Understanding & Calculating the Value of Storage

By: Melissa Shandor, The Storage Acquisition Group, Strategic Advisor California and Pacific Northwest

The objective of valuation is to determine worth based on unbiased metrics which can be calculated to assign value. Yet with varying approaches, parties cannot always agree.  Owners and investors may assign different numbers, even when researching the same facility.  Understanding the available methodologies and capitalizing on value-add opportunities should be the goal of both owners and investors when determining value. Examination of acceptable forms of valuation allows for an impartial calculation of worth.

Sales Comparisons:

Although familiar to most, when valuing storage, the sales comparison approach will likely be inaccurate.  Sales comps should not be used independently because there is often a lack of comparable sales within an adequate timeframe and/or radius of the subject property.  If comparable sales do exist, the purchase price may be undisclosed; therefore, the average price per square foot could appear considerably lower than the true amount.  Sales comps are able to report the change of ownership, presence of private and/or REIT owners, and, when reported accurately, price per square foot.  Although they do not provide the entire picture, they should be part of the valuation process.

Cap Rates:

Everyone loves to talk cap rates, why?  Because cap rates are a simple way for owners and investors to express value.  Cap rates are market specific and mathematically generate a number linking net operating income to value.  Because they are dependent on reviewing financials, owners should be wary of anyone quoting a specific cap rate if they have not reviewed your P & L.  Evaluators assume reoccurring revenue will be accounted for and expenses accurately reflect current market rates.  Occasionally, financial reports can uncover a discrepancy in expense reporting.  For example, what happens when the owner is performing all of their own maintenance? Or when a manager is being paid double what the other managers in the area are being paid? Both scenarios change the expense report and therefore change the cap rate.  Owners should know their income-to-expense ratio to remain competitive in their market.  Reviewing operating expenses and making necessary adjustments will help maintain the value of the property.  Investors will be critically analyzing expense ratios and applying their own metrics when assessing value.  They will take into account the numbers you provide and then adjust accordingly for any values that do not match up with the market.

Rates & Occupancy:

Rent rates deserve considerable attention for true valuation.  Due to their intimate relationship with cap rates, income, and overall value, examination of rates is a vital part of calculating worth.  Although many owners are not keen to raise rents, it is a necessary step to increase value.  When owners are not increasing rates, the value of their property is negatively impacted.  Rental rates should increase accordingly with your market. Whether your plan is to sell or hold, study the street rates in your market and catch up to them if you are not currently there.

Owners should understand that 100% physical occupancy is not the goal.  In fact, this is often seen as negative by investors when assigning value. Recognizing the difference between physical and economic occupancy is essential.  Value is seen in economic occupancy because it measures total possible income versus the number of filled units.  Hovering around 90% economic occupancy should be the goal of owners hoping to achieve maximum value.  If you are currently at 100% physical occupancy, consider raising rents, this will help the value of the property.

Additionally, capitalizing on square footage and the ideal unit mix for your market is essential for return on investment.  If no one in your market has any 5X5 units available consider if you are able to provide this unit size.  Minor investments in unit mix can create opportunities for increase in value.

Macro & Micro Economy:

We have little control over macroeconomic factors, but grasping the impact of population growth, interest rates, and inflation can help to provide scale in determining value.  Macroeconomics strongly influences the landscape of the commercial real estate market.  As we are seeing in our current economy, rising interest rates are directly impacting the amount buyers can pay for properties.  Investors who require financing are unable to make the same offer they could a year ago.  For owners, it feels like they have somehow lost value, but what has actually changed is the buyer’s purchasing power.  Investors must account for the increased cost of acquisition, and the difference will be reflected in their offer.  To the owner, it may appear as a lower value, but the reality is investors who rely on financing have to cover the cost to borrow funds.

Microeconomic factors such as traffic counts, access to the market, surrounding retail and housing, etc. can greatly alter the valuation of two seemingly similar properties.  Visibility and ease of access directly impact customer preference when choosing a facility.  If your visibility is hindered, invest in a strong digital presence.  As we become an even more digital society, the allocation of funds for digital marketing is essential.  Owners who do not currently have a line item on their expense report for digital marketing should know that investors will add it to their calculations when assigning value.

Owners need to be knowledgeable of approved development projects by local planning boards.  Anytime retail or housing is approved and/or under construction near your facility, it will help value.  Know and understand the impact of local zoning laws and tax changes as they too can alter the value of a property.  An example can be seen in markets with strict zoning regulations for new storage.  This creates value for existing storage.  Owners should ask “what barriers to entry exist in my market?” and “how do they affect the value of my facility?”.

Determining Value:

When calculating value, the best approach for both owners and investors is to do the research.

Owners should review their financials and compare them with their competitors.  Using a critical eye to assign objective, emotion-free values, and making appropriate adjustments are essential.  If owners do not have access to competitor information, they should reach out to professionals willing to share free data.

Investors often are comfortable with performing research but should consider using multiple sources when assigning value.  Access to only one industry platform limits the ability of an investor to assign value.

Values consistently change; therefore, owners and investors should continuously familiarize themselves with changes at the facility level, within the surrounding market, and throughout our country as a whole.

Melissa Shandor serves as the Strategic Advisor in California & the Pacific Northwest for The Storage Acquisition Group.  She utilizes her background and expertise in data analytics to acquire self-storage assets and maximize return on investment for sellers.  By supporting owners, investors, and developers in navigating market data, she has developed professional

Understanding the Real Estate Transaction

By: Monty Spencer, CEO

Although negotiation times vary, there are principal steps that occur as part of the real estate transaction that parties involved can expect to see.

To begin, the buyer and seller must agree upon a realistic, market-supported starting point for price negotiations.  Both parties should be amenable to a confidentiality agreement before exchanging proprietary information.  The buyer must be prepared to provide the seller with a list of reports/information needed in order to perform a thorough evaluation of value. Both buyer and seller should be clear about any extenuating circumstances that may require an adjusted transaction timeline such as tax considerations, third-party inspector availability, financing issues.  The buyer should provide the seller with an LOI or a PSA. Once provided, the seller should consult with an attorney and counter with any desired changes in order to begin a formal negotiation. Once terms are agreed upon, both parties sign, and buyer deposits earnest money as outlined in the PSA. At this time, the process would move to the due diligence period.

Sellers should expect a due diligence period of 30-60 days followed by a closing period of 30 days.  During the due diligence period, sellers should expect the following: 

Seller’s number one priority should be to continue running their business as efficiently as possible throughout the sales process.  Sellers should gather and organize 12 months of financials, operational reports, bank statements, rent rolls, surveys, environmental reports, approved building/zoning plans, list of major improvements.

Additionally, the seller will need to provide access to the buyer and their third-party vendors to complete their due diligence. In most cases, terms regarding access, notice, and confidentiality will have already been addressed in PSA negotiations.  The seller should begin focusing on a transition plan for staff, utilities, vendor accounts, equipment, and items that will not convey with the sale.

Buyers have their own set of responsibilities when transitioning into the due diligence period.  Buyers are expected to do the following: 

Regarding the buyer’s financing (if any), the buyer should have all the required debt and equity lined up and committed.  Further, the buyer should perform a thorough review of the facility’s financial and operating reports or have someone lined up who can perform such an evaluation within the constraints of the due diligence period.

The buyer should have third-party vendors vetted and booked to perform any required consultations. Not only must the visits be performed within the due diligence period, but the buyer must allow themselves time to review any returned reports.  The buyer should have a clear understanding of the criteria they hope to find after performing their financial and operational reviews.

The goal is to have a simple and seamless sales process that avoids potential problems and delays.  To avoid problems, parties should consider the following: 

Both the buyer and the seller should have a contingency plan and know where they are willing to compromise should unknown problems arise.  It is essential for both parties to do their homework and understand market conditions. Taking the time to research the market including sales comparables, rental summaries, and development pipelines will pay off when it comes time to negotiate a price.

As for transaction times, they can range from 60 days to 120 days (without complications).  To avoid frustration, both parties should begin by setting clear guidelines and taking the time to make sure essential items have been addressed.

Transparency by both parties is key to a successful transaction.  Both buyer and seller have a vested interest in completing the transaction. If either side experiences an unforeseen challenge, it is highly likely both sides will want to come together to find a solution and salvage the transaction.  Having realistic expectations and goals when presented with delays in the process will allow both parties to work together more efficiently.

As seen in other industries, commercial real estate has noted trends that impact change in the market and transactions 

Recently, Covid 19 has created challenges for owners that slowed transactions.  Moratoriums on raising rents and evictions altered the outlook of many facilities and affected the ability to provide accurate reporting to initiate a sale.  2021 has proved to reverse some of this and shown the resiliency of self storage.

The exuberance of investors who focus on this market sector has increased over recent years.  The self storage industry has proved to be an effective hedge on investment dollars for companies and individuals looking for a recession-resistant way to invest their capital.

Proposed tax changes may have a significant impact on the urgency to enter into a real estate transaction.  With the uncertainty surrounding capital gains, set up in basis, and 1031 exchange options, sellers may choose to expedite future liquidation plans.

The best advice that could be given to buyers and sellers is:

• Set realistic expectations
• Be willing to do the homework
• Prepare for and be patient through unforeseen challenges
• Bring integrity and transparency to your transaction

Cowles M. “Monty” Spencer, Jr. serves as The Storage Acquisition Group’s President & CEO. Monty is an accomplished real estate executive with over 20 years of commercial real estate experience. He has won numerous CoStar® Power Broker of the Year and Commercial Real Estate Council Awards, as well as winning the Deal of the Year Award & Broker of the Year Awards for three consecutive years. Distinguished throughout the industry for developing dozens of high-profile retail projects, Monty has brought his unique blend of expertise and ambition to spearheading The Storage Acquisition Group. He received his BA from the University of Mississippi in Business Administration & Marketing.

The State of Self Storage in Canada

By: Lloyd McDonald, Director of Canadian Acquisitions 

Self-storage in Canada has become an exciting and sought-after market class in the last 24 months. 

The Canadian media started paying attention to the self-storage asset class with the announcement that Bill Gates, the Co-Founder of Microsoft has invested some of his wealth into self-storage.  However, the truth of the matter is that investors and institutions have been migrating their investment dollars into “hard assets” with cash flow for some time.  A multitude of factors has influenced this to occur.

Interest Rates:  Low interest rates have resulted in historically low bond yields for investors, resulting in the search for cash flow from other/alternative investment classes.

COVID:  When compared to other real estate asset classes, the self-storage industry has performed exceptionally well.  Multi-family capitalization rates have become compressed due to the consolidation of assets from large public and private REIT’s in Canada.  Additionally, multi-family landlords have been greatly limited in their ability to increase rates or evict tenants who fall behind on their payments.  This has made it more difficult for the “mom & pop” operator to manage their assets in an efficient manner.  Across the board, commercial retail real estate assets have experienced volatility due to businesses’ limited capacity to provide services in a COVID environment.  Another factor is the trend of staycations has resulted in the purchase of more recreational items such as camping equipment, bikes, motor homes, boats, and sporting equipment.  This has resulted in the need for storage increasing.

Resiliency of Self Storage:  The self-storage space has seen an uptick in occupied units in most markets and I believe this is partially due to the use of technology that has allowed for self-storage Owners to manage their properties with limited personal interaction.  The ability for a client to rent a unit online and set up auto payment options has resulted in high collection numbers.  COVID has accelerated a trend that sees Owners utilize technology such as automated access and automatic billing for their clients.  In addition, the storage industry has benefited from families who are in the position to downsize their family home, whether that is for economic reasons such as employment uncertainty or the natural aging of the baby boomers who are transitioning to accommodations with less storage space.

 As storage becomes a more appealing asset class for investors, individuals looking to grow their portfolio have decided to invest in self-storage.  As with any investment, there are obstacles for both buyers and sellers.

Buying:  Often the facilities are valued based on Gross Potential Income.  This results in the potential Owner paying more for the asset that the business itself is worth.  Financial institutions will typically only lend on actual income (not gross potential income).  This can result in the purchaser being required to place a larger down payment than expected to purchase the asset.  Self-storage assets are in high demand and facilities that are listed through a Broker are “shopped” to the market.  Often when Broker fees are factored into the purchase price, the buyer can pay above the market value of the asset without the income to support the additional fees.  If a Buyer can deal directly with the Seller, it is often easier to facilitate a transaction that is a win-win for both parties.

Selling:  It’s been my experience that Sellers struggle to determine the “fair market value” for their facility.  The possible delta between what the broker feels the asset is worth and the business appraisal to obtain financing can derail possible transactions.  Ideally, potential sellers would source a reliable company that offers valuation services with no commitment to list.  This allows sellers an obligation-free way of determining the asset’s value.

Similar in nature to the US, there are different levels of activity based on the market.  Traditionally, assets tend to sell more quickly closer to primary/urban markets and there has been extensive activity in these areas.  However, we have seen a trend to transactions occurring in secondary and tertiary markets as the landscape for urban locations becomes more competitive.

Self-storage ownership in Canada is quite decentralized with 70% of owners having a single asset/location.  There is a trend toward consolidation of storage assets.  There are several groups in Canada that have consolidated or built a portfolio of assets over 1M Net Rentable Square Feet (NRSF).  These firms would account for a great deal of the remaining 30% of the market, although there are still several mid-size regional operators across Canada.

If I was going to provide any advice for individuals looking to invest in Canadian self-storage I would recommend analyzing if you have the time and expertise to actively manage a facility.  If the answer is no, then I would encourage the individual to seek out current storage owners who have an investment vehicle to purchase and manage a portfolio of assets on the investor’s behalf.  Real Estate in general is a business that requires ongoing commitment and focus to learn about the industry and trends to maximize the value of your facility.  If you’re unable to or unwilling to be an active investor, consider investing with the best owner/operator that you can find.

For any self-storage owners who are looking to sell their properties in the next year (+), get professional advice early in the process.  This advice does not need to come at a “cost” to the seller.  True storage professionals should be able to discuss your asset and the market without requiring a fee or a listing.  When I speak with owners, I am very transparent in letting them know that there is no requirement or commitment on their end.

Typically, I see transactions stall for three possible reasons:

1. Value. The owner isn’t aware of what the true value of their facility is and the buyer and the seller can’t agree on the business’ “fair market value”.
2. Legacy. The owner hasn’t had a conversation with their family to determine if they want to keep the business within the family or if it is the desire of all family members to divest of the facility.
3. Taxes. It’s important to speak with a tax accountant and tax attorney to make sure that your business is structured in a manner that allows the Seller to maximize the value of the facility.

If I could offer any additional insight, it would be you don’t build a business to sell, however, you should build your business so that it can be sold.  It’s important to invest in technology and to have business systems and processes in place that allow for a potential buyer to assume the management of your facility.  When I speak with owners early on in the decision to sell, I assist by showing them how to maximize the value of their asset.  By being able to provide them knowledge about their competitors and what the market supports for acceptable amenities, I am able to support them in wise decisions to make their asset as valuable as possible.  If an owner is looking to sell, partnering with an expert is essential to develop a roadmap for the future.

Lloyd joined The Storage Acquisitions Group in 2021 serving as the Director of Canadian Acquisitions.  He has an extensive background in real estate and built a private financial services firm that placed over 1B of investor capital into multi-family, commercial, and industrial asset classes across North America.  Most recently, Lloyd was instrumental in the consolidation of a national portfolio of self-storage assets in Canada.  His talent for building relationships, analyzing businesses, and negotiating deals make him the ideal leader to oversee the Canadian market.

Biden’s Proposed Tax Changes

By: Yann Reichelt, CPA, Advisor

How Biden’s Proposed Tax Laws Could Affect Real Estate Owners:

As the Biden administration sets its sights on finalizing the budget reconciliation process, what key policy changes should real estate owners be aware of?

1031 Exchange
The 1031 exchange is one of the most popular and effective tax deferral strategies used by real estate investors, however, under the proposed tax law changes submitted by the Biden administration, this strategy could be repealed. The change would only be applicable to future transactions and cannot be retroactively applied to past transactions.

Under the proposed law, gains in excess of the $500,000 exemption limit on the sale of real property would be taxed at the taxpayer’s applicable capital gains rate. For example, if a real estate owner sold real property for $1 million with an adjusted basis of $275,000 resulting in a gain of $725,000, the owner would be taxed on $225,000 of profits received from the sale (the first $500,000 is tax-exempt). In contrast, the current tax law would permit the real estate owner to defer tax on the entire proceeds and instead reinvest those proceeds into a subsequent investment.

Capital Gains
In addition to changes to the 1031 exchange, the Biden administration aims to increase long-term capital gains from 20% to 39.6% (for taxpayers with an adjusted gross income level over $1 million and potentially as low as $400,000). This is a significant change as it repeals the advantageous tax rates for real estate owners and instead taxes proceeds from the sale of real property at the taxpayer’s ordinary income level.

Included with this change would be a recharacterization of carried interest from capital gains to ordinary income, thus proceeds of this nature would be taxed at the ordinary income tax rate (currently 37% for an AGI over $400,000)

Together with the proposed repeal of the 1031 exchange transaction, this could be a significant disincentive to invest in real estate.

Estate and Gift Tax
Another key proposed change to tax law is to increase the estate tax to 45% (from 40%) and to repeal the ability for the beneficiary of an estate to receive the “step-up” in basis at the time of the grantor’s death. Under current law, if a taxpayer owns real estate and transfers the property to an estate, the basis of the property is increased to the fair market value of the property at the time of the taxpayer’s death. In essence, this allows the deceased taxpayer to transfer the property tax-free and the estate avoids a tax liability.

Additionally, the Biden administration is proposing to decrease the estate tax exemption from $11.7 million back to $5.3 million. Amounts transferred in excess of the exemption limit are subject to the estate tax rate.

Expected Timeline
Steps to Change Tax Law	Expected Completion Date
Initial budget reconciliation process completed	April 2021
House and Senate to vote on the budget and approve	October 2021
Effective date for proposed tax changes	January 1, 2022*
*Note: certain provisions may be effective as early as October 2021

Summary of Major Changes
Tax Law	Current	Proposed
Corporate tax rate	21%	28%
1031 Like-kind-exchange	Allowed	Repealed
Bonus depreciation for qualified property	100%	50%
Capital gains rate for AGI over $1 million	20%	39.60%
Estate tax lifetime exemption	$11.7 million	$5.3 million
Estate tax and gift tax rate	40%	45%

Yann Reichelt joined The Storage Acquisition Group in 2020 serving as an analyst for storage assets nationwide.  Yann is a licensed CPA and utilizes his background in accounting and economics to research markets and provides industry reports for potential acquisitions nationwide.  Yann graduated with a Bachelor of Science degree from Virginia Commonwealth University with a double major in Accounting and Economics.  If you have further questions about selling your self-storage asset, please reach out to Yann directly at yreichelt@thestorageacquisitiongroup.com.

New Director of Canadian Acquisitions

By: The Storage Acquisition Group

After serving the U.S. nationwide for the past seven years acquiring self-storage facilities and portfolios, The Storage Acquisition Group has extended its outreach to Canada.  Leading these efforts is Lloyd McDonald a seasoned financial, commercial real estate, and self-storage professional.

Lloyd has an extensive background in real estate and built a private financial services firm that placed over $1B of investor capital into multi-family, commercial, and industrial asset classes across North America.  Most recently, Lloyd was instrumental in the consolidation of a national portfolio of self-storage assets in Canada.  His talent for building relationships, analyzing businesses, and negotiating deals make him the ideal leader to oversee the Canadian market.

Lloyd will oversee acquisition efforts throughout Canadian top markets and specialize in purchasing storage facilities and portfolios directly without owners having to list their assets. He will provide storage owners with transparency throughout the sales process allowing them to net the highest possible profit.

The Storage Acquisition Group (TSAG) specializes in purchasing self-storage facilities and portfolios throughout the US. Uniquely TSAG allows owners to sell direct without having to list their facility. With our 4-tiered approach, Market Analysis, Acquisitions, Underwriting, & Closing Support, The Storage Acquisition Group is able to help owners navigate the sales process with the highest net profit.

If you are considering selling your storage facility, we are the team to call. With our network of affiliated brokers and qualified buyer, we can put your facility into contract within 48 hours of agreed upon underwriting.

Understanding the Proposed Tax Plan

By: Yann Reichelt, CPA, Advisor

Understanding the Biden Administration’s Proposed Tax Changes

If the Biden Administration goes through the second budget reconciliation process, there are significant tax changes expected to impact corporate, individual, and capital gains tax rate increases, like-kind exchanges, and estate and gift tax exchanges.

1031 Exchange
-Consideration of repealing this program going forward.
-Practical note: cannot retroactively make deferred gains taxable, only gains on future transactions. A strong lobbying effort is expected.

Capital Gains
-Increase from 20% to 39.6%, for AGI over $1M, but could be as low as $400k.
-Your LT capital gains would be taxed at your ordinary income levels.

Estate and Gift Tax 
-Reduce exemption from $11.7M back to $5.3M (Pre- TCJA)
-Increase tax rate to 45% (from 40%)
-Repeal the “step-up” in basis. Currently, when a taxpayer dies the estate’s assets are re-measured to their fair market value – i.e., a step up in basis.

Expected Timeline
Steps to Change Tax Law	Expected Completion Date
Initial budget reconciliation process completed	April 2021
House and Senate to vote on the budget and approve	October 2021
Effective date for proposed tax changes	January 1, 2022*
*Note: certain provisions may be effective as early as October 2021

Summary of Major Changes
Tax Law	Current	Proposed
Corporate tax rate	21%	28%
1031 Like-kind-exchange	Allowed	Repealed
Bonus depreciation for qualified property	100%	50%
Capital gains rate for AGI over $1 million	20%	39.60%
Estate tax lifetime exemption	$11.7 million	$5.3 million
Estate tax and gift tax rate	40%	45%

Yann Reichelt joined The Storage Acquisition Group in 2020 serving as an analyst for storage assets nationwide.  Yann is a licensed CPA and utilizes his background in accounting and economics to research markets and provides industry reports for potential acquisitions nationwide.  Yann graduated with a Bachelor of Science degree from Virginia Commonwealth University with a double major in Accounting and Economics.  If you have further questions about selling your self-storage asset, please reach out to Yanndirectly at yreichelt@thestorageacquisitiongroup.com.

What to Prepare When Selling a Self Storage Facility

By: Andrew Burachinsky, MBA, Advisor

Self-storage owners have varying motives that influence their decision to sell.  The decision to retire, investment portfolio diversification, or estate and tax planning are some of the typical reasons owners choose to sell.  Whatever the catalyst, there are items that need to be addressed prior to the decision to sell.

Maintenance & Repairs

A clean well-kept facility produces a higher value and allows the owner to have more negotiating power when trying to achieve their asking price.  Basic maintenance and cleaning make the property more presentable.  Eliminate unnecessary items, remove the trash, and address any landscaping needs.  Repair any safety concerns such as broken lights, cracks in sidewalks, etc., and replace damaged locks, doors, and signage.  Although you may not want to invest a large amount of capital into your facility before selling, important items that impact income need to be addressed.  One item many owners often ignore is a significant difference between buildings built at different times.  If you have added onto your property make sure there is not a stark difference between older buildings and newer ones.  If you do have a budget for capital improvements some to consider are:

• Security Upgrades (gates, fences, cameras, lighting)
• Self-Storage Management/Communication Software
• New roof (if needed)

Rental Rates

Your rental rates need to be comparable with the market.  To evaluate your facility accurately you will need to prepare a rent-roll.  This will be used to determine the current rents received and allow for more realistic projections of future income.  Remember to clear up any long-term delinquencies and work at managing these delinquencies to stay within the industry’s norms.

Once you have your property’s rental rates, it needs to be compared to the market.  Our company offers complimentary Rental Summary Reports to owners interested in selling their facility because it is the only accurate way to determine if your rent rates are comparable.  If the analysis reveals your rental rates are not comparable, raise unit rents appropriately.  Rental rates allow prospective buyers to determine if your facility is able to successfully compete in its market.  Having a breakdown of all of your unit sizes and features should be included in this report.

Financial Records

Ideally, you have financial records in order for the past three years, but more often than not you will be required to provide a 12-month trailing financial statement.  These are easily attainable if you are already utilizing accounting software.  For all unusual transactions, there should be an explanation; all buyers will be interested in accurate and complete records.  This is the most common reason to inhibit a deal from closing.  When we present a property for acquisition, we require the owner to provide us with the following reports:

• Management Summary
• Occupancy Statistics Report
• 12-Month Trailing Profit & Loss Statements
• Current and Projected Real Estate Taxes
• Photos

Request a Business Valuation

Understanding your market and the value of your property can best be accomplished by receiving a professional valuation of your asset.  Even if you receive what you believe to be an accurate value from a broker it is important for you to do some of your own research.  Brokers who list facilities will often provide you with a price that may be acceptable to you but not realistic for your market.  The best way to determine a realistic value is through analyzing the capitalization rate and price per square foot for your market.  This is why The Storage Acquisition Group provides storage owners with transparent pricing based on what industry experts have verified as accurate data.

The decision to sell is never easy. Setting aside the complexity of the transaction, simply walking away from a business can be a difficult decision. For many owners, storage ownership has been a continuous process of designing, building, maintaining, and improving the asset. As a company, we appreciate the hard work, sweat equity, financial and emotional risk that goes into this. We want to make the process smooth and help you make the right decision, so we’re here to help with questions regarding market dynamics, capital gains, 1031 options, and other issues that may affect the decision or timing of a sale.

Andrew Burachinsky spent the majority of his career working as an accountant for a private equity fund manager focused on institutional-quality real estate investments in Latin America. He utilizes his knowledge and experience in Finance & Accounting to provide an edge in the constantly changing self-storage industry. Andrew holds an MBA with a concentration in Management from Centenary College. If you have further questions about selling your self-storage asset, please reach out to Andrew directly at aburachinsky@thestorageacquisitiongroup.com.

Breaking Down the Biden Tax Plan

By: Yann Reichelt, CPA, Advisor

Although no formal plan has been released there are multiple levels within the Biden Tax plan which should be noted by business owners.  Corporate tax rates can be expected to rise to 28% from the current 21%.   A 7% tax increase may not seem ideal for business owners, but it is 7% less than the corporate tax rate of 35% before the Trump tax reforms of 2017.   

A concern of commercial real estate investors has been the repeal of like-kind exchange rules.  Under US tax law like-kind or 1031 exchanges allow for a transaction or series of transactions to allow an owner to dispose of one asset and acquire a replacement asset.  The generation of tax liability during these exchanges may make owners think twice before selling their assets.  

If the Biden Administration successfully repeals the 1031 exchange, we may see a shift towards investor’s usage of a lesser-known tax deferral strategy known as a 721 exchange.

Under a 721 exchange, a seller transfers their investment into a Real Estate Investment Trust (REIT) and Umbrella Partnership Real Estate Investment Trust (UPREIT) and in return receives ownership shares of the REIT/UPREIT. It is important to note that similar to a 1031 exchange, the resulting capital gains from the sale of the investment property in a 721 exchange is only deferred, not avoided. Additionally, there are two key differences between a 721 and 1031 exchange. First, once a 721 exchange is completed, there is no “switchback” – i.e., the REIT/UPREIT shares cannot be converted back to real estate through a 1031 exchange or subsequent 721 exchanges. Second, if the REIT/UPREIT sells a portion of the portfolio and returns capital to the investors, the investors will be required to recognize any capital gain or loss when they file their taxes.

Another potential drawback for the commercial real estate industry is the proposed limitations for investors’ use of real estate losses.  If you sell your investment property for less than your cost basis, you can use that loss to offset all of your capital gains from other investments and up to $3,000 in income from other sources in the current year.  The combination of preventing investors from using losses to offset capital gains and the potential repeal of the 1031 exchange are significant setbacks to the real estate industry.

Proposed changes to reduce the Estate Tax Exemption to $5 million from $11.58 million is another item that individuals should be aware of. Currently, this provision allows for tax-free exclusion on the transfer of an estate up to $11.58 million with any excess taxed at a rate of 40%. As a result, business owners interested in valuing and transferring their assets to family members may need to assess the impact of cutting the exemption in half.

Other Expected Changes under the Biden Tax Plan:

We can expect to see tax credits within the manufacturing industry.  The goal is to revitalize facilities and ideally increase production in the US.  Currently, there are 565,537 manufacturing businesses in the United States a 1.4% decrease from 2019.  China is the leading manufacturer in the world with over $2.01 trillion in output followed by the US at $1.867 trillion.

The pharmaceutical industry can expect to see incentives eliminated to move production overseas.  Germany leads the world in drug export revenue at $62.3 billion.  The United States hits the list at number 5 generating $22 billion dollars annually.

Pharmaceutical production isn’t the only list that Germany sits at the top of, they are currently the most energy-efficient country in the world.  The Biden tax plan proposes to extend tax incentives that generate energy-efficient and clean energy jobs which could help the US climb from their current position as the 13^th most energy-efficient economy.

New market tax credits provide incentives to businesses that invest in low-income communities.  Under the Biden administration, we can expect to expand tax credits for investors willing to initiate growth in these new markets.  Additionally, business owners can plan for more tax credits under the low-income housing tax credit.  This is a dollar-for-dollar tax credit for affordable housing investments.

Tax credits to encourage businesses to build child care facilities onsite.  With 64.2% of households having two employed parents and 23% of households being run by single parents, onsite daycare would alleviate many parental concerns.

One last tax credit to be on the lookout for are tax credits to improve accessibility and compliance for the Americans with Disabilities Act.  The ADA prohibits discrimination on the basis of disability in employment and requires business owners to provide reasonable accommodations for employees with disabilities.  Although smaller businesses will not be able to take advantage of these tax credits (businesses with fewer than 15 employees are not covered by ADA provisions) larger businesses willing to make these changes could see incentives come tax time.

The ultimate impact of the proposed changes outlined is difficult to determine amid the uncertainty involved on what changes will actually be passed into law. A key factor will be the results of the senate run-off race in Georgia where Democrats need to win 2 seats in order to have equal footing in the senate. If the Republican Party remains in control of the senate, it will be very difficult for Biden’s proposed changes to get passed into law. Lastly, the earliest that any of these measures may take effect is 2021.

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Yann Reichelt is a CPA and currently works as a Manager for the Business Assurance and Advisory at Keiter.  He joined the TSAG team in 2020 and works collaboratively with Jonathan Spencer and Scott Eckert in various markets throughout the US.  Yann brings over a decade worth of experience in accounting to the TSAG team.  If you have further questions about how the Biden tax plan affects your self-storage asset, please reach out to Yann directly at yreichelt@thestorageacquisitiongroup.com.

Excessive Supply:  Compressed Rental Rates & Extended Lease-up Time

By: Monty Spencer, CEO, Senior Advisor

A developer builds a new storage facility in a hot market, but it takes longer than expected to lease up causing rental prices to be lowered and the property value to drop.

What happened? Typically, the challenge is due to: Lack of Due Diligence. The failure to properly drill down into market data can cause a seemingly good investment to become an unprofitable one.  Excessive-supply problems have cropped up across the country leading to slower lease-ups, compressed rental rates, and lower property valuations.

Besides an immediate drop in operating income, excessive supply impacts CAP rates for property owners in oversupplied markets. Oversupply can hurt everyone in a given market – not just developers of new facilities — and it’s important to recognize the signs and stages of how this unfolds. A reckoning is occurring in many over-developed markets and will continue as long as developers don’t recognize the warning signs.

I want to stress: 

Not all oversupplied markets are the same.

The Atlanta market, for instance, has seen a 14% increase in self-storage supply over the past three years, a major jump that should raise alarm bells for new-construction developers. Yet, the Atlanta area is a dynamic, fast-growing region that can absorb new supply more readily than other markets.

The Philadelphia area has seen an 18.5% increase in supply over the past three years and its population isn’t growing nearly as fast as Atlanta’s population. Yet, Philadelphia’s self-storage penetration rate – or the square feet of space per capita – is much lower than the national average, and therefore it can absorb some new supplies in certain areas.

Still, other markets, such as Charleston, S.C. (25% supply growth over three years in an already overbuilt market), have seen a flat-out frenzy of development and in many cases, the developers have completely ignored the market dynamics which clearly suggested that new projects would face significant headwinds to reach full stabilization and full market rent.

These developers usually go through stages of denial:

— ‘It won’t happen to me’ – Developers who at the outset hope that their new property will be an outlier and not be affected by the market dynamics which are obvious from the inception of a project. They’re almost invariably proven wrong in the end.

— ‘I can always sell at pre-construction proformas’ – This often happens soon after a developer starts to nervously realize a new facility is yielding less cash flow than estimated – and thinks another investor will ride to the rescue and buy at estimated pre-construction levels.

— ‘I’ll stick it out’ –Many developers who stubbornly hold to the belief that the new normal is not applicable to them and stick it out for quite a while. But even when a facility reaches 80% or higher occupancy, it still doesn’t translate to an expected cash flow — due to slashed rental rates — that will provide a purchaser the income needed to justify an asking price.

Sometimes, the only hope for these developers is that a city or town will place a moratorium on new construction, capping overall supply while demand catches up. Understanding a market is more than believing you know the outcome of a development.   While being familiar with the market you are developing is helpful, financially successful developments typically combine local knowledge with a comprehensive market study to determine the viability of each project.  Researching, analyzing, and understanding the empirical data is the only successful approach.

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Cowles M. “Monty” Spencer, Jr. serves as The Storage Acquisition Group’s President & CEO. Monty is an accomplished real estate executive with over 20 years of commercial real estate experience. He has won numerous CoStar® Power Broker of the Year and Commercial Real Estate Council Awards, as well as winning the Deal of the Year Award & Broker of the Year Awards for three consecutive years. Distinguished throughout the industry for developing dozens of high-profile retail projects, Monty has brought his unique blend of expertise and ambition to spearheading The Storage Acquisition Group. He received his BA from the University of Mississippi in Business Administration & Marketing.

Repurposing Vacant Retail via Conversion to Self-Storage

By: Dan Cromwell, CCIM, Senior Advisor

Kahului, Maui – October 2018: Our direct flight touches down at 11:30 AM HST, Kahului Airport (OGG), 5:32 hours after takeoff from Los Angeles International Airport (LAX). The start of our semiannual visit to our condo in Kaanapali is officially underway as we shift gears into muscle memory: the Mrs. picks up the rental car while I collect my golf clubs and other checked baggage. We load up the rental car and head to our first stop at Costco, where we pick up the basics for the next week. Next stop, the adjacent K-Mart for our non-bulk items – or so we thought…

Instead, we were greeted by an impressive storefront for the very first U-Haul full-service facility on the Valley Isle. Make no mistake, this is a highly visible, “First & Main” retail location that was home to a very successful K-Mart for the previous 24 years, not some converted warehouse in a nearby industrial district. U-Haul’s parent company, Amerco Real Estate Co., purchased the site for $26.8 million on Oct. 17, 2017, from 424 Dairy Road LLC, a company of Hendricks Commercial Properties of Beloit, Wis., according to county property tax and state business records. Factored against the 107,520 sq. ft. store footprint, this represents a price per sq. ft. of nearly $250/sq. ft. It is worth noting that the building sits on 7.3 acres of fee simple land that should attract interest from pad users, especially quick-serve & drive-thru dining options.

*The acquisition of the Kahului facility was driven by U-Haul Company’s Corporate Sustainability initiatives: U-Haul supports infill developments to help local communities lower their carbon footprint. Their adaptive reuse of existing buildings reduces the amount of energy and resources required for new-construction materials and helps cities reduce their unwanted inventory of unused buildings.

By repurposing the former Kmart, U-Haul prevented the use of 360 tons of metal manufacturing and transportation (the same amount of steel used to make 363 passenger cars); avoided 5,730 tons of new concrete pours (enough to create 116 miles of concrete blocks); kept 6,237 tons of construction and demolition debris out of landfills (avoiding 240 dump trucks traveling 5,038 miles in total); and stopped 3,759,443 pounds of greenhouse gas emissions from entering the atmosphere (the same carbon emissions of 288 large SUVs or pickup trucks for one year).

In addition to the remarkable benefits resulting in a reduced carbon footprint as demonstrated in the Kahului K-Mart example, I see these conversions as a viable, stand-alone business model for the following reasons:

• Proven track record with the previous retailers within in-fill retail locations surrounded by established communities with a (presumably) built-in customer base.
• Excellent visibility on a high-traffic retail corridor providing consistent signage reminders for potential customers along with a strong long-term branding opportunity.
• Faster delivery than “ground-up” developments with drastically reduced pre-development costs due to the elimination of site engineering and site preparation work.
• Reduced “cost-of-market-entry” expenses due to the existence of a building shell – note that most big box stores have the volume (ceiling height) necessary to support a mezzanine level.

Needless to say, there are also a number of challenges facing a conversion from retail to self-storage, including the following examples:

• Current zoning does not allow for self-storage. This can often be overcome by obtaining a conditional use permit (CUP) that expands allowable uses to specifically include self-storage.
• Government officials clinging to the hope that the vacant store can attract another retail use so the City can continue to receive sales tax, the lifeblood of many community’s source of income. This false hope often wears thin as the months pass and the negative impact of a high-profile vacant storefront outweighs the harsh reality that there just isn’t another retail user on the horizon, especially if/when the property becomes the target for graffiti taggers.
• NIMBYs – there seems to be prevailing concerns shared by neighboring property owners that the storage facility will generate excess traffic with illegal dumping on nearby sites. These objections can be offset by the fact that the previous retail user-generated more traffic than most self-storage users would create and the on-site security could actually thwart any illegal dumping.
• Unrealistic pricing that doesn’t support a conversion. If the seller adamantly holds out for a “retail” sale price, it won’t pencil out for conversion. Ideally, a developer will be able to purchase the shell for an amount well below the replacement cost.
• Inadequate load capacity. A fundamental rule-of-thumb for storage facilities is a load rating of 125 lbs/sq. ft. Unless the previous retail use was a warehouse club like Costco or Sam’s Club, this could prove to be a dealbreaker if the cost of retrofitting the foundation throws the overall conversion budget out of synch. Ideally, the current owner is able to produce the engineered drawings for the facility; otherwise, an “as-built” inspection/calculation will be necessary before proceeding with an acquisition.

The identification and qualification process should adhere to the same rigorous analysis that one would employ in any site selection assignment in order to understand the underlying site characteristics.

• What are the underlying demographics in the trade area?
• Are these numbers static or is the trade area in a state of transition?
• What about psychographics (tapestry segmentation) – is the make-up of the populace conducive to developing a successful self-storage facility?
• Is the subject building an isolated vacancy or is the overall retail trade area in a state of decline?
• What is the competition, both in terms of existing self-storage facilities and other potential uses imagined by other prospective buyers?

In closing, as the pace of store closings picks up as a result of the impact caused by COVID-19 restrictions, there should be ample opportunities to acquire well-positioned assets priced well below replacement costs. Combined with reduced interest/competition from existing retailers looking to expand, this may be an ideal time for self-storage operators to consider the upside(s) of a campaign focused on conversion from retail to self-storage.

*Taken directly from U-Haul’s corporate website.

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Dan brings decades of experience in nearly every component of the CRE to TSAG. He has expertise in economic incentive negotiations, site selection & evaluation, tax increment financing, public/private partnerships, entitlements, acquisitions, dispositions, strategic planning, development services, investment/financial analysis, centroid, and roll-out studies.