Understanding Self-Storage Operating Expenses
Author: Jeffrey Shouse Category: Economy, PGP Valuation Inc, Self-Storage
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Accurate valuation is enhanced by solid operating history. However, it is common to rely upon expense comparable data when valuing properties through direct capitalization. Understanding how operating expenses vary from region-to-region is key, especially for specialized lenders and investors looking to expand into other national markets. The table to the right is a sampling of over 200 expense comparables located throughout the country (evenly distributed). In addition, we have added information from the most recent Self Storage Almanac. Possible considerations for comparing operating expenses are discussed below.
Real Estate Taxes: Every state has its own method for calculating property taxes. There are several states (like Michigan and California) that reassess facilities based on sales price. Therefore, since the definition of “Market Value” assumes a sale, appraisers are forced to use an amount calculating the value of the property and the tax rate. Each local jurisdiction must be reviewed and understood. This can oftentimes cause headaches for refinances and construction loans.
Insurance: Rates are fairly similar across the nation. Special consideration should be given to flood, earthquake, hurricane, or other natural disaster areas. Typical range for this category is $0.15 to $0.25/SF. It is typical for lower rates to be achieved through blanket policies. It will be interesting to see if or how much policies rise over the next couple years due to a variety of factors.
Utilities: Both location and climate play a role in this category. Densely populated areas typically see higher energy costs. The number of climate controlled units at a facility should also be considered. Typical range for this category is $0.15 to $0.40/SF.
Repairs and Maintenance: This category includes cleaning out the units, replacing doors, landscaping and any maintenance associated with the facility. Areas that require a snow removal expense and/or elevator servicing are typically higher. Long term expenditures are also affected by climate; however, these expenses are typically covered in the reserves category. Typical range for this category is $0.15 to $0.30/SF. Age and physical characteristics play a part in budgeting for this category.
Off-Site Management: This is typically done on a percentage basis (EGI). Therefore, areas with higher rents result in higher management costs. Typical costs range from 4% to 6% of Effective Gross Income. This expense is not to be confused with General/Administrative expenses.
On-Site Management: This category is greatly impacted by location and average living expenses. Unless zoning restricts, it is common for resident managers to live on-site. Expenses are often higher for facilities not offering living accommodations for managers. Typical range for this category is $0.75 to $1.25/SF.
Advertisement: The amount of competing facilities and the property’s access and exposure are primary considerations for this category. Typical range for this category is $0.20 to $.40/SF.
General/Administrative: Fairly comparable from region-to-region. This expense includes accounting, legal fees, other professional fees, and general administrative costs. Typical range for this category is $0.25 to $.40/SF.
Reserves: This category takes into consideration capital improvements over a holding period. For self-storage facilities, it would typically include replacing the roofs, resurfacing the streets, and replacing the fencing and storage doors. Typical range for this category is $0.10 to $.20/SF.