How are storage units appraised in small towns?

Question

How do small town banks appraise storage facilities? I’ve found that most “mom and pop” owners have no idea what a CAP rate is and just know what they paid for a place and what they think it’s worth.

There is no concept that the value is based on the NOI. Also, there are no commercial appraisers anywhere close to this property, so how would a bank appraise it to know how much they would lend on the loan?

Josh Ridpath · Answer

Self storage facilities are largely valued using the income approach. Secondarily, an appraiser would perform a sales comparison approach based on a price per unit. Ideally, the sales would come from either your same town or from areas with similar demographics, etc. Capitalization rates are also extracted from the comparable sales where available. A cost approach is usually only performed if the storage facility is either proposed (not yet constructed) or under 5 years old.

Greg Dickerson · Answer

The banks do not appraise the property they hire Commercial MAI appraisers to value the property. Self storage is valued like other commercial property which based on the income, replacement cost and comps.

Kevin K. · Answer

As the others have stated, a 3rd party bank hired Appraiser would most likely utilize the Income Approach with secondary support from the Sales Comparasion Approach. If the income was $0 the Appraiser can still utilize the Income Approach. They would have to stabilize the cash flow and determine a potential gross income. For example (36 storage units x $50 per unit per month = $21,600) + ($8,400) gym rental income = $30,000. The next step the Appraiser would take is to determine the operating expenses R.E. Taxes, Insurance, utilities, management fees, payroll, etc.. Assuming ($12,500) in expenses. They would arrive at a forecasted Net Operating Income of $17,500. Applying a 9% cap rate, as the other posters have indicated is typical or what the appraiser cancextract from the market, Would equal an “As Stabilized” value of $195,000 upon stabilization  ($17,500/.09%). In order to arrive at an “As Is” value. The appraiser would have to deduct lease-up time say 6-months (-$10,800), lease-up costs and any repairs in order to get the units maketable. Say the total cost is ($25,000), deducted from the “As Stablized” value to arrive at an $170,000 current as is value. It should be noted, all these numbers are just to show an example, I have no idea what storage units rent for in your area nor the expenses associated with the subject property.

Is there any reason all 36 storage units are vacant?

Also, as another poster noted the loan amount does fall below the $250,000 threshold, so the bank can do it internally whether the bank wants to, as it’s a tricky asset, is up to them.

Michael Wagner · Answer

@Heath Jones, you are absolutely right.  While stabilized assets are valued almost exclusively on income, non-performing property valuation includes "other" considerations that appraisers are all well versed in (cost to construct, land value, replacement cost, comparable sales, etc).

Clearly it would be great to buy them at a true CAP but as you've already seen, the is not always possible.  To land on an offer price, I reverse engineer everything.  Starting with the Projected stabilized value, I simply subtract my "required" profit, needed repairs, any working capital to cover negative cash flow, etc).

For example, my ROUGH criteria is that I want to double the value of a property.  So if the stabilized value is realistically thought to be $800K and the property needs $50K in work and $30K in working capital, I could offer $320K to the seller. I'd be all in at $400K.

Ken Jernigan · Answer

Commercial appraisers normally complete two out of three valuation methods: market, income or cost. They will then reconcile the two. Most common are market and income. With market they will look for comparable properties and make adjustments based on the condition of yours. Income will look at NOI and assign a cap rate based on similar sales. Not all appraisers are familiar with self storage, though.

If you're thinking expansion or improvement of the property, some lenders, notable SBA lenders, will get an "as complete" appraisal and lend against that, or cost, whichever is lower. You can include the cost of improvements. What some developers do is get a bridge loan to stabilization and do a cash out re fi when leased up.

You also should look into previous uses of the site to make sure no environmental issues exist.

Heath Jones · Answer

@Michael Wagner @Ken Jernigan @Josh Ridpath @Kevin K. Thank you all so much for the feedback. Kevin, based on your post, I was spot on with my evaluation based on general rules of thumbs. The seller of course wants way too much and has no reason to sell, so as of now it is not seeming like a good deal. He wants what it would be worth after it is stabilized. I’ll post an update if anything changes. Thank you all again, it is very much appreciated!!

Joshua Watts · Answer

If the gym was not rented then one would have to make an educated guess on what it could rent for. But one needs to be correct because this is where one can end up overpaying.

Chris Mackinlay · Answer

I can offer nothing to this other than it's an area I am considering. Thank you for posting!

Heath Jones · Answer

Thank you all for the feedback!! I thought I'd get a little bit more specific. For this particular deal, it has sat listed for sale for a long, long time now. It is a 36 unit storage locker building coupled with larger building currently rented out to a gym. The storage lockers are not actively rented and the gym is only paying $700 in rent. The owner is older and wants 200k. Herein lies the problem (I probably should have been more specific from the get-go), even if you were to be overly optimistic and base the evaluation on GROSS, and not NOI, at an 8 CAP you would get an overly generous value of 105k (=8400/0.08).

@Michael Wagner You're right that owners don't need to know what a CAP rate is, but they will need to know why the bank won't give a 150k loan (75% LTV on 200k price) on a commercial real estate deal only valued at most 105k. This is why I was asking how lenders (I should have said appraisers) value these properties if they aren't performing. It is on me to educate the owner on why his property is not worth 200k and then come back with a fair offer. However, it is going to be difficult to convince them that their property is more than likely worth 100k less than they think it is.

How would this property be valued if the gym was not renting the building and there was $0 income? At some point, it can't just be based on the income, otherwise, a property with an NOI of $0 would be worth $0. If that was the case, how the appraiser evaluate CRE such as this?

Michael Wagner · Answer

Yes, I've seen 8-9 caps in the small markets that I operate in right now. I've heard that banks are tightening valuations by half a point compared to a month ago because if everything going on. To your question though, any bank with experience lending on storage will have established practices for determining value. I have been known to "help" less experienced appraisers understand the nuances of valuation in our industry when providing them with the financials and property your;). And don't worry that the owners don't know what a cap rate is. They don't need to;)

How are storage units appraised in small towns?

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