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Self-Storage Valuation: A Technique for Checking an Appraisal's Fairness

Charles Ray Wilson Comments

How do you judge the fairness of an appraiser’s value and selected cap rate? The use of an “effective gross income multiplier” can help self-storage facility owners better understand their facility’s worth.
I recently visited my friend Bill, who owns a self-storage facility. When I walked into his office, he was sitting behind his desk, looking like he’d just seen a ghost. When I asked what was wrong, he said, “My loan is coming due, and I just talked to my lender. He said that since revenue has declined and cap rates increased, I’ll have to come up with $500,000 in additional equity to refinance.”

When I asked how the bank estimated the amount of equity he would need, Bill said it was based on the appraiser’s estimate of market value, and he’d sent the lender his most recent profit-and-loss statement. I asked if the appraiser had met with him to go over the data and inspect his facility. The appraiser hadn’t, but the lender gave him a copy of the appraisal. “I’ve lost everything,” Bill said. “My retirement nest egg is gone. I don’t know what I’m going to do!”

A Valuation Technique

There are many self-storage owners in this same situation. Clearly Bill and others like him need some way to check on the reasonableness of an appraiser’s judgment. How can they know if the value the lender comes up with is a fair one?

There’s a simple valuation technique used for other types of real estate that could help. Called the effective gross income multiplier (EGIM), the technique provides a quick and reliable estimate of value. It would give owners an idea of their facility value, some indication of whether there is a problem and, if so, just how big it might be. It would also allow an owner to judge the reasonableness of the appraiser’s selected cap rate.

I told Bill we should look at his appraisal, specifically the appraiser’s estimate of his effective gross income (or revenue, as it is often called). There are a few items that can really influence value, and estimating the EGI is one of them. We’d have to keep in mind that in a declining market, appraisers tend to be conservative, often focusing on a facility’s most recent performance and sometimes ignoring the not-so-obvious.

An appraisal is just an opinion of value based on a series of judgment calls that starts with the estimate of gross income and concludes with net operating income. Estimating EGI is not easy, as it begins with an analysis of the competition. This usually turns up a wide range of rental rates for each unit type.

To encourage a more accurate appraisal, talk to the appraiser about how you set asking rental rates. For example, if you set rates at the low end of the range offered by competition because you don’t wish to offer huge concessions, make sure the appraiser understands this. Otherwise he might use your existing rates, and then deduct the typical cost of concessions in other facilities, thus penalizing your facility. Explain your management style and how your facility differs from others. 

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