You have found the perfect self-storage facility, you’ve put a value on it and your purchase offer has been accepted. Now it’s time to get to the real details and begin the due diligence period. This is the time where the serious research and analysis is done. This is extremely important when you consider that soon you will be putting your money (and the bank’s money) into the deal.
Things to consider
Below you’ll find a list of important things for you to consider as you navigate through the due diligence period. It’s important to make observations and inquiries related to all the items below.
- Survey: Are there any easement issues? Encroachments? Etc.
- Permits and certificate of occupancy (CO): Was there a CO issued? Is there a business license in place? Is the zoning correct?
- Building and site inspections: Are there any repairs needed? Deferred maintenance? If the facility is climate controlled, are the HVAC units in good shape?
- Building plans: Are you able to review the building plans? If so, this will allow you to see how many units there should be vs. how many units there actually are. The plans will also show the building size and more.
- Signage: Was the signage built per local regulations? Can you make it bigger, better or more appealing in any way?
- Personal property: How much goes with the property in the deal? Is the personal property in question in good working order? This includes evaluating things like golf carts, tools, computers, office furniture, etc. Make sure that there is a list items like these that are supposed to stay with the property, and, after closing, make sure these items are still there.
- Title: Is there title insurance to be reviewed?
- Environmental reports: Are there environmental reports that need to be reviewed? The bank will require a new one anyway if you are financing the project, but, if there is one available, you can review it to see if it was clean when the previous owner originally bought it.
- Management: If there are managers in place now, will you keep them on after the transition? If you plan on keeping them on your staff, speak with them about the current practices and procedures and identify areas where things can improve. You can also use these conversations as an exercise to make the final decision about whether or not to retain them at all. Keep in mind, though, that if there are issues with the facility, the current manager could be contributing to them.
- Rent roll and occupancy: Verify that most of the units on site are occupied. It’s important for you to know what rates the tenants are paying, and if an increase in rates has happened recently. If not, it might be time to increase rates. Are there any delinquencies? One suggestion to help improve delinquencies might be to move tenants to an auto-payment plan. Be aware that the existing owners can create the illusion of occupancy by renting to a friend or family member who may or may not actually be using or paying for the unit. This may make the physical occupancy look good, however, after closing, you will likely have a mass exodus of these “tenants.”
- Rental agreements: Make sure that all tenants have a valid rental agreement on file. Even a tenant who is being comped a unit should still have a rental agreement in place.
- Prepaid rents: Are there any tenants who have pre-paid their rent? If so, that income should transfer over to you at closing for future months.
- Service agreements: Make sure that you are aware of any other agreements between the business and other vendors such as landscape contractors, HVAC maintenance companies, etc.
- Ancillary income: It’s also important for you to verify other means of revenue that the facility is using or not using, such as moving supplies, tenant insurance, locks, rental trucks, etc. Are these means being maximized?
- Repairs and maintenance: Has the facility been well-kept, or are there repairs and deferred maintenance that need to be addressed? These factors can impact your initial offer, so be weary of them.
- Bank fees and credit card processing: Are these in line, or could there be some savings?
- Insurance: Review the existing policies and discuss them with a self-storage insurance expert to see if any changes are needed.
- Property tax: You must verify that taxes are up-to-date and confirm what they should be after closing. This can sometimes be an unpleasant surprise to new self-storage owners because taxes are usually re-evaluated after closing and are determined by the new price. They’ve been known to double in some deals. Be aware of how this will impact your project, and see if you might be able to use this in price negotiation.
- Appraisal: Has there been an appraisal completed recently? If so, how does it compare to your offer? If there is not one in place, the bank will require that one is completed if you plan to finance the deal.
- Profit and loss (P&L) statements: You’ll want to review and verify all monthly income and expense numbers. Verify that the bank statements match what is reported on the bank deposits and the rent roll, and check that all costs have supporting invoices and receipts. Are there personal expenses that are being run through the business? Additionally, it will be important to get three years of tax returns (if possible) to see trends and ask questions if needed.
- Auctions: Do what you can to find out if there have been auctions held at the facility, and, if so, review the records to be sure that they were done properly. You don’t want to find out after closing that there was a wrongful sale that will then become your responsibility.
- Competition: Visit the nearby competition and see what you can find out about them. Is their location better than yours? How is their management? Can you find out how full they are or even what their pricing is? How do they stack up to how you plan operate your facility? How is their curb appeal when compared to yours? Ask around in the area to see if there are any reputation issues with your facility.
- Location: Drive by your location at night–as well as when it’s raining–to see how it looks. Are all of the lights working? Does it look safe? If it’s raining, is water flowing down or coming out of the downspouts? Are there gutters? If so, is the water running over their edges? Is there water standing anywhere on the site? Are there any drainage issues? Take note of what you observe.
- Marketing: Understand what the owner is currently doing with their marketing strategy and put some thought into what you could do better. What do their their website and other online presences look like? How can you improve on these marketing tactics moving forward? Will you be able to keep the current phone number? These are important things to consider as you strategize on marketing plans for the new facility.
- Utility bills: Find out what the utility bills have been historically, and if there may be any increases expected by the supplier. If you can, try to go back a couple of years to review for trends or any unusual activity.
- Warranties: Are there any warranties that will transfer? These might include building warranties, door warranties, equipment warranties for things such as the HVAC system, etc.
- Expansion plans: Are there any expansion plans approved for future development?
The due diligence period is your chance look at anything and everything related to your new facility. It’s important for you to know all the facts before you make the final offer and offer a purchase price.
If you would like to learn more about experts who conduct due diligence studies, contact our team today.