Help me evaluate this self storage deal

[James Seely]

Some self storage units in my area have come up for sale and I'm curious on other peoples thoughts on what it's worth.  Sorry in advance, this might be long.

There are 3 storage facilities in this town I will call A, B, and C.  I'm a partner on A.  The owners of B contacted us to see if we wanted to buy.  B has about 60 units and a commercial building under lease for the next 4 years.

2014 numbers

Income - $28900
$9400 - Commercial building
$19500 - Self storage

Expense - $7900
$0 - repairs
$1400 - insurance
$6000 - taxes
$500 - Electric

NOI = $21000
Asking price $320000
CAP Rate = 6.5%

Occupancy
2011 - 90%
2012 - 95%  - this is the year Facility C was built
2013 - 85%
2014 - 75% 

Our facility has run at 98% pretty consistently for many years and didn't see a change when B or C was built.  The properties are all pretty similar except C has room to expand.  I'd grade them all at a B.  Ours may be a little lower as it is the oldest.

Concerns
- some of the units get water in them due to poor drainage
- $0 for repairs the last few years makes me wonder what has been ignored and isn't realistic going forward
- Facility C just got to 85%  I've heard they are going to put up a fence but 85% is also normally where an owner will build more units
- We just received notice that all of the commercial property in our county is going to be reassessed
- A similar property about 10 miles away just sold at a 13 cap.  We purchased ours for 11 cap
- Expenses don't include snow removal and mowing

Upside
- We have had to turn people away for our storage units so this would give us overflow since we can't expand.  Yes I know we should raise prices but these 3 storage facilities are in a town of 1000 people.
- Taking this from 75% occupancy to 95% gets us closer to $35000 NOI
- Current owners say about 25% of their new tenants are looking for our facility but call them because they used the town's name when they named their facility.

Some rough numbers I've come up with for potential offers
$210,000 - assuming a CAP rate similar to our 10%, COC is 23%
$225,000 - Cap rate is 9%ish, COC 18%
$250,000 - Cap rate is 8%ish, COC 14%
$275,000 - Cap rate is 7.5%ish, COC 10%
$300,000 - Cap rate is 7%, COC 7%ish

Personally I don't want to get under 10% COC but there is potential upside that would increase COC if we could get occupancy up.

So what do you think this is worth?

James

[Account Closed]

Hey James, this is an interesting scenario! Getting market domination can be really beneficial in self storage since it allows you to "fix" prices. With the requirement for stormwater management for new properties (which can easily run 100k+), it's not likely that other facilities will be built in your area. That being said, market control is not worth a 6.5% cap rate...you want to buy the property for what it's making right now, not what it could be making in the future.

First: Get current numbers. Making a decision on old numbers is a recipe for disaster.
Second: Call brokers that have sold self storage places in comparable markets to yours, and ask them what the final cap rate was at. They might not tell you, but it doesn't hurt to ask. If a similar facility ten miles away sold at a 13 cap, why in the world would you entertain a 6.5 cap?
Third: Submit a counter list of expenses that includes your capex costs and management, as well as professional fees and landscaping costs -- I know you might be managing it, and that self storage has really low capex costs, but don't leave those out. Not only will you regret it down the road when you don't make as much as you could have, but it gives you more room to negotiate.
Fourth: I'd be worried about the reassessment. Really stress that in the negotiations, that you're taking on the risk.

Yeah, this property could be worth a lot more, but negotiate hard based on what's there right now. I'm not saying to be domineering or rough when you're negotiating, but it's not realistic for the buyer to expect you to absorb so much risk/deferred maintenance/high price.

Did you close on it?