Building the Bottom Line
The rewards can be great. Assume a cap rate of 8.5 percent will be an additional increase in your store’s NOI of $8,500 and result in an overall increase in the value of your self-storage asset of $100,000. Let’s examine some steps in which you can begin today to create more value in your facility.
Rental-rate management. Most purchasers want to see a trend of increasing revenue to be certain such improvements are long-lasting. For example, there’s a difference in the mind of a purchaser between rental-rate increases that were put into effect last month as opposed to a year ago.
Percent occupied vs. total revenue. What many self-storage operators have come to find out lately is their physical occupancies have maintained fairly well, but there has been some pressure on rental rates and concessions to maintain such occupancy. Remember that what the sophisticated investor is purchasing is cash flow, not physical occupancy.
The hotel industry uses a standard called REVPAR, which stands for revenue per available room. This metric is obviously different from a standard of percentage occupancy. As operators, we must continually review our operations to focus on rent per available square foot. This can be accomplished by managing rental rates to either encourage the renting of problem-sized or excess spaces in inventory, and maximizing profit on space categories and sizes in short supply. Again, advanced planning is called for since this process requires time for maximum impact.
Delinquent tenants. Owners are sometimes reluctant to conduct auctions on delinquent units and eviction of “deadbeat” tenants, fearing that the decrease in physical occupancy will put their self-storage facility in a poor light. Instead, we encourage owners to think about how they will maximize rent per available square foot. Is a particular tenant paying you a little at a time on a large delinquency? Could such a tenant be replaced with a well-paying one?
Property-tax appeals. Inappropriate tax assessments on self-storage properties are perhaps the single largest expense item that can adversely impact your NOI and the price you’re likely to receive. In recent years, local governments are experiencing extreme financial pressure. At the same time, assessors from taxing authorities have taken notice of the very handsome prices paid for self-storage facilities. The assessors have often used that information in assessing self-storage at ever-increasing value, resulting in higher property-tax bills.
Many self-storage buyers have discovered after a sale that taxes on their properties have gone up significantly and, consequently, their anticipated ROI has turned out much lower than expected. Whether or not you determine a property-tax appeal is in order, you should fully understand your assessment and whether a sale of the property at a given price will have adverse or perhaps even favorable tax consequence to the new owner. Many prospective purchasers will automatically project higher real estate taxes where such assumptions are unwarranted or, even worse, where a strong argument could be made for a reduction in taxes, which would actually add value to a sale.
Once you have actively started the sale process, keep your eye on the ball. Don't let your operating performance decline because you're too focused on the sale of your facility. Many purchase and sale contracts have a provision for purchase-price adjustments or cancellation if operating performance declines during the period between contract execution and closing.
Jeffrey Supnick is president of Supnick Real Estate Co. and a 25- year veteran of the self-storage industry. He has formerly served as a real estate officer for Public Storage Inc. and Storage USA. During his career, he’s been responsible for the development of more than 30 self-storage sites. Supnick Real Estate is a full-service firm devoted exclusively to self-storage brokerage, consulting and property-management services. For more information, call 856.722.1414; e-mail firstname.lastname@example.org; visit www.supnick.com.