Section 14 • Valuation


Administration, On-Site Management, Off-Site Management, Utilities, and Advertising. Generally, expense ratios range be- tween 30 and 50 percent. Table 14.1 on page 150 discusses each expense category in detail.


Currently, the biggest hot button expense impacting the


value is real estate taxes. Self-storage product across the na- tion can range from $30 to over $400 per square foot. The decline in capitalization rates coupled with the improvement in the economy has resulted in significant increases in value across the market. Self-storage is technically an industrial use and some assessors continue to value it as a storage ware- house use, which can result in a significantly lower value. However, with the influx of sales over the past three years, assessors have realized the value of a self-storage facility. Therefore, assessments are on the rise as many states require them to be based on 100 percent of market value. It is very important to understand the tax laws in the state and to fore- cast accordingly, particularly if a sale is involved.


NET OPERATING INCOME AND CAPITALIZATION RATE The net operating income is effective gross income less the expenses. This calculation is the key figure to determine when valuing a property. The resulting net operating income is divided by an overall capitalization rate to derive an opin- ion of value for the subject property.


The following is a summary of the various components that are needed to create a proforma.


While capitaliza-  


  + Vacant Units at Market + Other Sources of Income - Vacancy & Collection Loss = Effective Gross Income - Expenses = Net Operating Income


Source: Cushman & Wakefield


tion rates will be discussed in detail in a subsequent sec- tion, they have been steadily declining since 2011. A myriad of ways to obtain current capitalization rate in- formation exist, but it is important to acquire the most up-to-date information as


the


market continues to change. The following three methods are the most common:


• Recent Comparable Sales • Investor Surveys • Market Participant Interviews


DISCOUNTED CASH FLOW In today’s market, self-storage participants are increasingly sophisticated; therefore, a discounted cash flow analysis is often utilized by investors. This involves a forecast of cash flows over a typical holding period (usually 10 years) and re- quires assumptions regarding income and expense growth rates. Because most investors separate the actual income collected from the vacant units at market rents, different


Currently, the biggest hot button


expense impacting the value is real estate taxes. Self-storage product across the nation can range from $30 to over $400 per square foot.


growth rates can be utilized. In today’s market, investors are typically forecasting slightly lower growth rates (from five to eight percent to three to five percent) than in the recent past due to the influx of new supply in most trade areas. With that, aggressive revenue enhancement techniques that allow managers and owners to analyze the income at the facility. Additionally, owners and managers know that rental rates can be increased on an existing tenant at a higher growth rate due to them being a captive tenant. Most often, it takes significant effort to move out of a facility; therefore, own- ers and management have become proficient in finding the sweet spot between raising rents and losing tenants. The sensitivity of each facility is highly dependent on the local area and is unique to each location.


Conclusion An analysis of a property’s income and expense is the best tool to determine the value of a self-storage facility given its income-producing attributes. Fortunately, an income and expense statement can be easily developed for use by all types of market participants.


152 Self-Storage Almanac 2018


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