Due Diligence for a Self Storage Transaction

June 1, 2020

The critical point of any real estate transaction is the due diligence period, especially if deposits are at stake. During due diligence, buyers investigate whether a property is worth the money and risk involved. Both self-storage buyers and sellers can benefit from expanding their knowledge of the due diligence process, because if handled improperly, it can quickly derail a deal. The buyer’s due diligence consists of numerous inspections, audits, and third-party reports to verify that the property is a suitable investment. Normally, the process begins with the verification of the seller’s financial statements, followed by an environmental and physical audit.  If you’re the seller, your role is to disclose all relevant information and assist the buyer as much as possible in order to streamline the transaction. This article outlines some key tips to consider when conducting due diligence documentation.

  1. Have a transaction-making attorney on hand: You want to have an attorney review the legal documents and investigate pertinent issues with regards to the self-storage property. This can include: the purchase and sale agreement, title-insurance binder, zoning compliance, and environmental reports. An attorney that is unfamiliar with commercial real estate and self-storage can ruin a deal.
  2. Have the appropriate documents organized and available: Regardless of whether you do your own accounting or have hired an accountant, the following should be checked and documented in detail: Cash to accrual-basis conversion, accounts-receivable and accounts payable reports, and physical plus sales inventory. Additionally, buyers should review the individual leases and rent rolls for the property. The books should be in order and everything neatly organized and easily accessible. Poor organization or inaccurate data can significantly slow down the transaction process, result in a lower bid, or void the whole contract altogether.
  3. Evaluation of the property’s physical condition: Unless the property is new, the buyer will expect some needed maintenance. However, large deferred maintenance should be taken care of prior to listing the property or the buyer may reduce their offer. Some buyers look specifically for properties that can be upgraded or expanded, in order to improve their return on investment.
  4. Make sure all parties agree on contract deadlines: People often mistakenly assume that everyone is on the same page, but contracts often include legal language that specifies how dates should be counted. A good transaction coordinator or deal lead will ensure that all deadlines are clear and met.
  5. Prepare for the possibility of financing: You should know whether the buyer will need to assume your current financing or secure a new loan. You may want to require the buyer to demonstrate his or her ability to obtain the necessary funding. If financing is on the table, then you or your broker should contact several prospective lenders, so you’re prepared to provide the necessary documentation required in order to expedite the buyer’s loan application. It is important to not let poor communication slow down the transaction process.

Follow this advice and you will be on track towards a successful, smooth, and quick self-storage transaction.