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Sale price vs debt service

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  • Sale price vs debt service

    All:

    I've been in the management side of self storage for a couple of years after running a good size retail company (50 employees). I recently was sought out by a real estate friend as a potential buyer for a storage facility not too far away. The facility has around 250 units, is just outside a mid-sized metro area (1st ring suburb) and hovers in the low 90% range of occupancy. Without getting into all the nitty-gritty details, it averages around $19,000 per month income pays $3,400 in taxes and $500 in insurance per month.

    I've read the various formulations on figuring out the value of the property but ultimately doesn't it come down to being able to afford the debt service, taxes and insurance while paying oneself a reasonable salary and having money set aside for improvements/repairs/ additional expenses?

    So let's say I offer $750,000 for the facility, put 10% down on a 9.5% sba loan and end up with a payment around $9,000 per month (including insurance and taxes). At another $5,000 per month in salary (owner run), that leaves around $5,000 per month left over. That initially sounds like a lot but with repairs, maintenance, office, refuse, and day to day expenses, that could easily get swallowed up.

    Their storage rates are comparable and probably don't have a lot of upside. They have a low vacancy rate (under 10%) so not a lot of upside there either. It seems like $750,000 is my top number, right?

    I'd love input or an alternative way to look at it. Thanks everybody

    Matt

  • #2
    Looks like you have done a good job with the numbers. See if you can take a look at the past years costs of maintenance, utilities, ect. Depending on the age of the facility, the costs might start getting higher if you need to replace doors, fix roofing, replace office equipment and such. You might want to think of adding part time employee, so you can get away once in a while.
    --
    Ron

    http://n6ach.com
    http://laws.n6ach.com
    [email protected]

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    • #3
      Ron,

      Good points. it is a little bit of an older facility having been built in the mid-90's. I have gone through their maintenance records and it appears that they replace 4-5 springs on doors per year at around $200 a pop. Their in one pretty large flat roof that must be 20 years old and will need replacing at some point in the next 5 years.... that'll cost a pretty penny, I'm sure. There is a bunch of metal trim that has been bumped over the years and could be replaced. Blacktop also needs to be redone soon.

      I am thinking I might need to lower my asking price to take into consideration the amount of improvements that will be tackled in the next few years.

      Thank you!

      Matt

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      • #4
        OK, so I was doing some loopnet searches and came across a property (I won't say what it is to protect the innocent) that has a crazy sale price that I can't figure out how to justify....


        This complex is in a very rural area over 75 miles from the closest small city. It only has around 50 units, is around 85% occupied and brings in $3,000 per month/ $36,000 per year. Expenses (not including payroll) sits at $9k per year. So in a perfect scenario, an owner who paid cash could profit around $25,000 per year.

        They are asking $800k for the place.Paying the loan on the facility would be more than what it brings in!


        Matt

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        • #5
          Originally posted by tonaselfstore View Post
          OK, so I was doing some loopnet searches and came across a property (I won't say what it is to protect the innocent) that has a crazy sale price that I can't figure out how to justify....


          This complex is in a very rural area over 75 miles from the closest small city. It only has around 50 units, is around 85% occupied and brings in $3,000 per month/ $36,000 per year. Expenses (not including payroll) sits at $9k per year. So in a perfect scenario, an owner who paid cash could profit around $25,000 per year.

          They are asking $800k for the place.Paying the loan on the facility would be more than what it brings in!


          Matt
          UNLESS they have a lot of land for expansion that seems to be way out of line. I've signed up to receive notifications of facilities available in the Southeast. I'm using them for comparison as I'm thinking of selling in the future. Pricing is all over the board, but that does seem excessive.

          Comment


          • #6
            We really don't have enough information from you to answer your questions. Though I will say this I have never seen a single facility for sale that small that could support $5000 a month for the owner, and pay debt service and expenses.

            That said if income is actually 19k a month I would want to check out their financials, because they may be offering a great deal

            Comment


            • #7
              Some sellers value their properties based on what land has sold for in the area, regardless of any business on that land.

              Some sellers have built and grown the business to whatever it is today and have a HUGE emotional connection which they place a very high value on.

              Some sellers place a high value on what the property would be worth IF the buyer did X, Y, Z upgrades

              Some sellers inherited the property and just want to cash out so they price it low. The low prices scares buyers off because they dont know about the owners situation.

              Do your research, more research, ask business owner in the area what they know about the property, ask realestate agents, ask anyone and everyone for info...

              Comment


              • #8
                Most lenders will require at lease a 1.2 debt service coverage ratio. Gross income minus gross expenses then divide by your debt service. Leave ~10% of what’s left in an account for reserves to pay for future cap ex. You seem to be missing a few expenses above. MGMT software, website, marketing, lawn care (even if you don’t have a lawn expect to pay someone to blow leaves and spray for weeds), utilities (elec, water, phone, dumpster, internet), and professional fees should all be deducted out of gross income in your proforma. Then, calculate your DSC and look at your after tax cash flow. If you’re still looking at $5,000 then that would be a 6.7% CoC return on your initial investment of $75,000. IMO, not worth the investment unless you can add value by raising rates or increasing occupancy. Ensure you are looking at both the facilities street rates and tenant rates. With small mom and pop operators you will always find some family and friend units that you can gain value from which they are not. Most valuations are done today via Cap rates. However, cap rates fluctuate on market value. Therefore, it’s hard to pin down what cap rate would apply to a certain facility since there are so many factors important to each buyer. The formula above is how we value a facility. If we can’t get a return we are happy with and someone else is willing to pay a higher price we simply move on. Good luck!
                Last edited by Nick_Newk; 18 January 2020, 02:28 PM.

                Comment


                • #9
                  Originally posted by Nick_Newk View Post
                  Most lenders will require at lease a 1.2 debt service coverage ratio. Gross income minus gross expenses then divide by your debt service. Leave ~10% of what’s left in an account for reserves to pay for future cap ex. You seem to be missing a few expenses above. MGMT software, website, marketing, lawn care (even if you don’t have a lawn expect to pay someone to blow leaves and spray for weeds), utilities (elec, water, phone, dumpster, internet), and professional fees should all be deducted out of gross income in your proforma. Then, calculate your DSC and look at your after tax cash flow. If you’re still looking at $5,000 then that would be a 6.7% CoC return on your initial investment of $75,000. IMO, not worth the investment unless you can add value by raising rates or increasing occupancy. Ensure you are looking at both the facilities street rates and tenant rates. With small mom and pop operators you will always find some family and friend units that you can gain value from which they are not. Most valuations are done today via Cap rates. However, cap rates fluctuate on market value. Therefore, it’s hard to pin down what cap rate would apply to a certain facility since there are so many factors important to each buyer. The formula above is how we value a facility. If we can’t get a return we are happy with and someone else is willing to pay a higher price we simply move on. Good luck!
                  Nick,

                  I did a complete Income / Operating statement taking into account all of the expenses that I was given (including those you mentioned and more) and came up with that $5k leftover per month. My guess is that my offer of $750k will be about half of what they will have it listed at.... which lead to my initial question about valuation.

                  At a 6% cap rate, this facility would be selling for $3.6 million, at 10% cap - $2.3 million. There is no way to pay the debt based on 10% down. And even if I paid cash (lol) the ROI ( per your point) wouldn't be worth it.

                  I'm used to buying and selling businesses straight, no land. I can use different multipliers of gross or net sales to help determine price. Still trying to figure out what the real estate guys are thinking with the cap rates....

                  Thanks everybody!

                  Matt



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