Self Storage: Deal 12, Selling a location

[Henry Clark]

We have 8 locations in 5 towns/cities.  Wife and I decided to sell our latest storage location we built at 1170 Railroad Avenue, Council Bluffs, Iowa.  

We have either bought or built the 8 locations so this will be a first, going through the Sales side of the equation.

Why?  

Risk Assessment.  Each of us have our own Risk assessment.  My family hit our Risk tolerance and this is part of our actions.  This is our tolerance level, not yours.  Keep doing what you do.   We are already set financially.  Just met with our Financial Advisor and re-positioned our Stock Market positions.   After discussing, decided our debt exposure was the most critical item we could address.  Across all of our Storage Assets we currently have a Debt to Equity ratio of about 30%.  Want to move to about 60% equity position.  This sale will get us there.  We are still building at some of our existing locations, just "add on" buildings.

Interest rates.  Still in the process of completing permanent financing on this project.  We would get an SBA loan with 20/25 year terms, probably around 5/6% depending on Feds, 10% collateral and timing.  This is more than acceptable, so the interest rate is not making us sale.

But?  Thought, Self Storage units did good during an economic downturn?  They do.  But our debt ratio and concern for the overall economy, has surpassed our risk tolerance.  If the economy gets bad, then storage does well.  If the economy stays bad for 2 or more years, then people can't pay for their storage.  It's all a matter of our assessment of how Bad and how long.  Keep doing what you do.
Not looking for a discussion on World Economy on this post.

So the above is why.

Now I will walk you through the Sales process and will keep you updated.

1.  Of the 8 locations, which to sale?  The above location doesn't have its permanent financing completed, two months out on an SBA loan.  Will continue with that in case I pass on the Sale.  It has the most debt.  

2.  When I was a kid I truck farmed.  Paid my first year of College through that.  Always sell your Best Vegetables and eat the 2nds yourself.  This is our Best location, thus it will bring the most premium in this market.

a.  Unit size 339 units, 58,580 sqft.  With some 12 x 20; 12 by 30; 12 by 40 buildings.  Decided on one of our larger size locations, since that would bring in more potential buyers.

b.  Location, yardi metrics Self Storage 1 Sqft/capita for that location versus 7 Sqft/capita for Iowa (was at the Iowa Self Storage convention, one of the presenters noted the 7 Sqft/capita).  Again, this is one of our better locations from a Customer/market or need standpoint.

c.  Location, higher income area in town.

d.  Location, Competition-  all hills, hard to find more than 2 acres of flat ground.  No zoning (I2) for storage competitors.

e.  Location, Competition- no old buildings to retrofit to self storage.

So we decided on this location since it is our best location and should get the most interest.

Downsides to this location:

3.  25% occupancy, we just started up a year ago.  Due to our construction access and the tightness of our permanent entrance we decided to build the whole facility out at once versus just half.  So we would actually be at 50% after one year.  Need to sell this status.

4.  Built the whole facility out versus half/half.  This turned out actually good. Our Trachte manufacturer said our units would be $500,000 more today.  Plus our concrete road costs would be higher also.  Thus we couldn't have built for the same price in the future.

Upsides:

5.  Standing Seam roof.  Single slope to take snow melt to the Sunny side of the pavement during the winter.

6.  Security system.  Average 1 camera for 6 units, Face entrance camera, Special license plate camera at entrance, Motion Beam sensors (call alarm).

7.  Office, high speed internet, bathroom, Shower/kitchen/sink/etc.

8. Self service location.  We do everything over the phone with two minutes instructions, or they can watch our website youtube.  They do the contract on site.   With our system we spend about 10 hours per week managing, other than grass cutting.

How to Sell?

9.  Sell myself.  No commission, lack of contacts, legal shortcomings, lack of marketing, post on Crexi/loopnet, would have to vet all of the potential buyers since I don't know them.

10.  Sell through my local realtor, who also does online Auctions.  Can handle the sale and online.  Lack of Self Storage knowledge, contacts, or pricing.

11.  Self storage Realtor-  Chose Tom Flannigan at Argus.  Decided to pay the commission.  Don't have to worry about marketing/legal or setting the price relative to the market.

Terms of Sale:

12.  All things are negotiable.

13. At first, I wanted a large non-refundable deposit, no "Post" due diligence- they could look at a data set on line, Prospectus/Market/Close in 45 days, no subject to financing.  Tom adjusted my expectations.  He said the buyers would be pre-vetted so a large nonrefundable deposit was not as critical as in a Home sale, "Post" Due diligence was standard and would take longer with the larger buyers versus a smaller buyer, time frame would be 60 to 90 days, Prospectus to finance close time frame.

Brochures:

14. I put the preliminary financials together based on the way we run the business. Since we do self service and do ourselves, our Management and Admin costs were basically zero. We spread our time over 8 locations. Realtors adjusted this significantly upwards, to fit potential buyer Operation models. That reduced the NOI and thus the potential Sales price; but that will fit the buyers math. We cash flow about 15% points higher based on our Business and Corporate model.

15.  We do Autopay only and only have 1 delinquent.  Thus working how to convey the "Cleanliness" of our accounts on the brochure.

16.  Also working on the market aspect how to make the current 1Sqft/capita for this location versus Iowa average of 7 sqft/capita to stand out.  Along with the barriers to penetration for competitors due to lack of zoning and flat land.

Start small and Make Your Big Mistakes Early.  

Should I listen to my own advice and sell our smallest location (45 units) first, to work through the Sale process?  Not in this instance, based on the metrics we are trying to hit.

[Henry Clark]

@Bob Metry

Stabilized Occupancy impact on price:

a.  Appraisal, based on past appraisals for new construction, stabilized would add about 10% more to the value.  This may sound like a very small difference, but the appraisal is based on three approaches;  1.  Cost, 2.  Revenue generation, 3.  Comparables; plus a market assessment of will it rent up or market demand.  Thus the "Stabilized" status is diluted to a degree.

b.  Buyers, will pay more for a stabilized site.  This is a tricky question based on the advantages I noted above.  Will there be a bidding war?  Will they recognize this location has a high barrier to entry and the current yardi metrics for existing storage is 1 sqft/capita, versus the Iowa metric is 7 sqft/capita.  Nothing is a sure thing, but this market location needs a lot more storage.  Will they do a Risk assessment and add this property to dilute their risk against highly competitive markets.

How long would it take to get to Stabilized:  It will take longer since I built the full site out.  But as noted, the cost to build has gone up significantly since we contracted.  If we had built only half of the location we would be at 50% versus around 25%.  But then we would be looking to do the addition this fall, and the costs would have been significantly higher. We only had a temporary construction access and I wanted to close up the entrance.  Plus it is harder to get contractors back later.

Wait?:  All a question of Risk tolerance versus personal financial position.  Each person has their own trigger point.  As noted we took a position to reduce our debt load versus future potential revenue stream.  If I was unmarried, 30, lower personal wealth and this was my only project, I would not have sold, since my risk tolerance would be a lot higher.  I remember the day when I had $300, bag of clothes, box of books and an old flatbed pickup.  My risk tolerance was super high on that day.

Start small and Make Your Big Mistakes Early.  The reverse is don't make your Big Mistakes, late in Life.