Analyze My Deal - First Time Commercial Investment

[Karen Devlin]

I've been renting SFRs for about 15 years now and I'd like to step up to a larger commercial investment. I'm working with a local broker and he's presented me with this deal: 

Self-storage facility located in Oregon. Price is $1,315,000. 

I have $370K cash that I need to reinvest from a 1031 that I just completed. The plan is to use that plus $30K cash from savings as a down payment of $400K and finance the additional $915K @ 4.25 for 25 yrs. 

Here are the details: 

1-acre lot with approximately 19,000 sq ft across 8 steel buildings. 151 storage units total.

Built in 1986, new roofs and exterior paint in 2015

Includes office with bathroom/sink

On-site manager will likely stay on as an employee

Sale includes additional .22 acre lot. Opportunity to develop the lot to support 30 additional storage units (estimated cost $75K).

2018: NOI = $77,331.34

2019: NOI = $78,472.83

2020 to 7/31: NOI = $44,824.19

Storage rental rates are currently 10% below market value. Plan would be to develop additional lot with 30 storage units and bring rents up to market value starting with a 5% increase.

Thoughts on questions I should be asking? All advice is appreciated. 

[Israel Garavito]

@Karen Devlin that seems a pretty tight due diligence period. Have you built any extensions to your contract?

Let me step back and ask you if the PA was put together by your attorney or by the seller? A non negotiable for us is that we provide the PA in a commercial deal.

In due diligence make sure you (this is off the top of my head):

1. Review all leases, compare to rent rolls and bank accounts to verify income, regardless of what the tax returns say (this is why it’s a tight DD period, and we usually take a team on site to get through it in a week). Make sure you get a good pulse on the business and how and when the cash flows in. This includes delinquencies, late payments, evictions, etc. what do you do with stuff when you evict and they just leave it there, and do you have that underwritten properly?

2. Review all structural

3. Permits

4. City inspections and COs

5. All contracts and utilities

6. Can you open all units? Not sure how that works with storage, but I’d like to see all units. Every single one.

7. Licensing: make sure those are up to date and if they are up for renewal, make sure the cost is underwritten. Not sure the licenses needed to operate a storage facility.

8. Property tax increases

9. Easements

10. Any debts in property taxes? Utilities?

Etc.

And don’t do this by yourself. Take a GC or whatever or whenever you work with and have them give you a quote or an opinion. Example: are you 100% sure that adding those extra units will cost what you think it will?

And then you and your team come back with all this info, polish your underwriting, and re assess.