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

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Another example would be a facility that has a one-year spike in the repairs and maintenance line item. Let’s say the property typically runs about $15,000 annually in repairs and maintenance, and then we see a jump to $28,000 in the last year. After discussing it with the owner, we learn the facility’s asphalt drive was repaved for $14,000.  Since this is a one-time expense, we could decrease the repairs and maintenance line item.

Further, debt service, mortgage payments, depreciation and interest don’t count as expenses and should not be included in the NOI calculation.

Capping Off the Valuation

Once you verify the expenses, a simple subtraction from the income at the top of the P&L will determine your facility’s NOI. Lenders and potential buyers will look at this NOI figure because there’s no subjectivity involved; it’s based on actual income and expenses for the last 12 months. While a few years ago properties received additional value for future income that wasn’t yet in place, those days are gone!

To complete the property’s valuation calculation, you divide the NOI number by a cap rate. The cap rate is a percentage figure that can be somewhat subjective since an owner always thinks the cap rate is lower than it really is. Their logic is simple: A lower cap rate equates a higher value.

Let’s take two examples: A property with a $250,000 NOI in a 10-percent-cap market would be worth $2.5 million ($250,000 divided by .10 = $2,000,000). The same property with a $250,000 NOI in a 9 percent-cap-market would be worth $2.77 million ($250,000 divided by .09 = $2,770,000).

So who determines the cap rate? The best source for a market’s cap rate would be local real estate or mortgage brokers who specialize in self-storage. They have information on recent sales, listings and appraisals that would verify a market’s applicable cap rate. Every market has seen cap rates climb in the last few years, so don’t be shocked if your property’s value is not as high as expected. While there may be some factors that allow a facility to have a lower cap rate than competitors in the same market, the difference may only be one-quarter to one-half of a point.

Even if you aren’t planning to sell your property, this valuation exercise is a valuable process for any self-storage owner. Valuations are a critical calculation for loans coming due since property values have decreased as have the proceeds lenders are providing on loan to value.

This exercise provides a good indication whether you have enough value to refinance the loan without having to come up with more money to buy down the loan amount. Since the numbers don’t lie, you can realistically determine your property’s real value. 

David Zorich is a senior vice president at The BSC Group, where he provides mortgage brokerage and financial consulting solutions to commercial real estate owners nationwide. He can be reached at 949.232.4997; e-mail dzorich@thebscgroup.com; visit www.thebscgroup.com.

Related Articles:

Selling Your Self-Storage Facility: Prepare in Advance for Maximum Success

Determining Self-Storage Facility Value: Understanding Income, Expenses and Cap Rates

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

Self-Storage Due Diligence: Seller Tips for Inspection, Financing and Closing

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