The Texas Self Storage Association (TSSA) recently elected officers and board members for the 2009-2010 term of office. The new appointments will be introduced at the TSSA conference and tradeshow, Oct. 25-28, in The Woodlands, Texas.
 
The new TSSA officers are:

• President: Dan Small, Diamond Self Storage Management, Pearland
• Vice president: Robert Loeb, Castle Hills Self Storage, Victoria
• Treasurer: Tom McCloskey, MC Self Storage, Lytle
• Secretary: Mark Skeans, Skeans & Associates, San Antonio 

Josh Parrott of AAA Storage Centers in Lubbock remains on the Executive Committee as immediate-past president.
 
Returning board members are Kathy Hall of Burnet Road Self-Storage in Austin and Brad Young of 5 Star Storage in Midlothian. They are jointed by newly elected directors:

• Paul Glover, Storage Choice, Dallas
• Jay Kanter, O’Connor Self Storage, Dallas
• Amy Nolan, Advantage Public Storage, Corpus Christi
• Charles Plunkett (vendor member-representative), Capco Steel Inc., San Antonio

Kathy Tautenhahn of Tautenhahn Holdings in The Woodlands, Texas, will now serve as an ex-officio member of the board, along with past presidents Lolita Bader (A Better Place Self Storage, Boerne) and Wayne Johnson (Strategic Storage Holdings, Dallas).
 
The TSSA, established in 1986, is a non-profit trade association dedicated to enhancing the quality of the self-storage industry in Texas.

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U.K. self-storage operator Safestore recently partnered with Tesco, a local supermarket chain, to offer a discount to the grocer's customers via a club card. Tesco customers can now use their club-card points when renting a Safestore unit. The discount also applies to existing Safestore customers. Vouchers are available on the Tesco website.
 
Established in 1998, Safestore has more than 90 self-storage facilities in the United Kingdom. Tesco, founded in 1919, has more than 2,000 stores throughout the United Kingdom. The Clubcard system allows members to collect two points for every 1 pound spent in store.

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SecureCare Self Storage purchased five Boulder, Colo., facilities from Pennsylvania-based U-Store-It Trust for $26 million. The facilities comprise nearly 250,000 square feet of self-storage space.
 
SecureCare previously owned the properties before selling them to U-Store-It in May 2006 for $31.6 million. For this transaction, it bought the properties through the HVP Storage II LLC name, funded by investors through Chicago-based investment company Heitman Capital Management LLC.SecureCare has more than 100 self-storage facilities in Colorado and nine other states.
 
Source: Boulder County Business Report, Storage space goes for $26 million

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American National Self Storage Inc. sold its self-storage facility and business in Homestead, Fla., for $1.75 million to Homestead US 1 Self Storage. The 41,115-square-foot building was built in 1986 and renovated in 1993. The new owner purchased the property and the business as an investment and plans to renovate the building to increase occupancy. Lee Katsikos, Jorge Davila and Rodney Langer represented the seller. Matthew Rotolante and Stephen Rigi represented the buyer.

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Dover (Ohio) Self Storage will host a garage sale on Saturday for Habitat for Humanity of Tuscarawas Valley. The organization will be selling gently used or like-new items that have been donated or are leftovers from previous Habitat homes. 

Items will be sold at a 10 percent to 25 percent discount off the original cost and include a propane hot-water tank, gas fireplace logs, carpet, doors, Pella windows, PVC plumbing fittings, shingles and roofing materials, paint, sealer and other miscellaneous items.  All proceeds will go toward future home-construction projects.
 
Source: The Times-Reporter, Habitat planning garage sale Saturday

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How do you judge the fairness of an appraiser’s value and selected cap rate? The use of an “effective gross income multiplier” can help self-storage facility owners better understand their facility’s worth.
 
I recently visited my friend Bill, who owns a self-storage facility. When I walked into his office, he was sitting behind his desk, looking like he’d just seen a ghost. When I asked what was wrong, he said, “My loan is coming due, and I just talked to my lender. He said that since revenue has declined and cap rates increased, I’ll have to come up with $500,000 in additional equity to refinance.”

When I asked how the bank estimated the amount of equity he would need, Bill said it was based on the appraiser’s estimate of market value, and he’d sent the lender his most recent profit-and-loss statement. I asked if the appraiser had met with him to go over the data and inspect his facility. The appraiser hadn’t, but the lender gave him a copy of the appraisal. “I’ve lost everything,” Bill said. “My retirement nest egg is gone. I don’t know what I’m going to do!”

A Valuation Technique

There are many self-storage owners in this same situation. Clearly Bill and others like him need some way to check on the reasonableness of an appraiser’s judgment. How can they know if the value the lender comes up with is a fair one?

There’s a simple valuation technique used for other types of real estate that could help. Called the effective gross income multiplier (EGIM), the technique provides a quick and reliable estimate of value. It would give owners an idea of their facility value, some indication of whether there is a problem and, if so, just how big it might be. It would also allow an owner to judge the reasonableness of the appraiser’s selected cap rate.

I told Bill we should look at his appraisal, specifically the appraiser’s estimate of his effective gross income (or revenue, as it is often called). There are a few items that can really influence value, and estimating the EGI is one of them. We’d have to keep in mind that in a declining market, appraisers tend to be conservative, often focusing on a facility’s most recent performance and sometimes ignoring the not-so-obvious.

An appraisal is just an opinion of value based on a series of judgment calls that starts with the estimate of gross income and concludes with net operating income. Estimating EGI is not easy, as it begins with an analysis of the competition. This usually turns up a wide range of rental rates for each unit type.

To encourage a more accurate appraisal, talk to the appraiser about how you set asking rental rates. For example, if you set rates at the low end of the range offered by competition because you don’t wish to offer huge concessions, make sure the appraiser understands this. Otherwise he might use your existing rates, and then deduct the typical cost of concessions in other facilities, thus penalizing your facility. Explain your management style and how your facility differs from others. 

A Revenue-Management Tool

One of the best ways to estimate EGI is to track total monthly collections per occupied square foot over the past 12 to 24 months. This includes rental as well as ancillary income. There are at least two benefits for doing this monthly. First, it offers a quick way to judge the fairness of the appraiser’s estimate. Second, it helps owners measure the impact of changes in rates, physical occupancy and concessions on total revenue. 

This revenue-management tool was first used by the hotel industry and is often referred to as “revenue per available room,” or REPAR. The real estate investment trusts use a similar methodology for tracking revenue called “revenue per available square foot.”

While it sounds complicated, it isn’t. It’s simply the facility’s total monthly revenue divided by the number of occupied square feet for that month. In Bill’s case, his facility has 53,874 net-rentable square feet. Assuming the physical occupancy was 85 percent and the total month’s revenue was $27,873, the EGI per occupied square foot for that month was 60 cents.

• 53,874 square feet x .85 = 45,793 square feet
• $27,873 divided by 45,793 = $0.60 per square foot

The graph titled “Trend in Effective Gross Income per Occupied Square Foot” plots Bill’s monthly EGI (blue line) and the one-year moving average. Notice that even though revenue has declined, Bill has actually collected more per occupied square foot by adjusting asking rental rates, concessions, discounts and promotions. His EGI has averaged about 60 cents per square foot over the past year. We can now estimate Bill’s EGI at approximately $329,700. 

• $0.60 x 45,793 square feet = $27,475
• $27,475  x 12 months = $329,709

A Valuation Tool

The EGIM is a handy tool to estimate value, and it’s easy to use. The advantage of using it is you don’t have to analyze operating expenses, only the amount of EGI. The multiplier is derived from the market by dividing the sales prices of recently sold self-storage facilities by their annual EGIs.

An analysis of more than 1,500 facility sales in my company’s database over the past several years shows EGIMs ranging between 5.5 and 9.5 (excluding extremes). EGIMs reflect investors’ anticipated risk and return and, like cap rates, have declined considerably over the past year. My analysis of EGIMs between 2007 and today indicates a peak at something over 9.

The selection of an EGIM should be based on recent local sales of comparable facilities. A quick check of sales in Bill’s market indicated EGIMs between 7.5 and 8.5, so we used 8. Having already estimated his annual EGI to be $329,700, we were quickly able to approximate his facility value at $2.6 million. 

$329,700 x 8.0 = $2,637,600

Now Bill has some idea of what his facility value might be after a full appraisal is complete, and he’s in a better position to discuss his opinions with his lender. Bear in mind, this is not a substitute for an appraisal, but rather a starting point for an intelligent discussion about value. 

EGIM as a Predictor of Cap Rates

There’s a relationship between EGI and cap rate, expressed by the following formula: 

(1 - Expense Ratio) / EGIM = Cap Rate

If you’re not sure what the cap rate should be, you can use a range of EGIMs from sales in your neighborhood to derive a range of cap rates and see if the appraiser’s selected cap is within a reasonable range. Assuming EGIMs range between 7.5 and 8.5, as in Bill’s market, the cap-rate range would be: 

• (1 - .35) / 7.5 = 8.7%
• (1 - .35) / 7.7 = 8.4%
• (1 - .35) / 8.0 = 8.1%
• (1 - .35) / 8.2 = 7.9%

This exercise indicates that if the EGIM is based on local sales, and the operating expense ratios were taken into account when calculating the EGIM range, the appropriate cap rate would range between 7.9 percent and 8.7 percent, all else being equal.

In Bill’s case, we concluded the appraiser was too conservative on the estimate of EGI. We also concluded the cap rate of 9.5 used in the appraisal was well outside the indicted range. 

Get a Ballpark Estimate

The use of an EGIM is no substitute for having a compete appraisal, but if performed properly and with good data, it can provide a ballpark estimate facility value based on something other than the owner’s bias. An EGIM also allows for a fairness check on the appraiser’s cap rate. It’s important to compare apples to apples, and ensure the multiplier is applied to an estimate of EGI that reflects the facility’s historical performance trend.

The EGIM technique is just another tool, not a substitute for conducting a full appraisal. However, it does provide a logical starting point for a discussion of value that’s not just opinion-based.

Charles Ray Wilson is the founder of Self Storage Data Services Inc., an independent research firm that maintains the nation’s largest database of self-storage operating statistics. He is an internationally recognized leader in providing independent research on the self-storage industry. For more information, visit www.ssdata.net.

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If there’s one statement appropriate to describe the current lending environment, it’s “The worst is yet to come.” Now that phase one of the residential debacle is behind us and phase two is just beginning (more than 1 million foreclosure notices of default are generated every 12 weeks in the United States), commercial real estate is about to go through one of the worst eras it has experienced in a long time.

While delinquencies and vacancies continue to rise, we have yet to really see the catastrophe being created by tighter underwriting requirements, stricter credit, bank failures and consolidation, and current and future loan losses in our nation’s banks and commercial mortgage-backed securities (CMBS) market.

According to Fitch Ratings, there were approximately $50 billion in delinquent CMBS loans as of July 31, and that number will probably reach $100 billion by year’s end. CMBS delinquency rates are expected to eclipse 5 percent by the end of 2009. There’s an incredible amount of maturing CMBS and portfolio debt, and nowhere to refinance these if not a well-performing and reasonably leveraged property.

In a recent survey of 120 company presidents, CEOs and other executives, 82 percent indicated real estate values would remain flat or decline in the next 12 months. Moody’s/REAL Commercial Property Price Index said $2.2 trillion of properties acquired or refinanced in early 2004 lost value since the transaction, and many of these properties―typically leveraged 70 percent to 80 percent―will face significant refinancing hurdles, even if prices hold firm.

Few lenders today are willing to advance more than 50 percent to 60 percent of value. “The bottom line: Defaults are exploding,” says Richard Parkus, an analyst with Deutsche Bank. “It's terrible. It's going to be worse than in the early ’90s.”  Parkus expects the market won't begin to turn around until 2012 at the earliest. By then, commercial-property prices will have declined by as much as 50 percent from the peak in early 2007, he estimates.
 
Failing Banks

Available credit―and certainly cheap credit―will go to properties with low loan-to-value (LTV) ratios and strong borrower balance sheets, or to borrowers with the ability to provide additional collateral. If you’re looking for a takeout or construction loan with a property still in leaseup, finding a lender other than your current one will be near impossible.

While the government is trying to pump capital into the banks to induce lending, much of the funds have gone to allow select banks to buy failing banks, relieving the FDIC of the need to take over and manage them. As of August, the bank-failure tally was more than 80, with many more on the horizon.

The capital infusion has also gone to strengthen bank reserves, needed to cover mounting loan losses as well as under performing or over leveraged loans. Many major money-center banks, such as Citibank, are out of the commercial-lending market and are instead concentrating on a growing portfolio of special assets. Others, such as Chase, are looking for loans at 60 percent LTV or less and restricting asset types. Because of this, the availability of credit is fast becoming a crisis.

The good news is if you have a maturing loan, your current bank or CMBS servicer may have no option but to extend it, although likely at a rate, term and amortization less than what you’d like to see. If you have a conduit loan maturing, it may be more complicated, dealing with special servicers and the real estate mortgage investment conduit that holds the loan pool.

Much of what is happening today was forecasted earlier in the year, but the problem is much worse than anyone expected. Businesses large and small are closing, causing vacancies in all commercial property types. People are losing their jobs or concerned about losing their jobs, spending only on necessary living expenses. This reduces store sales and causes slower tenant payments, broken leases and re-negotiation of rent.

The pressure is on the property owner to keep the cash flowing, and on the lender to keep the loan afloat. Mounting loan losses are restricting lenders’ ability to originate new loans, as capital must be retained to stay solvent. Rumor is the FDIC is planning to close more than 100 banks this year, but the number of banks on the watch list is much higher.
 
What You Should Do

Banks are still your best bet, but expect LTVs to max out around 60 percent to 65 percent and, on occasion, 70 percent. If you owe more than that, you may be required to pay the principal down, provide additional collateral or, if you’re lucky, have your existing lender refinance you at terms that hopefully make sense for both parties. Most banks are opting to keep fixed rates at three- to five-year terms or go with a straight adjustable rate. Amortizations range from 15 to 25 years or, sometimes, 30 years.

Rates in the mid to high 6 percent range should be expected at minimum and can exceed 7 percent with ease. Insurance companies and pension funds are also good funding sources, but they will cherry-pick the best properties with lower LTVs, good histories and strong locations. Expect 10-year fixed rates to be in the 7.25 percent to 7.5 percent range, and amortization to range from 20 to 25 years.

Start looking to refinance at least 6 to 12 months prior to maturity. Begin discussions with your current lender early to find out if it even will be able to entertain an extension. One of the biggest financing changes is the inability of mortgage brokers and bankers to fund loans nationwide, as many of those sources have either dried up or gone away, leaving a few national and regional banks and handful of insurance companies to provide the funds required.

Have your financial house in order and your property financials up-to-date for the best results in your financing search. Now more than ever, a mortgage professional may be the key to helping you obtain a loan—whether it’s the perfect one or not. These days, you may need to take what you can get.
 
David Smyle is the president of La Mesa, Calif.-based Benchmark Financial, a commercial mortgage banker providing financing options for self-storage and other commercial property types nationwide. For more information, call 877.862.7916; visit www.benchmarkfin.com.

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Self-Storage Talk: Numbers

Nearly 1,000 registered participants convened in Washington, D.C., for the third day of the Inside Self-Storage World Expo at the Gaylord National Resort & Convention Center.

Expo attendees, including self-storage owners, managers, investors, builders and vendors, enjoyed two days of education on a wide range of industry hot topics, including marketing, financing, self-storage construction and development, green building, and day-to-day facility management.

The exhibit hall will be open Wednesday from noon to 5 p.m., and Thursday from 9 a.m. to noon. Nearly 100 exhibitors will be in attendance. Exhibiting companies include self-storage developers and builders, brokers, finance and insurance experts, door manufacturers, software vendors, and more.

The ISS Expo will also host a cocktail reception on Wednesday from 5 p.m. to 6:30 p.m. The reception is co-sponsored by Mako Steel Inc. and U.S. Door & Building Components.

On-site registration for the exhibit hall is available through Thursday.

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Equity Based Services (EBS), which operates 63 self-storage locations in 11 states, reports sales are up 13 percent from a year ago.

Businesses and homeowners downsizing have contributed to the increase in sales, said Troy Downing, a principal at EBS. “We’re a cash flow business. As businesses downsize into smaller facilities, all those desks, file cabinets and the rest of it have to go somewhere.”

Equity recently obtained an extension on a $3.5 million construction loan for a new facility in Arizona. The three-year loan from Imperial Capital Bank in San Diego was used to erect a climate-controlled storage building in Peoria, Ariz., and came due last month. The bank extended it for a year, basically on the same terms, Downing says.

Sales for EBS in August were up 13 percent from a year ago. Some markets are faring better, including Texas, where the firm has 20 storage facilities, and Las Vegas/Henderson, Nev., where it has nine.

Source:  San Diego Business Journal,  Equity Based Services Sees Sales Rise, Others Don't

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