For anyone developing a self-storage facility or currently operating one, it is never too early to think about the day you sell your property. In planning your exit strategy today you will not only be rewarded by operating a better investment in the present term, but you will also be handsomely rewarded in the future when the property is sold.
In other words, the more cash you generate during the time you own your facility, the more money you will make when you sell. The key to reaping these rewards is planning. The planning principals in this article relate to structuring your current loan, creating good financial reporting and detailed property records, and proper tax planning, all of which needs to take place before the benefits can be realized in the future.
Although the pace of self-storage facility sales has recently diminished considerably, it is anticipated that sellers will continue to enjoy great opportunities well into the future. Over the past several years the availability of substantial amounts of capital at attractive terms has fueled incredible opportunity for those selling their self-storage facilities at premium prices.
In the midst of the present severe contraction of credit for real property in general, including self-storage properties, there are still many reasons to be optimistic about the self-storage industry. Plus, there are still a reasonably large number of self-storage properties being sold today using more creative means to get deals completed.
Your Current Debt Structure
Having the right financing in place is more important now than ever before. Structuring your current loan properly can make your facility far more attractive to potential buyers. The wrong type can make it expensive to sell and will eat into your profits.
The commercial mortgage-backed securities (CMBS) loans that were so prevalent in the past several years provided substantial penalties to those seeking to sell or refinance their properties prior to the expiration of the loan term. On the other hand, those same CMBS loans were assumable to purchasers of the underlying real estate.
In the current lending environment, having an assumable loan can be a major benefit to a buyer and seller. Currently, lender requirements call for buyers to have as much as 35 percent equity in a project. These high down-payment levels shrink the pool of qualified buyers and limit the cash-on-cash returns a buyer can expect to achieve.
If you are in the market to finance a new project or refinance an existing one, consider asking the lender to allow for a loan assumption provision. It is important that you fully understand your current loan and the implications of that loan when you are ready to sell.
Lending institutions today have become extremely conservative and extraordinarily cautious. These institutions are nearly unified in their need to have a thorough understanding of your facility operating procedures so that they can attain the confidence they require to make an important financial decision.
Make sure you can demonstrate to investors and lenders that you have a sound accounting system; do not wait until you have made the decision to sell to implement your financial controls. An investor must be convinced that the financial accounting you are presenting adequately represents the financial condition of your property. Otherwise, that investor will be likely to either pass on your opportunity, offer less than he might be willing to pay, or be unsuccessful in obtaining the necessary financing to make the acquisition.
The rationale of presenting a true picture of your financial operations is not limited to being fair to a potential buyer; it also needs to be fair to you as a seller. When making expenditures on your property, be careful to distinguish between operating and capital expenses. An operating expense is any amount paid to maintain your facility or any cost of doing business. A capital expense is typically an investment in the property that increases value and is not routine in nature.
Examples of a capital expense would be adding landscaping or putting on a new roof, as opposed to operating expenses which are lawn care or minor roof repair. In establishing your accounting procedures, take care to distinguish between these categories of expenses. If an owner fails to make such a distinction, he could penalize himself by overstating actual expenses, which would lead to a diminished valuation.
Allow for Time
Loans today take longer to obtain and lenders require more assurance about the continued performance of your property. A portfolio of data and information on your property can be readily integrated into a loan package and is invaluable in creating the certainty in your property that your prospective buyers will need to obtain their loan and close the sale on your property. Here is a short checklist of the information a buyer will need:
- Facility acquisition document list
- Full-size site plan
- Building plans, land-use approvals and building permits
- Loan documents and previous title report
- Property tax bill for the last two years
- Sample copy of a lease
- Insurance policies
- One year of utility bills
- All service contracts (Yellow Pages, trash, snow, pest and landscape)
- List of any personal property included in the sale
- Rent roll: unit sizes, numbers, rental rates, move-in dates, rate increases with dates
- List of delinquencies and aging report
- Monthly occupancy and income report for past two years
Planning Is Essential
In addition to providing what we may look back on as a favorable capital gains tax rate of only 15 percent, the Internal Revenue Service offers you the opportunity to indefinitely defer the tax consequences of any sale of a business property according to Internal Revenue Code Section 1031. This procedure is commonly referred to a 1031 or Like-Kind Exchange.
Property under a 1031 Exchange, if used for investment or business purposes, can be exchanged for “like-kind” properties. The rules concerning what constitutes a like-kind property are somewhat liberal. As far as timing is concerned, replacement property must be identified within 45 days and the actual purchase must close within 180 days. With so many investors having recently sold real estate for a profit, there are many in the market looking for “exchange” properties to buy. This factor has been partly responsible for rising valuations of investment properties as buyers have been outpacing the supply of sellers of investment properties.
Owners can increase their liquidity and sell shares as they need funds or never sell shares at all and avoid gains on share appreciation by having the shares go to their estate and having their heirs inherit the shares at what is know as a “stepped-up basis.” Once again these tools require not only professional guidance, but also taking steps in advance of selling.
Jeffrey Supnick is president of Supnick Real Estate Co. and is a 25-year veteran of the self-storage industry. Supnick Real Estate Co. is a full-service firm devoted exclusively to self-storage brokerage, consulting and property management services. For more information, call 856.722.1414; e-mail [email protected]; visit www.supnick.com.