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Essential Steps of the Self-Storage Due Diligence-Process, Plus Important Trends to WatchEssential Steps of the Self-Storage Due Diligence-Process, Plus Important Trends to Watch
The devil is in the details when buying or selling a self-storage property, and due diligence is a vital part of the process. Learn about the essential steps. including the collection of property-level information and a thorough market analysis, and how they impact both sides. You’ll also discover important trends to watch.
Ben Vestal
December 16, 2024
6 Min Read
The devil is in the details when buying or selling a self-storage property, and a keen attention to the due-diligence process can make the difference between success and failure. Both buyer and seller have an important role to play. Often, there’s a real estate broker involved, too.
Brokers are often thought of as promoters and salespeople, but their true value is often revealed as they assist clients during the due-diligence phase of an acquisition, regardless of which side they represent. This can be critical, as many buyers and sellers are unfamiliar with the minutiae associated with a complex transaction of this nature. With that in mind, let’s explore the essentials of the due-diligence phase, plus some trends to watch.
The Due-Diligence Timeline
The time allowed for due diligence in a self-storage acquisition is outlined in the purchase-and-sale agreement. This is arguably the most important aspect of the contract, as both buyer and seller commit to working exclusively with each other to reach closing.
During the due-diligence period, the seller agrees to remove the self-storage asset from the market and assist the buyer (and possibly the buyer’s lender) in understanding the property details. The buyer agrees to spend the appropriate amount of understanding that information. They may engage consultants to provide an appraisal, environmental study, property-condition assessment, zoning-compliance report, title commitment and survey. This is to satisfy their understanding of the facility and possibly arrange financing to acquire it.
Depending on the buyer’s experience and the complexity of the self-storage transaction, due diligence can generally be completed in 30 to 60 days. However, most clauses in the purchase-and-sale agreement allow the buyer to approve all items at their sole discretion and will allow them to terminate the sale without penalty. If you’re a seller, consider working with a qualified industry broker who can refine the due-diligence language and identify the good and bad buyers in the current market.
Property-Level Due Diligence
The self-storage buyer and seller should collaborate to gather all required information for the first phase of due diligence. In fact, the seller should begin collecting and organizing necessary documents well before the property is even listed. The buyer should provide the seller with a list of requested items when they submit their offer.
If you’re the seller, be prepared for an influx of requests, as the era of low- or no-documentation loans is over, even for the most qualified buyers. Below are a few of the basic property-level documents that’ll get the exchange going. You may face challenges to deliver, as some of these can be difficult or impossible to locate.
Three years of profit-and-loss statements, broken down by month if possible and in Excel format
Two years of property-tax statements
Monthly management-summary reports for the past 12 months, dated on the last day of each month
Monthly occupancy reports for the past 12 months
Monthly utility bills for the past 12 months
Three years of tax returns for the ownership entity, including only property-level information
A copy of the Certificate of Occupancy from the city
List of all personal property on the site
List of any vendor contracts that can’t be terminated with 30 days’ notice
Copy of the facility’s standard lease
Phase I environmental studies
Site survey and all municipality documents
Photos of the property (preferably on a sunny day)
Market-Level Due Diligence
Today, this is the most important part of the self-storage due-diligence process. With dynamic unit pricing now prevalent throughout the industry, it’s challenging to find a submarket (within a 3- to 5-mile radius) where street rates aren’t significantly lower than the in-place rents of existing customers. Yes, that’s correct: New customers are often paying less and, in many cases, much less, than tenants who have been with the facility for a while—sometimes a long while.
Since the tapering of the pandemic and the sharp increase in interest rates, demand for self-storage has been decreasing, forcing facility operators to capture customers with lower street rates. Despite these rent specials and lower occupancy levels, many operators have managed to hold their revenue steady through aggressive increases to existing-tenant rents. However, we’re beginning to see a decline in rent rolls, which may slow growth in net operating income over the next several quarters. If you’re a self-storage buyer, you need to conduct your own market due diligence to verify the asking rents in the submarket and assess the appropriateness of the seller’s revenue projections.
We’re also seeing a significant number of fully entitled “shovel-ready” developments being marketed for sale. This is due to a challenging construction-financing market and developers’ concerns about where in-place rental rates will settle following the rent-roll decline. Right now, it’s very difficult to make a new project pencil out. However, as interest rates stabilize, the finance market may rebound, creating an oversupply of new self-storage. Therefore, as part of the market due diligence, buyers should research potential new projects in the area.
Preparing for Unexpected Shifts
As a buyer examines the details of the self-storage asset they’re buying, they should keep in mind that they and the seller may differ in significant ways, and a sale may lead to unintended financial consequences. For example:
If the seller is a large, experienced operator, they may enjoy discounts in their insurance premiums due to economies of scale. If the buyer’s business is smaller, they may experience a dramatic increase in costs for this property.
When ownership changes, some of the vendors who serve the facility, such as the landscaping or pest-control company, may take the sale as an opportunity to adjust their service contract to reflect current market rates, which can be significantly higher.
The local municipality may reassess the property value at the time of sale, which could lead to increased property taxes.
Whether you’re the buyer or the seller, you must be prepared for unexpected shifts and how they might impact facility cash flow. While issues may arise, a successful closing is still achievable if both parties are committed to collaboration. A professional self-storage broker can provide insight to how similar challenges have been resolved on other transactions.
Again, the devil is in the details, so watch for them. Ultimately, self-storage due diligence is all about dotting the i’s and crossing the t’s. If you can work carefully and harmoniously with the buyer, seller and brokers, you’ll get it done.
Ben Vestal is president of Argus Self Storage Advisors, a national network of real estate brokers who specialize in self-storage. The company provides brokerage, consulting and marketing services to buyers and sellers via an extensive marketing platform. Property listings and informational resources can be found at the company website. For more information, call 800.55.STORE; email [email protected].
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