21 May 2019
The first and most important step of valuing a facility is to understand and examine the income that is currently being collected. The main source of income for self storage properties is derived from the storage units. The most typical report utilized by valuation professionals is not actually the rent roll, rather it is the Occupancy Statistics report or Unit Mix report. This report sorts the units by type (typically drive-up and climate-controlled or by story) and then by size.
This will not only allow for an analysis of the asking rents but will also allow for the comparison of the collected market rents. The forecast of the rental rates should be based on the subject’s position in the market as well as the subject’s occupancy rate for that specific unit and type.
While the main source of income is from the storage units, there are a variety of other income sources at a self storage facility. Most common sources include parking, truck rental, tenant insurance, cell towers, on-site offices, pack ‘n ship operations, retail sales, as well as fees, such as administrative and late fees. Generally, other income ranges from 1% to 10% of the self storage unit rental income.
Once the gross income is estimated, the vacancy and collection loss must be deducted to determine the Effective Gross Income.
There are two main components of vacancy: physical and economic.
Physical Occupancy: It is important to examine the historical physical occupancy. Are there any seasonal patterns that need to be accounted for? For instance, occupancy rates in a college town may increase during the summer months and then decline during the winter months. It would not be wise to assume a physical occupancy based on the occupancy rate in July, nor would it be wise to assume a physical occupancy based on the occupancy rate in January. Therefore, it is best to look at the occupancy on an annual basis while understanding the occupancy pattern at the facility.
Economic Vacancy: Economic vacancy is also known as collection loss or concession loss. This figure accounts for the loss of income on a lease. For instance, a tenant may default on its rental agreement or may receive a month free on a new lease. Either way, this loss is collectively known as the economic loss. The economic vacancy at a facility is quite dependent on the local area of the facility but generally ranges between 1% and 3%.
To be most consistent with the investment market, the Effective Gross Income (EGI) is forecast in line with the historical pattern; therefore, if a property is located in an oversupplied market, where rental rates are increasing at 3% a year, an investor would typically continue this pattern. However, if the property’s income has been increasing considerably over the past few years, an investor may include a similar increase in rental rates into the forecast.
The resulting income figure is known as the EGI, and this is the total income projected to be collected at the facility. This is the first step to developing a property's proforma.
