Many of our clients have been asking us to find them “value-add” deals these past two years rather than straight up acquisitions or ground-up development opportunities.
So, what is a value-add deal and why would you want one?
There are really only two types of value-add deals when you get right down to it; management improvement deals, or physical plant improvement deals.
These deals involve the implementation of best practices that run the gamut of merely raising rents because you are 100% occupied and have become the “low cost provider” of storage in your market; more concerned with physical occupancy than economic occupancy.
Examples of management improvement best practices include:
- Not charging your tenants an administrative fee for a first-time renter.
- Charging your tenants a late fee rather than waiving it each time.
- Hiring a real estate tax consultant and appeal your last tax increase.
- Hiring an industry professional call service to replace an answering machine.
- Begin requiring all tenants to show evidence of off-premise insurance, or to purchase tenant insurance through you from one of the third-party insurance carriers catering to our industry ($9 - $11/thousand dollars of coverage).
All of these management best practices should increase your facility’s revenue and/or decrease your operating expenses. They should increase your net operating income (NOI), and every $1,000 of increase in your NOI translates into a $9,000 increase in the value of your facility at a 6-percent cap rate.
Physical Plant Improvements
These improvements are generally a capital improvement to your property and will involve some amount of capital to improve the financial performance of your facility.
Therefore, you are always looking at the length of time to receive your return of capital outlay. These capital improvements are different from capital needed for remedial maintenance (asphalt driveway repairs, broken doors, leaking roof, etc.) and capital outlay to make the facility look better (new landscaping, signage, painting of fence, doors or building, etc.).
The physical plant improvements I am referring to would have an economic impact on the increase in income or decrease in operating expenses.
These types of physical plant improvements could include:
- Installation of a management kiosk to reduce the number of manhours per week (reduction in payroll).
- Installation of solar panels to reduce the cost of utilities.
- Replacement of electrical ballast/light fixtures to reduce cost of electricity.
- Taking larger interior units and reducing them in size, thus, adding more units and increasing the rate per square feet of the new units and the income per month.
On a larger scale, value-add can be accomplished several ways, especially if the facility has unimproved land to accommodate the installation of portable storage buildings or RV/Camper three-sided covered metal buildings. Another substantial improvement would be the installation of a lift or elevator for customers to access second or third-floor units.
Obviously, all of these physical plant improvements have a cost and take a certain amount of planning and research to compare the value that they bring to the bottom line. All of these improvements will need architectural drawings, cost estimates and permits to accomplish.
The ability of a purchaser to identify these types of opportunities and then be able to estimate the value of these options, separates this purchaser from the ordinary acquirer of a stabilized cash flow facility. The purchaser will have taken an income-producing asset and created a value-add asset that will provide a greater return on investment (ROI) than that of the ordinary stabilized facility. Once the management and/or physical plant improvements are implemented, the facility will begin to rent out the new improved units and build the net operating income to a higher level.