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

Charles Ray Wilson Comments
Continued from page 1

A Revenue-Management Tool

One of the best ways to estimate EGI is to track total monthly collections per occupied square foot over the past 12 to 24 months. This includes rental as well as ancillary income. There are at least two benefits for doing this monthly. First, it offers a quick way to judge the fairness of the appraiser’s estimate. Second, it helps owners measure the impact of changes in rates, physical occupancy and concessions on total revenue. 

This revenue-management tool was first used by the hotel industry and is often referred to as “revenue per available room,” or REPAR. The real estate investment trusts use a similar methodology for tracking revenue called “revenue per available square foot.”

While it sounds complicated, it isn’t. It’s simply the facility’s total monthly revenue divided by the number of occupied square feet for that month. In Bill’s case, his facility has 53,874 net-rentable square feet. Assuming the physical occupancy was 85 percent and the total month’s revenue was $27,873, the EGI per occupied square foot for that month was 60 cents.

  • 53,874 square feet x .85 = 45,793 square feet
  • $27,873 divided by 45,793 = $0.60 per square foot

The graph titled “Trend in Effective Gross Income per Occupied Square Foot” plots Bill’s monthly EGI (blue line) and the one-year moving average. Notice that even though revenue has declined, Bill has actually collected more per occupied square foot by adjusting asking rental rates, concessions, discounts and promotions. His EGI has averaged about 60 cents per square foot over the past year. We can now estimate Bill’s EGI at approximately $329,700. 

  • $0.60 x 45,793 square feet = $27,475
  • $27,475  x 12 months = $329,709

A Valuation Tool

The EGIM is a handy tool to estimate value, and it’s easy to use. The advantage of using it is you don’t have to analyze operating expenses, only the amount of EGI. The multiplier is derived from the market by dividing the sales prices of recently sold self-storage facilities by their annual EGIs.

An analysis of more than 1,500 facility sales in my company’s database over the past several years shows EGIMs ranging between 5.5 and 9.5 (excluding extremes). EGIMs reflect investors’ anticipated risk and return and, like cap rates, have declined considerably over the past year. My analysis of EGIMs between 2007 and today indicates a peak at something over 9.

The selection of an EGIM should be based on recent local sales of comparable facilities. A quick check of sales in Bill’s market indicated EGIMs between 7.5 and 8.5, so we used 8. Having already estimated his annual EGI to be $329,700, we were quickly able to approximate his facility value at $2.6 million. 

$329,700 x 8.0 = $2,637,600

Now Bill has some idea of what his facility value might be after a full appraisal is complete, and he’s in a better position to discuss his opinions with his lender. Bear in mind, this is not a substitute for an appraisal, but rather a starting point for an intelligent discussion about value. 

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