Due Diligence in Self Storage - Title, Survey, and Third-Party Reports

Due Diligence in Self Storage Acquisitions: Part 2

In the first part of my series on due diligence in self-storage acquisitions, I explored the foundational steps and organization required to ensure a successful transaction. Now, I delve deeper into the specifics of title and endorsements, surveys, and the crucial third-party reports that safeguard your investment. These components are vital for uncovering potential risks and confirming that the property aligns with your strategic goals.

Title and Endorsements

Securing a clear title is the cornerstone of any real estate transaction. In the self-storage sector, where properties may have complex histories, ensuring that the title is free of encumbrances is essential. During the due diligence process, a title search is conducted to identify any liens, easements, or other encumbrances that could affect the property’s value or your ability to develop or manage it.

Endorsements are additional protections added to the title insurance policy, customized to address specific concerns related to the property. For self-storage facilities, common endorsements might include:

• Access Endorsement: Ensures that the property has legal access from public roads.
• Zoning Endorsement: Confirms that the property’s current use is in compliance with local zoning laws and can continue as such.
• Environmental Endorsement: Protects against losses due to contamination not discovered during the Phase I or Phase II environmental assessments.

These endorsements are not standard and must be negotiated, but they provide an extra layer of security that can be critical in mitigating risk.

Surveys and the Importance of Boundary Accuracy

An accurate survey is another critical aspect of due diligence. It provides a detailed map of the property, showing boundary lines, structures, easements, and any encroachments. For self-storage facilities, where space is a premium, understanding the exact boundaries is vital. This ensures that you’re fully aware of what you’re purchasing and that there are no disputes with neighboring properties.

The survey should be conducted by a licensed surveyor and ideally include an ALTA (American Land Title Association) survey, which is more comprehensive and meets the highest standards of accuracy. This type of survey is particularly beneficial when seeking title insurance endorsements.

Third-Party Reports: An In-Depth Look

Third-party reports are essential tools in identifying potential risks and liabilities associated with the property. These reports should be conducted by reputable firms with experience in the self-storage industry. The key reports include:

• Property Condition Assessment (PCA): This report provides a detailed analysis of the property’s physical condition, including the state of the buildings, HVAC systems, electrical systems, and more. It identifies any immediate repair needs as well as future capital expenditures, allowing you to budget appropriately and negotiate with the seller if necessary.
• Zoning Reports: Zoning compliance is crucial in self-storage acquisitions. A zoning report will confirm that the property is zoned for its current use and identify any restrictions or potential issues, such as non-conforming uses that could affect future operations.
• Roof Reports: The roof is one of the most critical components of a self-storage facility, and its condition can significantly impact the property's value. A roof report will assess the current state of the roof, estimate its remaining lifespan, and identify any necessary repairs or replacements. This is particularly important in regions with extreme weather conditions.
• Environmental Reports (Phase I and Phase II): Environmental assessments are essential to identifying potential contamination issues that could pose legal and financial risks. A Phase I Environmental Site Assessment (ESA) reviews the property's history to identify any potential environmental concerns. If issues are found, a Phase II ESA involves more invasive testing, such as soil and groundwater sampling, to confirm the presence of contaminants. In cases where the property includes residential components, such as mixed-use storage with apartments, radon testing should also be conducted to ensure the safety of tenants.

Conclusion

Due diligence is about more than just ticking boxes; it’s about thoroughly understanding every aspect of the property you’re acquiring. By focusing on title and endorsements, accurate surveys, and comprehensive third-party reports, you can mitigate risks, ensure compliance, and make informed decisions that protect your investment.

In the fast-paced world of self-storage acquisitions, taking the time to conduct thorough due diligence can be the difference between a successful investment and a costly mistake. Stay tuned for the next part of this series, where we’ll explore the financial due diligence process, including analyzing financial statements, rent rolls, and market conditions.

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Best regards,

Matt Wess

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