Preparing to Purchase a Self Storage Facility, Part 2: Building Your Team of Professionals, Once You’re Ready to Buy
In Part 1, we covered the members you’ll need on your team before you even start looking at properties. Now that you’ve got those in place, and a list of a few properties you’re interested in investigating further, who else do you need? These team members are essential in helping you make an offer and close the deal.
The appraiser plays an important role in the financing process. If you obtain an appraisal with inflated values and unsupported conclusions, you can often experience delays in securing financing. A properly prepared appraisal report can save the borrower more money in time savings than a fractionally lower interest rate. A properly prepared appraisal can also make the difference between having an acceptable vs. unacceptable after-debt-service cash-on-cash return.
Title Insurance Company
This team member is essential to any real estate purchase, and lenders require it on almost any transaction they finance. Having a title insurance company ready to work with when you make an offer on a property will help expedite your due diligence.
Just because the previous owner has a number down in their profit and loss statement for insurance doesn’t mean it will be the same for you. Perhaps you intend to run the facility differently or expand it. Maybe you intend to use a different insurance provider or a different plan. Either way, it’s very important to collect precise information on what your insurance costs will be when investigating the purchase of a facility.
Marketing Firm Specializing in SEO
With an increasingly competitive market comes the need to compete with marketing, specifically with a focus on Search Engine Optimization (SEO). SEO is necessary in our current digital world, to make sure your store shows up in internet searches, on social media and in aggregator directories.
When selecting a marketing or web design firm for your SEO efforts, there are several things to look for:
- Experience with the latest SEO tactics and Google algorithms. They should be Google certified as well.
- Examples of previous work, including the URLs of websites and proof of results-driven from their efforts over time.
- Estimates for several options they offer to help with your marketing budget.
- Referrals and testimonials from previous and current customers from a variety of industries.
If they are a one-size-fits-all firm, they may not be the right one for you. If you are a small one store company, there needs to be affordable options for you to choose from; just as if you are a large 50 store company and you want the aggressive campaign strategy that has higher costs associated with it. Sometimes a marketing firm can be better at marketing themselves than their customers, so it’s important to ensure that they’ve represented their previous clients in a way that brought in results and that was affordable.
Many facilities are managed by the owners, especially since over 80% of the market belongs to “Mom & Pop” operators. When you take over a facility, whether or not you intend to manage it yourself, you need to assess what management you need to have in place. If you decide to manage it yourself, it’s important to be realistic about the time needed, and to write out a management plan. If you have an employee, or several employees, who will manage your store, it’s important to get them in place before you close on the property. When you purchase a facility, it’s probable that it will come with tenants in place, so the transition in business operations needs to be seamless.
Finally, if you hire a third-party management company to manage your facility, here are some key things to have in place before signing a contract:
- References from previous clients
- Overview of expenses charged for management (look out for hidden fees)
- The split on insurance commissions between owner and management
- Proposed operating plan
If your feasibility study shows demand that exceeds supply in the market of the facility you’re looking at, you might decide to build an expansion of the property into your pro forma. Doing so necessitates a working relationship with a quality construction firm, and one that is experienced with building self storage. You can estimate the costs of building an expansion, but if you can’t find anyone to build them at your prices, then your numbers are just a thought exercise. You can also read our previous blog, “Most Important Things to Consider Before Hiring a General Contractor to Build Your Facility”, to learn more about finding the best construction firm.
Conducting a Phase 1 environmental site assessment on properties you intend to purchase is absolutely necessary. Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), liability for the costs of rectifying environmental hazards (such as contaminants in the soil) fall on the owner in the time that the hazards are discovered. Conducting a Phase 1 environmental site assessment can exempt you from the liability for any hazards discovered. So, if you’re looking at a property, there are essentially four scenarios that relate to this study:
- Pre-Purchase Testing with Hazards Found
You have the site tested before you buy it, find toxins, and require the previous owner to rectify it before you purchase it, at no cost to you. This gives your property a “clean bill of health” for when you decide to sell it to someone else in the future.
- Testing with No Hazards Found
No hazards are found during the site assessment, and you purchase the site with the ability to later sell it.
- Testing with Hazards Later Found
If the site assessment finds no hazards on the property, but later hazards are discovered, you are much less likely to be held responsible for the clean-up.
- No Testing
If you purchase a property with no testing done, and it turns out to have environmental hazards that require rectifying, you will likely be held liable since you have no plausible deniability of the hazards.
Not having a Phase 1 ESA completed will also greatly increase your chances of being denied when you apply for a loan to finance your acquisition. After all, a core responsibility of loan underwriters is to mitigate risk, and the costs associated with remediating a major environmental hazard can sink a loan deep into the red. When choosing a consultant to complete your Phase 1 ESA, make sure that his report will be acceptable to your potential lenders, that he has at least $2 million in Errors and Omissions Insurance, and he has the depth to follow up on any potential recognized environmental conditions he identifies.
When you find the right property for your investment goals, you need to close on it quickly and hit the ground running. With so much demand for self storage as an asset class right now, it’s possible that when the due diligence period expires the deal will be awarded to another buyer if you are not able to close within that timeframe. When you do close on a property, you need to have the headaches out of the way. Have your managers already hired, your replacement signage ready to install, and a website ready to launch.
If you need help building your team of professionals or with any step along the way, or you are ready to buy a self storage property, you can contact us today and we’ll get you on the right path for success.