A similar analysis of the sub-market to what was described in the development feasibility section should be performed during the due diligence period when acquiring an existing facility. This is the only way to be comfortable with the potential upside of a property and the rate and occupancy assumptions in your pro-forma. Furthermore, an in-depth financial audit and unit audit (sometimes called a “lock check”) should be performed when considering any self storage acquisition.
Self Storage Acquisition Audits should answer the following questions at a minimum:
- Do revenues on the income statement match those based on actual bank deposits and information recorded on the management summary? If not, why not?
- Are there any discrepancies with what you actually observe when looking at each unit versus what is on the “walk thru” report? If so, what is the explanation?
- What is the condition of each examined unit?
- Does a sampling of the leases raise any red flags about the legitimacy of the lease? Is each lease signed? Do the rates on the lease, after considering possible rate increases, match up with what is reported on the rent roll?
- Does an examination of the rent roll highlight any tenants with several units that might pose extra risk should any of those tenants vacate? There are ways to mitigate this risk.
- What about accounts receivable? Are auctions being held regularly to keep accounts receivable at a reasonable level? What is the real occupancy when considering tenants with significant delinquency? Again, there are things you can ask a buyer to accomplish before you close on a property with high delinquency.
- Do the actual utility bills match what is being reported on the income statement, or is there a disconnect – maybe a missing month or an extra month in the trailing 12 expenses.
With over 10 years of self storage acquisition experience for major companies (Storage USA and Extra Space Storage), Bret Durfee can help you understand and assess the risks of your pro-forma revenues and expenses.
Call Bret at 801.419.5600 to learn more about how we can assist you in your financial due diligence efforts.