Let’s assume you own a 40,000-square-foot facility with $400,000 realized annual rents and $150,000 in operating expenses. A 5 percent increase in rents coupled with a 1 percent decrease in operating expenses would increase your profit by $21,500 per year. In addition to enjoying the income, at a modest 10 percent capitalization rate, you’ve increased the facility value by $215,000!
On the flip side, if you didn’t raise rents, but expenses increased by 3 percent or $4,500, your facility has decreased in value by $45,000. Imagine the potential if you could manage any part of these operational improvements over many years.
Maximize all possible revenue sources including retail sales, tenant insurance and truck rentals. It’s important to have a track record of revenue from these sources, so start now. Analyze every expense to find other areas of incremental savings, such as keeping a watchful eye on delinquencies, appealing real estate taxes, reducing Yellow Pages advertising and shopping energy providers. These are just a few ways to increase revenue and reduce your operating expenses.
Prepare for Sale
An outright sale is the cleanest exit strategy, so when the time is right for you, consult with a self-storage broker. In addition to a free valuation, a broker can provide you with ideas to enhance facility value. This includes books and records, capital improvements, due-diligence checklists, and a marketing plan to generate offers.
In the one to three years prior to a sale, ensure your financial statements are in order and all income is reflected on your tax returns. Buyers will pay for what you’ve produced, not what could potentially be generated from the property.
Keep More Sales Proceeds
A popular tax-saving technique is called a 1031 Exchange, named after that section in the IRS Code. This allows you to sell your facility and reinvest the proceeds into a like-kind exchange or other real estate investment within a designated time frame. Ask you accountant about this technique.
Another option is to sell your facility to a real estate investment trust for shares in its company stock. This delays capital-gains taxes until such time that you liquidate the stock. This can be done over time or combined with your estate plan as gifts to your heirs. In many cases, your heirs will receive a higher or stepped-up cost basis, which is the stock value on the date of your death.
Make a plan and manage it. From daily operation to one day exiting the business, a keen focus on your investment, goals and timing will allow you to enjoy the fruits of your efforts.
For more information information, check out the webinar " Planning Your Self-Storage Exit Strategy: Options for Facility Owners ," available on demand through the Inside Self-Storage Store.
John E. Barry is vice president of brokerage for Investment Real Estate LLC, which provides brokerage, management, and construction services as well as feasibility studies for self-storage owners in the mid-Atlantic and northeast states. For more information, call 717.779.0804; visit www.irellc.com.