What’s It Worth?

Operating expenses are subtracted from EGI, resulting in NOI. It's important that NOI be calculated for all storage facilities using industry standard parameters for other income and operating expenses. This hypothetical example uses those industry standards.

Income is an easy figure for an owner to determine and for a lender or buyer to verify. There's seldom a difference of opinion regarding income. It’s simply the amount of money deposited in the bank. One must assume an owner is doing all he can to maximize income. This means rents are as high as possible and in line with competition. It also means the facility is managed, advertised and marketed adequately, and occupancy is as high as it possible given market conditions.

The Same, But Different

Note that the incomes from same-size properties in the same market may not incur the same values. Income is limited by the average unit size of a particular facility. Two properties of the same square footage, occupancy and rents for the same unit sizes may have different unit mixes. These two properties would generate different incomes and have dissimilar values.

Everything else being equal, a 90 percent occupied, 50,000-square-foot property with 600 units (an average unit size of 8.3 square feet) will be worth more than a 90 percent occupied, 50,000-square-foot property with 500 units (an average unit size of 10 square feet). This is because smaller units generate higher rent per foot and, correspondingly, a higher sales price per square foot at the same cap rate. Sales comparables report price per square foot but not average unit size. As a result, it could be incorrect to estimate property value by simply using the price per foot of recent sales.

The Effect of Expenses

The other component of NOI is operating expenses. Unlike income, expenses can cause a difference of opinion. You may or may not employ a professional management company or have a maintenance-reserve account. You may or may not pay salaries for full- and part-time employees in the proper manner or have adequate insurance coverage. Real estate taxes may increase substantially when a property sells. Buyers estimate the increase, but it’s irrelevant to you unless you're selling.

In sum, the potential exists for different NOI calculations of the same property. This is why industry standards are used to confirm that expenses are in line. Regardless, after a property’s NOI is calculated, the appropriate cap rate must be applied.