With interest rates and capitalization rates at all-time lows, and potential suitor-purchasers lurking about, many self-storage owners find themselves pondering this question: Do I sell now? Some are discovering their assets are more valuable than they imagined or, in some cases, not as valuable as they might have been led to believe.
Whenever I speak at industry events, I ask the owners in the room if they would be willing to sell their properties. Most of the time, very few raise their hands. Then I ask, “What if so-and-so large operator came knocking on your door with a blank check?” Then more hands typically go up. When pressed, most owners would at least consider the idea of selling.
What I often find is even if an owner wants to sell, neither he nor his property is ready. The facility isn’t managed to maximum value. Owners often leave a good deal of potential value on the table simply because they don’t know any better. I conduct a lot of acquisition due-diligence audits and, in most cases, I leave feeling somewhat sorry for the seller because of the simple steps he could have taken to increase his asset value.
Even if you aren’t currently planning to sell your storage property, since we never really know what might happen, doesn’t it make sense to manage the property as if you were going to sell it tomorrow? Why not ensure its maximum value at all times? Don’t you want to continually increase profit? To that end, consider the following “best practices” to capitalize on the potential of your asset.
Prepare monthly income statements. Any potential purchaser (in the case of a sale) or bank (in the case of a refinance) is going to want copies of at least 12, if not 24, months of income statements. The value of your self-storage facility is going to be primarily determined by some factor of the net operating income. Your financial due diligence should also include monthly reconciled bank statements and monthly management-summary reports.
On a monthly basis, your income statements, bank statements and summary reports should more or less balance with each other. Any buyer or bank will seek to confirm the income as stated by the summary reports is the same as the money deposited into the bank and the revenue reported on the income statements.
Also regularly review your facility expenses. Make sure you’re seeking competitive prices on all of your utilities and vendors, and keep up with the latest technologies for reducing costs, such as LED lighting and less expensive Internet options. Recognize that every reduction in expenses is an increase in your facility value, while every waste of money is a reduction in value.
Keep your unit inventory accurate at all times. During due-diligence audits, I regularly find inventories that are inaccurate. In some instances, these imprecisions can harm facility value.
Unless you’re adding or deleting units, your rentable square footage shouldn’t change. An undulating square-footage number indicates managers are moving units into and out of inventory, and you need to understand and be able to explain why this is happening. During one audit, I found a 10,000-square-foot discrepancy. The manager had incorrectly completed a large number of unit conversions and no one had noticed.
Make sure there’s an explanation for all “unrentable” units and a plan for removing them from the unrentable list. Every rented unit should have a tenant lock and every vacant unit should have a company lock. Also keep your number of company-use units to a minimum.
Keep your lease files precise at all times. One of the most aggravating issues for a potential buyer is rental leases that are inaccurate, disorganized, out-of-date and just plain missing. Every rented unit must have a signed lease, and the leases need to be filed by unit number, not alphabetically, for ease of auditing.
Every lease should list only one person as the tenant—no rentals to husbands and wives, boyfriends and girlfriends, moms and sons. Tenants with multiple units must have a signed lease for every unit. Even complimentary units must have signed leases, including manager units, owner units and charity units.
Keep up with your rate variance. Owners and managers often don’t monitor this number, and many don’t understand why it’s important. The rate variance indicates the amount of rental income the facility can’t collect due to tenants who are paying some rate less than the current street rate. A negative rate variance of only $1,000 can represent a loss in facility value of more than $150,000.
Regularly review this number and implement revenue-management strategies to reduce it. Frequently check the rent roll to look for tenants who aren’t paying the current street rates, and make sure you know why. Was there a recent street-rate increase, or do you offer “friends and family” discounts?
Finally, review all discounts and waived fees for compliance and appropriateness. These reductions in rental income can negatively affect facility value. They can even indicate potential theft. Implement policies and procedures to disallow such discrepancies.
Lastly, take a look at your site. When contemplating a sale or a refinance, or when you simply want to maintain maximum value at all times, it’s important to regularly review the physical state of your property.
Fix the dents and the dings. Nothing says “We don’t care!” more clearly and loudly to your customers than neglecting property damage. Make sure signs and flags are new and fresh, not torn or hand-made. Make sure unit numbers are in place and accurate. Check the state of the drive aisles. Look for roof leaks.
Since none of us ever really know what might happen, the best strategy is to manage your self-storage facility every day at maximum revenue, profit and value. I mean, who knows…
Bob Copper is the owner of Self Storage 101, a consulting firm specializing in self-storage. Bob and his team have worked with hundreds of owners, operators and managers to maximize asset value, conducting countless due-diligence audits and helping owners position their facilities to sell. To reach him, call 866.269.1311; e-mail firstname.lastname@example.org; visit www.selfstorage101.com.