Top 10 Things Self Storage Brokers Want Buyers to Know

From my home office in Lincoln, Nebraska, and with apologies to David Letterman, I bring you the top ten things your broker wants to make sure you know for the most positive transaction experience possible.

10.  Think about the big picture ahead of time.

“Before engaging in the process, analyze what potential returns you might see from alternative investments compared to self-storage,” advises Larry Goldman, CCIM with Argus Self Storage Network and president of the Kansas Self Storage Owners Association. “Buyers should consider and decide if it is worth the additional return on investment to take a more active role in the day-to-day operations of a self-storage facility.”

“Self-storage is sometimes perceived as an idiot-proof investment. Whether you engage a third-party management firm or manage a property yourself, there is a time commitment involved that buyers need to be aware of. You also need to think about your personality and if you need to physically see your employees’ faces every single day.”

Know what your exit strategy parameters are before you buy. “Will you be able to sell the facility when you want to?” asks Goldman. “For example, if markets get overbuilt and the sector falls out of favor, will you see today’s cap rates in ten years?”

9. Allow your self storage broker to take a page from Jerry Maguire’s book when it comes to negotiation and “help me help you.”

After a recent experience with a seller representing himself without a broker, Adam Pogoda, director of acquisitions at Pogoda Companies, gained new respect for the skills a broker brings to the transaction. “A broker not only finesse the conversation between buyer and seller,” he says, “he/she adds value by helping each side be reasonable when facilitating negotiation.”

“In every transaction, the sellers’ needs are different,” elaborates Michael Johnson, real estate broker at Bellomy & Co. “Everything is up for negotiation. The price is the most negotiated, of course, and the timeline second. But so are a number of other terms from representations and warranties to earnest money.”

8. Read the offering memorandum before calling.

“Although I want to call before I read the book just to say what is the ask and when are bids due, it works to my advantage to read the book first so I can ask questions and schedule a tour,” says Pogoda. “Brokers are coming out with books full of information such as demographics, supply and demand, and future competition in the pipeline. When brokers are transparent about projects in the works, buyers have more confidence that nothing is being hidden.”

How credible the proformas and financial statements are plays a big part in the success of the transaction. “There can be a big difference between what owners are putting out there versus the reality. Timely, accurate information saves everyone’s time,” says Goldman.

7. Time is money.

Every timeline is different and your broker helps manage a seller’s expectations that a thirty-day closing is not likely. “Buyers often need 60-120 days to complete a deal and your broker will convince the seller that everything is ok and this is normal,” Pogoda counsels.

“Deals always take longer than expected,” says Johnson. “Twelve to twenty-four months ago we would receive multiple bids at list price and have a bidding war. Now, there is not as much of a euphoria or sense of urgency from buyers and facilities take longer to sell.”

Either way, once you are engaged in a deal, your broker (and your banker) sure appreciate it if you keep the timeline moving by providing documents and responding as quickly as possible.

6. Calculate the future bottom line.

To do this, take a hard look at the historic operating performance. “Consider: is the seller using reliable point of sale software?” asks Goldman. “I recently had a seller who was not able to fully verify his operating statement, resulting in constant price adjustments.”

Other factors to consider are what the taxes and improvements will be after closing and your true payroll costs. “The payroll number has to include a reasonable cost for small facilities,” he says. “If you are a small facility using the figure of 6% of gross sales, it is not realistic. For example, you are not going to find management companies who work for $1,000 per month.  Many will need $2,000 per month minimum.”

5. Look for opportunities for growth.

“There is always room to add value if the seller was complacent. Especially if he or she did not raise rates on existing tenants!” says Johnson.

“I was impressed recently by a broker who made calls to the city and planning commission about potential expansion before listing the property,” says Pogoda. “The best thing that can happen is when the seller gets site plan approval to show buyers this is a sure thing from an approval standpoint.”

4. Let’s get feasible.

“If I am selling a facility with expansion possibilities, it is wise for the seller to get a feasibility study done before putting it on the market,” says Johnson. “And if they haven’t, the buyer should get one. And, of course, I absolutely advise you get one if you are building a facility from the ground up.”

“I never see somebody that already has thirty facilities do a feasibility study on an existing facility,” adds Pogoda. “But there is real value in one if this is your first rodeo, and your bank may require it.”

3. Ideal buyers are fun buyers, but not in the way you might think.

“My ideal buyer is telepathic. He or she thinks the same way I do,” says Goldman. “When a buyer understands the industry and approaches the situation the way a broker does, it is so much fun to work with him or her because we speak the same language.”

Johnson’s ideal buyer has done his or her homework on the front end. “Attend industry seminars and luncheons. Know what criteria you want in a facility. Establish a good relationship with lenders,” he urges. “It is fun for brokers to help buyers buy their first property, then their second, and grow with the buyer.” Johnson also appreciates buyers who are willing to provide him with feedback about a property because it helps him find them future deals.

For Pogoda, the ideal buyer possesses the bulletproof trifecta of, “the cash to close, the experience to get it done, and [I have] trust in that person.”

2. Avoid these pet peeves.

“Not moving at a reasonable pace during the due diligence process is the worst,” says Goldman. “As is a buyer who fails to ask the important questions and offers a ridiculous price.”

Buyers who are unorganized with their financing and following the timeline are on the top of Johnson’s what not to do list. “As are buyers who just tie up the property when negotiating,” he adds.

“If a seller has had a bad experience with a buyer in the past, a broker will help you gain the seller’s trust if he trusts you too,” says Pogoda. “I’ve had to deal with transactions without a broker, and it can be difficult to convince a seller you are not out to get them, and that the provisions in the contract are there for a reason.”

1. Financing first.

“One of the first things you should do is talk with lenders on the front end,” says Johnson. “You need to know interest rates, down payment requirements – you need to build a list of criteria for what financing options you have. I get a call per week from a lender wanting me to refer clients. There are many out there.”

Goldman explains, “You need to know all of the costs involved with your loan. Hopefully, your banker is experienced and knowledgeable about self-storage.”

“If you are new to the self-storage industry, I encourage you to hire a debt broker,” says Pogoda. “He/she adds value by advising you on the timeline, shepherding you through complicated deals, and speaking with the bank on your behalf. I’m working on three deals right now; one with a local lender, one with a debt broker, and one we are financing another way.” There are multiple financing possibilities available and brokers want you to get your ducks in a row straightaway.

A famous author and lawyer once said, “The best of the best understand that people do business with people they like. People do business with people they trust, and people do business with those who make them feel special.” Be that buyer that brokers like to work with, and you are sure to reap many rewards from your relationship.

About the Author

Katherine D’Agostino is the founder of Self-Storage Ninjas, a feasibility analysis firm delivering unbiased reports resulting in facilities with high occupancies and the highest possible returns. Contact Sensei Katherine via her website, www.selfstorageninjas.com.