If you’re looking into buying, selling or refinancing a self-storage facility, one of the most important things you need to do know is the business’ net operating income (NOI).
Without an accurate NOI, you can’t determine what the facility is worth, said Amy Hitchingham, vice president of the Argus Self Storage Sales Network of commercial real estate brokers.
“This is what we try to explain to our clients all the time,” Hitchingham said. “It is widely talked about but not widely understood. The main thing we try to get our clients to understand is that the income of their property is generating is ultimately what drives the value.”
Your NOI is your total yearly revenue, minus your annual operating costs. It’s the money left after your operating expenses, excluding debt service and depreciation. For example, if your annual revenue is $700,000 and your annual costs are $200,000, your NOI is $500,000.
To determine the value of a self-storage facility, NOI can be divided by the facility’s capitalization, or “cap,” rate, Hitchingham said. The cap rate is the ratio between NOI and the property’s capital cost to the buyer.
For example, if a property that was listed for sale at $1 million generated NOI of $100,000, the cap rate would be $100,000 divided by $1 million, or 10 percent.
A property that costs $5 million might be a better value to a buyer than a property that costs only $1 million because of the ratio of the income generated by the property compared with the purchase price, Hitchingham said.
You can find out typical cap rates for self-storage facilities in your area by consulting with commercial real estate brokers, appraisers or lenders. Once you think you’ve got an accurate number, you can calculate what the facility’s sale price should be.
For example, if you own a facility with NOI of $500,000 and a cap rate of 7 percent, $500,000 divided by 0.07 equals a value of $7,142,857.
Buyers typically are looking for long-term trends in revenue, Hitchingham said, so they want to make sure NOI is rising every year, not declining.
“If you want investors to take you seriously and have people make legitimate offers on your property, they need to know what that income has been for a number of years,” she said.
Keeping accurate records
It’s important for self-storage facility owners to keep good records of their income and expenses for that very reason, Hitchingham said.
“Someone is going to look five years in the past and see how that facility has been performing,” she said. “To project forward, it is important to have that history.”
Whenever you’re considering the purchase of a self-storage facility, don’t take the seller’s word for the facility’s NOI, Hitchingham said. Take the time to look at the books and find out how the number was reached. If you don’t understand something, ask the seller for an explanation; make sure that no ongoing expenses were left out of the equation. Working with an experienced commercial real estate broker can help you navigate this process.
Self-storage facility operators sometimes fail to maximize their NOI and boost the value of a property. For example, many operators don’t sell tenant insurance, missing an opportunity to pump up profit. It’s important to be on the lookout for new sources of revenue, said Jerry Jones, a CPA in Reno, NV, who specializes in self-storage facilities.
“You have to be conscious about where you are spending your money, how you are spending it, and where you are not making money,” he said.
Robert Chiti, president and CEO of OpenTech Alliance and member of the Self Storage Association’s governing board, said a common method facility owners use to boost NOI is reducing payroll expenses.
This typically can be done by outsourcing some tasks, such as maintenance of the grounds. Another way is using automated payment and rental kiosks outside normal business hours; OpenTech sells these kiosks to self-storage facilities. In some cases, this technology can lead to the need for fewer employees.
“Payroll is the largest adjustable expense you have in determining NOI,” Chiti said.