Here is the second episode in a series centered around the due diligence process for self storage in today’s world.
Last week we opened the series discussing the building blocks for a successful due diligence period as we discussed the timeline and what to get from the Seller.
Where we are now in the transaction process is this:
- The contract is signed (let’s say today).
- The Seller is preparing what they are required to get to you and you will have them within a week or so.
- You have completed your timeline.
- During the period between the accepted LOI (letter of intent), through the contract negotiations, and now, you have reached out and lined up the list of people below.
- You have letter engagements, and once the contract is signed you begin executing them:
- Feasibility Report.
- Building Inspections.
- Geo-tech reports for construction (if applicable).
- Survey (unless there is a good survey from the Seller).
- Civil engineer if doing an expansion or new construction.
- Title work (depending on what state you are in, sometimes Seller gets that).
- Environmental inspectors.
- At least two lenders to present the RFLP (request for loan proposal). For more information on self storage financing, click here for a free eBook on the subject.
That is a good start.
Usually, the feasibility report is the first engagement letter I sign because often, that takes the longest lead time other than the financing.
Physical Inspections
I have been all over the place on how we have done inspections over the years.
We have used the following for our building inspections:
- Local commercial building inspectors.
- The erectors we have used for our expansions.
- Companies that specialize in self storage due diligence inspections and are members of the SSA (Self Storage Association).
- Let our engineers arrange the inspections.
- Use our own team to inspect.
- Hire a local contractor to do the inspection.
I am sure there have been more, but I just forgot.
If you are just getting started and do not have many relationships within the industry, I recommend either a local commercial building inspector or an SSA vendor.
The SSA vendor will perhaps cost more (flying around the country), but they are very capable, and they generate reports lenders and investors like. Note, however, most are also in the business of providing more services than just inspections, so there may be sales pitches on other services to solve issues they discover. However, on the whole, these guys are very capable.
Local commercial building inspectors are usually a good option (if you can find them). Remember, they are usually trained in the home inspection business and then expand out. Often they charge by the square foot, so be careful to let them know they are usually only going to get into the vacant units.
Both of the above usually create good reports. Remember, they will find a lot of stuff. Before the first customer rents a unit, a brand new facility would have an inspection report with numerous items found in one of these reports. Our job is to determine which are important.
Also, keep in mind, we are dealing with a simple product in most cases…a steel building with steel walls on a slab of concrete. Not a lot usually happening here.
Some of the issues we have found that are serious enough to deal with the seller on are:
- Buildings slipped off the foundation.
- Roof systems not the right size for the buildings.
- Poor water drainage causing problems with buildings (support beams rusted out where they connect with concrete) and severe asphalt issues.
Most of the remaining deferred maintenance items we can see in our tour of the property and have accounted for in our proformas.
When we have used the erectors or contractors for the inspections, we usually get good information, but the “reports” are usually nothing like we get for “inspectors.” If these reports are important, like with lenders or investors, I suggest leaning towards the inspector side.
I just caution against Uncle Harry, who knows a lot about construction being the one you rely on to tell you if the storage facility is built well.
Third-Party Vendors
Usually, what we try to do during the contract negotiations, which are in our world mostly done between attorneys because the seller and I have worked out what we are focused on during the LOI negotiations, is line up letter engagements and by when reports or services will be performed from third party vendors.
We mentioned them above.
Usually, the first thing I do after the contract is signed is to sign the feasibility report engagement.
Then the inspection engagement agreement.
If we need a new environmental report, I sign that one immediately. If the seller has a completed environmental report, and that company is still around, who originally completed it, often it is faster and less expensive to get the old report “updated.”
If doing an expansion, I generally locate and engage with the engineer but don’t order much work to be done or the geo-tech reports to be done until we get the results from the feasibility report. However, if we feel certain there will be positive results from the feasibility report on our initial analysis of the submarket, we move ahead.
That is your call.
There is a lot more detail in the Bootcamp, but in general, this is how we handle the physical inspections and third-party reports.
In the next episode, we will discuss financial records and operations review.
