Self-Storage Facility Due Diligence…Do the Due
Most experienced self-storage facility buyers understand that due diligence has to be completed prior to the purchase of a property. But, what exactly is meant by the term “due diligence”? According to Dale Eisenman of Midcoast properties, “due is defined as reasonable, just, regular and sufficient. Diligence is defined as prudence, attentiveness and care. Used together, “due diligence” can be thought of as sufficient care and reasonable prudence. In other words, it’s that degree of care one generally exercises with respect to his or her concerns.”
A self-storage facility transaction typically includes a period of time in the purchase and sale agreement in which the buyer can perform due diligence to ease any concerns. The duration of time is generally 45 to 60 days and the process is performed by operations and maintenance teams.
Due Diligence Procedure
The underwriting process has already determined the financial feasibility of this purchase, and a non-binding letter of intent (LOI) has been signed.
In its simplest terms, due diligence is confirmation of the underwriting product. The buyer needs to be able to build enough value into the facility to make money, repay lenders, and give investors a competitive return.
The following information is a guide with regard to considerations that buyers should be mindful of when it comes to the due diligence process. Three critical categories of concern are financial records, physical property, and the local market.
- Profit and Loss Statements: Check for inconsistencies in monthly revenue and expenses, bank deposits, invoices to support related expenses.
- Occupancy: Verify that occupancy, occupancy trends, and rental-rate sensitivity support your market assumptions.
- Rent Roll: Verify current rents and delinquencies.
- Rental Agreements: Verify that all rental agreements are in force and cross check with occupancy.
- Maintenance Expense: Clarify maintenance expenses.
- Real Estate Tax: Examine real estate tax history, and be certain that real estate tax post- closing estimates are acceptable.
- Ancillary Income: Review tenant insurance plans, retail sales, administrative fees, and truck rental program.
- Property Insurance: Check the existing policy and consult with your own agent.
- Third-Party Service Agreements: Review all third-party service agreements (software, marketing, landscaping, etc.).
- Credit Card Processing: Can fees be reduced?
- Auctions: Understand frequency, policy, and process.
- Appraisal: Review for accuracy. Does value support purchase?
- Survey: Review survey for encroachments, easements, or setbacks.
- Building Plans: Review for accuracy and ensure the building was properly constructed.
- Title Report: The title should be clean, with no encumbrances.
- Structural Report: Inspect the buildings, HVAC, doors gates, security system, lights, and roofs for damage/deterioration.
- Certificate of Occupancy and Permits: Building license should be up to date, and any zoning issues should be available and enforced.
- Signage: Verify signage rights and opportunities.
- Personal Property: Inspect the condition of any property that will transfer with the sale (golf cart, computers, furniture, computers, etc.).
- Management: Understand management practices and decide whether the staff should be retained.
The Local Market
- Competition: Know your competitor’s rental rates, occupancy, and physical store.
- Demographics: Do you know the number of households, income levels, dwelling types, and growth in the market? Do these demographics support your projections?
- Location: Consider drive-bys, traffic quality, visibility, and neighboring retail businesses.
- Reputation: What is the reputation of the facility and how does it impact your plans?
- Marketing: What is the marketing/advertising/social media strategy, and is it working for this location?
Due diligence enables the buyer to move forward with a sense of confidence in the transaction. To be sure that the buyer’s interests and options are protected, a qualified attorney or real estate professional should review the documents prior to signing.