March 17, 2021
I thought I would take a minute in this blog to discuss a few items regarding a pro forma for a popular commercial real estate asset, the self-storage facility. When we find a facility we want to investigate, sometimes we do not have hard expense numbers derived from actual quotes. This is especially true with ground-up developments. So, how can you construct a pro forma for a facility without hard numbers for expense items such as insurance, taxes, repairs and maintenance and employees or management fees? Let us go through each item below:
Insurance
When buy an existing facility that may be under insured or developing a new property, figuring out insurance expense is crucial to making a decision on the investment opportunity. Like most commercial real estate assets, insurance premiums can vary for a number of factors such as coverage, location and age of the asset, prior claims, unit mix etc. However, industry standards dictate a good rule of thumb for estimating the expense line item is to use $.20 per Gross Square Foot of the self-storage facility. Thus, a 50,000 square foot facility might have $10,000.00 in annual property insurance expense.
Taxes
Actual property tax expense can be easy to estimate as property tax statements can be easily located that show actual property tax expense for the commercial asset. However, if the purchase price is higher than the current assessed value used by the CAD to calculate the property tax liability, then you will want to assume the assessed value might be adjusted to reflect the sale. Thus, the property tax liability will increase. An astute buyer will account for the possible increase in their pro forma.
Repairs and Maintenance
Sometimes facility owners do not maintain the facility as well as they should leaving the next owner with a lot of deferred maintenance. Maintenance expense varies depending on a number of factors such as the unit mix, age of the storage facility, weather events, size etc. When creating a pro forma for an existing facility or development a good rule of thumb is to use once again $.20 per Gross Square Foot (GSF). This number will give you a good idea of what you should be spending in repairs on an annual basis. Of course, this can be adjusted as you move along in your due diligence. It is not a hard number. Many times facilities that are newer with less climate control units may require only $.10 per GSF. It is recommended to check this calculation against the actuals and verify with the owner and upon visual inspection if there is any deferred maintenance.
Employee or Management Fee Expense
This can be the largest expense line item an owner will see on their P&L, competing only with property taxes. If you are planning a new development or the facility you are buying was owner managed, you will want to calculate this expense into your pro forma. A number you can use for a part time manager is $13.00 per hour. Full time managers can be $16.00 per hour. Of course, this can vary up or down depending on the location of the storage facility. So, do your research by shopping job websites.
If you are considering hiring a third-party management company, a typical fee charged is 6% of the Gross Revenue or Effective Gross Income (EGI – Used in Pro Forma). This number can be negotiated down if the facility is large or if there are multiple properties. Some management companies charge a flat fee instead of a percentage. This is more likely if the facility is smaller. You might see a flat fee for a 15,000 SF facility in the amount of $1,400.00 per month.
Commercial Real Estate Investment is fun! Self-Storage Investment is even better! Call or email us with any questions or comments. We hope you found this blog helpful.
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