Published in SSA Globe, May 2003 – by John Gilliland
Interest rates are at a 40-year low. Cap rates are trending lower (higher prices). Competition is popping up everywhere. Retirement is looking more inviting everyday. So…you have decided to sell your facility. Now you need a real estate broker who specializes in the sale of self-storage facilities. What do you look for? What questions do you need to ask?
Facility value is determined by several different methods. Your broker should be able to explain these processes to you and how a buyer will use them in his valuation of the property. Have them explain cap rates to you and how they affect the value of your property. Ask to see comparable sales data to compare your facility with those that have sold in the surrounding area. A valuation of your property should include a market demand & supply analysis, a market rent survey, comparable sales information, a detailed analysis of your income & expenses for the past three years, and projections for next year. You should also request a financial analysis from a buyer’s perspective to see how your property compares to other alternate investments. Finally, have your broker determine the bank’s loan to value and debt coverage ratio requirements that any potential lenders are going to use to lend the buyer money on the property. It doesn’t do any good to find a buyer only to realize that they can’t get financing for the purchase.
A real estate broker should be able to analyze the property and make suggestions on how to increase the value of the facility. Raising rents is the most common way to increase value at little or no expense to the owner. Minimize the amount of company, discounted, or free units. Review your receivables to make sure that they are no more than 5% of gross collected rent and preferably in the 2-3% range. Are your expenses in line with industry averages? Consider a tax appeal, reducing your insurance premium, redo your Yellow Pages ad in smaller size with color to get the same results for less money, etc. Remember that every $1,000 increase in income or $1,000 decrease in expenses will result in an additional $10,000 in value!
Your broker can help you look at the facility with a critical eye and correct any items that are going to come to a Buyer’s attention. Clean up the entire property including the old pair of shoes on your roof (the buyer is going to look at your roof). Tidy up the office and remove any unnecessary clutter. Restock your merchandise inventory. Fix all the lights. Make sure your gate works and that all of the doors to the vacant units open and close easily. Repair any damage to the buildings. Tackle any major deferred maintenance items or at least have several quotes on the costs if you are unable or unwilling to make the repairs. Move all of your personal items off the property. Real estate brokers go through the inspection process all the time and can assist you in avoiding any price reductions due to easily resolved physical property issues.
Involve your managers in the sale process. They are going to know it is for sale whether you tell them or not. It is vitally important for your manager to be helpful to your broker and prospective buyers. Your broker should have some ideas on how to effectively tell your manager that you are planning to sell and how to motivate them to help you through the process.
Creating an impact on the market with a well-developed marketing plan is crucial to the sale of your facility at the highest price possible. You want your broker to generate as much interest in your property from multiple buyers that will generate several offers from which you can choose. Ask for a copy of the marketing plan. Does it address who the target market is going to be and how they will be reached? Ask to see a copy of a sample marketing package. Does it provide all the data a buyer is going to need to make an offer on the property? Determine who is going to pay for all the advertising, flyer preparation and printing costs.
Ask how your broker works with other real estate brokers. Do they cooperate willingly with other professionals in the industry? Will they share in the commission 50/50 if another broker finds a buyer? It is important that your broker gives your property the maximum exposure to all buyers, not just the ones his firm represents.
Self storage is a very specialized niche within the real estate industry. It is vitally important that your broker be intimately familiar with the business and to be able to explain the nuances effectively to first time buyers, bankers, appraisers and a host of others involved in a sale of the property. Ask how many self storage sales your broker has listed and closed. Ask them to walk you through a typical sale process and to give you an idea of what is customary. In the negotiation process you will need to know what is typically asked for in the due diligence period, what deposit amounts to demand, what are normal contingencies to expect, what are the normal transaction timeframes, and finally what pitfalls to look out for. This knowledge is only gained by going through the process multiple times.
Ask your broker if they have any management or ownership experience in self storage. How active are they in our state and national associations? Do they regularly attend the national and regional shows? You are making a major decision in the sale of a property. Be sure you have the experience of a self storage broker to assist you in the process versus the traditional, local commercial real estate broker.
We’ve dealt with the technical side of the equation, but what about the human side? You are going to be working with your broker on a weekly basis for a minimum of six months in the typical self-storage transaction. You need to have a strong, working relationship based on a mutual business friendship and trust since invariably there will be times during the sale process when stress will enter into the equation with unforeseen issues and the interaction of human personalities. Having a good relationship with your broker will help greatly in overcoming the obstacles of the transaction and completing the sale.
Making the decision to sell your self storage property is an emotional decision. Selecting a self storage broker is a business decision that needs to be researched in full to ensure that you have chosen the right self storage broker for you.