When you participate in a self-storage real estate transaction, whether as a buyer or a seller, you have a role to play and a process to follow. Although the duration of the negotiation and other details may vary, there are certain main steps that should always be followed. Let’s take a look at what you can expect when trying to close a deal and how to make it to the closing table successfully.
To begin, the buyer and seller must agree on a realistic, market-supported starting point for price negotiations. The two must agree to a confidentiality agreement before exchanging proprietary information. Additionally, you need to be clear about any extenuating circumstances that may necessitate adjusting the timing of the transaction, such as tax considerations, availability of a third-party inspector, financing issues, etc.
To get things done, the buyer should be prepared to provide the seller with a list of reports and other information needed to perform a thorough value assessment. The buyer must also provide a letter of intent or a purchase and sale agreement (PSA). Once the seller has this in hand, they should consult with an attorney and counter any desired changes to begin formal negotiation.
Once the terms are agreed and both parties have signed, the buyer must deposit the deposit as indicated in the PSA. At this point, you have formalized the process, which enters the due diligence period.
The role of the seller
Sellers should expect a 30-60 day due diligence period, followed by a 30 day closing period. During due diligence, the seller’s #1 priority should be to continue to run their self-storage business in the most efficient and cost-effective manner possible. This is also when they should gather and organize the documents 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 lists, surveys, environmental reports, approved building/zoning plans and a list of all major improvements .
Seller shall also provide Buyer with access to third party vendors. In most cases, all access, notification and privacy requirements will have been addressed during the APS negotiations. Additionally, the seller should begin to focus on a transition plan for personnel, utilities, vendor accounts, equipment, and any business assets that will not be passed on with the sale.
The role of the buyer
Self-storage buyers have their own set of due diligence responsibilities. If financing is required to purchase the property, the buyer must have all required debt and equity aligned 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 assessment within the due diligence period.
In addition, Buyer shall verify and book any third party vendors necessary to perform the required consultations. Not only should site visits be made during the due diligence period, buyers should allow plenty of time to review returned reports. It is also the buyer’s responsibility to have a clear understanding of the criteria they are looking for once the financial and operational reviews have been completed.
Both the buyer and the seller of self-storage should aim to have a simple and transparent sales process and to avoid potential problems and delays. Things can happen, however, they should always have a contingency plan and know where they are willing to compromise when problems arise. It is also essential that both parties do their homework and understand the 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 vary from 60 to 120 days (without complications). To avoid frustration, both parties should start by establishing clear guidelines and taking the time to ensure that the essentials have been covered.
Whether you’re buying or selling self-storage, it’s in your best interest to close the deal, so transparency is key to a successful transaction. If either party encounters an unforeseen challenge, chances are the two will want to come together to find a solution and salvage the deal. Having realistic expectations and goals in case of delays in the process will allow buyers and sellers to collaborate more effectively.
Self-storage is one of the real estate sectors in which recent trends can cause market changes and impact transactions. For example, COVID-19 has created challenges that have slowed down many transactions. Moratoriums on rent increases and continued evictions have changed the outlook for many facilities, affecting landlords’ ability to provide accurate reports to initiate a sale. Fortunately, some of that has reversed in 2021, with self-storage once again showing resilience in the face of disruption.
The repeated strong performance has only increased the exuberance of investors who focus on this sector. The storage industry has proven to be an effective hedge of investment dollars for businesses and individuals looking for a recession-proof way to invest their capital. Still, there are potential issues that can affect the market. For example, proposed tax changes can have a significant impact on the urgency of closing a real estate transaction. With the uncertainty surrounding capital gains, set up in the base, and 1031 exchange options, sellers may choose to accelerate future liquidation plans.
Regardless of market conditions, the best advice for buyers and sellers of self-storage is to set realistic expectations, be prepared to do your homework, be prepared, and be patient for unexpected challenges. , and to bring integrity and transparency to your transaction. If you do these things, you are more likely to reach a successful and satisfying agreement.
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 assistance. For more information, call 757.867.8777.