We've made a downward adjustment to those comparables considered superior to the subject facility and an upward adjustment to those comparables considered inferior. Where there expenditures upon sale, they've been included in the sale price. It's very difficult to accurately derive a dollar or percentage adjustment for each variable. For example, the data shows a value range (unadjusted). Further, the data does not specifically demonstrate adjustments for all the variables.
This technique compares each sale to the subject facility based on the net operating income per square foot of rentable area. This results in an absolute difference, accounting for all the variables, in terms of one percentage adjustment. This absolute percentage variance between the comparable and the subject is directly applied as a net adjustment to the price per square foot. The analysis is summarized in the tables, "Improved Sale-Adjustment Grid" and "Percent Adjustment Method Summary."
View "Improved Sale-Adjustment Grid."
The EGIM is calculated in the transactions by dividing the sale price by the effective gross income (EGI) at the time of sale. All other things being equal, the lower the income, the lower the sale price. However, there are other variables that affect the price/income relationship such as the condition of the property, the vacancy at time of sale, the stability of the income stream, the likelihood of near-term change (up or down), and the ratio of operating expenses to EGI.
As all of the sales are very similar to the appraised property in terms of physical condition, access and visibility, and the prospect for continuation of the income stream at or near current levels, the expense ratio is the most significant variable of difference. It affects net operating income and, by implication, the overall capitalization (cap) rate and sale price. The higher the expense ratio, the lower the EGIM.
As support for this EGIM, we've checked it against our concluded cap rate of 7.75 percent and the subject facility’s estimated expense ratio of 37.49 percent.
- Equation: 1 - [Expense Ratio / Cap Rate] = EGIM
- Calculation: 1 - [37.49% / 7.75%] = 8.07
Based on this calculation, we conclude the indicated value by the analysis to be as displayed in the following "EGIM Summary."
View "EGIM Summary."
In conclusion, the two indications of value for the subject sales-comparison approach are:
- EGIM: $3 million
- Price-per-square-foot analysis: $3.2 million
The income-capitalization approach considers the market value of the subject property from the perspective of a typical investor. In this regard, direct capitalization reflects the market. It demonstrates the expectations of the market based on a static (stabilized scenario) cash-flow model. Therefore, the income-capitalization approach conclusion is given primary emphasis in the final value conclusion to be consistent with the self-storage investment market and most probable buyers.