Split Up Self Storage Facility Purchase: Business vs Real Estate

[Weina Shi]

Dear fellow investors,

I am under contract to purchase a facility. The current assessment is about half of the purchase price so the real estate tax will go significant up. My attorney recommended that I consider splitting up biz value vs real estate value. Tax assessment will only be on the real estate value so the real estate value will be more manageable. Has anyone done this?

It add a little more complexity as it will be two transactions (to finance instead of one). Is it worth the extra effort considering real estate tax savings, depreciation, loan?

Thanks!

[Conor Freeman]

@Weina Shi From a lending perspective, it may be difficult to find financing if you split the business value away from the real estate value. Self-storage loans are typically derived from the rent the self-storage property generates, much like multifamily. If I'm understanding correctly, you're essentially looking to split the business out to where "the business" (you) receives the tenant's rent and then that entity pays the "landlord" (also you) on a master lease, pocket-to-pocket. In my experience, we've always financed your original structure with no master lease. Lenders will underwrite the newly assessed taxes regardless, as they always look to see how the property would operate if they had to take it back. 

I know a few small balance CMBS shops that can finance these (be wary of lenders without capped cost programs as lender's legal can run the bill up to $30-$50k even on small loans). Banks are obviously an option and some of our small balance life insurance companies are aggressive on self-storage.

I understand your ultimate goal is to build out more units in addition to the existing ones. My suggestion would be to work with a lender who is active in self-storage construction. They should be able to bifurcate the financing structure to where they finance the existing project with permanent debt, then provide construction financing for the next phase. It would need to be the same lender because you may need to redraw the parcel, stripping that 1st lender of land value. If the lender knows they're getting the construction loan on the next phase, they should be fine with it. 

This doesn't really answer your tax question. Like others have said, I would refer to your counsel, but wanted to chime in on the financing aspect. Let me know if you need any help.

-Conor