Life has changed from the days when you could walk into your lender’s office with an appraisal in hand and get a loan. In today’s lending environment, it's the lender who decides the appraiser and you, the property owner, are often left out of the whole valuation process.
Your first knowledge of the appraiser’s estimate of value comes when the lender tells you how much it is willing to loan. But it doesn’t have to be that way. There are several steps you can take to become part of the process and assure there are no unpleasant surprises when the appraisal report ends up on the lender’s desk.
It's the appraiser’s job to express an opinion as to the value of your facility. This is where you come into the picture—by working with the appraiser to assure he receives the historical operating performance data and any other evidence from the marketplace that supports his conclusions.
You should care about receiving a properly supported appraisal and not just the right estimate of market value, because your loan proceeds are often based upon more than just the market value. Often it is the appraiser’s estimate of future net operating income (NOI) that limits loan proceeds. An appraiser could prepare a report resulting in a value conclusion to meet the lenders loan-to-value (LTV) ratio, but fails to meet the lender’s required debt-service coverage ratio (DSCR).
Step 1: Prepare for the Appraiser
Your best opportunity to receive a proper appraisal is to meet with the appraiser in person at the beginning of the process. You’ll need to bring every bit of information pertaining to your property (deeds, tax bills, income and expense statements, etc.), and spend time going over the data with the lender.
Reproducing the same documents for the appraiser seems redundant and a waste of time. However, going over many of the same documents with the appraiser can pay big dividends. This is your best opportunity to make sure the appraiser understands and appreciates your asset and how it is performing.
When the appraiser calls to schedule the inspection, ask which documents he needs in addition to what the lender has already provided. Be sure to have copies of everything you provided the lender just in case the information wasn’t passed. For instance, you may have just had a successful real estate tax appeal and next year’s real estate taxes will be lower. This could be easily missed by the appraiser.
Due to the nature of appraising, scheduling a specific time of day to make the inspection is often impossible so plan to be available all day. Let the appraiser know you have rental surveys or other data to share and he will make an extra effort to be on time.
Tip: Everyone’s time is limited, but taking time to meet with the appraiser at the onset of the appraisal process can save you time and money. Bear in mind, it is not your job to convince the appraiser what your facility is worth—don’t even try. However, it is your job to see the appraiser has all the necessary information regarding the subject. (For more on this, see the list below.)
You would be wise as well to ensure the appraiser also has every possible bit of evidence from the market, which will lead to a better value conclusion—one that is well supported by facts and not just opinions. Here is a partial list of documents your appraiser might request:
- Unit-mix report
- Itemized income and expense statements
- Subject sale history
- Current tax bill(s)
- Site plan
- Legal description or title report
- List of recent capital improvement
Step 2: Prepare for the Property Inspection
The appraiser will determine the quality of construction, current condition and competitive position in the market. The appraiser will look for items of deferred maintenance, such as buildings in need of paint, broken or damaged doors, cracks in the pavement, etc.
Regardless if a building needs a fresh coat of paint, the overall appearance says volumes about tenant appeal and what kind of owner you are. Just as body language says more than words, trash littering the property, dirty vacant units or bathrooms, overloaded trash bins, burned out hallway lights and fences in need of repair all say a lot about the kind of operation you’re running.
The appraiser will compare your facility to your competitors, so take this opportunity to explain how it differs from the competition. For example, point out that all your units have ground-level access, or your closest competitor is only 80 percent occupied because it has too many small units, is harder to access from the busy street or driveways are too narrow for rental trucks. This isn’t putting down the competition, it’s stating facts that might not be so obvious to the appraiser.
Remember, you live with your facility day in and day out, 365 days a year. The appraiser has only a short time to learn everything about it and determine how it will perform in the future.
Step 3: Discuss the Competition
The appraiser will survey the competition to establish market rental rates, assess the level of concessions or discounts offered and determine the level of physical occupancy in the neighborhood. This all has a bearing on the level of tenant demand, so share your knowledge as to which facilities are most competitive and why.
Tip: Give your appraiser a list of competing facilities. This is your opportunity to point out who your real competition is so the appraiser doesn’t use the mismanaged 30-year-old facility down the street to estimate rental rates and physical occupancy levels.
If there is a new facility in your neighborhood, don’t be afraid to point it out. Better you point it out and explain your opinion of its potential impact than the appraiser reaching his own conclusions without the benefit of your input.
Step 4: Discuss the Financials
It’s important to go over the operating statements with the appraiser. Make sure he understands each line item. Point out expenses that may not be a normal reoccurring operating expense, or one that is not typical of other self-storage facilities. Perhaps you chose to “expense” the recently installed new roof on a small building instead of capitalizing it. You need to let the appraiser know or he might assume your maintenance budget runs higher than it actually does.
Also, you may need to point out differences in management styles. For instance, perhaps you offer a discount to fill vacancies on a particular size of units to fill them. Otherwise the appraiser may assume the level of rent you are collecting is the best you can do.
You also need too address the issue of existing tenants paying below current market rental levels. Perhaps you have not pushed rental increases to existing tenants as much as you should. Point this out. That additional income is referred to as “hidden NOI” because it drops directly to the net operating income line on the financial statement.
Tip: If you know you will be applying for a loan in the next few months, start increasing the rent to existing tenants paying below market rates now so you don’t have to deal with the issue later.
Make sure the appraiser understands that, nationwide, currently more than 65 percent of all facilities offer potential tenants some form of concession or discount. It has become a way of life for this industry. The appraiser should not become alarmed when learning the competition offers concessions.
Instead, take the time to explain how you use concessions or discounts to drive revenue and occupancy. Remind the appraiser that discounts result in renting a unit you may not otherwise have filled, and to a tenant who typically stays longer than intended.
Step 5: Share Your Knowledge of Current Market Conditions
The appraisal process involves the use of historical data, including sales. The expansion and contraction of mortgage capital impacts value and, in the case of self-storage, that means there have been fewer sales. For that reason, the appraiser may need to explore other neighborhoods or markets to find evidence of investment parameters such as the price per square foot of net rentable area and cap rates.
Tip: If you have the opportunity to review the appraisal, make sure the sales used were recent and from comparable markets reflective of the level of demand found in the facility’s neighborhood.
The self-storage industry will soon start to transition from a weakened market to an improving one, and reliance upon older sale prices could cause the appraised value to trail (or lag) the market. For this reason, it is a good idea to provide the appraiser with some current listings if possible.
Part of your job is to make sure the appraiser understands how well self-storage is performing despite all the bad news in today’s economy. If you are like most owners, your net income has either slightly declined or not at all. Make sure the appraiser knows self-storage values have not declined like the many other types of real estate because most facilities are performing well.
Let the appraiser know self-storage cap rates have not increased as expected because most facilities are still performing at or above the owner’s expectations. Listing prices have not declined as anticipated because of continued good facility performance.
Look for Discrepancies
You can choose not to be a part of the appraisal process and, perhaps, you will get lucky. But remember, luck is no accident; it is the result of diligence. The appraiser’s task is to measure and mirror the expectations of informed market participants. You can help assure that happens by providing your insights and a sense of your market’s current conditions.
Ask the appraiser to call you when the report is finished, but before it’s submitted to the loan organization to see if there are any major discrepancies between the facility’s actual operating income and expenses and the conclusions reached by the appraiser.
Remember, the appraiser cannot discuss conclusions, but if there were big differences, this would be the time for the appraiser to understand why and to be prepared to support his conclusions with market evidence.
Charles Ray Wilson is the founder Self Storage Data Services Inc., an independent research firm that maintains the nation’s largest database of self-storage operating statistics. Mr. Wilson is an internationally recognized leader in providing independent research on the self-storage industry. For more information, visit www.ssdata.net.