Are You Getting Your Money's Worth?

Establishing a value for your facility, foreither finance or sale, can tell you a lot about your investmentexpertise

By RK Kliebenstein

If you are considering either a refinance or a sale, yourfirst question will probably be, "How much can I get?"That question is most easily answered by asking the moreimportant question, "How much is it worth?" Thisexercise is offered to help you determine a value for yourfacility before you spend a lot money for an independentMAI (or similar designation) appraisal. While this informalvaluation method may not carry the weight of a traditionalappraisal, you may be able to reduce the costs of a professionalappraisal and even more important, know what the value is likelyto be ahead of time.

Go for Fact, Not Fiction

The self-appraisal method requires some strongdiscipline...taming the ego. We all want to believe that ourfacility is worth more than the other guy's...or at least, thesame. There are a number of factors that indicate value and arebased solely on data, not emotion or subjective criteria. Themost important contribution to the self-appraisal process is yourability to be objective. When making comparisons with otherproperties, seek the truth and work to compare apples to apples.Do not settle for oranges or bananas; keep your analysis based onfacts.

Keep extensive notes and audit trails for your findings. Makecertain you record dates, times, names and phone numbers oraddresses. They will build credibility into what you are doing.

If you are using the appraisal to make a life-changingdecision--to buy or sell, for example--do not hesitate to get asecond opinion...a professional opinion. Some industry leadersare Steve Hopper of Storage Valuation Specialists in Charlotte,N.C., or Ray Wilson of Charles R. Wilson & Associates inPasadena, Calif.

The First Step: Research, Research, Research

Research is to the appraisal process as location is to realestate; it gives it credibility. Do not be satisfied withassumptions. Attempt to get verification in everything you do.All verifications should be in the form of written documentationwith names, dates and times (who, what, where, when). Do notsettle for hearsay. The grapevine may not be as reliable as youthink. There are three approaches to value: income, market andcost. The latter two are of equal importance, but both togetherdo not carry as much weight as the income approach.

Cha-chiiing!

Making the cash register ring is what creates value for you.Remember, as a rule of thumb, every dollar of income equals $10of value. While that in itself does not seem like much, when youapply the dynamics of multiplication, every $1,000 of incomeequaling $10,000 of value, by the time you get to tens ofthousands of dollars in income, the whole approach makes muchmore sense.

Let's start with income. Calculate the gross potential incomeof your property by writing down your unit mix and the prices,along with availability (see Figure 1). The bottom right cornerindicates how much gross rental revenue you could expect ifyou were 100 percent occupied (every day of the year) and youcollected every dollar owed. So, when you brag about 99 percentoccupancy, that means in Figure 1 you would have had to deposit$438,000 in the bank in rental revenues. Have we hit the ego yet?Keep on reading.

Vacancy and credit loss: The bottom line when it comes tovacancy is how much money you deposited during the year vs. howmuch you could have deposited. That is actual deposits comparedto gross potential income. Simply divide the difference betweenrents deposited and gross potential rents for your true vacancy.This is known as economic occupancy.

Move on to other income: You can cross the fine line betweenvaluing self-storage as an on-going business or a real-estateasset. Other income associated with the operation of the realestate is generally allowable. The gray area is whether the saleof merchandise is allowable, and at the far end of the spectrum(and for many, off the charts) are the revenues from truckrentals. Income associated with the operations would include latefees and charges, auction proceeds, and administrative or set-upfees. Merchandise sales usually include storage-related sales,such as locks, tape and boxes. Figure 2 demonstrates typicalrevenues formatted for valuation. For a subjective value, excludeany income other than rents, late and collection fees,administration or set-up fees, and lock and box sales. Subtractthe cost of goods as illustrated.

Newton's Theory of Relativity: What Goes inUsually Goes Out

For the purposes of simplifying and making your valuationreport most useful, combine your expenses into the categories asdepicted in Figure 3. Remember the K.I.S.S. theory: Keep incomeand spending succinct. Follow logical patterns, such asalphabetical order and group expenses in a uniform manner. If youare paying the Yellow Pages ad with the phone bill, then subtractthe cost of Yellow Pages and add that amount to advertising.Insurance costs should only be physical damage (property) andliability insurance costs.

All personnel-related insurance should be included in on-sitepersonnel costs. As with any expense, make certain that if youraccounting is on a cash basis, that the insurance expensereflects an annual amount and does not over- or understate theexpense because of the timing of payments. Adjust management feesto 6 percent of total revenues. Include in the on-site personnelcosts all expenses associated with employees: wages, taxes,bonuses, training, health and life insurance and perks. If youare paying below minimum wage, adjust wages to meet minimum wagetests for the purpose of analysis. If you have a"bargain" manager who earns less than the prevailingwage for the area, make an adjustment upward. And, if yourmanager has a sweetheart deal, you can reduce the salary level toprevailing wages, unless there is a specific reason for thehigher salary requirement.

Property taxes should include personal property as well asreal-estate taxes. When placing a value on your facility, here isa chance for you to let your objective skills shine. If yourproperty taxes are well below what they should be, adjust them tothe market. Oh, how that is going to hurt. If, at the end of thevaluation, you have determined the market value to be $2 millionand the tax bill shows market value at $1 million, then doubleyour property-tax expense.

Other expenses should include all expenses as not categorizedabove. This will include office expenses, bank charges andcollection costs, postage, repairs and maintenance. Include pestcontrol, snow removal, janitorial costs and incidental wagecosts...remember when your neighbor's son swept the parking lotlast summer (did you include it)?

All in all, the total expenses should range between 30 percentand 40 percent of total revenues. At the low end of the spectrumwould be a large, multilevel facility and, at the high end, asmall facility with large land area. Expenses should notinclude amortization, depreciation or interest expenses.Partnership-specific expenses, such as legal and partnershipaccounting, should be excluded. Extraordinary expenses, such asowner expensed automobiles, key-man life policies or otherpartnership expenses not incidental to the operation of thefacility, should not be included.

The Bottom Line: Just What Is It Worth?

Once you have calculated a "good" net operatingincome, the challenge of applying a capitalization rate (Figure4) is ahead of you. Supporting data is not easy to find. Mostwarranty deeds do not state a purchase price, so you must rely onother data sources, usually the seller or buyer. Corroborate theinformation if possible. If the seller states a cap rate, attemptto verify the number with the buyer.

Be objective about the comparison of your facility to thecomparable sale you are analyzing. If the documented cap rate is10 percent and you are comparing a 15-year-old facility withunpaved drives, no access-control gate, and you manage thefacility yourself, adjust for the comparison to a new, fullyleased, low-maintenance property. If you can discipline yourselfto adjust for curb appeal and a fair evaluation of management,you can fairly establish a value for the facility. Attempt toobtain at least three comparable sales and adjust each cap rateto calculate a realistic value. If there is not somethingtremendously unique about your facility, the cap rate should fallbetween 10 percent and 11 percent.

Be aware that determining a cap rate is the most crucial areain which to be equitable in analysis; the results carry the mostdynamics. All cap rate verifications should be well documented,particularly if you later have a professional appraisal completedand the cap rate established by the appraiser differs from yourfindings. Providing the appraiser with the ability to verify acap rate may be an acceptable basis for having the value adjustedif you are in disagreement with the professional valuation.