So you have finally found a facility that you think is “the one,” but how much is the facility worth? Your next step is to figure this out and to determine if there is enough potential for ownership. It is essential to know the current value of the facility and what the potential future value holds.
As lenders, we have seen many facilities where the current owners are not engaged or interested in making the business all that it could be. Steer clear of making this mistake. This is a business that can be very profitable with effort, time and diligence.
Below are some terms that will help you determine a facility's worth, as well as determine whether or not it is worth investing in.
You will hear the term “occupancy” a lot. There are two types of occupancy: Physical occupancy and economic occupancy. Physical occupancy refers to the number of rented units. Occupied units (economic occupancy) refers to cash flow.
Economic occupancy is equally – if not more – important. If you have every single unit occupied, this does not necessarily mean that you are profitable as a business. Keep this in mind.
We see many facilities with high physical occupancies and low economic occupancies. This means that the tenants are not paying on time, or perhaps there are too many concessions being given to customers, such as a free month of rent with move-in.
You want these two types of occupancies to be close to one another. Additionally, you never want to be 100 percent occupied. Sometimes, operators are proud to boast that their facility is 100 percent full. When we tell them that they should not be at 100 percent occupancy, they are often confused. If you are, chances are that you are not charging enough.
It’s important to review the facility’s income and expenses and to see if everything is accurate. There may be missing data or unclaimed costs that can skew the overall facility worth.
Be sure that you find out how property taxes will be affected by the purchase, as well. Sometimes, for example, property taxes can double. You need to know this before the purchase so you can use it to negotiate the price and be aware of the cost when it comes time to pay the tax bill. Property taxes are typically going to be the largest expense for a self storage facility.
Are there opportunities for additional income? Is tenant insurance being sold? What about moving and packing supplies? Rental trucks? These are a few of the opportunities for additional income streams, ultimately helping you increase the value of the facility once purchased.
Be sure that you can see the rent roll before acquisition. Hopefully, the current owner has an adequate software in place that will allow you to pull reports for various things, such as the number of rented units, how long tenants have been there and how much they are paying compared to what the street rate is at that point in time.
You may find that there are several “friends and family” units that have been comped, which makes the physical occupancy look good. Also, you may see that there were several units just rented recently, which could have been done at a discount to make the occupancy look better. Analyzing these reports is an important step in your due diligence.
If you are looking for an independent third party expert to provide due diligence on the acquisition, research a reputable consultant or company, and ask for references. A great way to begin your research is through your state self storage association or the national Self Storage Association.
Make sure to do a thorough inspection of the property for any deferred maintenance or damage. These things will affect the facility's value and, therefore, the offer price. Items to consider include the age of the property (buildings), condition and type of roof, quality of doors and the condition of the fence, gate, and driveways.
Will the property be unmanned, or will a manager be necessary to run day-to-day operations? It’s important to think about this because the cost of payroll is typically the second most significant expense for self storage facility owners.
Let’s discuss an example to further highlight these points. The owners of a self storage business are finally ready to retire. The facility is 70,000 square feet and is almost 100 percent occupied with street rates that are lower than the competition. The rates on the existing tenants have not been raised in years, or even decades. Also, during business, the state implemented a sales tax on the unit rentals, and the owner has been paying them out of the bottom line and not passing them on to the tenants.
New ownership steps in and acquires the business. The new owners have since corrected the issues mentioned above and have found themselves with a very profitable business. Not all opportunities are as good as this example, but they are certainly out there.
There are many other details to look into when purchasing a facility and determining facility worth, but hopefully these things will help you get off to a good start before you make that first offer.
Remember, there are experts that can help you get started.
If you find that you can get the property for a price that makes sense and you have the potential upside, this may be the property for you.