Self-Storage Terminology You Must Know: Business, Finance and Real Estate
|Copyright 2014 by Virgo Publishing.|
|By: Linnea Appleby|
|Posted on: 11/08/2008|
We tend to toss around words that relate to the self-storage business—class-A property, cap rate, NOI—but not everyone may know what they mean. In addition, software applications may use different terms for the same calculation. Here is a Storage 101 review of some common industry terms.
Actual rent: The sum of actual rental rates for occupied units. (Does not include fees, insurance, merchandise, etc.)
Break-even occupancy: The occupancy level at which a facility’s expenses and revenue are equal. A facility will exceed break-even and show a profit when gross rent exceeds expenses plus debt service.
Capitalization rate: A measure of performance and an indication of value. The expected rate of return on a property. A cap rate is expressed as a percentage. A cap rate of 10 can be expected to return an annual return of 10 percent. NOI/Cap Rate = Value
Example: NOI of $130,000/8 percent = $1,625,000
(In general, the lower the cap rate, the lower the investment risk)
Classifications (property): Many experts will grade a potential project’s competitors by weighing factors such as appearance, accessibility, visibility, security features and whether there is onsite management. (A property’s classification can change with renovations and upgrades or neglect.)
Class-A properties: Properties featuring above-average design and construction quality. They generally command the highest rental rates and have a superior location in terms of desirability or accessibility.
Class-B properties: Properties with adequate design and construction quality, which may not be reflective of current standards and preferences. These typically command average rental rates and are generally well-maintained and desirable to most tenants.
Class-C properties: Properties that offer adequate functionality but few amenities. Their physical condition is acceptable but may have some deferred maintenance. They generally command below-average rental rates and are usually in less desirable locations.
Conversion: The process by which an existing structure is re-designed for use as a self-storage facility or the process of converting units to support supply and demand. (Example: a former Kmart store is transformed into a self-storage facility, or two 5-by-10s are reconfigured into a single 10-by-10 unit by removing a wall.)
Concessions: Dollars not received as a way to obtain more rentals, i.e., discounts, free truck or unit rental. (Remember, every dollar not collected reduces the value of the facility.)
Closing ratio: The number of prospect leads or contacts needed for a rental. For example, if you have 10 people who contacted you for a unit and eight rent, your closing ratio is eight divided by 10 or 80 percent. Track your own closing ratio and the store’s to see how you measure up.
Deferred maintenance: The overall impact of postponing or neglecting maintenance and periodic repairs. This saves money in the short run but frequently results in shortened asset life or more costly repairs later. This is different than preventive maintenance.
Due diligence: The process of investigating and obtaining the details of a situation, often in conjunction with the purchase of real estate (Doing your homework).
Debt service: Payments made on the facility’s loan. This is the interest, fees and principal due to the bank on a monthly basis.
Diversification: The technique of reducing risk by investing in different things.
Economic occupancy: The occupancy in terms of dollars compared to gross potential.
Gross Rental Income divided by Gross Potential Rent = Economic Occupancy.
Feasibility study: A study to determine the likelihood of the success of a project. It usually contains assumptions on rates, market conditions, construction costs, etc. It is one part of the due diligence process.
Generations of storage facilities: To date there are three generations of self-storage facilities:
Gross income: Income minus expenses before taxes.
Gross potential rent: The total dollar amount the facility would gross each month if every unit were rented at the street rate.
Lease up (aka absorption period): The period of time needed to fill a self-storage facility. A storage facility is usually considered fully rented or leased up at 85 to 90 percent. Occupancy must be held for three to six months.
Market radius: The area surrounding a self-storage facility in which the facility is competing for customers. According to the National Self Storage Association, 95 percent of the average facility’s tenants either work or live within a 3- to 5-mile radius. As the number of facilities increase, the radius decreases. Additionally, the density of the market area and natural barriers such as bridges, bodies of water, freeways, etc., also have an impact on a facility’s market radius.
Net operating income (NOI): Income minus expenses before taxes or debt service.
Net rentable square feet: The number of square feet of the facility allotted for rental units. (Does not include hallways, office, lobby or common areas, maintenance or electrical rooms, etc.)
Physical occupancy: The number of square feet of the facility that is rented.
Potential rent: The dollar figure the facility is expected to bring in each month based on the current tenants and current rental rate. (Assumes everyone pays their rent.)
Traffic reporting or lead sourcing: This has a number of different names but the point is to track and measure where your leads and tenants originate, answering the all-important question: “How did you hear about us?” question. Tracking is critical to determine what is working in your marketing plan so you can be more efficient with your advertising dollars.
Unit occupancy: The percentage of units rented at a facility. Example: Total 700 units with 546 rented. 546 divided by 700 = 78 percent unit occupancy.
Vacancy rate: Percentage of the facility not yet rented; the opposite of occupancy. (Example: Total 700 units with 546 rented = 78 percent unit occupancy, 22 percent vacancy rate. 700 divided by 546 = 154; 154 divided by 700 = 22 percent.)
You will encounter these and many more terms in your self-storage career. Learn them, understand them fully, or ask others to explain them clearly until they make perfect sense. Remember: Knowledge is power. Understand the above terminology and it will empower you and your self-storage business.
Linnea Appleby is president of PDQ Management Solutions Inc., a Sarasota, Fla.-based company that provides full-service facility management, consulting, startup services, auditing, management training and more. She is also the managing director for the Florida Self Storage Association. For more information, call 941.377.3151; visit www.pdqmanagementsolutions.com.