How should I acquire this Self Storage Facility, and why?

Question

I am in talks with an owner of a self storage facility and I am wondering which option is better to purchase it. A Master Lease with Option or Seller Financing and why?

Here are some details of property:

- not listed, owner called me off direct mail campaign

- 260 units in 5 buildings no climate control and 70% occupied (unverified)

- owner has price in head of $1,350,000, probably from a broker

- owner brought up seller financing in talks

- I should receive financials this week from accountant

- property is free and clear

- agent for Penske truck rental - only one in 10 mile radius

- paved, fenced, and has security system (unverified)

- house/office in front of facility with 2 employees - 1 is live in manager

Thanks in advance for your input. I am also looking for debt investors on this one as well. Owner owns other property in town such as cell tower, vacant land and a sub shop and he has owned this property for 17 years and he is ready to retire, he is 71 years old.

Michael Wagner · Answer

My answer would depends on the specific terms offered.  Both methods of acquiring are viable.  The master lease has less risk from the standpoint that if the property fails to perform you can walk away more easily.  It has greater risk from a legal standpoint....can be mitigated by having an ironclad option.  You just don't want to enhance the facility to the point where the owner could then wiggle out of the option.  The strategy you choose will likely be based on what the seller prefers...not because you let him force you but because he will make his preferred option "more affordable" by prescribing better terms to it.  If I were you I would try to get firm terms for each of the two strategies and then negotiate from there.  IT will become clear which has the most room for you to profit.  Keep us posted!

Mike

Pat G. · Answer

Brad T.

Thanks for the response. The game plan is to increasing the marketing, raise rents, increase capacity and sell in 5 years.

George:

Thanks for the response and input. Congrats on your opportunity, please keep me posted on how it goes.

In a Master Lease with Option to Purchase I would lease all property from the owner and then turn around and sublease to all the tenants. In a Master Lease I would not have equitable title.

Thanks guys

George Fitz · Answer

I'd prefer seller financing if it were me. That way you own the land and you will have complete control of the property. I'm under contract currently to purchase a self-storage property that is 6 acres- 3 acres of that I will own and 3 acres are on a ground lease (which I will assume). It would be a much easier, cleaner transaction if the sellers owned all the land and I just purchased from them. Among other things, the ground lease makes financing more complicated.

Also, you said Master Lease. Would you own the buildings on the property or would those also be leased? Among the many things this could affect is your ability to depreciate.

I guess it all ultimately depends on the seller financing terms you agree on versus what the lease terms would be. The devil is in the details. But generally I think it will be a cleaner transaction and better in the long run to buy the property, if it makes sense.

Brad T. · Answer

Hi Pat,

Sounds like an interesting deal.  What is your main goal for this investment, cash flow or capital gains?  The big question would be are you planning to keep it long term or get it stabilized and then sell it.

Best of luck!

Brad