You now have a self-storage facility under contract. Congratulations.
Now what?
This is where it can be exciting, scary, thrilling, and the most fearful thing you have ever done all at the same time.
That’s normal, especially if it is your first self-storage facility. I still get nervous every time.
And one more thing. Every deal will throw you a surprise.
I promise that somewhere, something out of the blue will come up, and you won’t be able to ignore it. It never fails.
Don’t freak out, just expect it.
When I have doubts, it helps to know the “spaces” that you, as a buyer, have to move through.
I call them spaces because every deal is different. Every Buyer is different.
There is no template for precisely what to do. So much depends on you, your financial strength, your company’s organization, the facility, the list goes on and on.
But every Buyer in some way or fashion must handle these five spaces during due diligence:
- The physical inspections.
- The Feasibility Report.
- The financial analysis and inspection of the books and records.
- The loan approval (OK, you can skip this part if you are a cash buyer).
- The legal and getting clear title.
This episode will deal with the first two, and part of the third space, although in reality, you are doing all of them simultaneously.
All are critical, and the name of them can be skipped (OK, one can if you are a cash buyer).
The Physical Inspections.
Here I have tried it all. I have tried using home inspectors — big mistake.
If you can find a commercial building inspector, great, just be careful how they charge. If they charge by the square foot, you most likely have some negotiating to do.
There are three ways I had what I consider successful inspections.
1. Commercial Contractors, or your own construction or maintenance team.
Having contractors look at the buildings and mechanicals and tell me where we could inspect problems. They will often tell you if, in their opinion, you need a structural engineer and or if you need an HVAC company to look at something.
The good aspect of going this route is it is most likely the least expensive. The bad part of going this way is you most likely are not going to get or get a very week report written up. If a lender wants it, well, they most likely have seen better. The other negative aspect of this is this is usually not what the contractor is trained to do, so you are just getting their opinion. It may be spot on, but then again, it may not be.
2. Self Storage Erector.
For years we did this. We have a relationship with one or two crews that install our self storage systems. They would charge a fee to inspect projects under contract for us.
This worked well, at least for us. Their reports were not always the best, but they absolutely knew what to look for. They have found all kinds of problems for us that most would never have found.
The challenge today is they are so busy. Taking time out of a job to run some people somewhere to do an inspection is not a very high priority. It is hard to get them today. I have been successful in the past because these jobs often had the potential of an expansion, and they knew if we bought it, they might have a chance to do some work.
Today they are so busy; they don’t care about that.
3. Engineering firm.
Over the past few years, we had a relationship with an engineering firm we use for all our projects, no matter the location. They organize the inspections for us now.
If it looks like we need a structural engineer and a contractor, they will put an inspection team together.
On one project, we had some drainage issues, so they brought in a specialist to advise us on the best route to go on that problem.
Bringing in a specialist can be more expensive, but we like the results. We get awesome reports. If I ever need to discuss a problem with the Seller, we have more than enough firepower in those reports. Our investors and our vendors tend to have a lot of confidence in our inspection process now.
I rarely had bad results with the other approaches we have used, but today this is how we are approaching it.
The other positive aspect of this approach for us is this is the engineer who will drive any approval process for an expansion. Even if they decide it is in our best interest to use a local engineer because of the political and regulatory landscape of the area, these engineers are the ones speaking for us because they know what we want.
And if you are looking at just raw land for new construction, a civil engineer is the only way to go on the inspections. They will drive whatever geotechnical inspections that need to be done, and unless there is a zoning change, in which case we also have a zoning attorney involved, they drive the approval process as well.
So these are the ways I know to handle the physical inspections of the existing self storage facilities.
And you can always use Uncle Harry. Everybody has one. A family member who knows something about construction: remember, banks don’t tend to put much faith in Uncle Harry.
The Feasibility Report.
I know you have done a preliminary analysis of the area, and you feel good about it.
Get a feasibility report. Even if the bank doesn’t say you need one, get a feasibility report.
The only my blog posts carry any authority in this space is because I have always obtained a feasibility report. I would have been out of business years ago without them. Especially in the market, I know. They are the ones that have saved me.
I get questioned at least ten times a week about who to use.
There are a lot of good vendors out there. The SSA and the ISS both have affiliate members who do excellent reports. I have used them.
As I have coached many of you, I have seen a lot of other great reports from people I have never used.
The process is always about the same.
They define the market area of the facility you are looking at or the land you are considering,
Next, they plot all the current supply. This also includes projects in the pipeline. This is what has saved me in the past. Projects that have been approved, but no construction has started.
Then they figure out what percentage of the current supply is in this facility’s market area.
Finally, they plug in the demand based on the number of people in the market area.
Not the most challenging thing, but very exacting, and they must have a database or the ability to get to a lot of data. This is why you pay them.
A mistake on your part can be very costly.
I have on the respires page of my website CreatingWealthThroughSelfStorage.Com a list of vendors we use.
Just know if they are SSA or ISS vendors, they are good. Trust them and use them.
The Financial Analysis and Inspection of the Books and Records.
You have your preliminary financial analysis.
My relationship to this is I am using the due diligence time period to replace my assumptions with real numbers.
If your contract does not deal with the due diligence items the Seller is to give you, you can click here to see what we request from a Seller. There will be a copy of a due diligence letter we have used in the past.
At this stage, our contracts cover that. I can’t give you a copy of our contract because I don’t want the legal community of the world dragging me in court because I am practicing law. That is also why I can’t put a Letter of Intent on the web sites or as a handout.
There are a lot of bored attorneys out there that love to target people like me for practicing law.
As I sift through that information, I replace the assumptions in my operating expenses and elsewhere with the real numbers.
I have also compared the occupancy numbers from the yearly and monthly closes I have received from the Seller to compare occupancy data against the marketing package.
I also plot the occupancy on a graph and notice trends both monthly and yearly.
Next, I take their financials, mostly from the P & L, and I compare it to the monthly closes. These are not always exact, but they should be very close. I usually request one or two months of bank records, and then I compare the daily closes with the deposits. In most cases, Owners will make or have their Managers make daily deposits. If not, I try to compare and figure it out. At the end of the month, the deposits should match the closes.
Also, while you are there, you or someone with you should go through every lease. You are looking for the following:
a). The tenant, the unit number, the rental amount, and the size matches what is in the computer.
b). The lease is signed.
c). There is no credit card information (i.e., numbers written down) in the file.
You will be surprised often how many leases are only partially executed. Critical. Ask the Seller to get them signed prior to closing. Also, if you ever auction a lease not signed by both parties, you could have some issues.
I know that now and then you will find a facility where the owner does not have a computer operating system. Everything is done by hand.
This makes it infinitely harder.
We are trying to get a realistic picture of the income we can expect, the real operating expenses, how much non-payment is really happening, and what we would expect if we took it over.
At the end of the period, we have put in real numbers to replace assumptions in our Pro Forma. Then we look at it and see if we are still getting a return that allows us to execute our business plan.
If so, we close. If not, we either negotiate it to the point it will, or we do not release our contingencies and move on to the next project.
One last thing. Often we are seeking to expand a facility. Part of the due diligence is to see if that expansion is possible, how long and difficult it may be to get approvals, and if there is demand for the expansion.
The feasibility report will answer the demand questions.
I have our engineers figuring out about the expansion approval process and how difficult it is. A lot is determined by how the contract is written. Sometimes we don’t have to close until we have the approvals.
Most of the time, however, I only have to know we can expand, and the process isn’t that cumbersome, and we will close and seek the approvals after closing.
That will be a function of when we need to expand, how the contract was written, and a host of other factors. This is where a skilled attorney and a quality engineer make all the difference in the world. I lean on them a lot.
When you are starting out, you may have to try to find an engineer in the market where you are buying. Find a good one if you can with self storage experience. In my opinion, these people are worth their weight in gold.
Really, I am not trying to over-sell here, but if you want to get deep into this process, at the Quick Start Academy, http://quickstartacademy.creatingwealththroughselfstorage.com/
we have detailed classes on this process, step by step, with forms and all types of in-depth training. The How To Build Your First Self Storage Facility covers ground up, conversions, and expansions in detail.
The purpose of this series of episodes is to cover the spaces that are, in my opinion, critical in today’s market for getting in or growing your self storage business.
We will finish the due diligence space in the next episode.
