Day 48: Self Storage Due Diligence Explained: Everything You Need to Know Before Closing

Hey folks, welcome to day 48 of the Storage 100. I am Joe Downs, and with me tonight is a special guest. And I'm gonna, I'm gonna dance here for a little bit, just let a couple people, uh, a couple people, uh, jump on that I know are excited to be here. Um, I'm actually, uh, if you can't tell, I'm at a hotel tonight because I am out in Phoenix, Mesa technically, at our Storage Mastermind. So everyone's off to dinner tonight, 6 o'clock here, 8 o'clock back home. Everyone's off to dinner and I'm staying back here for you because I made a commitment and a promise. Uh, but obviously we are live tonight and I'm excited to recap Section 3, and I'm more excited to bring on, uh, my special guest. Uh, when I'm done recapping, we'll open up for live Q&A. So, um, all right, hopefully, hopefully that's enough of a little, a little shuffle there to give some people a chance to log in, uh, so they don't miss everything. So, all right, again, welcome to day 48 of the Storage 100. Uh, Joe Downs with Storage Mastermind, and again, we are live. Uh, and tonight we're recapping Section 3, which is the last 2 weeks, which was all about evaluating deals but from a different perspective, right? And diving into the physical aspects of the due diligence process, uh, again, that we covered over the last 2 weeks. Each night we dove a little deeper. We didn't go super deep, but we dove, you know, a couple inches deep into some of the various, um, physical things you're going to encounter. when we're going through our due diligence period. So, and then we're going to walk through a quick due diligence checklist and show you how, uh, we at Bellrose, uh, Storage Group actually use these on deals. So, and then finally at the end, again, we're gonna open up for Q&A. There is a, uh, chat feature that you guys all have access to, and that's when I'm going to bring in my special guest, who is also one of my business partners who leads our development at Bellrose, but also, uh, all of our— all of the physical aspects of our— the management of facilities like CapEx and expansion opportunities. So, uh, excited to bring Tim Cain on for that. Um, if you've got questions about finding deals, analyzing properties, uh, or any of the due diligence that we went through the last 2 weeks, tonight is the time in the night to ask them. So let's get to it and dive in to the recap. Here we go. Okay, so if you've been watching section 3 in order, then you would know we started with finding deals. We covered how to find off-market storage facilities, how to reach out to owners, and how to build relationships that lead to deals. And then we moved into analyzing deals where we talked about how to evaluate a storage facility, what red flags to look For how to determine if a property is worth pursuing. And then from there, we went a little deeper on due diligence. So we've covered when to hire a third-party inspector, what they should be checking when they're doing the inspection. And some of those things we talked about were the Phase 1 environmental report, what they are, why you need one, what to look for in the report, where to look for in the report. Uh, as well as the bottom line on due diligence, which was, hey, or which is, um, you know, that, that due diligence period is your last chance. It's your trust but verify period. It's your last chance to walk away in that timeline, to walk away without losing your deposit money, your earnest money deposit money, which we're going to get to at the very end of this. So that period and the checklist and the items on that checklist And these sub-items on the checklist are critical steps, and there are things that we don't rush through. We dot i's, we cross t's, we put on the belt and we throw on the suspenders. We don't skip steps. And then we talked about walking the property, what you do, checking the units, assessing the condition, looking at the locks, looking at the physical aspects of the facility. We spent some time Mostly looking at the bigger ticket items like what do we look for in the roof, the HVAC system if there is one, um, asphalt if there is asphalt, or gravel, uh, if there is gravel. And if there isn't gravel, we didn't really cover it, but hopefully we're gonna get gravel. Uh, and then of course the gates. That's just, you know, name a— the— to name a few things we, we talked about the last 2 weeks. Um, and, and again, we We, we covered those, not everything. I mean, we could do a whole series on everything you should cover, but, um, and maybe we will. But we covered these because these are the items that can, that can bankrupt you, right? These, these are the big ticket items that if you miss them, it could be a really big deal. And I know, uh, when I do bring Tim on, he's probably gonna— he's put— there's some very fresh, uh, examples I'm sure he's gonna want to talk about. that were unfortunate for us at Bellrose, but I'll hold you a little suspense there. And then we learned how to calculate your immediate CapEx needs, how to plan for what you do and what to spend, what you need to spend on day 1 to make your facility rent-ready. What are the important items? What can wait? And then we've moved on to everyone's favorite topic, Which crosses over into legal, which is, I was going to say, slightly less exciting than legal, but these 2 are so thrilling and just twisted together because you're dealing with your attorneys when you're talking about surveys and zoning, confirming the property boundary lines and making sure the property's legally owned, legally allowed to operate as self-storage, not just yesterday, but today and tomorrow. We covered all that. And I say it's— I was obviously being facetious when I say it's exciting because it isn't, but it sure does get exciting the wrong way if you miss something here, right? It's exciting might not be the word to use, but let's just say it gets interesting if you miss something. So you don't want to miss anything there. And that's why these kind of— look, for me, they're boring, but my goodness, are they important. So we covered— in addition to that, we moved on then to the title commitment. What is it? How to review it, why skipping it is a terrible idea. And then we— I think the next day we talked about due diligence and the period. How long should it take? How long should we give ourselves to accomplish everything we need to accomplish in that due diligence period? What those periods should look like depending on whether it's a value-add acquisition or land. Why rushing it through that period is dangerous. Uh, we talked about how to negotiate enough time and more time. And remember, never ever let a seller pressure you into a timeline that— in a due diligence timeline that sets you up to fail. Um, but always be realistic. And if they won't let you be realistic, or if they won't be realistic with you, you can't be their buyer. That's just a hard no. So that's not something that, that we want to get ourselves into. Um, all right, over the past 2 weeks we talked a lot about due diligence, obviously, but we also covered the absolute deal breakers, right? So what were they? There were things like— these were the things you walk away from the deal, no questions asked, walk away. So what were they? They were environmental issues. That was a huge one, uh, because remember, if the soil is contaminated, you can't fix it easily and typically not affordably. There's some scenarios where it's not so bad, but a lot of times it's bad. We covered title defects. Those are things we're going to walk away from because if the seller doesn't truly own the property, you can't buy it. It's that simple. And then finally, physical structures— structural failures, I should say. A collapsing foundation or a roof that needs to be replaced that you missed, that, that'll eat away all of your profits, maybe in the deal, certainly for a couple years. Don't be afraid to walk away from these types of issues. Knowing when to say no is a critical skill set, and I know it's hard. And we do a lot of coaching, mentoring. It's, it's hard, especially when you're new, because it's exciting. It's hard to find a deal. Right, and then you get it, you get a fish on the line, you know, they're on the hook and you want to reel that thing in, and you do, and you're reeling it in, but then you find out, you know, something wrong with this fish, right? It's got 3 eyeballs. It's not fish we want to eat, right? So when you see that, we got to let it go. We got to unhook it, cast it back into the sea. Let some other fool catch that fish and eat it. That's not for us. So knowing when to say no, as exciting as it can be, and this is near and dear to my heart because I was always on the front end acquisitions and I had to be told no a lot. In fact, this is like PTSD. Tim's gonna come on in a couple minutes and tell you how he told me no and why on some very, very fresh deals. So these wounds are fresh, but they're really important. And really critical at this time to actually be talking about them. So while it was a loss for us, it's a win for you because they're real-life, very fresh examples that we're going to talk about in a minute. All right. We really covered a lot in the last 2 weeks in Section 3, and, you know, I hope you found it very informative, and I hope tonight You brought your questions because now is your chance to get answers to those burning questions. So please drop them in the chat. We'll tackle as many as we can. Um, and maybe you're wondering about finding off-market deals, or perhaps you've seen a red flag and want to know if it's deal killer. Well, tonight's the night to— don't hold back, right? Let's get after it with questions. This is a live Q&A. Drop your questions in the chat. Let's make it interactive. Tell us what's on your mind about evaluating deals or due diligence, whether it's something that you're concerned about, something you've heard about, something that scares you, something you're nervous about going through on your own. Just drop the, drop the question in the chat. I'll— I can answer them, and certainly Tim can answer them. So Tim, if you are willing to join us— oh, looks like you are.

Hello.

While we have— while we're waiting for some questions to be formulated here, is there— I don't know why I want to do this to myself, and I know it's painful for you too, but we just covered For the last 2 weeks, I know— I don't know if you've been following, but the last 2 weeks we— well, I just told you what we covered, but each night we were going into a different, um, a little deeper dive into different topics like survey and zoning. And we didn't cover— I'm actually— I think we did cover, um, I don't want to say it, but we did cover— I don't know which one you want to start with— our last 2 deals we lost, or last— there's been a few deals we lost. Um, and, and actually students. So, um, I'm thinking of one of ours, and actually, um, a couple students lost some deals because of things that we just covered in the last couple weeks. And I, and I shouldn't say lost, I should say, uh, backed out of.

Right.

Um, and you know what's funny? And I'm, I'll— I'm gonna let you tell the, uh, the Ithaca story here in a second, but But, um, do you remember you, you called me to let me know what the issue was and you said, man, we just can't catch a break.

Yeah.

And, and you were right. But at the same time, after I paused and thought about it, do you remember what I said to you?

Yeah, I— it was, it was a blessing. I mean, we—

I said, I think we just did.

Yeah, exactly.

So why don't you— while we're waiting, we got one question, but I want you to, to go ahead and tell that story. of Ithaca and, and, um, and what happened there and, and why it was such an issue, uh, because it's literally one of the things we just covered last 2 weeks. So I— and I want people to know that, yeah, these are topics that we're talking about, uh, and they're, you know, they're possible in storage, but they're not just possible. Like, these are real live examples. So even though I covered them as like, hey, these are things we need to cover in this Storage 100 series, Like, they're relevant. They, they just happened to us in, in real time. So literally it happened to us while I was putting these videos— when I was dropping these videos, this was happening in real time.

Yeah, yeah. I mean, and Joe, one thing to point out too is, you know, this was over the holidays as well. So this is a facility we had under contract and we were in our due diligence in Ithaca, New York. And just, there's always just an element that you and I have talked about of going under contract during the holidays, kind of that Thanksgiving to New Year's break where a lot of third parties and small companies, title companies, attorneys, engineers, kind of everyone goes on cruise control. And I just feel like our radar is up a little bit even more, you know, during that time. Because why I tell you that is You know, survey and title took a little longer to come back at Ithaca in Ithaca, New York because of the holidays. And what happened is long story short to the to the punchline we have we ended up to be in a flood zone which FEMA remapped within eleven months of acquiring this. You know, eleven months ago FEMA remapped the facility in an A and E A E flood zone hundred-year flood. Basically the worst of the worst. And why I say that date, Joe, there's so many documents out there, including third parties, that are not the most recent information, right? Imagine if Title and Survey did not catch that and they were reading something from 2024 earlier that year. So it's not— it's so beneficial. Not only, you know, everyone can do a Google search or ChatGPT search. Search, etc. But you really got to find the most recent information. So what we found during due diligence, uh, within 3 hours, by the way, we forgot that part. Within 3 hours of—

3 hours of the due diligence period expiring. So I guess it was like 5 o'clock on what, Friday or something? Yeah, yeah.

And we— so we found out about—

So what happens at 5 o'clock? What happens at 5:01, Tim?

501, our money is bye-bye. Our, our money goes hard.

Earnest money deposit goes by— well, the, the seller, it goes hard. The seller gets it. So that was what, $30,000?

Oh yeah, it was up there. It was $30,000. And then yes, it goes towards closing, but, uh, our insurance, it wasn't even in question that we could move forward with this deal because Because adding flood insurance in that flood map, in that flood zone, it was a deal killer, just like you went over before.

How much was it, Tim?

It was— so to put this in perspective, it was $11,000 was our normal, normal annual insurance. Add another $70,000 for flood insurance.

So for folks watching, listening, watching the replay, whatever, that additional $70,000 Had we closed on this thing, had we not caught it and closed, we would have been required to get that insurance. That additional $70,000 would have been— what were we buying this thing at, a 7 cap?

We're buying it like 7.5 cap, and, and it's sliced in half in that, in that hour.

So 7.5 cap, I'm gonna do quick math for us live here, Tim. I can do it live.

Better you than me.

Is $933,000. So our facility, this facility we had under contract for $1.5 million.

$1.5 million. Yep. Yep.

Would have been worth about $600,000.

Yeah. 1/3 of its value over in because of, of a remapped FEMA flood zone within the year.

Yeah. And the reason, folks, if you're, if you don't understand that, that math is that $70,000 is a new expense. Right, right off the bottom, the top, you know, right up the NOI. It just reduces the NOI by $70 grand. And then at that $7.5 cap we were, we were paying for that facility, that makes it worth about $600 grand instead of the $1.5.

Brutal.

Wow. Brutal.

And brutal.

And you take that away, and I loved this deal. Yeah, I loved it. It was a seller finance deal, 20% below market. He wasn't— he was using some units. He wasn't even getting all the revenue out of this thing. And this is exactly what we look for in a deal. This is— I mean, it checks so many boxes except for the flood box.

Ah, but crisis averted. Yes, we took it on the chin, but you're right. What if we move forward that— oh my gosh, that, that, that will set you back. I mean, you know how much damage that would have done to us.

Yep. And what's, uh, Tim, of all the topics I covered, what was— I mean, I can give student examples if, or you can if you can remember them, but what's, uh, what else would you point to that we've experienced in the topics that I've covered that are real?

Yeah, you know, the other one that comes to mind looking at that checklist too is, you know, though, like during the due diligence phase, really like going line by line and checking the financials for discrepancies. So our acquisitions manager, you know, Jack, he caught something during due diligence, another facility right before this that we had under contract. And this was actually with a broker. And unfortunately, the seller unintentionally, we'll call it that, you know, whatever happened happened, but they double counted on their revenue They double counted a triple net lease that was outside of storage, so it was accidentally in the rent roll, right? And then it was accidentally on on ancillary income coming in. So if you're falling, and it was around eleven or twelve, it was I'm sorry, it was twenty four thousand dollars annually. So what's that, Joe? So they double counted it. So we have to take We had to subtract out that $24,000. And then what does that do at a $7.5 million cap, right?

We—

it's a whole— yeah, go to the tape, Joe.

Yeah, I mean, what was it, $7 million cap?

It was a $7.5 million— this was like $7.25 million cap, somewhere in that range.

Yeah, I can do that for you. $331,000.

Yep. And this was around a $2 million deal, so And it put us in a tough spot because this isn't us going back to the broker and saying, hey, uh, we found something after, you know, that, that we don't like, or our lender is not cooperating, or this happened, that happened. This was if our team again didn't check out the financials during due diligence and not have caught that double count, we would have walked into a negative $300,000 of equity day one.

Yeah, I mean, these, these details— remember I said belt suspenders? Yeah, they matter. This, this is, this is part of, of what we do every day because you do—

I—

you do run across these, these issues, these scenarios. And that's why I hope, I hope anybody who's watched these videos realizes these— this is not just I'm not just putting these out there for the algorithm of YouTube to get more views. These are real scenarios that we encounter all— I don't think there's anything we haven't encountered at this point. Don't say that, Andrea. No, at least of what I've shared so far. If we haven't encountered it, a student has. And by the way, Brad Cross has a question here that last example is perfect segue to, which is, He's asking, are audited financials generally available from private owners? And Tim, I'll let you comment on that after I do. But Brad, I would say what you can expect from a private owner is 180 degrees the opposite of audited financials.

Yeah.

It is as far as you can get from audited financials. I mean, some of this, sometimes, Brad, they're writing down their P&L handwritten on a piece of paper. and asking if we have a fax number, you know what I mean?

Yeah.

That's one extreme. But, you know, you get, um, you get the books and records in notebooks. Um, some, some mom-and-pop private owners are advanced enough to have it in Excel, and others actually have them and, you know, use, use basic software like ESS or something like that. Um, a lot, a lot can produce a P&L, but a lot of times we're actually, um, having to recreate it. So the answer is a hard no on audited financials. And in fact, Brad, you know, we would— Bellrose is what would be considered a mid-operator, and based on the number of facilities we've acquired and own, and we wouldn't have audited financials either. It's— that's, that's far too taxing of a cost and a burden on, you know, small boutique operations like us. Tim, do you— are you familiar with, um, I don't want to hog the mic, but are you familiar enough with the story, speaking of, um, title issues, um, with the story from— I'll say her first name— Gretchen, one of our students, regarding a grandfathered facility? No, no, you're not. Okay, this story, this is one I hadn't heard.

Do tell.

So You've— we've all heard of, hopefully. If you haven't, I'm sharing with you. Um, you know, you— we talked about it, actually. I might have covered it this week. If not, I'm going to cover it again, or last week's. We, uh, I know we covered grandfather scenarios. So you can have a facility that either was built when there was no zoning or was built when zoning allowed storage, and then over years the area around it, path of progress perhaps, uh, changes and becomes, let's say, very residential. And so your parcel is in the middle of a, a designated area that might be designated residential now. That zoning was changed and approved by the municipality, and your status as approved for zoning then becomes what they call grandfathered. And you have to be careful there. On the one hand, it seems like it's you got a moat around your facility as long as you can maintain that grandfathered status. So in fact, I just did a podcast with Jason Mandel, our attorney. We recommend a lot to a lot of people who we talked about this on the on the self storage invest self storage investing podcast, which was just released last Sunday. And, um, he actually was the attorney on this deal, so I, I know the ins and outs pretty, pretty, um, down to the detail. He— and so on a grandfather property, just what I covered this past week was, um, you could— you keep that grandfather status, but when you're buying it, you definitely want to get a letter from the municipality saying, acknowledging, yes, you have a grandfather status. You want that. And that's transferable and you want to transfer that. And it should be transferable, I should say, because what one of our students, Gretchen, found out with Jason as her attorney was— and this is fascinating because I had never heard of this— this particular scenario, the facility was grandfathered with an asterisk. It was grandfathered for the buyer and one more buyer.

Wow.

So, it was allowed to be sold one more time and could maintain its grandfathered status. Gretchen was coming in to buy this thing, 2 buyers later. So, the buyer she was— the seller, I should say, she was buying, she was under contract with, going through her due diligence, and Jason and his team found this. That seller was actually not zoned for storage anymore. It had gone past— it had one more transaction went through.

So they missed it when they bought it.

An attorney wasn't involved, or they didn't do a survey. They didn't do whatever they did. They, they didn't perform all of the steps to confirm, including getting a certification from— or a letter at least from the municipality saying it's— yes, you, you can still operate this as storage. So that seller was dealt some pretty bad news. Obviously Gretchen couldn't buy that facility because she's buying something that's not even zoned for storage, but the seller themselves that own and operate that facility aren't zoned for storage, and nobody knew. Now, mum's the word, I assume, and I don't know what's going to happen with that facility, but The— and I'd never seen that where, you know, usually your grandfather's grandfather, and you just have to maintain that status. And, you know, then you still have to guard against things. It's still a risk because what else can happen? Fire, tornado tears your buildings down. If you lose more than 50% of that footprint and you don't have that certifying that you can maintain this as self-storage, You're at a loss there too if you don't have that. Even though you bought it grandfathered, cert, you know, it was grandfathered in, if you lose the— if you lose more than 50% of that building, you can't rebuild it as self-storage. And in fact, today at our mastermind, this subject came up and we were talking about it, and one of the buyers said they were buying a facility That, um, was grandfathered. And again, your first instinct is awesome, I got a moat around me, no one else is allowed in this area, it's captive audience, right? Especially if it's residential around you. But they wanted to expand because there was additional land there. They wanted to expand it. And folks, you should never buy any facility based on expansion. It should stand on its own. That's— I think we covered this, this past 2 weeks as well. Uh, but the upside for them was expansion. And what they found out was this thing was, you know, great. Talked to an attorney and said, you know, you could put it under contract. And actually, this is 2 lessons in one here. You can put it under contract, but I would give yourself a longer due diligence period because you got to go to that municipality and make sure you can get that letter that extends to Expanding that facility. Because if you can't and you're buying it to expand, you don't know that you can expand it. You might— they might grant you a variance to do it, because now you need a variance. They might grant that variance, they might not. So that's why you have to buy that facility where it stands on its own. You're buying it based on what it is. If you can expand it, cherry on top. Um, Tim, let me, uh, throw some questions at you here that, uh, we're getting.

Yeah, yeah. Yep, I'm tracking.

Financials we covered. Uh, where can we find more links? Hopefully— oh, Drew, thank you for sharing the YouTube. Uh, folks, it's under— it's on YouTube, by the way. Um, it's called the Storage Mastermind. You can find it, just Google Storage Mastermind YouTube, you'll find it. Uh, we got the link. Great. Is proximity, Tim, to a former gas station always a deal killer or something manageable?

You know, I'm reading it right here. Proximity to a former gas station. Yeah. So it is a former gas station. You know, it's pretty hazardous. It's very, it's very low probability that you're going to get that through environmental. So it's going to automatically go to a Phase 2, you know, in environmental phase.

What does that mean as the buyer, Tim? It's automatically— what does that mean for me as the buyer?

Yeah. So that means your radar's up already. You know, it's going to have environmental issues, you know, The environmental phase ones come back with RECs, and that's historical data on things like it was a manufacturing plant and they used the dangerous chemicals. It was a former gas station, or it's been storage the whole time and there's no RECs. So going into a gas station, which is usually corner lots anyway, which we typically tend to not love anyway, we'll go into that in another session for building and expanding because of setbacks. But, uh, former gas station, it's going to automatically go to a Phase 2, meaning, you know, going in there is going to be questions, there's going to be recommendations, there's going to be recs. And Phase 2 is, uh, way more expensive, right? It's more of an investment right off the bat.

So I need to budget for more cost.

Yep.

Yep.

More cost and time.

Time. So, and do I want to do that right up front?

You want to do that right up front. But, but I tell you, I don't know, and I'm not saying this for every single operator, we've never bought, acquired. I don't think I know anyone in the industry that's acquired a former gas station. There's just, um, so many reasons why, you know, you don't want to go. It's not worth the battle. Um, now, never say never, because it might be abandoned for 50-plus years and You know, whatnot. But if it's a heck of a deal and you have a lot of information, you have more time on the due diligence, and you have the budget to go straight to a Phase 2, sure. I never say never, but we typically— that's one of the red flags we look at. And I thought that meant, Joe, when I, when I read that, I thought he— they were talking about that's adjacent to, or, you know, or abuts to a gas station. Which can be just as catastrophic. Faith Star, you gotta answer yourself.

I think that answers the question. It is proximity to a former gas station. So Dallas is asking, is proximity to a former gas station— so let's just say it's before, which we've run into before.

Yep. So you got to ask yourself, uh, one thing. It's, it's— we always say in the development world, follow the water. You know, follow the oil, follow the water. If you are uphill from a former gas station Right, and you're adjacent to it and the topography and the grading is attractive, meaning that that water and that oil is not going back, you know, going against gravity. Sure, that's one thing. But if you are at the same grade or even downgrade from a former gas station, it's going to be the same answer that we just went over, that it's probably running downhill and you're going to have some issues.

Before I get to the follow-up question, Tim, Self Storage Brothers was Wasn't one of them next— wasn't one of them downhill from a gas station?

It was. So one of the 4 was.

Did we run a— wasn't there— isn't there something you can do beforehand to check to see if that property had issues or was remediated? Is there anything you can do there?

There is. And to clarify, it wasn't a gas station. It was an auto parts. So it was one of those kind of like if someone's even changing oil next to you, Right. For like gas station, you know, that's— we just went over that. But even on those kind of like one-off places where they have a garage and you've noticed that they're also changing oil, that's why we always say to spend a day. You know, we can go into that on how much time to spend and where to spend your time on due diligence and whatnot. But, um, and there is— so you can do before you go into a formal phase 1, You can just do a historical. It's a condensed Phase 1. It's a, it's like a light report, kind of like comparing a feasibility and a desktop feasibility. You know what I mean? So it's a lighter report that just looks at historical to see if it's even worth your time, or if just like, if it's just explaining, oh, that makes sense. This, this isn't an issue. We can go ahead. We, you know, this is low risk to us. Because I don't know about you, Joe, but there's never been There's always been some type of risk during due diligence. It's just how many out of 10 risks, 7, 8 of them are okay, and then can you live with those, you know, the others?

Right. Follow-up question from Dallas was, how do the lenders typically look at this situation?

Yeah, so, you know, not all lenders on existing facilities Not all facilities require a Phase 1, right? And I think that is a bit— we know from firsthand, that is where sellers try to kind of persuade you, like you were talking about earlier, and, and saying, oh, I didn't get a Phase 1. Well, you got it from a local credit union.

Oh, you need a Phase 1? Yeah, yeah.

So not all lenders require Phase 1 for existing facilities, but most do these days after they've been burnt. It is a big deal, especially when you're expanding or developing. You you get a phase like there's no question that that lenders are going to require a phase one. So if you do get a phase one and a lender requires, and there is Rex, there's issues. Yeah, that's a condition of closing. I mean that that Tim, what are Tim?

What are Rex?

It's just it's those are the issues that. Raise the flag so they can be— I think I said earlier, like, REC would be this was discovered that this was a manufacturing plant in the '60s and it used that scary chemical. You know, that's a, that's a no-go these days. Or there was an oil— there was an underground oil tank discovered and it had a spill and there was a claim, you know, a claim filed. 7 years ago, and you need to go find the report that shows that you have a clean environmental from that spill. So it's, it's things that you— that they discovered that you need to deal with, or at least be known before closing.

Okay, Tim, are, are these scenarios— let's say I'm a first-time buyer, I'm new, or thinking about getting into storage, and I run into this issue. I mean, Is this on a first deal? Is this too much for me?

You know, it always depends on how sweet of a deal it is, but if you're going into phase 2 territory and there's, I mean, this is one of the big deal killers that you've, you've discussed, right? I mean, there's other things you can get around, even roof replacement. Well, you can go get quotes and then back into that number for, for renegotiation. Right. Environmental phase, environmental concerns. It's not only a costly issue, it's also time and kind of just not— it's unclear if you can even get it resolved. And then let's say you are okay with it, which you shouldn't be, and you move forward and you go buy it and then you expand and then you turn this into an institutional-level facility and it's beautiful. Do you think that institution buy— do you think their investment committee, do you think their board's going to let them? That's one of their no-gos, right? So it's— it might not be a problem now.

So even if I've, I've found a deal, 100% financing, the seller loves me, uh, I can expand it, I can double the size, the market Supply index is a two. I'm gonna fill up quickly. I mean, Tim, this is the deal of a lifetime. What am I doing?

That's a business decision, right? That that's that that truly is a business decision. If you're gonna put a gun to my head with that decision, if you are well capitalized and you have your risk management and you have the right veteran team, including. Environmental specialist and you are— this isn't your first rodeo, and/or you're coming from another asset class where you're very familiar with this process and working with the Corps of Engineers and the— this process, hey, power to you. That's your business, that's your money. For the common folk, um, that's going to be one of those great stories you come on here and talking to us and say, man, that was the hardest thing I've ever walked away from, but Now I have 7 facilities because I didn't go bankrupt at facility 1.

I think that's the right answer. Um, Tim, one question, one, I think, last question here before I, I share with you the solicitation we just got.

I'm reading, I can see the chat. Okay.

Uh, how do we treat the 500-year floodplain?

Uh, key to the auction process. Yeah. So why this was— this is, it's usually caught during the survey and title, like, like the, the report, the zoning report and the survey title search, right? That usually is done by our attorneys or your attorney, your team. This is— it would have been caught way sooner, but because of the holidays. And then, as well as it just changing for the remapping FEMA, it went under the radar a couple more weeks than it should have. So, to the key to the inspection process is do your title and survey report as soon as possible in your DD. And then, because we had a third-party report as well that unfortunately it was not flagged because it was using outdated information, which, you know, there's always checks and balances. It's always great when separate vendors and third parties are checks and balance. So the title and survey caught it, and it's already built in there. It just took longer than it should have, and it was a very, very— hopefully the only time this happens. So it's in there already.

Right. One more question before we get this solicitation. I don't know if you want to address Curtis. This could be a first where where a transaction is made live. Curtis, I'm gonna address it. Everything's for sale.

Yeah, there you go.

Um, uh, Tim, what are what are some items that I've addressed in the last two weeks that there are workarounds for? And before you answer. And I think I have an example that you and I just discussed on a podcast as well. Um, in the mastermind today, this, this actually came up, and what we said was, look, a lot of times problems, issues, hair on the deal sometimes are opportunities if you have the resources and know-how and understanding to work around them. A lot of people will run. So, um, do you— are you— do you know when I say we just talked about the deal on a podcast, or do you need me to tell you what you did?

No, unfortunately there's been a few of those, Joe. So which—

All right, Lynchburg. So what— so we had, we had, uh, we had setback issues. Oh yeah, right, in Lynchburg that we— I don't think we realized right out of the gate, right?

Yeah, it was another thing caught on the By the way, it was another thing caught in that same Title 1 survey.

Yeah. So, how did we work around that?

Yeah. So, to your point, it stems opportunity and creativity, right? Because I, you know, we— I think we're pretty proud of this one for getting creative. You know, it was more of an art to make this work. So, the zoning— or I'm sorry, the setbacks— this parcel, our neighbors were So if you know, commercial setbacks are a lot more attractive than residential setbacks, right? So a lot of commercial setbacks are all the way up to the property line or very favorable, you know, under 10 feet that you can start building. So—

Tim, let, um, just to clarify for people watching, so when you say commercial setbacks, I don't want them thinking our property. I want them to think our neighbors.

Correct.

So if our neighbor is a commercial property, in some— you're saying in some jurisdictions we go right up to the property line. Or there's a minimal minimum or a very minimal buffer.

Yeah. Compared to residential, which would be, which would be, it's more like 25 to 50 feet, sometimes even 100. When you have a lot of, uh, AHJs, authorities that have jurisdiction, they require not only a setback, but then a buffer where you have to do vegetation, trees, everything like that. So, It's a big deal, and I think a lot of people get that wrong on expansions as well. They just go and say, oh, we've got an extra acre. Well, if you have a residential setback on 2 sides, that's— that is not an extra acre, which we can go into on, you know, another time. Uh, it's always less than you think.

So let me, let me paint the picture for people watching. So picture it almost like a perfectly rectangular deep property, right? And we had on the right-hand side of it, if you're, if you're looking at it, and we were— we bought a 9,000 square foot facility, we're gonna expand it to— you're adding 18,000.

Yeah.

Was it 18? Whatever, something like that. So down the right-hand side, it's a straight line, right? Down the right-hand side, if you're looking at the property, we had— we found 2 different setbacks. We had a commercial and a residential. And so folks, if you're, if you're watching, you can see, you know, instead of being a straight line, whatever, it was one of these.

It was right, right in the middle. It was the oddest thing. And it was a, uh, trailer park. It's a trailer park, right?

So, and you couldn't just push everything over because we had— we were narrow rectangles. That was our drive aisle, right? So we would have had to go no storage in the middle, right? Or what was the creative workaround?

Yeah, so we found a workaround in this jurisdiction that— just disclaimer, it is not the same in every single jurisdiction. You know, always check your zoning and setbacks. We found that portable storage that we could just basically kind of camouflage and just look like it's just part of our normal storage because this is just a long rectangle. We're just connecting the $18,000 net rentable to the existing $9,000 in a fortress style.

Tim, you and I know what portable storage is, but for those who don't, what is it?

Yeah, portable is— it's technically business equipment, right? So it's not a fixture, it's not a dwelling, it's not— you can't depreciate it, right? It is an actual, you know, think of how jurisdictions use sheds. This is literally storage that looks like storage to the naked eye. A lot of times you can't tell the difference. But this is storage that if need be, you can move, usually with a forklift, but it is portable and it is not a dwelling.

You said you can't depreciate it. I think what you meant is it's not on a, on the typical commercial depreciation schedule. Actually, you can depreciate it. Yeah. Yeah.

As business equipment. Yeah. Yes.

As business equipment.

Yes. But not as a dwelling. Yeah. It's not a, it's not a fixed dwelling. Yeah.

All right, so, um, folks, there's, you know, a couple different— there's different types of portable storage. Um, are we doing promos on here? Yeah, we'll throw it. We'll throw a little promo. Uh, we'll tell them who we use, right? So I believe— did we use Boxwell?

Yeah.

So there's a company called Boxwell. Uh, they make portable storage as Tim described it. You know, when it's assembled, it comes like flat-packed. When it's assembled and standing in place and functional for a customer, I mean, it is identical to construction-built permanent storage. And so we had this boundary line and we had the permanent structures up against as far as we could go, right? And then we took the Portables and just built them and dropped them right in place, right, right up so they were right in line with front and back, I guess, of, of the permanents. And then we picked back up the permanent construction-built storage, right, once we were back into the commercial property line. It was a really bizarre situation where you had that kind of cutout there. Um, folks, you can't tell the difference.

And in fact, they rent the same. They rent the same.

They rent the same. We had another facility in Florida, in Apalachicola, where there was a whole row of them, and the appraiser and the surveyor didn't realize they were— that's right, permanent, or they were portable. Yeah, because they were— when you push them together, they just look like they were built.

Yeah.

Um, yeah, it's a great workaround. Yeah.

And you could—

you place them Wasn't there a boundary line issue with that one at Apalachicola?

We had to— didn't we have to secure them? It was a portal.

Well, that was, that was so we could finance them. Uh, no, but wasn't one of them about a foot over the boundary line? We had to get a variance for it.

Yeah, yeah, little, little things like those are things, but it's opportunity to your point, right? Because there's gonna— I think you and I can both agree we've not done a deal that does not have hair. I, I—

right? Yeah, there's always something, always something, especially with storage, because a lot of times they were built a long time ago before zoning. zoning, or that now there's zoning, whatever. So Dallas, that's one example. Um, you know, I'm trying to think of another one. Uh, I just had one on top of my head, now I'm forgetting it. But that's one example of an item, um, where, you know, we had a boundary line issue, setbacks.

And we've, you know, because of portables, we were able to make it work. And we've gone, we've gone twice now to Phase 2s, by the way, and they ended up being nothing. Yes, it was an additional investment, but it was peace of mind that, you know, our guard was up. We, we elected to go Phase 2 because we, we felt comfortable, and it ended up being nothing. So I don't want to scare absolutely everyone from, from a Phase 2 environmental. So there's certainly workarounds. And we always got to remember, Joe, what I really liked about what you said earlier, that don't let the sellers kind of push you around and rush you You know, we're on the the sale side all the time too, right? And I tell you, once you get something under contract or you found the right buyer and you vetted them, you're you're in this. You want that buyer to close.

Yeah, you don't want to put it back out on the market because you're gonna have the same issue again.

Same issue. So whenever you think you have yeah.

Okay, and Dallas, and everyone watching and listening, the other thing you can do when you Because sometimes you find these issues when you're under contract. We just talked about all the ones we found under contract. When you bring that issue to the seller, a lot of times they will give you an extension because of what you just said. You don't want to take it off them or put it— have to put it back out on the market. By the way, when it's out on the market, if it was a listed deal, people start asking questions. Hey, this was, this was under contract, now it's back out. What happened? What's wrong with it?

Exactly.

And then you're disclosing it anyway. So you're better to work with the buyer you have in hand as the seller than go out finding a new one and having them start the process and the time, the clock all over again, renegotiating the deal. You're— are you even getting as good of a deal the next time around? Because they're coming into it thinking something wrong with this thing, I just got to find out what it is because it's back out on the market. So You know, I don't want people thinking, oh, once you found it, the deal's over, or I'll never have enough time. In fact, in the flood issue in New York, he gave us first 2 days.

Yeah.

And then 2 weeks. Weeks. And we didn't even, we didn't even use it because we just said, look, no matter what, we're just— we, we could— why? Because it was seller financed. And he said, I won't require you to have insurance. Don't fall for that, folks.

Yeah.

Because who's your buyer? To Tim's point earlier, you turn— you take a mom-and-pop, you turn it into an institutionally managed, run, uh, turnkey facility. Who's your buyer? Your buyer's gonna have to— your buyer's gonna do some work. You're gonna have to disclose it to them that you're in a floodplain, you don't have any insurance, and the deal's not going to work. So don't— I, I— sometimes people get cute, you know. We talk— we're talking about workarounds, but workarounds Workarounds don't mean getting cute and skipping steps and just, oh, this will— we'll figure this out. No, no, no. You have to always remember you got to get out of this thing someday. So it's not just about what you can do or the seller is willing to accommodate for you. Your buyer isn't going to want that scenario. They're not going to deal with it. So it's going to devalue your property. So yeah. Um, Tim, uh, this has been awesome. Thank you so much for joining me. I'm going to ask Drew to bring my deck back up so I can land this plane here. And so again, Tim, thank you so much. I hope everyone watching really got a lot out of that because these are, you know, these are things you're gonna run into if you're in this business. And you're serious in this business and you start looking at deals, and when you get one on the, on the line, you're— they're not always clean. Sometimes they are. We've— look, we've acquired 20 facilities. Uh, some had some hair, a lot, you know, fair amount had a little, little hair, little hair here and there, whatever. We've probably walked away from maybe the same amount. I'm not even sure. I, I— we had, uh, well, Tim, you're not here anymore, but you're listening. We had David Harkness here at the mastermind today. And I said, oh, I was introducing him as a speaker. And I said, David, I know we've— you've inspected— he's inspected every facility we've bought, uh, with, uh, Fivefold Technology or Fivefold Technical Consultants. And I said, David, um, you've, you've inspected all 20 of our, our facilities, but I suspect that you've actually inspected more like 30 or more, right? Because deals don't always work out. So it's just part of the business. Factor it in, you know, and plan for, you know, when you're looking at, when you're setting yourself up to look at what can I afford to buy, where should I be looking, what should my buyback, all that stuff, factor that in. There's going to be some loss here with some legal and, you know, things are gonna pop up that you're gonna, we call 'em dead deal fees. There's gonna be a couple grand here and there that, It sucks, but it's part of the business and it's better than— what were the 2 examples I gave you tonight? Buying something for, uh, that's $300,000, overpaying by $300 grand, or overpaying by $900 grand. I'd rather lose $5 grand on a deal, uh, on inspections or whatever, than that. So, uh, and that might be a nice segue into, um, you know, everything we've been— we've gotten to so far, how to find them, due diligence, whatever. Now, how do you pay for them? So guess what? You're in luck because that's exactly what we're diving into next. Section 4 is all about the financing. So I'm going to break down everything from SBA loans to raising private capital over the next 2 weeks. We're going to cover how to structure seller financing deals, my absolute favorite. And then sometimes we haven't done it yet. We have not crossed this bridge. However, one of our students is working on one of these deals right now. In fact, I need an update. Adam, if you're watching, I need an update on how that's going with the zero money down seller financing deal that you were working on. Um, and we're also going to cover financial jargon like cap rates, which I— we've covered some of this stuff already, but we're going to go in more depth of cap rates, NOI, DSCR, and more. And by the end of section 4, you will be able to underwrite a deal with an air of confidence that you might not have had prior to this series. So Get ready to master the money side of self-storage because section four kicks off tomorrow morning. All right, now it's time to land the plane. Thank you for joining tonight's recap. Thank you again for Tim for joining me. I hope you found it beneficial. If you missed any part of section three, go back and watch the episodes, especially and they're still available for you. on the YouTube Storage 100 series. The channel is The Storage Mastermind. If you haven't already, please hit the subscribe button so you don't miss the daily drops and more importantly, the lives like tonight's Q&A. And folks, day 49 kicks off tomorrow. We'll be covering the earnest money deposit or the EMD and how to structure it and how much you should risk. It's really Kind of the first thing you need to understand when we are talking about the money aspect of a deal, you know, from financing and equity and whatever. First thing we do is in our offer, our LOI is what's our earnest money deposit, right? Price. How much am I willing to put down and how do I structure it? So small favor to ask you here is to give this a like, this video a like if you watched it and you feel it deserves it. I'm biased, but I feel like it deserves it. Uh, and of course, um, share this episode. And not just because sharing is caring, but remember, when you like, subscribe, and share, what you end up doing is advertising to your network who might be your future investors. And I'll bet you more of them than you think are looking for opportunities to invest in asset classes like self-storage, and they just might thank you later. Thanks for joining, folks.