I realize I have not done a detailed series on the due diligence process for self storage acquisitions in these episodes yet. We have discussed many aspects of it, but never a series devoted to this topic.
Time to remedy that with a five-episode series.
In our Self Storage Bootcamp, we have an entire phase of the four-phase strategy devoted to due diligence and putting a facility into service.
We will touch on what we learn there in this series.
Overview of The Due Diligence Process
Every deal is different.
The due diligence for raw land and new construction is very different than a self storage acquisition.
Buying an existing building for conversion is different as well.
For this series, I will make the assumption you have an existing facility under contract.
One of the episodes in the series will lightly touch on expansions and conversions and what added steps might be needed for those situations.
My relationship to the due diligence process is that I have made lots of assumptions before putting the property under contract. During this period of the transaction, I am replacing my assumptions with real numbers and information.
Then I re-look at the deal when I have all the information I am going to get and see how much and in which direction my original assumptions have moved.
Does the opportunity now hit my benchmark requirements to do a deal?
Has my cash-on-cash returns improved or gone down? Do they still hit my minimum?
Has the risk of this deal increased or diminished?
Often, the hardest part of a transaction is after everything is in, the deal still has the minimum requirements we need for a deal, then pulling the trigger and closing.
That is the absolute scariest time of a transaction for me. But we have discussed this in other episodes, so we won’t dwell on it here.
As stated above, every deal is different. If you are buying an existing facility, I am assuming you have to pay more than you want to, but the deal can still work if your assumptions hold out during the due diligence process.
That is usually the case with me.
Also, given how hot the market is now, you probably do not have a long timeline for the due diligence. I am going to assume 30 to 45 days for this series.
This means you are handling all the aspects covered in this five-part series at once. So, for us, it is a busy time.
Timelines
The first thing I do is map out a timeline.
Over the years, I have used it as a template and given away a free overview of the spaces needed to be covered in most self storage due diligence time periods. You can download it here if you don’t have one already.
What we do today is take this and add to it or take away depending on the deal and map out timelines.
In short, I want to make sure nothing falls through the cracks. We need to cover:
- Physical inspections of the facility.
- Geo tech reports if expanding or new construction of the land.
- Feasibility reports.
- Other third-party inspections.
- Another specialist may be needed from the original inspection.
- Topographical survey if construction is involved.
- Title work.
- Financing (we don’t cover that in this series, but we have covered it in detail on Episodes Below:
- Financial records inspections
- Take over strategy and plan.
We set out a timeline and who on our team is going to handle what and by when.
I know for many of us, myself too, in the early days, it is all of us. But the reality is, these are the spaces we need to move through. So set up a checklist and follow it.
What to Get From the Seller
In a perfect world, our due diligence timeline does not start until we receive all of the items listed below from the seller. We write this clause in our contract, but sometimes it gets taken out by the seller’s attorney, and we are not going to lose a deal over it.
:
If the facility is listed, most brokers already have what we need ready to go in a virtual room somewhere in the digital nether land, and we get a link to it.
Our attorney writes into the contract what we are requesting from the seller. However, before that practice began for us, I used to send a letter to the seller the minute the contract was signed. Here is what we usually ask for from the seller:
- Copy of insurance policies.
- Title policy (from the last loan).
- Phase I environmental study.
- Current rent roll (we will update one day before closing).
- Copies of last three years Federal and State tax returns.
- Copy of tax bills.
- Topo Survey if available.
- Bank statements (last three years).
- Utility bills.
- Profit & Loss statements for the previous two calendar years.
- Balance sheets for the previous two calendar years.
- Management Summary reports for the end of the previous two years.
- Monthly Profit and loss statements for the current year.
- Monthly balance sheets for the current year.
- Monthly management summary reports for the current year.
- Current accounts receivable list from storage operating system.
- Ability to get operating system reports periodically during the due diligence period if requested.
- Architectural drawings or building plans.
- Capital expenditures (detailed of last three years, current and planned).
Usually, we don’t get everything on this list. There may not be building plans. Title reports sometimes are hard to find. Surveys are not always available.
But we get what we can from the Seller, then move forward.
In the upcoming episodes, we will dive into how we move through the above material and the other spaces of a due diligence period.
But successful due diligence starts here with the fundamentals: a good timeline and the right material.
From here, we can replace assumptions with real numbers.
Next week we will go over the inspections and third-party reports.
See you then and there,
