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Exit Strategies: Best Practices for Selling a Self-Storage Facility

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.

Dates Announced for Inside Self-Storage World Expo, Las Vegas 2010

The Inside Self-Storage World Expo will return to Las Vegas to produce the self-storage industry’s largest conference and tradeshow in 2010. The event, scheduled to take place Feb. 28-March 3, 2010, at the Paris Las Vegas will include educational seminars, networking opportunities, product and service exhibits, and add-on intensive workshops. Details such as seminar descriptions, speaker biographies and pricing will be added to the website at www.insideselfstorageworldexpo.com during the summer. In the meantime, self-storage owners, operators, managers, investors, developers and suppliers can get information and register for the upcoming ISS Expo in Washington, D.C., Oct. 5-8, 2009, hosted at the Gaylord National Resort & Convention Center.

ISS Blog

Being the Best on the Block

I came across an interesting article on CNN.com today. The CNN crew asked Americans their thoughts about the struggling economy. The views, of course, range from confused and scared to hopeful and annoyed.

The interesting thing about the story is how the economy has affected everyone regardless of race, sex, income and age. For example, 28-year-old Jeremy Coleman is fearful he may lose his job as a technology services worker. Patricia Lewis, on the other hand, is disabled and now battling foreclosure. It seems everyone has been affected in one way or another.

This year, the self-storage industry, often touted as recession-proof, has experienced fallout from the recession. New construction has slowed, and some facilities are experiencing lower occupancies and seeing more late payers. Still, in other parts of the country, some facilities are renting more units and have few delinquent accounts.

Whether you're experiencing a boom or bust, being the best on the block is critical. And it all starts at the front door. Here's a great article from the ISS archives about maintenance and remodeling.

If you have a maintenance tip you'd like to share, click on post a comment below.

 

 

 

D.C. Taylor Co. Provides Series of Roofing Webinars

D.C. Taylor Co., a nationwide commercial and industrial roofing contractor, will present a series of free “Online RoofTop Seminars,” webinars created to provide facility managers, plant engineers and building owners with roofing information and expertise. The one-hour sessions will be taught by roofing professionals and other industry experts. Continuing-education units are available for most sessions. This year’s topics are:
 
March 18: Criteria for Selecting a Roofing Contractor
Before hiring a roofing contractor, learn how to evaluate and select a contractor that best meets your needs―and can complete the job safely.
 
April 29: Is Solar Right for Your Roof?
Find out if solar energy makes sense for your facility. You'll learn about different types of solar panels, what kind of roof structures are good candidates for solar installations, and how to find financing options that can make solar energy generate even more income for your business.
 
May 27: Food Safety: Protecting Your Brand
A single roof leak can result in lengthy production shutdowns and lost consumer confidence. This seminar will help you reduce the risk of contaminants entering a food-processing facility through the roof. Learn how to protect yourself during roofing projects and through ongoing maintenance.
 
September 16: Increase Your Profits With Roof-Asset Management
Learn how the implementation of a roof-asset management program can lower your total roofing costs, help you make better, more timely roofing decisions, improve record-keeping, and allow you to focus on core business activities that generate profits for your company.
 
October 21: Why Roof Safety Is Everyone’s Responsibility
When an accident happens, newspaper reporters and customers tend to remember where the incident happened, not who was responsible. Learn how to avoid bad publicity and protect your employees by maximizing roof safety and minimizing hazards.
 
December 9: Maximizing the Value of Your Roof Warranties
Learn how to read the fine print, understand what you are agreeing to, and what you have to do to meet the requirements of your roof warranty. This seminar will teach you the steps you need to take to maximize the value of your manufacturer's warranty.
 
All webinars begin at 12 p.m. CT. For details and to register, visit www.dctaylorco.com/seminars.

Investment Real Estate Brokers $8.1M Sale in Virginia

John Barry of Investment Real Estate brokered the sale of Storage America of Fairfax, Va., to StorageMart for $8.1 million. The 60,984-square-foot facility was 90 percent occupied at time of the sale. The two-story facility has 453 units, eight office suites, a first-floor drive-through lane, and onsite manager’s office and apartment. For more information, visit www.irellc.com.

Fort Wayne, IN, to Get Several Self-Storage Complexes

A 2.3-mile stretch of Stellhorn Road in Northeast Fort Wayne, Ind., may soon contain four self-storage complexes. In addition to a $5 million facility proposed by Fort Wayne Self Storage LLC, StorAmerica LLC has started site work on a 50,000-square-foot facility expected to cost more than $1 million, and two more proposed sites will cover more than 110,000 square feet. If all four projects are built, fierce competition could ensue.
 
Local senior-housing developer Yellow Retirement LLC also wants to get in on the action, with plans to invest $1.5 million in a 36,600-square-foot self-storage facility for its tenants. The Fort Wayne Plan Commission is scheduled to hold hearings on that project and Fort Wayne Self Storage’s proposed facilities next month. Other nearby storage projects already have zoning approval.
 
Fort Wayne Self Storage has three other Allen County locations, including one that opened last month on Thomas Road, according to Kyle Zimmerman, general manager and part owner.
 
Source: Fort Wayne JournalGazette.net, Surge in self-storage: Developers to fill void on Stellhorn with 4 sites

W.P. Carey Forms Self-Storage Joint Venture With Harbert Management

Investment-management company W.P. Carey & Co. LLC and its affiliate, Carey Storage, together with investment-management firm Harbert Management Corp., are contributing a total of $50 million into a new self-storage joint venture. The venture begins with an existing portfolio of 13 self-storage properties worth $60 million that have been by W.P. Carey's investment team over the past two years. The company manages approximately $440 million in self-storage assets. The team is actively pursuing additional acquisitions.
 
W.P. Carey is an investment-management company that provides long-term sale-leaseback and build-to-suit financing for companies worldwide. The company manages a global investment portfolio worth more than $10 billion. It began investing in net-lease properties in 1973 and has been managing its Corporate Property Associates series of real estate investment trusts since 1979.
 
Based in Birmingham, Ala., Harbert is an investment-management firm managing more than $8.9 billion in assets and committed capital as of January 1, 2009.
 
Source: CNNMoney.com, W. P. Carey and Harbert Management Form Self-Storage Joint Venture

Obama Unveils $75B Foreclosure Prevention Plan

Homeowners facing foreclosure will have help next month. Last week, President Obama unveiled details of a $75 billion foreclosure prevention plan designed to help seven to nine million “responsible” homeowners remain in their homes with affordable mortgage payments. The official rollout date for the program is March 4.

It's a move backed by the National Association of Home Builders (NAHB). “We applaud the Obama Administration for unveiling its plan to stem the rising tide of foreclosures that is flooding the market with excess inventory and undermining overall home values,” says NAHB Chairman Joe Robson. “This is an important first step to address the acute supply problems confronting the housing market.”

The plan has three main components: a refinancing program, a mortgage modification program and actions to bolster the financial stability and mortgage support capacity of Fannie Mae and Freddie Mac, two leading lenders.

The Obama Administration believes its plan will enable Fannie Mae and Freddie Mac to refinance loans for four to five million homeowners.

Source:  Nation's Building News,  Obama Foreclosure Plan to Help Resolve Housing Crisis

Electric Back Door for Moving Trucks

On the Move Inc., a provider of truck-rental programs and related insurance for self-storage and other industries, and its business partner, Unicell, released a new feature for its trucks: an electric back door. The new door opens with the simple push of a button on the key fob. The companies expect to unveil this new feature to customers this summer. A retrofit for existing vehicles will also be made available. Info: www.onthemovetrucks.com

On the Move Trucks Commemorates 15 Years in Business

On The Move Inc. (OTM), a provider of truck-rental programs and related insurance for self-storage and other industries, recently celebrated its 15th anniversary. In recognition of this milestone, Unicell, OTM’s business partner of 15 years, awarded the company with a plaque. The two companies have worked together to create the aerodynamic design features of the Aerocell truck body and other truck designs for the self-storage industry. For more information, visit www.onthemovetrucks.com.

(From left to right) Susan Nash, OTM Executive Vice President, Scott Vader, Unicell President, and Mark Ulfig, OTM President/CEO