Self Storage Deal - Vetting???

Question

I'm vetting a 12 unit storage facility in PA, which has two additional parking spots for rental. Asking price is $329,000. It has a new roof and significantly renovated exterior walls and new garage doors. No security, fence, or cameras. Only electrical is lights above each garage door.

10 units rent for $250 per month on 12 month leases (10x19 ft each), and 2 of the units are doubles (20 x 19 ft each), renting for $500 per month with 12 month leases. Each parking spot goes for $100 per month. No extra land for expansion.

According to the seller, it's about 90% rented, with nearly everyone on 12 month leases. Vast majority of the tenants are building contractors that use the storage for their tools, supplies, etc.

So, how should I vet this? Questions to ask, things to be careful about, etc? Walk me through it. Really appreciate it.

Thanks.

Patrice Penda · Answer

Ask for the rent roll for the last 1 year and bank statements to confirm the numbers you are given.

Ujwal Velagapudi · Answer

Just a few I've noted down to ask. Some are subjective, so those are for you to be a good detective on figure out. Do more legwork and due diligence up front to see if this is a worthwhile opportunity, can save you a ton of time & money on the back-end.

2018, 2019, and 2020 YTD rent rolls - at least 2019 and 2020 should be verifiable via bank statements.

How many of those tenants are on their first lease, versus subsequent one? Are leases about to be expiring soon?

How has (if at all) covid impacted the last few months? Any delinquencies? Has renting become much harder? Is anyone showing signs they aren't going to renew?

Value add opportunities: What could these additions (e.g. fence, cameras, etc.) increase to the overall value of the asset? Any potential to add or upgrade units? Could you streamline some of the owners operations?

Verify all expenses. Find out every expense, everything and anything remotely needed to run his operation.

Any capital expenses required, or can you take over without any capex worry for a while?

Run the comps for similar facilities nearby.

Henry Clark · Answer

@Falgun Chokshi

Concerns already noted above, I will add.

a.  Check on zoning, certificate of occupancy, etc.  Are you grandfathered in, if incorrect zoning.  Usually small places like this occurred before zoning rules were set.

b.  Property tax cost

c.  Insurance costs and coverage used

d.  10x19 is a basic 10 x 20 storage unit.  Pull up Sparefoot and put in that zip code.  See what similar 10 x 20's run.  $250 sounds high, but you might be in an expensive metro area.  Do the same for parking outdoors on Sparefoot at those same locations if they have it.

e.  Next year I'm building Contractor Garages or Incubator buildings on one of our sites.  20 x 40 up to 30 x 50.  Market is $.85 up to $1.00 per sq foot.  Yours should be higher since they are smaller units.  Bigger Sqft is lower generally.

f.  If they are doing any work what so ever, they need to annually give you an "Additional Insured" rider from their insurance policy.

g.  As mentioned above, vet each renter.  These contractors are "in between" starting and succeeding.  They will be the first to go in a downturn.  Most of these smaller contractors will have their backlogs shrinking.  Luckily your units are on the smaller size for this type of contractor and the rent is not something they can't carry, if the choice is to get rid of their equipment or have no where to store it.  Key is to lock them out within a week if they miss their payment.  This is where your contract you want to be a "storage" facility and not an operation facility.  Storage you can legally go through the storage process and have them out in about 8 weeks.  If your renting them a production facility, then its like renting an apartment and getting someone out.

The deal:

Storage insurance for you should run less than $1,000 per year.

Electricity close to zero.

Property tax equals- ???????

Repairs- you noted minimal.

Rough $39,600 per year less expenses above.

Just for kicks say net is $35,000 before depr or taxes.

$329,000/$35,000= 9.4 year payback, subject to depr/taxes.

Its okay.  I shoot for 8 to 12 year payback.  Depends if there is extra ground to build on.

If you can get an SBA loan at 3% for 20 to 25 years with 10% to 15% cash injection or collateral; Traditional loan 25% to 40% collateral, but 5 year note renewals.  Should be a good cash flow property.

Options:

A.  I would push back with a lower offer say $280,000 (check out GIS map and see what it sold for before, if it did).  With income taxes out of cash flow, would prefer a lower price.

B.  If they have to have their $329,000 tell them its above your price range.  Could they do $225,000 now; and the rest ($104,000) due in 5 years with no interest.  Talk with your bank first if they will allow having the previous owners in the first position.  See how long it has been listed.

C.  Talk with your tax accountant.  Have the sale be an asset sale.  Have the property broke out into Road ($80,000), electrical ($10,000), no security, building.  Ask the impact for you asking for a "NonCompete Agreement" split out ($50,000) on the price, if the sellers will accept this.   Trying to get you as much up front write offs as possible so you take a loss the first year, to reduce income taxes and increase cash flow up front.

Definitely has the potential for a solid investment.

Zach Quick · Answer

@Falgun Chokshi is there any upside? Any comparable similar square footage rents near the facility?

Self Storage Deal - Vetting???

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