Valuing Your Facility

Part II

By R.K. Kliebenstein

There are three basic approaches tovaluation that are commonly recognized in commercial real estate.The first is the income approach, which we discussed in detail inthe September issue. The second method of evaluation is the"cost or replacement approach," and the third is the"sales-comparison approach." This discussion will helpyou understand these last two approaches. While they both playminor roles in the overall valuations of the facilities, theyalso can be benchmarks in determining value for insurancepurposes as well as other non-traditional acquisitions orrefinance disciplines.

Cost or Replacement Approach

Perhaps the easiest method of supporting valuation at cost orreplacement is a per-square-foot calculation with a factor thatrepresents the average cost to rebuild self-storage. This isperhaps the most simple method, although not the most accurate.It has the greatest utility when being applied to an existingfacility, but becomes much more difficult and less objective asone considers this for a vacant land/development site.

If your goal is to obtain a rough idea, and extreme accuracyis not important, one could easily call any of the majorself-storage building contractors and ask them what is theaverage cost per square foot for building self-storage facilitiesin a specific locale. Add the cost of land, and you have avalue--albeit not a very accurate one. Nevertheless, if this isjuxtaposed to your current site, you will get a rule-of-thumbvaluation.

The cost approach can be very accurate when properly applied,for example, on a new or proposed facility. The challenge inusing the cost approach on an existing, or particularly oldbuilding comes in trying to estimate total accrued depreciation.

Additionally, it can be said that the cost approach is areflection of cost and not value in up markets. Mostinstitutional investors and lenders today are starting to ask forthe cost approach as they wish to know a couple of things onlythe cost approach can tell them.

First, they want to know they are not overpaying orover-lending, because no property is worth more than the cost ofobtaining an equally desirable substitute property. Secondly,they want to test the question of highest and best use, whichthey can do only by knowing the land value. Thirdly, they need toknow the insurable value, which is based upon costs.

Most investors want to know the ease of entry into a market.The availability and cost of competitive sites would be disclosedby a cost analysis, as would the cost of building a modern andhighly competitive facility.

Contact with self-storage and/or building constructioncompanies can often provide the greatest amount of usefulinformation in determining a valuation through cost approach.

To become more precise or to measure this valuation in adevelopment application, let's first start with land replacement.Land replacement has several factors that must be identified inthe valuation process, including the following:

Traffic Count Demographics

One could spend a great deal of time analyzing each of these,but let's focus on the most important:

Traffic Count. The benchmark for traffic count in a24-hour period is approximately 10,000 cars. Anything less than10,000 devalues the property and traffic. Inversely, a trafficcount of more than 10,000 enhances the value. It should be notedthat the count itself is not the only factor. Otherconsiderations include the speed of traffic, size of the windowor opening through which the site is viewed, barriers to access,ease of ingress/egress and signage restrictions.

Demographics. While there are no absolutes indemography that point to a successful self-storage facility orthe value thereof, one would only point out that populationcounts within a market area should be approximately 25,000.Equally important in the analysis of how many are in thepopulation count are the number of self-storage facilities thatserve that population count. Other key demographic indicators arepersons per household, median income per household, median incomeper capita, median age of household, percent of renters vs.owners, and number of units in the structure.

Neighborhood Attributes. Perhaps the most importantcontribution the neighborhood makes to the valuation of thefacility is the composition of its populace.

Sales Comparison Approach

While this may be the least significant of the three methods,the sales comparison approach, commonly referred to as the marketapproach, is also a good barometer, particularly from theperspective that no property has value unless--like anycommodity--it can be sold in the open marketplace. The marketapproach simply indicates what comparable properties have soldfor in "arm's length" transactions, which means thesale has occurred without the pressures of either buyer or sellerhaving any previous responsibility or future responsibility toone another. That is to say they are not related parties orentities.

There are three overall market approach factors that can beanalyzed in comparing the subject facility to those that havebeen sold. The first method is a comparison of price per squarefoot. It should be noted that facilities with less than 40,000square feet are of an entirely different nature, and fewcomparisons can be drawn to facilities with greater than 40,000square feet--a caveat to the latter rule-of-thumb to smallerfacilities (less than 40,000 square feet) with very high rentalrates.

The second methodology in the market approach would be an EGIMcomparison or, more simply put, what facilities have sold for.The EGIM is simply a times-earnings ratio, for example, the salesprice divided by the total collections from the previous 12months. All discussions in the previous article about cap ratesare applicable here. But, keep in mind: One should only analyzethe cap-rate comparison if all of the facts of the incomeapproach are known.

The third methodology is overall sales price. That would be tosay that given cap rate, replacement costs, price per squarefoot, size and location, the price for one self-storage facilitycould be compared to another.

The most critical element in the market approach isverifiability of data. While listings and offerings may be goodbenchmarks in themselves, they are not significant enough toderive valuation. It is the sold transaction that governs allmarket approach discussions. That information should beverifiable through either the source (buyer or seller) or througha credible third party who has had access to documentationprovided by buyer or seller to determine value.

A good relationship with an MAI appraiser who may be able toshare this data would be significantly helpful in determining themarket approach of valuation to a property.

One Final Word

A professional real-estate appraiser should play a significantrole in determining a value for your property. Be very selectivewith whom you engage for the appraisal process. Check thecertifications and designations, but also have the appraiserestablish credibility through experience. Nothing like thetried-and-true experience in performing 40 or 50 self-storageappraisals can be substituted. It is not a belief amonginstitutional buyers or financiers (generally) that a local MAIappraiser has any advantage over an appraiser who works on aglobal basis and has in-house databases and access to saleinformation. It should be noted that most local appraisers do nothave the resources of a national appraiser, but that thoseappraisers who specialize in self-storage appraisals will oftenuse the services of a local appraiser to get specific informationfrom the venue of the subject property. Finally, it may be inyour best interest to seek the services of an appraiser who hasspecialized in self-storage real estate.

The valuation process by an owner is often the most difficultbecause it lacks objectivity. The purpose of this reading isnever intended to replace the professional appraisal, but simplyto give storage owners a view of valuation from an institutionalpurchaser and former financiers' perspective.

R.K Kliebenstein is the director of acquisitions for TheAmsdell Companies of Cleveland. Prior to his current assignment,he worked for Westar Management in Las Vegas, where he wasresponsible for new store marketing. His tenure in real estatedates back to 1979, with a focus on self-storage since 1990. Mr.Kliebenstein may be reached at (800) 234-4494, ext. 227.