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.)