Box up these acquisition considerations.
2012, The Wall St. Journal
reported that public self-storage real estate investment trusts outperformed
their office, apartment, and hotel competitors. The continuing strength of the
sector through 2013 has put interest in self-storage acquisitions at an
less than 20 percent of self-storage facilities are institutionally owned while
more than 60 percent are individually owned by independent “mom and pop”
owner/operators, presenting purchasers with a ripe climate for growing their
property portfolios through acquisition of constructed facilities. Investors
who represent large-scale buyers of self-storage facilities are seeing rising
purchase prices — and, consequently, lower capitalization rates — of recently
acquired properties as the byproduct of high deal volume and buyer competition
within the sector.
Key Acquisition Points
addition to general considerations that come to bear in any commercial real
estate deal, self-storage transactions present their own particular nuances
that should be accounted for when negotiating the purchase and sale agreement
and ramping up to closing. The following key concepts should be considered and
properly addressed in any self-storage facility transaction.
Occupancy Data. Consistent with other commercial real estate
sectors, the value of any self-storage property is largely driven by its
occupancy rate and profitability.However, in contrast to traditional
retail or office transactions, it is not customary for storage facility sellers
to obtain estoppel certificates from their tenants in advance of closing. As a
result, buyers bear an increased burden in vetting the financial viability of
the target storage property and its tenants, and any seller should be prepared
to provide a current, certified rent roll, showing, among other items, current
rental charges and delinquent payments for all lessees, as an exhibit to the
addition to analyzing the rent roll and property financials, the buyer should
review the seller’s lease form to make sure it complies with applicable law and
provides the typical provisions (concerning rental increases, limitation of
lessor liability, and similar considerations) desired by the buyer.
the due diligence period, buyers should verify that the property is zoned
appropriately for self-storage use. Additionally, buyers should investigate
whether desired ancillary uses (such as truck leasing) are permitted on the
property. Typically, buyers will want the sale agreement to permit them to
contact municipal officials to verify appropriate zoning and provide them with
the right to terminate the deal and recoup their deposit if the facility is in
violation of applicable zoning regulations.
Transition. During the negotiation of the deal and
well before the closing date, the seller and buyer should coordinate the
transfer of operations to the buyer. Facility owners often collect income from
the sale of insurance to property tenants, and the seller’s cancellation of
these insurance programs pre-closing can invite confusion and hurt the buyer’s
near-term revenues. Additionally, the buyer and seller should agree upon the
transfer of software programs, management kiosks, and related operations, such
as truck leasing, which may be used in the management and operation of the
storage facility. Failure to do so will often result in lost tenants and
and Internet Marketing.In certain
municipalities, permits are required when a new owner replaces existing sign
panels with new signage displaying the buyer’s brand.Often, sellers will
agree to permit the buyer to operate using the seller’s signage for a defined
period (usually 60 to 90 days) post-closing while new sign permits are pursued.
the prevalence of Internet marketing, sellers and buyers should coordinate the
phasing out of the seller’s property-specific web presence by the closing date.
Failure to do so will often disturb the search engine algorithms used by
prospective renters to locate storage properties.
Potential. If the buyer of an existing
self-storage property is considering expansion, it is advisable for the buyer
to use its due diligence period to explore the relevant municipal restrictions
concerning density and building height and requirements, including setbacks and
parking space minimums, that would be triggered by expansion. Similarly, as
part of the buyer’s title review, the impact of private restrictions found
within deeds, easements, and other recorded documents should be analyzed. It
is, of course, common for a buyer to request the seller to transfer to it all
rights to any development plans, permits, and approvals, though the
effectiveness of such transfer will be regulated by the municipal bodies that
granted such permits and approvals to the seller.
of these concepts will help ensure a successful transaction.
Maguire is a real estate attorney at
McCausland Keen & Buckman and has represented buyers
of self-storage facilities throughout the country. Contact him at
firstname.lastname@example.org. The views
expressed in this article do not constitute legal advice, and any party to a
commercial real estate transaction should seek independent legal counsel.