In today’s world, if you are getting in the self storage business, or growing your self storage business, you look at a lot of “Offering Memorandums” (OM).

We have to develop a strategy for quickly figuring out which ones we should focus on and which ones we should quickly set aside.

I could have more accurately called this episode what not to focus on when looking at an OM because the first thing not to focus on is the “CAP Rate.”

Yes, the quoted CAP rate may indicate which OM to look at first, but I promise you that whatever the OM is showing as an NOI will not be your NOI. It probably wasn’t even that for the current Owner after the Broker got through “reviewing the numbers.”

In my suggested steps for getting in the self storage business, the first thing you have done is to develop your “business strategy,” which informs you what type of storage you are looking for.

For us today, for example, if we are looking at an OM, it most likely has expansion potential. That is part of our current strategy, to take smaller mom & pop projects and turn them into “institutional” grade facilities.

So, at this point, I am making the assumption you are looking at OMs that appear to meet your basic business strategy, such as location, size, etc.

Location & Submarket

The very first thing I try to do is get a feel for the location of the project.

I have learned the hard way (that is, through buying or developing a project) that you want a high visibility location today.

I would describe self storage as a retail business today.

If I see a project at the end of a cul-de-sac, for example, I have learned they are most likely not the ones.

If a project is two or three turns off the main road, or in an industrial park, or buried in a neighborhood, I immediately discard.

I am looking for main roads, high traffic for the marketplace, locations

If you cannot figure out the location from the OM, use Google earth for touring the surrounding area virtually

This is my first test to pass.

Next is some quick assessment of the “submarket.”

What I call the “submarket” is the zero to three-mile radius or the zero to five-mile radius depending on the size of the market. For example, if I am in Houston’s inner belt, I am focused on the zero to three-mile radius more than the five-mile radius. If I am in Houston’s third outer belt, I am probably more interested in the zero to five-mile radius.

In our portfolio, our average customer lives 3.2 miles from our project. But remember, it varies on the size of the market and the density of the population.

At this point, I am not trying to quantify the exact square feet of self storage per capita in the “Submarket.” I am just trying to see if the market is clearly overbuilt.

Most OMs have a demographic report and a list of competitors. At this point, I try to total the square feet of self storage listed as competition and divide it into the population. In most cases, if the project is below “equilibrium” square feet per capita, the OM will tell you.

Again, there is no exact number at this point I am looking for, but if it appears to be, let’s say 13 square feet per capita, I set this OM aside. If, on the other hand, it appears to be 3 or 5, or even 6 to 7 square feet per capita, I will put it in a pile to analyze.

If, after a “preliminary analysis” the project still looks good, I will then pay for a preliminary report from Yardi or Radius Plus, or some other subscription service to get a closer look into the submarket.

Ultimately, if we are putting a project under contract and bringing more space into the market, we always get a third-party feasibility report during the due diligence. Use ISS or SSA approved vendors for those feasibility reports.

Property Condition

If the location appears to be good, and the submarket does not appear to be overbuilt, the next thing I do is then quickly try to ascertain the condition of the property.

This is not always easy to do. I suggest looking at the pictures and closely reading the “investment summary” that is included in most OMs.

Again, go back to your original business strategy. That will inform you as to what you are looking for in an existing self storage facility you are acquiring. For example, if the facility is constructed from concrete block instead of metal buildings, for some, that is fine, for others, it would throw the project out. Institutional buyers today, for the most part, do not want to purchase concrete block facilities. So, if your exit strategy, for example, is to sell to institutional buyers, most or all concrete block construction would necessitate you to discard the project at this point.

I am also looking for apparent capital improvements we would need to make so I can put an estimate in my “preliminary analysis.”

For example, if the doors look old, faded, and/or rusty, I would assume I am replacing all or half of the doors. In my analysis, I would apply a number of $375 per door (look at the number of units). If I was going to refinish the doors, perhaps half that.

There is a lot of information easily at your fingertips today if you are seeking average cost for specific types of repairs or improvements.

Perhaps I am going to paint the buildings or address the drive lanes from looking at the pictures.

At this point, I suggest you are assuming what you may do to address deferred capital improvements to get the project to your business strategy standards and use broad initial capital improvement estimates.

In how we analyze, the “initial capital improvement estimate” is usually added to the sales price in the “Preliminary Financial Analysis.”

Preliminary Financial Analysis

Here is where I run the numbers.

I don’t want to take this episode to go over that, because I have many other places where you can learn that. If you are interested in two training videos on how to analyze expansions or conversations, click here.

You have a business strategy. In that strategy, you know the returns or other benchmark numbers you are looking for.

Run the analysis and see if it hit the benchmark numbers or not.

If it did not, what difference do you have to do or what price do you have to offer to have it hit those numbers. I change financing sometimes or change what the expansion looks like. I do not want to get pie in the sky in my assumptions, but I am looking for realistic ways to run this facility that may help us get to the benchmark numbers.

I try not to low ball offers too much to see if I can get them. I know what I can pay to hit my numbers, assuming my assumptions hold out during due diligence. I won’t go over that number and come in perhaps slightly under. I have discovered I have way more success offering close to what I can pay, then coming in way below.

I am looking for a project that hit the benchmark numbers in some way or fashion. We don’t need home runs, just solid deals.

If we end up putting the project under contract, at that point, we verify the assumptions in the Preliminary Analysis and re-run to see if it still works.

Conclusion

I then either save the OM to a file in one part of my computer if I don’t think it will work, or I save it to a file of potential deals.

When I am ready to go for a deal, I look at the ones in the “potential deal” folder, then decide which one to go for first.

This is one way of quickly moving through a lot of OMs to find the best project for you at any given moment.

Most I look at do not work. But you may be surprised. If you are clear on what you want, you will recognize it when you see it.

Good luck.