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Creating a Realistic Pro Forma Operating Budget for an Underperforming Self-Storage Asset

Creating an operational budget for self-storage is challenging under any circumstances, so how does an owner or investor calculate a realistic plan for an underperforming property he intends to acquire and improve? Consider these items when creating a pro forma budget for a facility in transition.

If you already own and operate a self-storage facility, you know it’s important to have a written financial plan for the business. There are many resources out there designed to help you create an annual operating budget. But what about an underperforming property you’ve acquired (or intend to acquire) and improve?

Ideally, you want to turn this facility around and increase profitability. Already, industry brokers have begun pricing properties in this seller’s market based on how they should function, rather than how they are already functioning. Your task, as an owner or investor, is to determine if these often-overzealous calculations are obtainable. This will take research on your part, and a pro forma budget.

The days of bargain hunting for self-storage may be behind us, but there are still some very lucrative deals available. Even in the competitive real estate market of the last four years or so, I’ve witnessed instances in which new ownership of a “mature” property experienced year-over-year revenue growth as high as 65 percent. That’s a rare find, of course. My company’s acquisitions during this span have averaged approximately 20 percent first-year growth, which is a more reachable target. Let’s look at how to create an accurate operating budget that can help you achieve similar success with an underperforming property.

Expenses

With an acquisition, chances are there’s a financial history from the previous owner. To begin, focus on expenses. Look for areas where you might be able to “trim the fat.” Assuming you aren’t using third-party management, you may not have the advantage of economy of scale, but there may be other opportunities where you can reduce costs. Give every line item a thorough examination. What you find may surprise you.

I’ve seen storage businesses that have operated for years using their local bank for credit card processing, paying more than 3 percent per transaction when they should be paying less than 2 percent. This may sound minimal, but with $500,000 in processing annually, a 1 percent savings is $5,000. Don’t leave that money on the table! When you add that amount to your net operating income, it’s worth about $75,000 in property value at today’s capitalization rates!

Look for expenses that can be eliminated. I recently took over a property that was leasing a copier. A one-time purchase of a $300 copier eliminated that monthly expense. Do you really need that fax line that’s costing an extra $30 per month? Perhaps you do, but it is the 21st century, and your business may do fine without it. Gather bids on things like waste removal and landscape maintenance. You might find unrealized savings on any item.

After looking for places where you might be able to reduce, look at those in which expenses may actually increase. The property has been underperforming, which is why you want it, right? Well, it’s underperforming for a reason, and you have to figure out how to change that trajectory. You may need to consider upgrades to facility marketing, curb appeal or community involvement. The property may require a remodel.

Righting the ship may involve an injection of capital, so it’s important to plan and figure out a schedule. Perhaps you’ll initially want to focus on cleaning up the rent roll, and then look at making capital improvements beginning at the six-month mark. Can you make the necessary upgrades out of operating capital, or will you need to have a cash call? Your budget will give you a good indication of how you’ll move forward.

Revenue

To make that determination, look at the revenue side of the budget. There are two major factors that go into calculating monthly revenue: actual dollars per square foot ($/PSF) and occupancy. There are also secondary revenue streams to consider, but we’ll examine those later.

If an undermanaged property averages 20 rentals per month, can you expect at least a 25 percent increase behind an aggressive, new marketing plan? If so, look new rentals over the past 12 months and increase those numbers 25 percent by way of projection. Be cautious, though. Are there delinquencies to be cleaned up? You might actually see an occupancy drop during the first three months while you trim the dead weight, which could offset planned net gains.

Also, calculate rental increases. If the property is renting at $.80/PSF and your goal is to take it to $1.10/PSF, this will need to be done incrementally. After examining the facility, you’ll determine how aggressive you can be. You may decide you’ll be happy with taking your $/PSF up to $.90 in the first 12 months. That means each month, your projected rental revenue should increase $.083.

Let’s assume you plan raise rent on 300 units. Dividing that number by 12 months means you should average 25 increases each month. Next, determine what your average percentage will be. Let’s say that during your first year, you’re going to be fairly aggressive with a 12 percent increase. Assign a dollar amount to that 12 percent to determine the overall effect it will have on your $/PSF.

Keep in mind this is an aggressive increase, so there will be some churn. If the churn rate for the previous year was 6 percent per month and you know you’re going to be aggressive with 12 percent rent increases, you may need to increase that churn to 10 percent or more in your budget projection. Are you prepared for the possibility of losing that many paying customers? This all needs to be calculated into your monthly numbers.

Market Factors

There are also seasonal factors to consider. What does the history of the property tell you? If there was a 10 percent churn last August, can you expect that to repeat next August, right before school starts? This is where market knowledge is critical. Do you get a lot of college rentals? Is there a troop deployment returning home? Is the new subdivision nearby selling its final phase? Look for things that can have a negative impact on occupancy and factor those into your planning.

Finally, look at secondary revenue streams. Are you increasing the facility late-fee structure? Will you be adding ancillary product and services such as tenant insurance, merchandise sales or truck rentals? If so, these will need to be added as new line items for revenue and accurately calculated into your expectations.

Creating a budget for an underperforming property can be challenging, but by setting realistic and obtainable metrics, a previously mismanaged self-storage facility can soon be on the right track to produce the revenue it should.

Monty Rainey is owner of RPM Storage Management LLC, a Texas-based third-party management company that performs self-storage feasibility studies, due diligence, staff hiring and training, and more. Prior to launching RPM in 2014, Monty served as a district manager for a self-storage real estate investment trust and property-management firm. In his career, he’s led the successful management of more than 100 properties in Colorado, Oklahoma and Texas. For more information, call 830.832.9496; visit www.rpmstoragemanagement.com.

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