Section 15 • Self-Storage Valuation
Another measure of this variable relates to unit rent. For example, the operation of the business generates the net operating income applied to the real estate. In general, there is a correlation between higher rent and higher value. As a result, an adjustment for economic conditions is considered. Unfortunately, precise data and a direct relationship are difficult to isolate. Looking at net operat- ing income as a benchmark, and considering the other adjustments, an adjustment can be derived.
• Adjustment Summary - The total range of adjustments should always decline after the adjustment process, or what is the point of the exercise? In the following exam- ple, the range is narrowed from 90 percent to 15 percent. An example is presented in Table 15.8.
• Effective Gross Income Multiplier (EGIM) - The EGIM tests the reasonableness of the forecast year-one cash flow to the concluded cap rate. Using the formula 1-ex- pense ratio/EGIM (or value divided by effective gross income), expense ratios can be compared to concluded cap rates. In general, the lower the expense ratio the higher the cap rate.
5.50% 5.75% 6.00%
$4,669,220 $4,547,062 $4,435,085
Valuation Scenario: Cash Flow Start Date:
Investment Holding Period: Analysis Projection Period:
Cost of Sale
Percentage Residual
Indicated Market Value ($/SF) Source: Compiled by NKF
$4,583,135 $4,463,769 $4,354,351
$4,499,046 $4,382,403 $4,275,480
As Is 9/4/20 10 Years
Years 1 - 11
2.00% 59%
$145.82
• Secondary Approach - For self-storage, the sales comparison approach is secondary. Because of the em- phasis and impact of cash flow and relatively low sales volume in many markets, the price elasticity of self- storage can be very large. As previously discussed, the market emphasizes cash flow and the income approach significantly more than the sales comparison approach.
The Cost Approach The cost approach is based on the proposition that the in- formed purchaser would pay no more for the subject than the cost to produce a substitute property with equivalent utility. This approach is particularly applicable when the property being appraised involves relatively new improve- ments that represent the highest and best use of the land, or when it is improved with relatively unique or specialized improvements for which there exist few sales or rents of comparable properties.
• Applicable and Relevant - The cost approach is best used for newer properties due to the challenges of estimating depreciation. However, some lenders want an estimate of remaining economic life to ensure the building is economically viable during the amortization period of a loan. This can create challenges and highest and best use questions of a self-storage property. Some investors like to purchase below replacement cost, but this metric can be difficult to quantify due to the wide range of replacement cost estimates. There- fore, the applicability and the relevance of the cost approach warrants careful consideration to a credible opinion of value.
• Land Valuation - Self-storage land can be difficult to entitle or obtain zoning approval. Municipalities prefer other property types that generate more jobs or retail sales tax revenue. Therefore, if land sales utilized in an appraisal are not purchased and entitled for self- storage, the land component of self-storage can be un- der-valued. In general, self-storage land approximates a range of 10 percent to 40 percent of total property value but is typically in a narrower range of 25 percent to 35 percent.
Unadjusted Range Adjusted Range
$108.33 $135.41
Concluded Improved Sale Indication (S/SF) Source: Compiled by NKF
138 Self-Storage Almanac 2021
$172.47 $155.23
$131.38 $143.02
$143.00
• A cost approach for self-storage typically represents a value upon completion. Depending upon the local mar- ket, it may be appropriate to add absorption costs for stabilization (rent loss and some profit for time during lease-up).
These guidelines can help a layperson review an opinion
of value. Self-storage is a unique asset class, and an opinion of value should carefully review and consider these charac- teristics. If reviewing a value conclusion, these points can be utilized to consider the credibility of an opinion of value.
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