Should I buy this Self Storage Facility?

[JoshuaSCurtis]

Hey guys!
Ok, a little bit about the facility that I am looking into buying. This will be a very long post, as I am copying the notes that the owner sent me, regarding the facility. Need some insight!!

Here you go!


FINANCIAL ’08 DATA AND FACILITY INFO

Current rates: $39 for 5x10 (12 units)
$57 for 10x10 (14 units)
$72 for 10x15 (24 units)
$84 for 10x20 (14 units)
$200 for 1 16'x36' bay (currently rented)
$350 for 1 28'x36' bay (unoccupied, has small corner office inside)



Proforma Income:
100% occupancy: Gross Annual: $56,640
90% occupancy $50,976
70% occupancy $36,648
50% occupancy $28,320

We recently started a special for 20% off all units (about what the previous owner's rates were) to see if that would help fill the place...too soon to see if it helped. Only a couple of tenants are at the discounted rate.


The facility was built in 2000 by the previous owner who self managed it. I have owned the unit since July 07, and bought it at 90-95% occupied. Multiple problems occured with the transition including: management became 1)offsite, 2)managed by someone new to not only self storage but property management in general, 3) mgmt moved offices, creating more confusion. For a more complete list of management issues see below.

Here is the financial data for 2008 : (see also attachments for 2007 P&L, and Rate Analysis done by the previous owner in ’07. )

Jan -July 2008 Financials:
Gross Income: $15439
Net deposits: $10,015 (after management and bookkeeping expenses, which are $3-400/month, maintanance, advertisisng, some upgrades* and utilities)
Taxes: $1937 (6 months)
Insurance: $992 (6 months) (Tax and insurance costs not included in the above net deposits)
Occupancy: approx 30-35%

*For 2008 expenses which differed from 2007: Bookkeepers hired, cost approx $750/6 months. For the large bay unit (which has a small office inside of it- see diagram) we put in extra doors to access the building from the outside, wired it for electrical, and put in a gravel driveway. Those expenses were about $1500. This was done with the hopes of renting either the largebay/office, and/or the rental office (currently unoccupied as management is offsite), to a business.

I'm in the process of breaking down 2008 expenses and can also email the statements for Jan to July.

About the facility…

The facility was built in 2000 by the previous owner who self managed it. I have owned the unit since July 07, and bought it at 90-95% occupied. Multiple problems occured with the transition including: management became 1)offsite, 2)managed by someone new to not only self storage but property management in general, 3) mgmt moved offices, creating more confusion. For a more complete list of management issues see below.

The property is fenced with an electronic access security gate and yard lighting.

The three existing buildings total 10,560 square feet and include an office/sales area with restroom, 12- 5x10 units; 14- 10x10 units; 24- 10x15 units; 14- 10x20 units; 1- 16x36 unit; 1- 28x36 unit.

The buildings are sized like this: Office/Shop 36x60x14; Mini Storage #1 30x130x8'6"; Mini Storage #2 30x150x8'6". The roll up doors on the shop are 12x12; the doors on the 5x10's are 3x7; the rest of the mini storage unit doors are 8x7.

There is 1 acre available for expansion, and if placed properly there is enough space to nearly triple the number of units. Location: 2-3 blocks east of Main St The town of about 16,000 people and Tennessee in general has been an area of slow and steady growth.

Terms: Since the occupancy rate is low I am trading terms for price. Of note, the previous owner was 90+% occupied when I bought it in 2007. Thus, the facility should be able to be turned around with proper management; I just had a hard time doing this from afar with inexperienced personnel. And again, there is room for expansion.
Here are three options for consideration:

1. 15% down, 85% seller financed at 8%, 30 yr amort., 5 year balloon.
2. 25% down, 75% seller financed at 7.75%, 30yr amort, 5 year balloon.
3. 10% down with agreed upon equity split at a later date.

As you can see the income does not justify the price, which is why I'm offering terms. Keeping cash in your pocket with low downpayment provides capital for expansion. This needs to be purchased by an experienced self storage operato/developer willing to put in the work to turn it around, and probably needs to be managed by the owner to save costs.

Terms are negotiable.

Regarding the management…

I am including this section to better inform the buyer as to the events that occured this past year which were significant factors in the occupancy and collections decline.
1. The "legs" of the management team has changed several times, one person got fired for being incompetent.
2. The management was not enforcing any fees at all; fees are a significant portion of self storage income.
3. It was difficult to have leverage on the management team as it was a lot of work for minimal reimbursement; the current manager is also a busy realtor.
4. The phone was not being answered consistently. Now it is rolled over to the manager’s cell phone. A call center may also be helpful.
5. Little networking was done in the way of cross-promotion, but I recently partnered up with a moving company (Hardison Moving Company) ...from what I can tell this family business is the main or even only game in town and was a big source of referrals for the previous owner. (2-3/week). I am in the process of co-branding with him, making flyers for each of his custormers, etc.
6. Credit cards were not accepted until very recently, and most tenants do not have a card on file.
7. Invoices and self addressed envelopes were not initially sent. The management did start that practice back up in February, but by that time a lot of the tenants were very delinquent.
8. RE: collections no one is making repeated phone calls to collect delinquencies. We just hired the bookkeepers who are now sending certified letters but do not make phone calls. I'm in the process of hiring an outside collections agency to tighten up the reins.
9. This is a brand new management team which started their business at the same time I bought the faciltiy. They were new to both property management and self storage.

As you can see all of these problems are fixable especially if it's owner-managed.

The name of the business, signage, and phone number will be transferred with the facility.

[AroundTheWorld]

I will come back and post more thought later, but for now - - - here are a few quick questions / observations.

I don't see a clear net income - - - or a "proforma" income. It is tough to evaluate the value of the property w/out this info.

Have you looked into other facilities in the area? In a situation like this, it is really important to look at what "other" factors could be contributing to a declining occupancy. Was another top notch facility built just down the road? What tare the occupancy rates of all of the neighboring facilities? While bad management could lead to a decline in occupancy, you need to do your own research here, rather than taking her word for it.

And finally - - - don't buy potential. What you are picking up here is a HEADACHE. Yes, it absolutely could be an AWESOME opportunity, but ONLY if you buy it right..... (paying more than top dollar so that you can get terms is not buying right)

Terms - - - those can be found at a local bank (if the price is right).... what you need is a DEAL. So, I personally would jump on the "price" or "terms" deal. Keep your options open. What PRICE will she give it to you for? And, at that price, is it worth the purchase? Then, ask yourself, "where can I get the money?"

If you do all this, and decide it looks good to you - - then

Look at your cashflow. (Monthly income - Monthly Expense - Debt Service = ? )
How much money would you be making (or paying) each month? If you are negative cashflow (I have a hunch you would be, though I don't know your purchase price) do you have the money to cover that? For how long?

And.... one more thing. She is offering 7 - 8 % right now? Currently, local banks are lending on commercial loans at a 6% rate - give or take. While credit is definatly tight given the mortage meltdown, don't underestimate your ability to get a loan. Much better to get the property at a great price and a bank loan at 6% than to buy the property at an overinflated price and pay 8% on the money!

[JoshuaSCurtis]

Hey Sonya,

That is all great advice! I appreciate you looking into this. I also got this document which goes over the financials. Take a look at it and see what you think. Maybe this will answer your Pro-Forma Question??

Best,
Josh

---------------------------
ADVANTAGE SELF STORAGE
PROFIT AND LOSS STATEMENT- 2007 (July 1st-Dec 31st, 2007)



Income: $13,533


Expenses:
Advertising: $1,161
Cleaning and maintenance 200
Insurance 992 ($1984 for one year)
Management fees 789
Supplies 143 (locks)
Taxes 1,937 ($3876 for one year*)
Utilities 1,872
Total Expenses: 7,684


Net Income: $5,839



* Includes county and city taxes

[Bilgefisher]

Very newb question, but insurance is only $1900 a year? I honestly thought it would be higher.

I'll be interested to see how this progresses.

[AroundTheWorld]

That insurance expense is actually higher than ours is, on average.

Insurance can very a lot from region to region. Your insurance company will also be looking at how far away you are from a fire department, if you are fenced, security camera's. Typically, you are getting insurance on your buildings and for general business liability - - - NOT for your tenants possessions. Our insurance provider makes it mandatory to us to:
• Put a statement on the wall letting hte tenant know that we are not liable for theft or damage
• Place that same verbage in the lease. We also have to say, in the lease, that storing explosives is not permitted.
• Let the tenant know, upon moving in, that they have the option of purchasing tenant insurance to insure their possessions.
Josh, do you mind disclosing how much the property is listed at? (and, therefore, what would your payments be?)
How much square footage rental space is there?

Here are some additional expenses to consider:

Maintenance / repair expense seems pretty low.
Merchant Service Fees (This is the fee you get charged if you will be accepting credit card payments)
Auction Fees - - If you have to auction things off, there is expense involved in that. You need to run ads, send certified letters, hire an auctioneer, or get certified yourself, etc.
Phone Expense - or is this included in utilities?
Landscaping (weed control)
Security Expense? Some people handle this in house, other's hire it out, or pay for a monthly service, and still other''s don't have security.

[JoshuaSCurtis]

Hey guys,
As for taxes, this is fairly close to downtown and could, very easily, be extremely close to a fire station, police station, etc.
Sonya,
Thanks so much for all of the extra expenses to consider. I am in the process of analyzing this and the numbers. Not sure what the woman would be expecting in terms of payments, but see below for purchase price:
$395K

Now...to be completely honest, I am completely new to self storage, so i do not know if this is a good deal for the PRICE.
In terms of...well...TERMS, haha, I have contacted her and told her to get together a rough term deal to consider. Once she gets this together, I will be able to let you know the monthly payments.
Please let me know if you need anything else!
Best,
Josh

[AroundTheWorld]

Well, based on her earlier letter that she would give you a loan at:

8%
30 year amortization
for 15% down - - - that would make your payments approximately:

$2460 a month.

A proforma financial statement is a financial statement "of the future."

What do you believe the income statement will look like in one year?

Come up with a "reasonable" occupancy level (again, check the competition in that area)
Calculate revenue based on that occupancy rate
In the expense side, use your own numbers - - what do you think you would have to spend on repair expense?
What other expense (that she has not included) will you incur?
And - finally - what are YOU projecting the net income to be?

The, the next step would be to look at the cashflow.

Net Income
less debt service payment ($29,500 for the year)
= Cashflow

[JoshuaSCurtis]

Sonya,
Got one more response from the owner...check it out!
-------------------------------------------
How much are you looking to put down?
Right now my mortgage is at 7.75% 30yr am, and I would either have you assume it or "wrap" it at the same rate. This is where the trade off occurs: obviously the larger the down payment, the better the cash flow situation. If you put down 15% only, your payment would be about $2405/mo. I'd be willing to take less than 15% down in exchange for equity sharing. This is why the buyer needs to be experienced and probably have an expansion plan...you keep money in your pocket (by using a low down payment) to be used for development, marketing, consulting, a kiosk, etc to get the income coming in.

Merchant services: Is through the management team's bank, which is a local community bank, and I'm not sure how much it cost. (it doesn't get passed onto me). However I looked into plenty of merchant services and you can do it for free with business paypal virturally, or you can get the equipment from them for very cheap. This is a nominal expense to the tune of $30 or less a month; fees are taken out by the merchant service company usually around 2-3%. Worth every penny!! I've been trying to promote using it more (especially for automatic payments).

Auctioneer- have not used one. We went through the legal steps to dispose of contents instead, because we found someone who would clean out the units for free in exchange for contents. I decided it was not worth the hassle for me to try to organize an auction. However I'm sure you could find someone to do it either for a flat fee or for a portion of proceeds, or some combination of the two.

Phone expense is included in the data already. I think the bill is about $60/month right now because I kept the land line but just have forwarding services only, plus the yellow pages ad is included in this fee.

There is no security expense per se, except for the electrical bill for security lights, which is part of utilities.

Landscaping- my manager has been mostly taking care of it himself or paying people here and there to mow the lawn. I've been trying to get someone more professional in there. So far my expenses for that have only been around $100 every couple months, but I think realistically it should be more like $200/month.

[AroundTheWorld]

She is sure trying to sell you this thing!

I look forward to hearing your results on:

What your cashflow will look like
What the area competition looks like.

[JoshuaSCurtis]

I have yet to work out the financials on this...will try to do that in the next few days. Extremely busy. A quick question, in terms of determining Net Income...what exactly is the formula with what she is giving me (pro forma, current income, etc.).
I obviously need to analyze this as the business is CURRENTLY performing. Analyzing and purchasing on potential is speculation and gambling...
I can pull together a rough Net Expense, but how exactly do I get to Net Income with the information that I have? And...if I can't, what else do I need to ask for?

Sorry...just new to this game...
Best,
Josh