What is your selfstorage facility really worth? There are a number of reasons an owner might want to know the answer to this question. You may be thinking of selling, or maybe you are doing some estate planning. Regardless of the reason, the methodology of determining your propertys value is the same. This article will describe that methodology and explain why it is the way it is.

The first concept we must accept is the value of a facility is based on cash flow, not how much you paid for the property, how long you have owned it or how much it cost to build. Hopefully its worth more today than it was when you bought or built it, but time alone does not cause income property to appreciate. There are only two factors that affect property value: its net operating income (NOI) and the capitalization rate (cap rate).

NOI is the number of dollars remaining after all operating expenses have been paid. Its the actual gross income of the property minus operating expenses. The cap rate is the yield percentage rate applied to the NOI to arrive at value. Lets first discuss how NOI is calculated.

Income

Income is an easy figure for an owner to determine and a buyer to verify. There is seldom a difference of opinion between owner and buyer regarding incomeits simply the amount of money deposited in the bank. One must assume an owner is doing all he can to maximize income. This means he has established the highest possible rental rates while keeping them in line with competition. It also means the facility is adequately managed, advertised and marketed, and its occupancy is as high as it can be given the condition of its market.

It is important to note incomes from properties of the same size and in the same market area will not necessarily be the same or even similar. This is because income is limited by the average unit size of a particular facility. Two properties of the same square footage, occupancy and rental rates could have different incomes and, therefore, different values.

Everything else being equal, a 90 percent occupied, 50,000-square-foot property with 600 units and an average unit size of 83.3 square feet will be worth more than a 90 percent occupied, 50,000-square-foot property with 500 units and an average unit size of 100 square feet. This is because smaller units generate higher rent per footand correspondingly higher sales prices. Sales comparables usually report price per square foot but not average unit size. As a result, owners who determine the value of their property by simply using the price per foot of recent sales will usually come up with the wrong value.

Operating Expenses

The other component of NOI is operating expenses. Unlike with income, owners and buyers often view operating expenses differently. This difference is the primary reason they often have varying opinions of NOI and, hence, property value.

For example, an owner may employ a professional management company or have a maintenance-reserve account. He may be improperly paying or expensing salaries for full- and part-time employees or have inadequate insurance coverage. The matter of real estate taxes is one of the main areas of disagreement between owner and buyer. These can increase substantially when a property sells. Buyers estimate the increase and take it into account, whereas this is irrelevant to the present owner.

Cap Rates

After a propertys NOI is determined, the appropriate cap rate must be applied to it. Several factors are considered in deciding the suitable cap rate, which can be adjusted lower or higher depending on property and market characteristics. A masonry-constructed newer property, with a longer remaining economic life and stateof- the-art security systems, located in a rapidly growing area would command a better cap rate than an older, metal facility in a mature area. In these times of the lowest interest rates in decades, a property with an existing high-interest-rate loan, which must be assumed due to a high prepayment penalty, would not command as good a cap rate as one where new financing could be secured.

The charts on pages 118 and 119 show financial descriptions of two different properties and how the application of a different cap rate affects property value. Property A is a newer, optimally run property with an average unit size of 106 square feet and new financing for 70 percent of value. Property B is older. It has the same rental rates as Property A but an average unit size of 152 square feet and an 8 percent loan that must be assumed. Due to the difference in average unit sizes, the average rent of Property A is almost 10 percent higher than that of Property B. Note the cash-on-cash return for each property is the same.

Bill Alter is a real estate broker and has been a facility sales specialist for 17 years with the firm Rein & Grossoehme Commercial Real Estate in Phoenix. For more information, call 602.315.0771.

Though these basic real estate components reinforce and substantiate your assessment to selland this process has been repeated thousands of timeseach new entry to the selling market brings its own indecision and unique anxiety. If youre an experienced seller, you understand the process and requirements of each phase; if not, you need to carefully plan your marketing and selling strategy.

Brokerage

The first step in the process is to locate an experienced and competent broker whose self-storage agency track record and reputation reflect professionalism, market knowledge and appraisal comprehension. This individual should also have an almost instant ability to bring forth the most qualified local buyers for your property profile.

National self-storage operators are no longer preeminent buyers in the industry. A self-storage brokerage specialist can evaluate and appraise your property based on local and regional market values. He can suggest changes, modifications and enhancements that will add value and maximize the ultimate selling price. Clearly, selling the property internally can be time-consuming and difficult. Any transactional or legal missteps made during the process can be costly and, often, unalterable. A first-class broker is worth far more than any reasonable brokerage fee associated with the completed transactionsuch a broker will maximize profits and provide peace of mind.

Market Value

In combination with a good broker, the market value of your property needs to be established. The value will likely be derived from cash-flow-related calculations and computed via a capitalization rate of net operating income. Other factors that figure in establishing property value are:

• Age and type of construction
• Local competition
• Availability of developable land
• Area demographics
• Comparable rental rates

Documentation

The creation of a due-diligence document binder is a critical next step in the process. The binder should contain all the necessary documents a potential buyer will need to review in the orderly evaluation period. This important activity will expedite the duediligence process. The binder should include the following:

• Bank statements (two years)
• Real property-tax invoices (two years)
• Utility bills
• Profit-and-loss statements (two years)
• Occupancy reports (two years)
• Outside service agreements
• Environmental reports and surveys
• Preliminary title report

I also recommend you work with your attorney in drafting the formal purchase agreement prior to coming to terms with the potential buyer. Having this document prepared allows you to control the terms and conditions of the sale. You are also better equipped to respond to any changes in the agreement a potential buyer may have. Additionally, have your broker contact potential lenders for the property. This will expedite the loan process and circumvent any initial problems a buyer may have in qualifying and securing a loan.

Curb Appeal

A pre-marketing checklist should be developed in conjunction with your broker to ensure all primary curb-appeal and deferred maintenance issues are addressed and/or corrected. Basic deficiencies in the common visual areas can cause potential buyers to think the property may have other veiled problems. It is essential you understand your propertys weaknesses and be prepared to address any issues that may arise regarding them.

There are myriad studies that have demonstrated the critical importance of cosmetic detailing in selling any form of commercial property. A basic pre-marketing checklist should include the following:

• Pressure-wash the facility and driveways.
• Paint wood, block and stucco, where necessary.
• Replace street numbers.
• Check, replace or repair facility signs.
• Number each hallway and staircase.
• Check, replace or repair facility ingress and egress signage.
• Refresh the facility landscaping
• Check the integrity of fencing, lighting, gates, elevators, etc., and make any necessary repairs.
• Check for on-site water-retention areas.
• Check storm-drain integrity.

Marketing and Property Exposure

Comprehensive and efficient property exposure is one of the most important functions a real estate broker can provide the property owner. The subject property must be marketed and shown at its best. Normally, an all-encompassing marketing brochure will be drafted by the broker and disseminated to the investment community. The subjects typically discussed in the marketing brochure include, but are not limited to:

• Investment summary and financial analysis
• Loan/cash-flow analysis
• Unit mix and income schedule
• Location map with facility photographs
• Facility features
• Rent survey
• Demographics

A key factor in distributing the marketing brochure is understanding the buyer profile for the property. Again, in terms of efficiency, the broker needs to expose the property to those buyers in the region who would most likely have a general interest in acquiring it for their own portfolios. Familiarity with and identification of the proper buyer profile is a critical brokerage function. Marketing and property exposure sells the property. The property and marketing brochures should be exposed through the following venues:

• Direct phone contact and mailing
• Newspaper and magazine advertisements
• Real estate websites
• Outside brokers

What to Expect From the Buyer

Astute, qualified buyers establish their goals and required financial returns regarding self-storage investments long before a purchase agreement is executed. A property must satisfy the buyers parameters. As such, be prepared to review your property with the buyer to conduct a thorough due diligence.

The topics a buyer must evaluate generally consist of the following:

• Verification of occupancy, rental rates and late fees
• Physical inspection with a building inspector
• Discussions with city planners to evaluate any future self-storage projects
• Evaluation of delinquencies and auctions
• Review of the local Yellow Pages ad
• Verification of fixed expenses
• Certificate of occupancy, and related city and county documents

It Boils Down to Dollars

As with any commercial real estate investment, the value of the property will primarily be based on cash flow, not the number of storage units, rentable square feet or the size of the land. The amount of income that flows to the bottom line will always link your selfstorage property to its market value. As much as possible, keep your actual rental rates consistent with advertised rates and area competition.

Finally, keep your occupancy as high as possible. These two primary characteristics should give you an excellent chance to receive maximum value in the sale of your investment property. Good luck!

Stephen I. Grossman is a senior vice president with Lee & Associates, Newport Beach, Inc. He has been responsible for the sale of more than 500,000 buildable square feet of entitled self-storage land, and the sale or escrow of more than 2 million square feet of existing self-storage facilities. For more information, call 949.724.4709; e-mail [email protected]

This is the ISS annual real estate issue, which presents an opportunity to discuss wood-destroying insects and organisms. When we discuss insects in this context, the culprit is almost always termites and, less frequently, Carpenter Ants. (In the interests of brevity and a show of good faith that Im not trying to pad my word count, wood destroying insects and organisms will hereafter be referred to as WDI/O.)

Noreal estate transaction should ever be undertaken without a comprehensive WDI/O inspection. It is unlikely any reputable lender or broker would allow a real estate transfer to close without certification that the structure is free of WDI/O.

A reader recently wrote and asked how much faith he should have in the WDI/O inspection report he was given on a property he was considering for purchase. My answer was, not much. The issue wasnt the contents of the report, the company performing it, or even the results. The concern is the prospective buyer was not the final arbiter in the hiring of the company performing the inspection.

Unfortunately, there are a lot of unqualified businesses and individuals in the building-inspection industry. No doubt the majority of people in this business are competent, ethical professionals. The problem is, in most states and provinces, the industry is grossly under regulated. The individual who comes to inspect your structure could have gotten the job simply by watching a one-hour video on WDI/O and taking a self evaluated exam.

You, as the buyer, should take steps to ensure you are getting a quality report on the condition of your potential investment. This is normally the part where I give you a bulleted list of information related to the topic. Unfortunately, laws and regulations vary so greatly from one place to another, this column would need to be several hundred pages long. In researching this article, I tried to gather info by checking Internet resources on a state-by-state basis. Working in alphabetical order, I finally threw in the towel at California. However, there are a few bits of advice I can give that will cover a lot of ground:

• First, seek qualified legal advice from a lawyer with no connection to any of the parties involved in the real estate transaction. Given the size of your investment, and the ramifications of a bad WDI/O report, hiring a lawyer who specializes in real estate is money well spent.
• Second, if you are comfortable with your knowledge of the rules of the game, hire an inspector who has no financial interest in the outcome of the examination except if he screws it up!
• There is actually a third piece of advice that can guarantee you will not have a termite problem in your building: Buy it in Alaska. It is the only state where termites have not been detected.
• Finally, just because you are dealing with buildings made of steel and concrete, doesnt mean WDI/O is not an issue. While your structure may be impervious to such things, the contents arent. A termite doesnt care if its eating a 2-by-4, a cardboard box full of financial documents or an antique dresser. Your liability for the condition of the contents introduced to and stored in your facility is likely quite limited, but your reputation is at risk.

Ant Control

I hadnt anticipated writing a regular monthly section answering readers questions; however, if I get the same question from a number of different sources, Ill include it as a public service, as well as a mechanism saving me from having to think of things to write about!

This past month, I received a number of inquiries about a specific problem regarding ant control. The common theme of the questions was ants invading a structure and not going away, even though the outside source was located and thoroughly treated. This is a dilemma for amateurs and professionals alike. Even if you managed to kill all the ants outside, you have to deal with the ones inside.

Most pesticides in use to control ants are classified as Pyrethrins and Pyrethroids. Pyrethrins are a naturally occurring chemical derived from the Chrysanthemum plant. Pyrethroids are man-made versions of the same. While they are an effective pesticide, they also act as a repellent. Since ants live outdoors, what youve done when you use the repellent outside is block their exit. When you spray the ants inside, all you are doing is killing the ones you can see. You end up chasing ants around your building for days on end, killing a few at a time, and contaminating your environment.

Baits are the preferred method of treatment when dealing with ants close to a structure. Baiting gives the ants no reason to go inside in the first place, and while a little slower acting than pesticides, it is more efficient. If you decide to have a pest-control professional handle the situationwhich I recommend choose one that uses bait as his main weapon of choice against insects.

Ken Berquist is a field representative for R&D Pest Services in San Diego. He can be contacted at [email protected].

For several years, self-storage owners and operators have asked the questions: How can I simplify records storage? and Can I do it myself without a lot of front-end cost? Today, because of technology and technique innovations, it is not only possible but quite practical. This article discusses these innovations and the implementation process of a records-storage product that diversifies your business and improves square-foot yield.

First lets take a moment to recount the benefits of record storage within self-storage:

• Improved yield by renting cubic rather than square feet
• Increased contract term from 30 days to essentially permanent
• Long-term revenue growth that always increases each month
• Compound storage growth rate of between 7 percent and 25 percent annually from existing accounts
• Product diversification and differentiation from competition
• An opportune cross-sell item
• A catalyst for additional box sales
• A platform to launch a full-service records-management business

The first of our questions is, How do I make this simple? We have a tendency, in our fast-paced world, to overly complicate things. This is easily done with computers and technology that never seem to slow down the pace of our life. So, in this instance, what we need to do is get back to the basics. Records storage at its base is quite simpleit is inventory control.

Businesses all need to keep their records, whether they like it or not. No one likes to keep these things, but they must; and they generally do not know what to keep and what to throw out. You may have a simple, inexpensive and easy solution for them right in the palm of your hand.

Lets define a simple records-storage system. It is made up of seven components:

1. Box storageStorage of boxes can be facilitated by creating only three box-size categories. Box size No. 1 is anything up to and including 1.2 cubic feet; box size No. 2 is any box that measures greater than 1.2 and up to 2 cubic feet; box size No. 3 is any box that measures between 2 and 3 cubic feet. Charges are assessed at the rate based on the box size.
2. Box retrievalThe issue of inventory control requires that someone carefully manage the account. It necessitates a simple check-in and check-out system using barcodes. You create a work order, pull the box, scan the barcode, and move the box to a shipping area.
3. Box deliveryOutsourcing this step to an independent courier is a key to simplicity. Of course, selecting the courier, training him on the process, and managing the process is very important.
4. Box re-filingRe-filing boxes into storage is done as a batch process. As boxes come into inventory, you stage and barcode scan them into a temporary receiving area. They are returned to shelf storage only when you have the time. Batching the work process makes labor cost inexpensive and increases work-unit profitability.
5. Box indexingAlthough more indexing is always best, many records centers require a client index the box so they maintain only a box number as a reference. Box numbers can be the barcode number, which is scanned by a reader, and no keying is required.
6. Creating client reportsFrom time to time, clients require reports. The inventory-control system can easily generate them. This service can be quite profitable.
7. BillingMonthly billing is done in advance for storage and in arrears for services. The major records-management software products all have a billing module with exports to standard accounting packages such as QuickBooks.

Do It Yourself

Our second question is, Can I do it myself without a lot of front-end cost? Of course, there will be some cost involved with this business decision. What we want to achieve is low front-end cost and 90 days to profitability. Lets look at the cost components and see how we can recover them quickly. They include software, racking, setup process tools, training and support.

1. SoftwareDo not think you can store records without software. That is a certain invitation for failure. Software is available in a low entry-cost, small-business version.
2. RackingThe cost of racking in self-storage generally equals about four to six months of records-storage revenue. It is purchased only as you need it, one storage unit at a time.
3. Set-up process toolsThese are available from vendors and include business processes, strict control and management oversight.
4. TrainingThis is essential, but it must be repeatable so that, as personnel changes, there are no glitches in the turnover.
5. SupportTo ensure success, you will need ongoing support. It is available on a contract or as-needed basis from several industry sources.

The answer to both questions we posed in this article is yes. The implementation of a records-storage business within the walls of an existing self-storage facility can be a painless process that takes less than 90 days.

Regular columnist Cary McGovern, CRM, is the principal of FileMan Records Management, which offers full-service records-management assistance for commercial records storage startups, marketing assistance, and sales training in commercial records-management operations. For assistance in feasibility determination, operational implementation or marketing support, call 877.FILEMAN; e-mail [email protected]; www.fileman.com.

Construction Corner is a Q&A column committed to answering reader-submitted questions regarding construction and development. Inquiries may be sent to [email protected].

A: The answer depends on the type of door-alarm system you currently have running at your facility. If it is a wired system, you are probably out of luck. There is no easy way to wire individual RVs and boats. However, if you have a wireless system, it is as easy as adding a sensor to a unit. Select security vendors carry specific wireless devices just for your situation. Call your wireless-alarm system vendor and confirm that it does.

A: Sealtite is used primarily for outdoor installations due to its weatherproof nature. It is just as bendable and flexible as regular flex, but comes with a PVC coating around it. There are also special compression connectors and fittings that are used with Sealtite. Metal, flexible tubing, or flex, is usually used for short conduit runs where bending pipe is neither possible nor available. Flex is not weatherproof and must be limited to interior installations only.

Tony Gardner is a licensed contractor and installation manager for QuikStor, a provider of self-storage security and software since 1987. For more information, visit www.quikstor.com.

As winter snow melts and spring months deliver frequent rain, floods become one of the most common natural disasters experienced by residences and businesses. In addition to excess waterfall created by seasonal changes and weather, drainage-system failure, inadequate dams and other plumbing mishaps are also causes of flooding.

The worst floods occur where land is flat and low-lying. These areas are known as flood plains. Mud, earth and a plethora of man-made objects can be carried long distances by flood water, uprooting and destroying anything not firmly attached to the ground. You dont have to be in a flood plain to be at risk for damage. Floods can happen anywhere at any time. Even typically dry states such as New Mexico and Arizona can be prone to flash floods, which happen quickly with very little or no warning.

Flood Coverage

Did you know self-storage insurance policies, like most commercial policies, do not include flood insurance? Many facility owners do not realize their standard business policy does not protect them until its too late. As a matter of fact, only a small portion of businesses exposed to the risk of flood damage are insured.

Fortunately, its easy and inexpensive to protect yourself against flood through the National Flood Insurance Program (NFIP), which is backed 100 percent by the federal government. The NFIP divides risk areas into three basic groups: low, medium and high. Less than one-third of all reported flood claims come from high-risk areas, and more than one-quarter come from low-risk areas. Thats why most business-insurance experts strongly recommend you have flood insurance, even if you are at low risk.

Before the NFIP program, people only had their community and charity organizations on which to depend. The problem with that was government assistance in each area was limited and inconsistent. Flood insurance was sparse because the people who bought it were only those living in flood-prone areas, making insurance rates expensive. In the late 1960s, Congress took notice of these problems and passed the NFIP. It was designed to assist with costs of loss; inform and educate people to build up and away from flood-prone areas; and set forth requirements on building construction to prevent and deter flood damage.

You can get good and affordable coverage even if your facility is in the boundaries of a flood plain. Flood insurance costs an average of just a few hundred dollars per year for businesses; and a special, low-cost, preferred-risk policy is available for businesses in less-hazardous areas.

The NFIP and its write-your-own (WYO) servicing companies guarantee coverage for anyone in a high-risk area. Depending where you are located, it may not be necessary to purchase flood insurance at maximum amounts. If you are outside a designated high-risk area, you can purchase partial coverage and receive an ACV (actual cash value) payout for damages up to the purchase amount. However, if you have a lot of equity in your buildings and property, you may want to consider purchasing excess flood protection, which is available up to twice the regular limit. This extra protection may be very prudent given inflation and construction costs.

Plan Ahead

You can purchase flood insurance at any time but, there is a 30-day waiting period from the date of your application before coverage goes into effect. It is essential to plan ahead and get coverage from your agent before flooding occurs to ensure you will be covered if disaster strikes. Some emergency considerations to make would be to establish an action plan for monitoring storm activity, preparing for flood conditions, and implementing emergency-salvage operations. It is important to know the history of your area to better anticipate flooding potential. Another precautionary measure would be to document the interior and exterior of your facility and valuables with video or photographs to aid in the event of a claim.

Monitor weather reports through National Weather Service advisories. Every so often, see that all outside doors and windows are tightly secured, and check the conditions of flood doors, gates, walls, dikes, etc. Test all sump pumps for proper operation. Back up all important computer files and records and store them in a secure location. If you suspect flood conditions, shut off gas and electrical service and relocate valuable possessions to safe elevations. Stay calm if disaster threatens. Be prepared to evacuate the area immediately.

If a flood has occurred, begin salvage activities immediately, giving priority to your most valuable property and possessions. Remove flood debris, and drain all standing water as soon as possible. Dehumidify damp areas as thoroughly as conditions allow, and return fire-protection systems to full operation as soon as possible. Carry valid identification, along with proof of residency and your business license. Drive carefully through debris-strewn areas and areas with standing water. Last but not least, contact your insurance-claims representative immediately for adjusting and related services.

Universal Insurance Facilities Ltd. offers a comprehensive package of coverages specifically designed to meet the needs of the self-storage industry. For more information, or to get a quick, no-obligation quote, write P.O. Box 40079, Phoenix, AZ 85067-0079; call 800.844.2101; fax 480.970.6240; e-mail [email protected]; visit www.vpico.com/universal.