Self Storage- Appraisal Review

In the process of filing for an SBA loan through our local bank. We have been using a Construction Loan with Interest only payment during the construction and as we have started the rent up phase. As part of the loan process we had an appraisal done on the project, as we move to permanent financing.

The appraisal came back at $3.4mm “as is”.

With a Stabilized (90% occupancy) valuation at $4.43mm.

The total project package is $3.1mm, thus we are covered for the loan, but I will run through my review of the Appraisal.

“The Appraiser is Always Right”. Could go back and ask for adjustments or even get my prior Appraiser, but this Appraisal fits the numbers we need. Appraisal cost $3,300.

Overview of an appraisal methodology for Commercial:

A. Cost Approach

- The land is evaluated separately from the structure. They used our purchase price on the Undeveloped property as a “Strong” basis for the valuation and not the Developed value. They compared to other properties in the area that are for sale or have sold. $1.11 per square foot was their assessment of our property, out of a comparable range of $.49 to $6.11 for “Recent Sales”. Along with properties for sale ranging from $1.24 to $10.08. They failed to recognize us taking a hay field with trees on the side. Clearing, Grading, adding City water and Sewer, then building a Commercial building on the property. The Value of the property should have gone from $50,000/acre, up to $125,000/acre. We have an identical piece of property on the other side of town, where we increased the appraised value from $25,000 to $125,000 by clearing and putting a Business on the property for Actual use. Appraised $225,000; I would say $500,000. Just a different Appraiser and approach.

-Building cost. They did comparables, but mainly relied on the “Marshall Valuation Services” for building cost estimates. Coming in at $2,204,000 for the buildings 60,100 SF, not including the land.

The building cost is about $700,000 off what it actually cost. So, I called “Marshall Valuation Services” to understand how their rates are developed. Their information is updated Monthly, and goes back to 1985. I did not dive into the detail of how they adjusted for inflation, do they adjust for footing types 18 inch versus 48 inch for us, road construction (concrete for us). They don’t recognize the fact that Self Storage buildings along with Concrete have risen over 40% in the last 2 years. It is partially factored in, since they “Add” new monthly data.

-They came up with $2,620,000 total estimate for the land $225,000; Building $2,204,000 and other adders for landscape/fence/Entrepreneur efforts.

B. Sales comparison Approach

They pulled together all of the Self Storage sales in the area from 2016 to 2021. The pool showed prices ranging from $31 to $116/sf. They did not note whether drive-up or Climate controlled. They placed us at $73/sf due to being new and our rent up thus far, and demand in the area. This does not factor in “Value Add” potential such as any extra land, potential increase in rental rates, operating cost reductions, etc.

The $116/sf sale stands about $20/sf above the high end. I actually looked at that property and valued it about $2mm below what it sold for. Was a nationwide bidding war on that property. Great location, extra land for expansion, rate hikes and occupancy hikes easily achievable. Thus a $90 figure for a high end, is a better comparison.

What does $90 versus $73 appraised represent on a 60,100 location= $1,021,700 less valuation. Keep in mind our location is new and theirs aren’t.

$73/sf on 60,100= $4,387,300 Sales approach valuation.

C. Revenue approach

They developed a P/L along with an analysis of Cap Rates for sales in the area. They used a Cap rate of 6% for our location. A value of $3,500,000 was determined based on their P/L analysis and the Cap rate they determined. Their final valuation was $4,200,000 but they assume a 3 year rent up phase to Stabilization of 90% occupancy, thus they did a NPV back to $3,500,000.

The largest difference is in the way we handle operations. We have 8 locations in 5 Cities/Towns handled through my phone, for self service. They applied Management and Admin costs of $70,000 per year on this location which has 60,100 SF and/or 335 units. Obviously, you have to apply some costs no matter how you manage, and for valuation purposes, our management approach is not the norm, so you would apply higher cost than what we do.

But for discussion, what does $10,000 cost increment mean from a valuation standpoint, using a Cap Rate of 6%= $166,000 swing for a $10,000 incremental change in income from either a Cost reduction or revenue increase approach.

So, if someone used our management approach and the $70,000 was reduced by $50,000 per year, this would be a valuation increase of $50,000/6%= $833,000. Believe me, if I was working all day long on storage, I wouldn’t be doing posts.

D. Highest and Best Use review

They evaluate based on land only, demolition, curing issues, or current usage. They determine the property is best valued “As IS”, which would be normal for a new construction. Along with this they look at the “Exposure Time” if this property would be for sale. They did not note many comparables in the immediate area, but came up with a time frame of 9 months for a sale. This is a local appraisal firm, that does not do many Self Storage locations. “Any” storage location should be able to come under “Terms” within 1 month of being listed in this market, nationwide. The purpose of their “Exposure Time” figure is to give them Appraisal valuation some credence in terms of a sale of the property.

Summary:

Since the appraisal supports our loan request, we will not go back and try to increase the appraisal or get a new Appraiser. Again, the Appraiser is always Right.

With that said, keep in mind they have a Standard approach they take. Which does not necessarily reflect the actual Cost or Market value of your property.

You can use the above discussion points from several standpoints:

1. If you can get your appraisal higher than your loan, you can use that appraised “Equity” in future loans as collateral with the same bank.

2. If you're ever trying to get a HIGH appraisal for your land you can bring these above points up “BEFORE” with your appraiser. No one likes to be told they were wrong, after the fact. Show them what you think your land should be valued and why. Show them how much your building cost and why. They will still use their standard methodology, but you can help sway them in their assessments.

If you read the whole appraisal there are several areas where they have to make judgment calls. Help them ahead of time. They can’t see Value Add. For example this location is in the High Income area for the city. There is only one other small storage location in the area. The terrain is very hilly. Land is almost 100% zoned Residential. There is twice the population/market we need to fill this new location.

3. So you want to Sale your property. Recommend you spend the money to get an appraisal and don't show it to anyone. You don't mind spending $3,300 to help you get an additional $500,000 value??? I don't like CAP rates, but Self storage is one of the Real Estate products that naturally fits (intuitively) using CAP rates. Your comparing metal buildings to metal buildings, right?

If people want to use CAP rates, then use that to your advantage.

A. When you look at a Self Storage offering, who does the CAP rate calc? The Owner? The Broker? It's not you the Buyer. Who do you trust? I/they want your money. What is the basis for that CAP rate?

B. Income. Who calculates the income to be used against the CAP rate to determine sales Price? Not the buyer. Usually on a Sale you are either shown historical or projected information. If you know you're going to sale in the next year, you can swing either or both your historical/projected information fairly easily. See one of my prior posts. Remember a CAP rate of 6% with a $10,000 cost or revenue swing= $166,000 valuation swing.

“Start small and Make Your Big Mistakes Early.”