the area. In the end, the shared goal is for both sides to move forward with confidence. This is best achieved through patience and cooperation.

Being Prepared

Just as experienced buyers can rely on a proven checklist of due-diligence requirements and procedures, sellers can facilitate the process with a little preparation. Keeping well-organized records won’t only make things easier, conducting a monthly review of these items can provide the owner with valuable insight. Treating records maintenance as a regular item on the to-do list is a best practice that can have far-reaching benefits, especially when it comes time to collect data during a facility sale.

Anna Beumer is due-diligence coordinator for The Storage Acquisition Group, a commercial real estate firm that specializes in self-storage transactions. She’s responsible for municipal research, site-assessment investigations, site planning, preparation of due-diligence reports, and tracking facilities throughout the acquisition process. For more information, visit https://thestorageacquisitiongroup.com.

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