Help valuing a self storage facility

33 Replies

I have come across an opportunity to purchase a small self storage facility that on the surface looks to be a good deal. The problem I am running into is the owners are close to 70 (ready to retire, this is why it is for sale) and they have not been keeping very good records and are not very sophisticated. They don't seem to do anything electronically and are having trouble getting me a lot of financials. I have asked for rent roll and tax returns, they are getting me 2009-2012 returns because they haven't filed 2013 yet. As for the rent roll, they don't seem to have monthly records. I personally don't even know how they know who has and has not paid.

I still want to purchase this property if at all possible, so I am wondering if anyone else has any experience with something like this. Also, I am wondering if there is any other way to value the property other than the rent rolls?

To add more info, I have a drawing of which units are occupied and what their rates are per unit, but without rent rolls I won't know who is current and who hasn't paid in 3 months. The rates are extremely low, they have not been raised in awhile, and just by my manual calculations I would be making 15% cash on cash as it is (assuming minimal maintenance and all rents paid on time). The owners will be moving out of 6 units when they sell, so that will provide additional income potential, and there would definitely be rate hikes immediately. They also don't really advertise and have no website, both of which I would do immediately to drive more business to my facility.

The owners are willing to do owner financing as well, which could be helpful but they want 10% interest and a 2 year balloon. Without paying 100% cash, I would have a hard time getting a loan without current rent rolls.

I definitely want this property, I see it as a great way to add some nice passive income once I get it stabilized.

I've bought small mult-fams where the owners haven't kept good records. With 2-3 unit properties it wasn't a big deal to value them based on how they would perform with me running the show after just a few months. With something this big though you need to look at the tax returns to find the NOI. Once you have that you need to find out what the prevailing CAP rate is for storage facilities in your area. You should be able to get that from commercial brokers local to you. You can then value the deal basing it on the market CAP rate.

Yeah if this were just a small multi-family it would be easier to value. In this case I will be assuming 30+ tenants. The tax returns go up through 2012, but that still leaves me with 19 months of unknown income.

I can figure out the market CAP rate, I was just wondering if anyone had any other suggestions for alternative methods of calculating to try and get a good value.

I should clarify it is only a small facility, approximately 50 units. No security gate, no leasing office/manager on site. It is just a block construction shingle roof building.

Have you tried setting down with sellers and discussing how they keep track of everything?

You may also want to repost all this info in the commercial forum here as well.

Originally posted by @Brandon M.:

I can figure out the market CAP rate,

 How would you do this?

You can figure out the market CAP by finding other storage facilities that have sold in that market. You'd need to know the sales price and the NOI of the properties sold.

Finding a commercial broker that handles self storage should be helpful.

I have spoken to a few brokers as well as investors, I would likely be looking for a minimum 15% cash on cash as is (preferably 20%). Anything extra from vacant units being leased up + rate increases would be my "appreciation" because this asset likely doesn't have a ton of appreciation potential.

I have had a hard time getting to sit down with them for a long time, a lot of our interactions are phone calls other than them meeting me at the site to view the property. They are always commuting back and forth between this area and the other side of the state, and they don't seem to have a lot of organization in their lives.

I will post this in the commercial section as well, thanks.

Originally posted by @Brandon Hicks:

You can figure out the market CAP by finding other storage facilities that have sold in that market. You'd need to know the sales price and the NOI of the properties sold.

Finding a commercial broker that handles self storage should be helpful.

Really?  ...And don't you think you'd be able to value the property with the hardest part known?  And yet the OP is baffled.  That's why I didn't think he knew how to figure a market cap rate.  Probably doesn't know how to apply it even if he has it.   I wonder why he is trying to value their business when he acknowledges they are not treating it like a business.

He's  toured the property, seemingly knows the market rents, v&c, expenses and market cap rate.  Dang, just use the income approach.   Do some below the line lease up adjustments (First month free is going to cost you 1/12 of pgi) .  There is no leased fee value here so there is no "appreciation" so quit confusing things. 

@ Bob Bowling

The market CAP is for other properties....not this one. You can figure the market cap even you're not looking at a property to buy.

Commercial property is valued on CAP rates. Which is based on NOI. This one is technically distressed and that would make me value it more based on how it would perform with me running it. I'd want a discount based on it needing turned around though and I'd need way better seller finance terms for me to help them.

Honestly you can use a  market cap calculation on any income producing property. However, finance calculations are better suited for large properties and they are mainly used for comparative purposes. With that being said, this is what I would do. 

1) Get the owners to give you a copy of the last 3 months of canceled checks for each of the units being rented. The checks should match-up to what the owners are claiming and if you take the check info and push it out over 12 months then that should match the tax return. 

2) Go pull the tax records from the assessor website and run a PMT formula (really easy if you don't know how to run one just Google it) based off your projected interest rate. This will give you a really good idea about how much your PIT will be.  As for the last I (Insurance) call around to local P&C agents.

Now you have a fairly solid idea of what is coming in and most of what will be going out. The on-going repair cost will be the tricky part. Old units will always surprise you so find a buddy that knows repair work or hire an inspector and be conservative with your estimates because if you can live with the worst case scenario then everything else is gravy.  

Honestly if you think it is a good deal. I would try to profit off the disorganization, cheaper financing and price. Especially since they don't have records so most people won't touch it.

The market CAP rate is tough to figure out, as the only other facilities that have sold recently are not of similar size/quality. The others that have sold were much larger, with a gate and an office. Mine is literally just a building with garage doors.

As I stated before, I can obviously do the calculations and figure out what the property SHOULD be bringing in based on unit mix and current rates, but I am just trying to figure out how to fully underwrite the property given the lack of actual information. Numbers don't lie, people do.

@Bob Bowling - If I seemed to have irritated you with my question, don't read/reply. I was simply looking for advice on a unique situation given there are no other "apples" to compare and there is very little financial information to do a true income approach calculation.

Originally posted by @Brandon M.:

The market CAP rate is tough to figure out, as the only other facilities that have sold recently are not of similar size/quality. The others that have sold were much larger, with a gate and an office. Mine is literally just a building with garage doors.

As I stated before, I can obviously do the calculations and figure out what the property SHOULD be bringing in based on unit mix and current rates, but I am just trying to figure out how to fully underwrite the property given the lack of actual information. Numbers don't lie, people do.

@Bob Bowling - If I seemed to have irritated you with my question, don't read/reply. I was simply looking for advice on a unique situation given there are no other "apples" to compare and there is very little financial information to do a true income approach calculation.

@Brandon M Originally you stated "I can figure out the market CAP rate," Now you are stating the opposite. (see bolded above)

And from how you describe the building why even use a storage cap rate comp?  What makes this a storage building?  No security, no manager apt...just a bunch of cubicles in a commercial building in an industrial area.  Call your local vice and ask for whore house cap comps!  LOL  Actually sounds like you could use any industrial comp.

My answers are to your post, not you.  Don't take it so personal.  If replies were meant ONLY for you then you'd post and people would respond to you by private message. 

Irritated?  Maybe a little from your flip flopping.  Maybe more so by your comments about the sellers.    So my generic read of this situation.   Older sellers probably with millions in real estate.  Busy with their lives and slightly pissed than not one of the five grandchildren will put down their Iphone and get off their *** and go down to the storage business and get things in order so they can make some money and perhaps inherit from Granny and Papa at a stepped up basis.  Probably a bunch of their crap in the six units that they are NOT paying rent for.  Whippersnapper comes by and thinks he's gonna Donald Trump them and pick up their property for pennies on the dollar since they are so unsophisticated.  10% and two year balloon?  Yep, they'll have the property back real soon.   They entertain whippersnappers' interest but are put off by the whippersnappers lack of knowledge evidenced by the demand for unnecessary financial information.  They are NOT going to sell based on their income.  They know they are not maximizing the business but don't care.  Why would they discount when they (or anyone else) could turn this around in 60 days?  

I could be wrong tho.

@Bob Bowling -honestly at this point I would just appreciate you forget this post and go make comments on some other post. There are thousands of posts you can read/comment on if this irritates you so much. 

You think asking for rent rolls and tax returns for an income-producing property are unnecessary? What the heck would YOU ask for then Mr. Expert? 

I came on here asking for advice because the sellers do not keep good books and records. 

The owners have even admitted they do a poor job of managing this facility. They commute back and forth from 2 hours away, don't try to advertise at all, and don't even enforce actual due dates. There is no telling how many units are even paying current every month and how many are delinquent. 

Sorry, now that I have spoken my mind to someone who needs to stick to their rental properties in Hawaii, I have more info to provide in hopes of getting advice from those who would actually like to help. 

I received the 2009-2012 tax returns today, rents received have decreased every year and losses have increased. This property shows a tax loss every year, including $24k loss for 2012. Now of course you are going to try and show as many expenses as possible to not pay taxes, but that makes it more difficult for me to accurately value the property. 

The sellers even admit they are very lax about collecting rent, so who knows how many units are even current on their rents. Given the current occupied mix, the rents received SHOULD be $24,900 for the year, so they are likely collecting only 1/2 of what is owed. They also admit not doing a lot of advertising, they commute back and forth from 2 hours away and have other properties they deal with. They have even stated they just want to be rid of the property so they can retire and ride off into the sunset. 

I am not necessarily looking to Donald Trump someone, but I also don't want to overpay for something that is losing money every year. To be clear, the owners suggested 10% and 2 year balloon but I have NO interest in an owner financing structure like that. 

Not that property appraisers are too accurate but the value there shows $25k for land, $95k for the building, and replacement cost of $173k. The building is approximately 6300 sq ft, built in 1982. 

What would you offer this owner? Any advice would be appreciated. I admit I am a self storage rookie, which is why I have come looking for advice. 

Originally posted by @Brandon M.:

@Bob Bowling -honestly at this point I would just appreciate you forget this post and go make comments on some other post. There are thousands of posts you can read/comment on if this irritates you so much. 

You think asking for rent rolls and tax returns for an income-producing property are unnecessary? What the heck would YOU ask for then Mr. Expert? 

I came on here asking for advice because the sellers do not keep good books and records. 

The owners have even admitted they do a poor job of managing this facility. They commute back and forth from 2 hours away, don't try to advertise at all, and don't even enforce actual due dates. There is no telling how many units are even paying current every month and how many are delinquent. 

First you should define your goal.

1.  Are you trying to value a business?

2.  Are you trying to value the property a business is in?  Is this a special use building or could any business operate out of it with minimal TI's?

Why would you be valuing a failing business?  That is the information you'll get from the owners tax returns.  How is that worth anything to you?

I would treat this as a VACANT PROPERTY as there are no long term leases that could affect value.  I would check utilities with the providers.  Probably the best indicator of value would be $persf of recent comparable sales.   Any rents would not go to you until you close.  Good luck to you if you think you're going to buy and then collect all the past due rents. 

As @Brandon Hicks stated and I agree you'd value using market rents. vacancy, and expenses and a market cap comp for industrial buildings and THEN adjust below the line for expenses to get to that NOI.

What DO you want to hear?  Tell us and it will save us all irritation.  Other people are telling me they are learning something from my posts.  Is there anything I've posted that cannot be used? 

My original posts were posted before I received any tax return info. Now that I have those I am seeing just how unsuccessful the business is as it currently exists. As stated originally, I am just asking for advice for those who have any, what approach would you use to put an accurate value on the property/business since the rent rolls don't really exist. 

And I only asked for tax returns because they told me the rent rolls are not up to date, I wanted to see SOME financial info. I do not want to try and value a property just based on someone's word. As I stated originally I could do my own math to determine what it SHOULD be making, but wanted to see what it was ACTUALLY making. 

And of course I don't expect to collect on any late rent, nor would I even try, but I would be cracking down and requiring all rents going forward to be on time, no more lax payment policies. 

As for the other uses, it literally is just 4 walls and a roof, directly behind a strip center so there are not a lot of other uses for the property. 

My goals: figure out what this property/business is truly worth. I have plenty of experience determining comps for residential properties, but this is a different asset type and does not have a lot of comps to use. There aren't a lot of great comps to value the asset itself, and there has not been a ton of information to be able to value from an income approach. 

I see this as a possible diamond in the rough with some ways to force appreciation/increase income (create website, add phone number and website to current sign, enforce accurate pay schedules, rent vacant units, increase rents). 

What I truly want to know: what would someone with more experience in the self storage space do? Would you offer the owners a low cash offer, knowing they want to retire and knowing the property loses money every year as it exists currently? Would you just walk away? 

Your post came in while I was responding to you.  Isn't it amazing how I was able to anticipate? 

1.  This property IS NOT losing money.   The storage business operating out of it is losing money.  Geez, keep the check book at home until you learn the difference.

I have rentals in three different states. I have also had holdings in other states and am familiar with more markets.  Of the $40,000,000,000 worth of properties I valued about $200,000,000 have been storage facilities in San Francisco.

When I've asked the buyer or seller why I'd be interested in some information they've offered they've been professional enough to realize that I'm not going to be ********ted and not take it personally. 

Anyway, I also would love to here any alternate methods of valuing.

Yes, absolutely amazing.......you should get an award for that.....

Originally posted by @Brandon M.:

Yes, absolutely amazing.......you should get an award for that.....

Whippersnapper!  Get OFF my beach!  ;-)  Dag burn Tomfools.

You never said what you would do with the information I have given, just lots of criticism. 

Would you walk? Would you make an offer? 

And of course I understand the difference between the business and the property, but one does not come without the other. I am buying both the property and the existing business and the clients that come with it. The property itself has very little appreciation potential, it is what it is, a block construction building with no room for expansion, etc. The appreciation potential is in the failing business being run in this property.

TomAto tom-ah-to.

Originally posted by @Brandon M.:

You never said what you would do with the information I have given, just lots of criticism. 

Would you walk? Would you make an offer? 

Criticism?  I think constructive advice.  Could have prettied it up some but that's not my way.  

How much would it cost to buy or build in a similar NBHD?  How much could you rent the building to someone else? 

I think (again, could be wrong) That you are trying to buy a failing business on the cheap.  Nothing wrong with that but you want the building with it on the cheap. 

Now lets say I have a restaurant space.   I've rented it out to 4 different restaurant operators over the last 20 years and each one has gone out of business.  Now when operator number 5 comes along am I going to discount rent to him because the 4 operators before him went out of business?  Hell NO unless he can point out that it was MY building that was responsible for the failures.  Heck if traffic numbers have increased I can charge him way more.

If I wanted to be in the storage business I would NOT pay any more for this property that what I could accomplish in a substitute location.  There is no business "good will" and the "clients" are non paying.

What is the MOST money this space could generate?  How many rentable SF?  What would the expenses be?  That would be more important to know that what granny and papa was doing.

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