Valuation • Section 9
how to underwrite a self-storage facility? Whether you are buy- ing, selling, refinancing, or challenging your tax assessment, the methodology for determining your property’s value is the same. When dealing with valuation, there are three standard ap- proaches that are considered:
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Cost Approach - The Cost Approach is based upon the principle that the value of the property is related to its physical charac- teristics and no one would pay more for a facility than it would cost to build a like facility in today’s market on a comparable site. The Cost Approach has limited applicability due to lack of mar- ket data to support an estimate of accrued depreciation, limited land sales, and construction cost comparables; thus, market par- ticipants do not rely on this technique when valuing properties. In fact, the only time appraisers utilize this approach to value is if they are required to! However, it’s common for lenders to re- quire a Replacement Cost Estimate, or “Insurable Value.”
Sales Comparison Approach – This approach is based on the principle of substitution, which asserts that no one would pay more for a property than the value of similar prop- erties in the market. In active markets with sufficient com- parables, this approach is an accurate measure of value that can reflect market behavior. Alternatively, this approach may offer limited reliability because many properties have unique characteristics, including a significant amount of RV stor- age or miscellaneous income that are difficult to account for in the adjustment process. It’s common for appraisers and market participants to use this approach to provide secondary support to the Income Approach, primarily due to a lack of recent sales with similar characteristics available.
Income Capitalization Approach – This approach is based on the premise that investors purchase facilities based upon their income-producing ability. With the Income Approach, market rents for the subject property are estimated, an economic va- cancy and applicable operating expenses are deducted, and the resulting net income is capitalized into a value estimate. The In- come Approach is based on an analysis of information extracted from the market, and provides a comparison of the subject to properties of similar character and income-producing abil- ity. This is the primary approach to value that appraisers place weight on when reconciling a value conclusion. Colliers International recently completed a survey with sev- eral market participants that asked the question, “When you
hat are the most common methods utilized when an owner, potential buyer, broker, or appraiser analyzes a self-storage facility? Is there an industry standard for
analyze a property for your own internal purposes, what are the most important components you concentrate on?” The over- whelming response included these four categories:
1. Determining market rental rates 2. Determining true economic occupancy 3. Understanding operating expenses 4. Determining a reasonable capitalization rate
As previously discussed, all of these components are part of
the Income Approach. The following sections, written by Colliers experts, will discuss these four important components in greater detail, explaining how we analyze them from an appraisal per- spective.
Rent levels are concluded by analyzing the asking and actual rent levels, the current
occupancy, and the rent comparable range at the subject property. If occupancy for a particular unit size is well above the concluded occupancy for the facility, then a bump is warranted.
Market Rental Rates Determining market rent levels is a challenge for appraisers. There are several components involved, which include the asking rate (street rate), actual rate (current average), the range indicated by the rent comparables, and the occupancy at the property. Since the unit mix varies at every facility, it’s com- mon to focus on typical unit sizes (5-by-10, 10-by-10, 10-by- 15, etc.). In 2006 and 2007, it was common for market par- ticipants to utilize proforma rent
levels based on asking
rates. However, times have changed and individuals are more interested in what facili- ties are actually collecting. Table 9.1 on the next page
reflects an example of how we compare historical regional
trends against the national average to gauge the strength of the larger market. After getting perspective on trends in the region, we focus
on the subject and local comparables. Table 9.2 on the following page provides a sample of how we determine market rent levels, while analyzing all the factors involved. Rent levels are concluded by analyzing the asking and ac-
tual rent levels, the current occupancy, and the rent comparable range at the subject property. If occupancy for a particular unit size is well above the concluded occupancy for the facility, then a bump is warranted. This analysis should allow for further re- finement of where rent levels can be increased and which unit types may need extra marketing or concessions to boost in- come/occupancy. It should be noted that rent comparables typically offer ask-
ing rates; therefore, even though the subject could be one of the nicer facilities in the market, the concluded rates could be found near the middle or even the low-end of the range. A typi- cal trend is as the unit size increases, the price per square foot decreases. This trend is followed in Table 9.2 on page 95.
2015 Self-Storage Almanac 93
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