Cap rates can be applied arbitrarily, and a small change can mean a huge difference in value. We could spend a great deal of time discussing cap rates, but in essence, make sure the appraiser for the local taxing authority used a cap rate for self-storage and not, say, for a single-tenant structure such as a drug store. The latter would tend to have a rate more like 6 percent as opposed to self-storage, which would be closer to 8 percent.
For example, a property with a net operating income of $300,000 would have a value of $3.75 million at an 8 percent cap rate. At a 6 percent cap rate, the value would be $5 million. Thus, the incorrect application of a cap rate in this case would result in a $1.25 million over-value of your self-storage store. You can see from this example how important it is to have the correct cap rate applied.
Equity and Other Matters
Finally, is your property taxed and valued equitably? In essence, is it taxed and valued like other self-storage properties in your market? In other words, if there are other stores that are similar in terms of size, age, type of construction and income, look at the property-tax cards for those stores to make sure they’re in line. If not, your store is not being treated equitably and a correction should be made to the value.
Check for the application of standard per-square-foot values and cost values. Look for reasonable comparisons for your property. You may consider having an appraisal performed by a member of the Appraisal Institute on your self-storage store prior to meeting with the county assessor or appraiser. You need facts and research here to make sure your property is being treated equitably in your market for tax and value purposes.
Fair and Equitable Taxes
I’m of the opinion that, in the end, we all just want to be treated fairly and equitably. We want the “Goldilocks” value—not too big, not too small, but one that is “just right.” This is true whether the valuation is for property-tax purposes or financing.
Self-storage is a unique animal in the world of commercial property—not really industrial warehouse and not quite retail. We have to double check to ensure the tax assessor has listed our use correctly, has the correct cost and cap-rate values, and has treated all similar facilities the same.
Remember, be professional in your discussions with the local county appraiser. I’ve seen firsthand that belittling, bullying and yelling do not work well and actually end up going the wrong way for the taxpayer. Rely on the facts, make sure you do your homework on the value issue, and you’ll come away with a fair and accurate value.
Jeffrey B. Turnbull is the president of Kodiak Mini Storage LLC. He has been involved in the self-storage business as a developer, owner and operator for more than 18 years, and currently owns three stores in the Charlotte, N.C. market. He’s a licensed attorney in North Carolina, a licensed real estate broker in North and South Carolina, and a past president of the North Carolina Self Storage Association. He's also a frequent contributor to Inside Self-Storage and a speaker on various industry issues. He can be reached at firstname.lastname@example.org .