How to Value and Sell a Self Storage Business

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In the thriving self-storage industry, accurately valuing your facility and property is key to a profitable sale. Drawing insights from industry leaders like Universal Storage Group, SkyView Advisors, and Viking Mergers & Acquisitions, this guide explores essential steps, from financial audits and income capitalization methods to marketing strategies and deal negotiation.

Unlock maximum value for your business and navigate the sale process with confidence.

Key Takeaways:

• Organize financial records and conduct operational audits to prepare your self-storage business for accurate valuation using methods like income capitalization and market comparisons.
• Focus on location, facility condition, and occupancy rates as primary factors that significantly influence the overall value of your self storage facility.
• Market your business effectively, qualify serious buyers, negotiate terms, and structure the deal to ensure a smooth closing process for maximum returns.

Understanding the Self Storage Industry

The self-storage industry in the United States is worth over $40 billion a year, per the Self Storage Association.

It offers steady investment returns that resist recessions. Average occupancy rates top 90%, even in tough economic times.

The Self Storage Association's 2023 report shows over 50,000 facilities across the U.S.

The sector grows 10% each year. Urbanization and e-commerce drive this boom.

Low operating costs stand out as a big plus.

They usually make up 35-40% of revenue. This setup leads to strong profit margins.

Investors can branch into niche areas like climate-controlled units.

These units charge 20-30% higher rents.

Take U-Haul's 2022 buy of 200 facilities.

Trends from shows like Storage Wars sparked it. Company reports show a 25% jump in EBITDA, which measures earnings before interest, taxes, depreciation, and amortization.

Picture a $5 million facility with an 8% cap rate.

A cap rate compares net income to property value. It generates $400,000 in yearly net operating income, or NOI, which is revenue minus expenses. This brings steady returns that beat inflation.

Preparing Your Business for Valuation

Get your self-storage facility ready for valuation by sorting financial records and operations data.

This boosts net operating income, or NOI, which is income after expenses. It makes your place more attractive to buyers like Universal Storage Group- our guide on selecting the best business brokers can help you identify the ideal partner to facilitate the sale.

Financial Record Organization

Start organizing finances with a full rent roll.

A rent roll lists all rentals.

Aim for 95% physical occupancy and $12 per square foot rates. That's above the market average of $10.

Follow these steps to build a solid financial picture. It takes about one week.

1. Collect three years' worth of profit and loss statements utilizing QuickBooks, exporting the data to Excel (estimated time: 2-4 hours); compute net operating income (NOI) by deducting operating expenses, such as property taxes equivalent to 1.5% of the assessed value and payroll constituting 20% of revenue from the effective gross income.
2. Conduct an audit of the rent roll to identify discrepancies between economic and physical occupancy, including instances where concessions may reduce income by 5%.
3. Adjust EBITDA for normalization by reinstating owner-specific benefits (e.g., $50,000 annually). Mitigate potential errors, such as incomplete utility documentation, which could result in an understatement of NOI by up to 10%. Check IRS Publication 527 for tips on real estate depreciation, which spreads out the cost of your property over time.

Operational Audits

Performing operational audits can reveal untapped value, such as enhancing economic occupancy from 85% to 92% through better tenant retention strategies.

Run a full audit with these steps:

1. Evaluate occupancy metrics using SiteLink software (a free trial is available, requiring approximately 4 hours for setup). It separates physical occupancy, or units actually rented, from economic occupancy, or revenue-generating units. Spot issues like short-term vacancies this way.
2. Examine expenses, including repairs and maintenance (about $2 per square foot yearly) and marketing and advertising efforts (allocate 5% of the budget via digital marketing such as Google Ads for targeted campaigns).
3. Assess service diversification opportunities, such as implementing military discounts or storage auctions, which MiniCo's 2022 audit study indicates can increase revenue by 8%.

The process typically requires 5 to 7 days to complete.

It is essential to avoid common oversights, such as underestimating technology costs (e.g., $10,000 for gate access systems). For optimal results, benchmark performance against industry averages from the same study.

Key Valuation Methods

The valuation of self-storage properties relies on three primary methodologies, with the income approach frequently resulting in the highest sale price, calculated based on projected net operating income (NOI) and capitalization rates of 7-9%.

Income Capitalization Approach

The income capitalization approach determines the value of a facility at $1.25 million by dividing the stabilized net operating income (NOI) of $100,000 by a capitalization rate of 8%, while incorporating a 1.25 times debt coverage ratio.

To implement this valuation method in the real estate market, first calculate the stabilized NOI using the formula: NOI = Effective Gross Income (EGI) - Operating Expenses.

For example, a 200-unit facility with rental units charging $500 per month in rent generates an EGI of $1.2 million. Subtracting operating expenses of $200,000 (such as maintenance and taxes) yields an NOI of $1 million.

In Microsoft Excel, the property value can be computed using the formula =B2/B3, where B2 represents the NOI and B3 the capitalization rate (e.g., 0.08). The 1.25 times debt coverage ratio ensures lender viability by confirming that the NOI adequately covers debt service obligations.

According to the Appraisal Institute's 2021 Uniform Standards of Professional Appraisal Practice, valuations should incorporate adjustments for a 5-10% vacancy rate to mitigate the risk of overvaluation.

Failure to account for this factor is a common error; for instance, it resulted in a 15% reduction to the assessed value of a Manhattan property, limiting the return to only 10% at 95% occupancy.

Market Comparison Approach

Based on a comparison of recent sales handled by a self-storage broker, a 50,000 square foot facility was sold for $8 million at a 7.5% cap rate. Adjusting for the superior location of your property yields an estimated value of $9.2 million.

To further refine this valuation, please review the following comparable properties from LoopNet listings for self-storage facilities:

In areas with high market saturation, apply a 5% downward adjustment to account for oversupply.

To project future value, incorporate capitalization rate compression (a reduction of 0.5% in growth markets), resulting in an estimated value exceeding $9.5 million.

Asset-Based Valuation

The asset-based valuation method calculates the replacement cost of buildings at $4 million and land at $2 million, less $500,000 in depreciation and reserves, resulting in a net value of $5.5 million.

1. To refine this cost approach, begin by appraising the land value and land costs using comparable sales data from reliable sources such as USDA reports, where commercial plots typically range from $40,000 per acre.
2. Determine the building replacement cost at $80 per square foot utilizing the RSMeans cost estimator, and apply straight-line depreciation over 39 years in accordance with IRS guidelines.
3. In this instance, the $500,000 depreciation accounts for 10 years of wear on a $5 million asset.
4. For replacement reserves, employ an Excel formula such as =Annual CapEx * 10 (for example, $20,000 per year multiplied by 10 equals $200,000) to allocate funds for future repairs.
5. It is imperative to verify compliance with local zoning laws and regulations, including obtaining government certificates, to prevent invalidation of the valuation certificate.

A frequent oversight in this process is neglecting post-valuation tax reassessments, which may increase costs by up to 20%, as indicated by IFAS studies on self-storage depreciation.

This method offers a strong case for investors.

Factors Influencing Value

Great location and top facility condition can boost your self-storage facility's value by up to 25%. This helps you get the best sale price, just like in deals by Universal Storage Group.

Boost Location and Facility Condition

Add landscaping and clear signs to improve curb appeal. This makes your property more appealing and sets up a solid sale plan.

An optimal location near major highways can increase a property's value by up to 30%, whereas poor curb appeal resulting from deferred maintenance and repairs may reduce the sale price by 15%.

Boost your self-storage facility value by fixing key challenges. Here are common problems and simple fixes:

1. Market Saturation: Tough spots in the US have lots of competition, like 10 facilities in 5 miles with U-Haul. Stand out by focusing on a niche like vehicle storage. Spend $5,000 on a feasibility study to spot gaps and plan smart marketing.
2. Facility Condition: Cracked asphalt hurts first impressions. Repave for $50,000 to get a 12% return - it looks better and draws more renters.
3. Zoning Issues: Wrong zoning can lead to fines and headaches. Get a legal check-up for $10,000 or more - it takes 2-3 months but keeps your value high, especially in prime spots like Manhattan.

Marketing Your Business for Sale

Strategic marketing through digital platforms and specialized brokers can generate more than 50 qualified leads, as evidenced by SkyView Advisors' initiatives, which have facilitated $20 million in self-storage transactions.

To achieve comparable outcomes, adhere to the following structured steps:

1. Retain a self-storage broker, such as Dale C. Eisenman, who typically assesses a commission of 2-4% and can initiate operations within approximately one month. Capitalize on their established network to conduct targeted outreach.
2. Formulate a digital marketing strategy, allocating a $5,000 budget to Google Ads campaigns that target keywords including 'self-storage investment,' while investing in search engine optimization (SEO) for terms such as 'facility sale' to enhance organic traffic generation.
3. Make a teaser package with net operating income (NOI - profit after expenses) forecasts, local rates, and a hidden tenant list. It sparks buyer excitement without sharing secrets.

Expect this to take 4 to 6 weeks. Skip pitfalls like setting prices without sales comps - they can add six months to the wait.

Speed things up with auctions like those on Storage Wars. Self Storage Association data shows they ramp up buyer interest by 40%.

Finding and Qualifying Buyers

Key buyers are Real Estate Investment Trusts (REITs - large real estate investors) and solo investors using Small Business Administration (SBA) loans. They need $1 million in cash ready for a $5 million facility buy.

To effectively engage these buyers, implement the following structured approach:

1. Generate leads through specialized brokers and networks, such as Viking Mergers & Acquisitions, which provides access to more than 200 pre-qualified contacts within the self-storage investment sector.
2. Conduct thorough qualification of prospects utilizing financial assessment tools, including debt coverage ratio calculations (with a target ratio exceeding 1.25) and authenticated net worth documentation, to confirm eligibility for SBA 7(a) loans.
3. Present customized proposals to targeted market segments, such as facilities oriented toward military personnel offering 15% discounts on storage units, while emphasizing potential return on investment (ROI).

The Small Business Administration (SBA), a U.S. government agency, reports a 90% approval rate for 7(a) loans in self-storage deals. This strong rate helps deals succeed more often.

Negotiation and Deal Structuring

Smart negotiation can land you a sale price 10% higher than the asking amount.

Build in seller financing to hit 20% debt service coverage. Debt service coverage shows if rental income covers loan payments easily.

Keep the capitalization rate at 9%. It's a measure of the property's income return.

Follow these key steps to make it happen:

1. Add earn-outs based on how full the storage stays after sale. Hit steady tenant levels for a 5% bonus on EBITDA, which measures core profits.
2. Boost tax savings with 1031 exchanges. These let you delay capital gains taxes when you reinvest sale money into another property.
3. Plan your exit with Letter of Intent (LOI) templates. These speed up reviews to just 48 hours.

Grab Argus software for spot-on cash flow forecasts in real estate. It costs $10,000 per year.

Plan for 4 to 8 weeks to set it up.

Picture a $6 million deal with 15% down. Buyers score an 18% return on their investment.

Harvard Business Review calls M&A tactics vital for maxing out value in property deals.

Closing the Sale Process

Closing means deep checks on official papers and fair splits of costs like taxes. Use SBA loans for a smooth switch in 60 days.

Nail this by following these steps:

1. Do full due diligence checks. Include a title search ($1,500 average) and Phase I environmental review ($3,000, takes about 30 days) to spot liens or pollution issues.
2. Prorate closing costs, such as utilities, payroll, and property taxes, through the date of possession, utilizing established formulas like daily tax rates.
3. Finalize the transaction with a reputable escrow agent, such as First American Title (1% fee), to ensure secure fund transfer.

The whole process takes 45 to 90 days.

• Avoid this pitfall: Skipping the handover of replacement reserves. It could cost up to $100,000 in risks.
• Real win: Universal Storage Group handed over a nearly full facility (98% occupied). Smart cost splitting saved $50,000 in fights.