Thread: Self-Storage Valuations

Hello! In preparation for my talk at the Inside Self-Storage World Expo in Washington DC on October 6, I’m looking for feedback relating to the proper valuation of self-storage today. Having once owned one of the nation’s largest self-storage appraisal companies and as the owner Self Storage Data Services Inc., a company that publishes self-storage operating performance data, I call it the way I see it. I have nothing to sell but information.

What do you want to know about valuations and the East Coast market?

Are you interested in knowing which expenses should and should not be included when valuing you facility?

Would you like to better understanding valuation techniques and be able to assess rather the lender or the appraiser has properly valued of your facility?

There are some sources of income lenders won’t allow and other some appraisers omit. Would you like to know what should be included?

I’d also like to open up the floor to share a little about your facility! Everyone knows real estate values are down as a result of the downturn in the economy, but just how much has the value of “your” facility declined, or has it?

I’ve given many talks on the trends in self-storage operating performance, but this talk will be different! This talk will be aimed towards show you have to measure the impact the current market conditions are having on the value of your facility.

Hey buddy,

One question I would love to have answered is what sources of "other income" such as truck rentals, supplies, etc do lenders not allow you to include and perhaps you can explain some of that thought process. I get this question every time I look at an acquisition for one of my clients and I think I know the answer but would love to hear yours.

Cannot wait to see you my friend,
hope all is well for you.

Mel,

Good to hear from you and as usual you have a really good, and a not so easy to answer question.

Lenders will allow ancillary income that is related directly to the rental of space, i.e., self-storage storage units. That usually includes; late fees, admin fees, locks, boxes, insurance premiums, etc.

There are two limitations that come to mind however. First limitation is the type of income and the second limitation is on the amount of income.

Truck rental income is an example of business income lenders will not allow when making a real estate loan. It is excluded because it is totally related to the "contract" between the facility owners and the trucking company. It can be terminated at any time and is not tied to the real estate. Now that's not to say an investor wouldn't be willing to pay something for the right to receive that income, they would and they do. The difference is that it is "business" income and not real estate income. By the way, business income is typically capitalized at a higher rate than real estate income reflective of it higher risk.

Sometimes there is confusion about the distinction between a real estate investment and a business investment. Self-storage is real estate, just as apartments, and multiple tenant industrial buildings are real estate investments.

The second limitation is on the amount of ancillary income. Lenders will allow most ancillary income that is typically generated at self-storage facilities, however they will "limit the amount" to what an investor is will to pay when purchasing a facility. For instance, a facility might be generating ancillary income equal to 20% of rental income, but most investors would not pay for it. Historically, investors have limited ancillary income to say 6% or 8% of rental income. Thus, most lenders will limit to something in that range, but there are no set amounts.

Mel, those within our industry who push the idea that self-storage is a "business" do not realize or just don't care about the negative impact it would have on the owners. They would not be able to obtain reasonable loan amounts and value of their facilities would be much less. Just think about how hotels are valued, and I think you would agree owners would not want that kind of approach used on self-storage valuations.

Hope this helps,
Ray

Ray:

I am pleased that you will be speaking at the DC Expo. I always learn so much listening to your presentations. One factor that I would like to hear more about is the level of discounting going on as new rental incentives. I know that you track a wide range of discount programs at SSDS. Would you consider going into more detail on what discounts are being used the most and what you see is the bottom line impact of all the various incentive discounts we are seeing across the country?

I am working in one market where everyone has gone to the first 3 months at a 50% discount no matter what the size unit or whether it is a climate or standard space. Even if the person stays an entire year, you would have lost 12.5% of the unit’s potential and 50% if they only take advantage of the discount period. Add to that the costs of the “Free Truck with Move In” and on smaller units with a short stay you may have actually lost money. I am not sure owners are sitting down and forecasting exactly the financial impact many of these discounts are really having on their bottom line and therefore their ultimate value.

Thanks - See you in DC.

MisterJim444

Jim and Ray,

look forward to seeing you both in DC. Thanks Ray for the clarification.