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

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Continued from page 3

An expense forecast should be based on the market. Historical expenses should be analyzed in relation to the market and can be arrayed in a graph to illustrate variances. In the current market, buyers are particularly cautious about tax risk at the time of sale and adjust for market-based management expenses.

Overall Cap Rate

The overall cap rate is calculated by dividing the net operating income by the sale price. According to The Appraisal of Real Estate, 13th Edition, the basic direct-capitalization formula can be described as IRV or I/R = V, where I is income, R is cap rate and V is value. Ideally, the overall cap rate is selected from the market through sales of similar properties. Several techniques are summarized in the "Cap-Rate Conclusion" table.

Cap-Rate Conclusion***

Direct Capitalization

Direct capitalization considers the income from one stable year of operation of the subject facility and capitalizes it into an indication of value. Under these parameters, the direct capitalization and the income summary are detailed in the tables, "Stabilized Year for Direct Capitalization" and "Prospective Value Upon Stabilization."

View "Stabilized Year for Direct Capitalization" table.

Prospective Value Upon Stabilization***

Discounted Cash-Flow Analysis

Due to increasing sophistication in the self-storage asset class, discounted cash-flow (DCF) analyses are being used more by investors. This involves a forecast of cash flow over a typical holding period (usually 10 years). It's ideal as a tool of projects in absorption because the DCF analyzes “as is” and prospective stabilized scenarios. For the subject self-storage facility in our example, this analysis is presented in the following table.

View table.

Correlation to Final Value Conclusion

The significance, applicability and defensibility of each approach conclusion are weighted in the determination of the final value conclusion. On this basis, the value conclusions from the three approaches are summarized in the "Final-Value Reconciliation" table.

View "Final-Value Reconciliation" table.

A powerful economic model, an appraisal is an excellent tool to determine the value or worth of an individual self-storage asset. Appraisal is complex and requires experience to understand and use properly, although the model is simplified for illustration in this example. As the self-storage asset class has risen in sophistication, so must the tools to analyze the market.

Christian Sonne is the executive managing director of the Self Storage Industry Group of Cushman & Wakefield, which offers facility valuations, industry analyses and investor surveys. Prior to joining C&W, Chris was a real estate appraiser serving financial institutions, government agencies, industrial and commercial firms, the legal profession, and the development industry. He has been a featured speaker at many self-storage conferences and is author of the “Self Storage Economics and Appraisal” seminar sponsored by The Appraisal Institute. To reach him, e-mail chris.sonne@cushwake.com .

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