Many self-storage owners tell us their facility "runs fine." Occupancy looks decent, rent checks clear, and nobody calls with emergencies.
Then we run the numbers for a sale, and the story changes.
Poor management rarely shows up as one line item. It shows up as a slow leak: a little revenue here, a deferred repair there, a review nobody answered. By sale time, that leak has taken real money off the value.
Physical occupancy is the share of units occupied. Economic occupancy is rent actually collected as a share of the rent the units could earn. The gap comes from delinquent tenants, discounts, and units held by tenants who are not paying.
Healthy occupancy runs from the mid-80s to the low-90s percent. As an example, a facility showing 90% physical occupancy but 80% economic occupancy is below healthy on the number buyers price. Buyers price the income collected, not the units filled.
The second blind spot is maintenance pushed down the road because nothing has broken yet.
Take a 33,000 sf facility of about 300 units with $156,816 in yearly NOI (net operating income, income after operating expenses). A $75,000 roof is almost half a year of NOI. Add a $20,000 gate system failure and the two repairs equal about 60% of a year of NOI ($95,000). These are example figures.
Buyers inspect gates, HVAC, roofing, paving and climate-control systems, and price every deficiency into the offer. A buyer who finds one deferred repair may assume others are being put off, and offer less.
Reputation takes a hit too. A slow response to a failing HVAC system in a climate-controlled facility can mean damaged belongings, refunds and bad reviews.
If you run the facility yourself and pay no one a market management fee, your books overstate profit. Buyers and lenders add a market management fee, market payroll and proper insurance before they trust your NOI. We model a management fee of about 6% of revenue.
Example: the same facility takes in $285,120 a year. A 6% fee is $17,107. If your books leave it out, NOI shows $173,923. A buyer deducts the fee and gets $156,816. At a 7.0% cap rate (NOI divided by price), the first NOI implies a price near $2.48 million and the second near $2.24 million. The missing fee costs about $244,000 of price.
If you plan to hold:
If you may sell in the next year or two, start now. We would rather help you clean up your books and close out deferred repairs a year or more before a listing than watch a buyer's inspection do it at a discount.
If you want a clear read on how your facility's management will look to a buyer, our team at Gorden Group is happy to take a look.
Reach out to us or request a property valuation.
