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The Self-Storage Appraisal Process: Understanding Valuation Approaches Used Today


By Christian Sonne

Appraisal is the process of formulating an opinion of real estate value as of a given date. The appraisal itself is an economic model that analyzes all factors that bear upon the value or worth of a real estate asset, such as a self-storage facility. The problem is defined, the property described and the data involved acquired, classified, analyzed and interpreted into an opinion of value. All property is analyzed according to the highest and best use, as though it were vacant and improved.

Three primary valuation approaches have evolved in the appraisal process:

  • Cost approach: Considers the value of the land as vacant, plus the cost of the improvements including profit, less accrued depreciation from physical, functional and external causes
  • Sales-comparison approach: Considers the recent selling price of similar properties compared to the subject, broken down into common units of comparison, with adjustments being made for differences
  • Income-capitalization approach: Considers the economic or contract rent (earning capacity) of the land and improvements, less vacancy and landlord expenses, with the resulting net income stream being capitalized by an investment yield or capitalization rate that would be reasonable to a prudent investor

The approach a professional appraiser uses depends on the type of property, the availability and suitability of the market data on which the approach is predicated, and other judgment factors. The use of two or three approaches will generally result in a range of values for the subject property. Those values are then correlated to a final value conclusion. This article emphasizes and analyzes the sales-comparison and income-capitalization valuation approaches to self-storage real estate.

Sales-Comparison Approach

Sometimes called the market approach, the direct sales-comparison approach involves investigating recent sales of similar self-storage properties and comparing them with the subject facility. It’s based on the premise that an informed buyer would pay no more for a facility than the cost of acquiring an existing property with the same utility.

The weakness of the approach lies in accurately accounting for the variables among self-storage building sales. For example, as a test of reasonableness, several tools of analysis are warranted. On this basis, the sales-comparison approach is generally given secondary consideration in the final value conclusion. The accompanying table, "Summary of Improved Self-Storage Sales," presents a brief analysis, beginning with comparable sales data.

The data analysis centers around property and transaction characteristics affect the price of real estate. According to The Appraisal of Real Estate, 13 Edition, produced by the Appraisal Institute, there are 10 common elements of comparison that should always be considered in the sales-comparison analysis. They are summarized in the table below.

View "Summary of Improved Self-Storage Sales."

The sales data indicates a value range from $35.13 to $57.60 per square foot, with an average of $45.28. Two units of comparison are used in this analysis: the effective gross income multiplier (EGIM) and an adjustment grid. Both value indications are correlated to a final estimate of facility value under the sales-comparison approach with a comparison to the range of price per unit and price per square foot from the data set.

The sales used in this analysis were the best available comparables to the subject property. The major points of assessment are:

  • Property rights conveyed
  • Financial terms incorporated into the transaction
  • Conditions or motivations surrounding the sale
  • Changes in market conditions since the sale
  • Location of the real estate
  • Physical traits of the property
  • Economic characteristics of the property
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