Buying Or Selling A Storage Facility

Key Elements Of Due Diligence And Rent Reconciliation In Transactions

The self-storage industry continues to be a lucrative investment for buyers and a profitable exit for sellers. Whether you’re buying or selling a self-storage facility, understanding the nuances of due diligence and the specifics of rent balances and credits in the settlement process is critical to ensuring a smooth transaction. This article will delve into these key aspects to provide clarity for all parties involved.

Due diligence is a critical step in any self-storage facility transaction. It provides buyers with a comprehensive understanding of the asset they are acquiring and assures sellers that their facility is represented accurately. The core elements include both a financial analysis of the property and a physical inspection.

As part of the financial analysis, a buyer needs to review 1) Profit and Loss Statements: Analyze at least three years of financial data to identify trends and anomalies; 2) Occupancy and Revenue Metrics: Review occupancy rates, rental income, and fee structures; and 3) Expense Analysis: Validate the accuracy of operational expenses, such as utilities, maintenance, insurance, and marketing costs. As part of the property inspection, the buyer would want to: 1) Inspect the physical condition of the facility, including storage units, gates, lighting, and drainage systems; and 2) Evaluate the structural integrity and compliance with local zoning and building codes.

One of the most critical components of finalizing a self-storage transaction is addressing rent balances and credits in the settlement statement. Both parties must collaborate to ensure a seamless transfer of tenant accounts and rental income.

At the time of closing, some tenants may have prepaid rent, while others may owe rent. The settlement statement must clearly delineate how these balances are handled. Common practices include 1) Prorated Rent Adjustments: Rent is typically prorated based on the closing date (for instance, if the transaction closes on the 15th of the month, the seller retains income for the first half, while the buyer receives credit for the remaining days); 2) Prepaid Rent: Any rent paid in advance by tenants for periods after the closing date is credited to the buyer; 3) Delinquent Rent: Unpaid rent for periods prior to the closing date remains the responsibility of the seller unless otherwise negotiated. Security deposits held by the seller should be transferred to the buyer. The settlement statement must reflect these funds, as they are considered a liability the buyer inherits upon assuming ownership.

The final reconciliation process requires accurate tenant account records, including: 1) a detailed rent roll, outlining current balances, prepaid rents, and delinquencies, 2) verification of tenant lease agreements to confirm rent rates and terms, and 3) an agreement on any potential rent credits or adjustments for discrepancies in the rent roll.

The settlement statement is the definitive document capturing all financial adjustments, including: 1) prorated rent amounts, 2) credit for prepaid rents to the buyer, 3) security deposit transfers, and 4) any negotiated offsets for delinquent accounts. By ensuring that these items are accurately recorded, both parties protect their financial interests and pave the way for a smooth transition of ownership.

The purchase or sale of a self-storage facility is a complex process that requires careful planning and thorough due diligence. Addressing rent balances, credits, and security deposits accurately in the settlement statement is essential to avoid post-closing disputes. Both buyers and sellers benefit from clear communication and detailed records to facilitate a successful transaction.

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Scott Zucker is a partner in the law firm of Weissmann Zucker Euster + Katz P.C. in Atlanta, GA. Scott specializes in business litigation with an emphasis on real estate, landlord-tenant and construction law. For more visit www.wzlegal.com. 

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This newsletter is for the purpose of providing general legal insight into the self-storage industry. It should not be substituted for the legal advice of your own attorney.