A special-use valuation is used when appraising the property of a business with a specific use that differs from its usual market value. Finding a mini-storage valuation, like most special-use properties, can be quite complex. It requires focused market research to determine historic, current, and future occupancy rates, rental rates and expenses. The majority of mini-storages have high occupancy rates and can be one of the most profitable properties to own.
It’s difficult for appraisers to separate the business entity, or management of the property, from the income produced from the storage units. This is because the facility usually has live-in managers who provide 24-hour services. Because of this, an appraisal of the going concern is often used. The value of a going concern depends on the income it is able to generate. The income to the business can be separated by deducting the income necessary to produce a market rate of return to the real estate. The income to the business can then be capitalized at an appropriate rate to produce the business' value. This amount coupled with the value of the real estate is the value of the going concern. (http://www.erassoc.com/GOING.htm)
Most mini-storage properties are valued based on comparable sales, income, and expenses. Mini-storages don’t always have standard sizes but most facilities offer similar sized products. Their sales are usually compared on a price per unit or price per square foot basis, and adjustments are made to comparable sales if the units are considerably different. Adjustments are also made to the special amenities of each property, such as fencing, security systems, door alarms, and climate control of individual units, as well as the individual properties location, age, design, access, and quality of construction.
While finding the value of a specific-use property like a mini-storage, the necessary variables to calculate are gross operating income, operating expense, net operating income, and cap rate. The steps taken to calculate each variable are as follows:
1. Determine the Gross Operating Income of the property by subtracting the vacancy rate from the gross potential income. (GPI-VR)
2. Determine the Operating Expenses of the property, which include management, legal and accounting, insurance, janitorial, maintenance, supplies, taxes, utilities, etc.
3. Subtract the operating expense from the gross operating income to find the Net Operating Income.
4. Divide the net operating income by the Cap Rate. The cap rate is the rate of return that the property would return to an owner at a specific value. It has a direct relationship to the value of a business in that the desired cap rate represents the return made based on the price of the property.
Example: Gross operating income=100,000, Operating expenses=20,000,
Desired Cap Rate =10%
· (GOI) 100,000- (OE) 20,000= 80,000 (Net Operating Income)
· (NOI) 80,000/ (CR) .1= 800,000 (Value of Property)