The Steps of a Self-Storage Real Estate Transaction: How Buyers and Sellers Contribute to a Successful Close

When participating in a self-storage real estate transaction, either as a buyer or a seller, you have a role to play and a process to follow. Though the length of negotiation and other details may vary, there are principal steps that must always be taken. Let’s look at what you can expect when attempting to reach a deal and how to get to the closing table successfully.  

Coming Together

To begin, buyer and seller must agree on a realistic, market-supported starting point for price negotiations. Both should be amenable to a confidentiality agreement before exchanging proprietary information. In addition, you should be clear about any extenuating circumstances that may require an adjustment to the transaction timeline, such as tax considerations, third-party inspector availability, financing issues, etc.

To help move things forward, the buyer must be prepared to provide the seller with a list of reports and other information needed to perform a thorough assessment of value. The buyer should also provide a letter of intent or purchase and sale agreement (PSA). Once the seller has this in hand, they should consult with an attorney and counter with any desired changes to begin a formal negotiation.

Once terms are agreed and both parties sign, the buyer should deposit earnest money as outlined in the PSA. At this time, you have formalized the process, which moves into the due-diligence period.

The Role of the Seller

Sellers should expect a due-diligence period of 30 to 60 days, followed by a closing period of 30 days. During due diligence, the seller’s No. 1 priority should be to continue running their self-storage business as efficiently and profitably as possible. This is also when they should gather and organize materials the buyer will need to review to make an informed decision about the property. These include 12 months of financial statements, operational reports, bank statements, rent rolls, surveys, environmental reports, approved building/zoning plans, and a list of any major improvements.

The seller will also need to provide the buyer with access to third-party vendors. In most cases, any terms regarding access, notice and confidentiality will have been addressed in the PSA negotiations. In addition, the seller should begin focusing on a transition plan for staff, utilities, vendor accounts, equipment, and any business property that won’t convey with the sale.

The Role of the Buyer

Self-storage buyers have their own set of responsibilities during due diligence. If financing will be required to purchase the property, the buyer should have all the required debt and equity lined up and committed. At the same time, they should perform a thorough review of the facility’s financial and operating reports or hire someone who can perform such an evaluation within the constraints of the due-diligence period.

In addition, the buyer should vet and book any third-party vendors needed to perform the required consultations. Not only must site visits be performed within the due-diligence period, buyers need to allow enough time to review any returned reports. It’s also the buyer’s responsibility to have a clear understanding of the criteria they’re looking for once financial and operational reviews are performed.

Avoiding Problems

It should be the goal of the self-storage buyer and seller to have a simple, seamless sales process and avoid potential problems and delays. Things can happen, though, so they should always have a contingency plan and know where they’re willing to compromise when problems arise. It’s also essential for both parties to do their homework and understand market conditions. Taking the time to research the market, including sales comparables, rental summaries and development pipelines, will pay off when it comes time to negotiate a price.

Transaction times can range from 60 to 120 days (without complications). To avoid frustration, both parties should begin by setting clear guidelines and taking the time to make sure essential items have been addressed.

Whether you’re the self-storage buyer or seller, you have a vested interest in completing the transaction, so transparency is the key to a successful deal. If either side experiences an unforeseen challenge, it’s highly likely both will want to come together to find a solution and salvage the transaction. Having realistic expectations and goals when presented with delays in the process will allow buyers and sellers to collaborate more efficiently.

Potential Impacts

Self-storage is among the real estate sectors in which recent trends can cause market changes and impact transactions. For example, COVID-19 created challenges that slowed many deals. Moratoriums on raising rent and pursuing evictions altered the outlook of many facilities, which affected owners’ ability to provide accurate reporting to initiate a sale. Fortunately, some of this reversed in 2021, with self-storage again showing resilience through disruption.

Repeated high performance has only heightened the exuberance of investors who focus on this sector. The storage industry has proven to be an effective hedge on investment dollars for companies and individuals looking for a recession-resistant way to invest their capital. Still, there are potential issues that can affect the market. For example, proposed tax changes may have a significant impact on the urgency to enter into a real estate transaction. With uncertainty surrounding capital gains, set up in basis, and 1031 exchange options, sellers may choose to expedite future liquidation plans.

No matter the market conditions, though, the best advice for self-storage buyers and sellers is to set realistic expectations, be willing to do the homework, prepare for and be patient through unforeseen challenges, and bring integrity and transparency to your transaction. If you do those things, you’re more likely than not to reach a successful and satisfying deal.

Monty Spencer is CEO of The Storage Acquisition Group, which specializes in acquiring off-market self-storage facilities and portfolios nationwide. The company also offers market-analysis reports, underwriting and closing support. For more information, call 757.867.8777.