What is your selfstorage facility really worth? There are a number of reasons an owner might want to know the answer to this question. You may be thinking of selling, or maybe you are doing some estate planning. Regardless of the reason, the methodology of determining your property’s value is the same. This article will describe that methodology and explain why it is the way it is.
The first concept we must accept is the value of a facility is based on cash flow, not how much you paid for the property, how long you have owned it or how much it cost to build. Hopefully it’s worth more today than it was when you bought or built it, but time alone does not cause income property to appreciate. There are only two factors that affect property value: its net operating income (NOI) and the capitalization rate (cap rate).
NOI is the number of dollars remaining after all operating expenses have been paid. It’s the actual gross income of the property minus operating expenses. The cap rate is the yield percentage rate applied to the NOI to arrive at value. Let’s first discuss how NOI is calculated.
Income is an easy figure for an owner to determine and a buyer to verify. There is seldom a difference of opinion between owner and buyer regarding income—it’s simply the amount of money deposited in the bank. One must assume an owner is doing all he can to maximize income. This means he has established the highest possible rental rates while keeping them in line with competition. It also means the facility is adequately managed, advertised and marketed, and its occupancy is as high as it can be given the condition of its market.
It is important to note incomes from properties of the same size and in the same market area will not necessarily be the same or even similar. This is because income is limited by the average unit size of a particular facility. Two properties of the same square footage, occupancy and rental rates could have different incomes and, therefore, different values.
Everything else being equal, a 90 percent occupied, 50,000-square-foot property with 600 units and an average unit size of 83.3 square feet will be worth more than a 90 percent occupied, 50,000-square-foot property with 500 units and an average unit size of 100 square feet. This is because smaller units generate higher rent per foot—and correspondingly higher sales prices. Sales comparables usually report price per square foot but not average unit size. As a result, owners who determine the value of their property by simply using the price per foot of recent sales will usually come up with the wrong value.
The other component of NOI is operating expenses. Unlike with income, owners and buyers often view operating expenses differently. This difference is the primary reason they often have varying opinions of NOI and, hence, property value.
For example, an owner may employ a professional management company or have a maintenance-reserve account. He may be improperly paying or expensing salaries for full- and part-time employees or have inadequate insurance coverage. The matter of real estate taxes is one of the main areas of disagreement between owner and buyer. These can increase substantially when a property sells. Buyers estimate the increase and take it into account, whereas this is irrelevant to the present owner.
After a property’s NOI is determined, the appropriate cap rate must be applied to it. Several factors are considered in deciding the suitable cap rate, which can be adjusted lower or higher depending on property and market characteristics. A masonry-constructed newer property, with a longer remaining economic life and stateof- the-art security systems, located in a rapidly growing area would command a better cap rate than an older, metal facility in a mature area. In these times of the lowest interest rates in decades, a property with an existing high-interest-rate loan, which must be assumed due to a high prepayment penalty, would not command as good a cap rate as one where new financing could be secured.
The charts on pages 118 and 119 show financial descriptions of two different properties and how the application of a different cap rate affects property value. Property A is a newer, optimally run property with an average unit size of 106 square feet and new financing for 70 percent of value. Property B is older. It has the same rental rates as Property A but an average unit size of 152 square feet and an 8 percent loan that must be assumed. Due to the difference in average unit sizes, the average rent of Property A is almost 10 percent higher than that of Property B. Note the cash-on-cash return for each property is the same.
Bill Alter is a real estate broker and has been a facility sales specialist for 17 years with the firm Rein & Grossoehme Commercial Real Estate in Phoenix. For more information, call 602.315.0771.