We are in the sixth and final episode in a series centered around the due diligence process for self storage in today’s world. We have covered a lot.
So far, we have discussed:
- Timelines and what to get from the Seller.
- Physical inspections and third-party vendors.
- Financial records and operational review.
- Expansions.
- Conversions
Today, let’s discuss how we take everything we have done so far and put it together to take over or open our project under contract.
Remember, our relationship to the due diligence process is we are replacing all our assumptions about the project with as much real information as we can get. This includes our proformas, our assumptions about the trade area, the physical structure itself (or land if building), and how well or poorly the facility has been run.
If you are buying an existing facility to either run or expand, it will have good qualities about how it has been run, and it has ways to improve it.
Your business strategy, or how you intend to run and manage this project to achieve the returns and placement in your investment strategy, will determine where you go from here as you put the project into service.
For purposes of this episode, let’s assume you have completed the inspections, you have received everything you are going to receive, the project still hits your minimum benchmarks numbers, and you are removing your contingencies.
Physical Facility
In most proformas, we have a number for upgrading the existing facility, or if we are doing an expansion as we often do, we have a line item in the construction budget called “existing facility upgrade.”
As you did your physical inspections and as you received your bids, were you still within that budget number?
If not, did you either borrow it, move numbers on the construction budget around to cover it, or put more equity in the deal?
Often, we discover some of the items we thought we might do, we decide we don’t have to yet, and we will have the funds when we need to form our reserve fund.
This is when we determine how much our reserve fund will be. In most cases, we find if we use between .12 cents per square foot to .15 cents per square foot, that works well. In the conduit loans, where the lenders calculate the amount themselves and give them the reserve fund, it is usually around .12 to .15 cents.
Often, during this period prior to closing, especially if we are not doing an expansion, we begin scheduling the upgrades with the contractors.
Employees
Again, we could have done an entire series on this subject alone, and I do not relate to myself as an expert here. We have done a lot of things right and a lot of things wrong concerning employees.
One of the things we have done right is always to have an employee manual. Even with part-time workers, my coaching is to have one.
I got one from the SSA (Self Storage Association) and began to adapt it to our company. But on day one, we had an employee manual, and it just keeps changing.
Part of that manual for us, or a separate one, is an operations manual. This is always evolving and changing as we and the industry grow and evolve.
Anything that is done more than once should be documented how it is done, then goes into the manual. That could be how to open the facility, rent a unit, what to give customers, how to close, what to do to a unit when a customer moves out, etc.
This is important because people come and go. I cannot tell you how many facilities we buy where the Owners become so dependent on the “manager who knows everything” that the Owner is helpless when that person is not there, and that manager is rarely as great as the Owner thinks.
You want your business run by procedures and systems as much as possible, and this starts here before you put the project into service.
As I have stated before, your company is going to have a culture and energy that your customers walk into. Will it happen by design or default. As the Owner, that is 100% in your court.
Some of you will be adding employees, and some will be reducing them. It does not matter. As you begin your operations, start adjusting your operational strategy to meet your business strategy, and document it along the way.
It not only makes the facility run smoothly because you have procedures and systems in place, but it also adds value upon disposition because you will be selling a real business.
Customers
During your due diligence period, you have been getting the stories from the Owner or Manager about your customers who are late.
You should, prior to closing, design a strategy on how to handle them. Usually, for us it is something like this:
- Customers who are more than 30 days late, or whatever that state’s lien laws state, the day you close, you send them a letter introducing yourself and stating their unit is slated for auction on whatever day you can. Again, the exact times vary depending on the state’s laws.
- Come up with a company policy (that goes in your manual) stating what you will accept to cancel an auction. Not a payment plan (we discussed that before), but a one-time payment that you will take and if they pay that and vacate within 48 hours. If a customer does that, you will nullify their lease.
We usually take 50% of what they owe, and they have to vacate.
I promise you will come out ahead in 99.7% (my guess) of the time. They will pay more for their stuff than someone at auction would, and you are way ahead of the game by getting that unit back into service.
Always stick to your plan. You do not want to open yourself up to liability by treating different people differently, especially if they are protected classes from discrimination.
Then hold the auction on the units of people that didn’t pay.
This is a critical step for us because it sets the tone and pace of how we handle late customers. My coaching is: do not vary from it and do not get sucked into the stories customers have. I know it is easy. Just don’t do it.
The day you close, have a letter ready to go to each customer introducing yourself, stating what you plan to do with the facility, who to make checks out to, and thanking them for being a customer. We try to have the tone of the letter say something like, we appreciate you, not much is going to change except for the improvements we plan to make.
If we are having a price increase, and usually we do, generally we wait until the improvements have been made or have been started before we do that. We may raise street rates, but for existing customers we let them settle into us as owners for a month or so.
Also, make sure your bank will accept checks made out to the old company as well as yours. You will receive them for a while. We have never had an issue doing this, and we let banks know as we are opening up our operating account this may happen.
Procedures
There is no way in a general episode like this I can go into the entire procedures for switching procedures. In the Bootcamp we share with you the forms and checklist we use, but in general, this is what gets accomplished:
After contingencies are removed and before closing:
The operating system is selected, and current facility info gets uploaded into the new system.
- It is updated daily if possible but is absolutely current on the day of closing.
Operating accounts at banks are opened, and credit card vendors are selected and set up.
Attorney for closing pulls a newly updated title report.
Rent roll and rent prorations are agreed upon for the closing with the Seller.
Day of Closing:
Letters go out to customers (except those in lien).
Lien letters as described above to out to lien customers.
The owner or partner does a walk-through of the facility, making sure what is in the computer and rent roll matches exactly what is going on in the facility. It is important you do this, not the manager. It shows you are in charge, you watch closely, and you expect a certain standard of operations.
Any variances, figure them out and adjust in computer. I have found units managers use, units given for free to friends of owner or manager, etc. Just terminate those types of arrangements if you choose. If not, get them in the system as a comp unit. We usually will comp no more than 3% of our facility to non-profits, friends, and family.
Locks changed, utilities changed, etc.
Conclusion
This is a brief overview of how you can use the due diligence period to design and put your facility into service, but I hope it helps.
You will not do everything right, and you are allowed to make mistakes and change your direction along the way. You are learning. We are still learning how we do it now is different from how we did it a year ago.
There is also no perfect way to put a facility into service. Just design what you think is the best strategy given your business plan, and run with it knowing you will be modifying it along the way.
Also, don’t forget to enjoy it and have fun. It may seem stressful at times, but remember, you created this deal, which is no small thing. Be inspired by who you are that you had the courage to step out and do this thing.
Good luck, and let me know how you are progressing.
