Financing Focus

Self-Storage Strategies

Box up these acquisition considerations.

In 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 all-time high.

Nationally, 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

In 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.

Tenant 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 sale agreement.

In 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.

Zoning.During 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.

Operational 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 property income.

Signage 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.

Given 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.

Development 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.

Consideration of these concepts will help ensure a successful transaction.

Andrew Maguire is a real estate attorney at McCausland Keen & Buckman and has represented buyers of self-storage facilities throughout the country. Contact him at amaguire@mkbattorneys.com. 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.

Andrew Maguire

Who Owns Self-Storage Facilities? Public Ownership 5 largest public self-storage companies own or operate 5,800 facilities Private Ownership 110 companies own or operate 10 or more facilities 2,450 companies own and operate from 2 to 9 facilities 30,800 companies own and operate 1 facility Source: Self Storage Association

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