Using Net Operating Income and Cap Rates to Estimate a Self-Storage Facility’s Worth: A Simple Calculation for Site Owners

David Zorich Comments
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Storage owners often ask me, “What do you think my property is worth?” My first response is usually, “What do you think it’s worth?” Taking their subjective viewpoint into consideration, I then ask the owner to provide me with a copy of the last 12 months of their profit-and-loss (P&L) statements. After underwriting the property, I can give them a pretty good idea of its value.

The underwriting method is not subjective and is typically the preferred method a potential buyer or lender would use when valuing any property. Numbers are black and white and can only be manipulated so much. In this article, we’ll examine how you can easily determine your property’s worth by figuring out your net operating income (NOI) and then applying a capitalization rate (cap rate) to that number. 

Verifying P&L Expenses

In line with broader commercial real estate conditions, fewer storage properties have been sold on the open market in the past few years. The sales that have occurred act as evaluative “comps” for appraisers completing an appraisal. A typical comp would be another self-storage facility that has sold in the past six to nine months within the same geographic location. But during the last two years, some states have only seen the sale of one or two storage properties per year.

When no real comps exist, the facility’s operating numbers are the best source for determining property value. Since all lenders examine the last 12 months of numbers from an income property, let’s begin there.

In its simplest form, income, which is stated at the top of most P&L statements, is comprised of rent, fees and goods sold. Other income from truck rental, cell towers and billboards may or may not be considered income. Some owners love the foot traffic a truck-rental business brings in, while others think it’s more trouble than it’s worth. Telecommunications providers usually have a 30-day cancellation clause in their cell-tower contracts, so many lending institutions and potential buyers may not count their income. Only the true income from rent, fees and goods sold should be used in your NOI evaluation.

Sometimes more than 30 to 40 different expense items can be listed on P&L statements. These can be categorized into nine subsets: real estate taxes, insurance, third-party management, office, salaries, repairs and maintenance, advertising, utilities, and miscellaneous. If some expenses on your P&L statement do not fit in these nine categories, then they may need to be omitted from the NOI calculation.

Personal expenses, such as autos, cell phones and sometimes even alimony/child support are frequently run through a storage facility. While these items are perfectly acceptable for tax purposes, they would not figure into the property’s NOI calculation. A good rule of thumb is if an expense isn’t something every storage owner would typically have in his P&L statement, it’s probably a personal expense that can be omitted.

As you categorize the items on your P&L statement into the nine expense subsets, it should be noted that if you don’t pay to have a third party manage your property, you’ll be required to add in five percent of your gross income to account for this expense. Every lender or potential property buyer requires this to be included in the NOI calculation.

There are also industry standards for each expense category that require a minimum amount of that expense to be charged annually. An example would be a property at 80 percent occupancy that only shows $2,000 per year in advertising. This expense would need to be adjusted upward since not enough advertising money is being spent to get the property to 90 percent or 95 percent occupancy.

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