• Welcome to AppraisersForum.com, the premier online  community for the discussion of real estate appraisal. Register a free account to be able to post and unlock additional forums and features.

Mini-storage Facility With Proposed Improvements

Status
Not open for further replies.

aces40love

Freshman Member
Joined
Apr 19, 2012
Professional Status
Appraiser Trainee
State
Tennessee
Our office recently accepted an assignment of an existing mini-storage facility containing 10 separate buildings. The owner has planned to build another mini-storage building to meet increasing demand as the facility has been at 95% or greater occupancy for the last 3 years. Based on the client's request, we are being asked to provide three values: an as-is, as-complete and as-stabilized. The bank wanted an as-is market value based on the hypothetical condition that all proposed improvements have been complete as of the effective date of value. We are also reporting an as-complete value (or proposed value) as of a future date when the proposed improvements are complete. In this case, the proposed value is 6 months out (to account for site work and construction) and we have conditioned this value on an extraordinary assumption. Lastly, the as-stabilized value is 18 months later than the as-is value (6 months allocated for construction and another 12 months to reach stabilized occupancy) and is also based on an extraordinary assumption. Note the capital expenditure for the new construction is $400,000.

The property is located in a rural area with no sales of any mini-storage facilities in the past 10 years and we relied heavily on the Income Approach. We have received very detailed P&L statements and a breakdown of unit mixes, occupancy and current rents. Basically the owner has provided a very good quality and quantity of data. Fortunately, we have income, expense and occupancy data for three different mini-storage facilities in the same county. The subject rents are similar to competitors market rents and the OER of the subject is similar to the competing facilities. We have run 10 year Argus DCF models for the as-is, as-complete and as-stabilized values. The NOI for year 1 was <-$174,626> based on the as-is model and <-$143,543> for the as-complete scenario. The NOI doesn't go positive until year two in either scenario due to the capital outlay for construction.

For the as-is value based on the hypothetical condition ("today's date"), we also performed a Cost Approach and a Sales Approach (used sales from a neighboring county). Note the financial and occupancy data wasn't available for the sales and we did a qualitative approach based on physical characteristics only - weak I know but we wanted to at least make an attempt. The cost came is at $2.2 million and the sales $2.45 million and the as-is present value of the income was $2.25 million. Mind you both the sales and cost are representative of the as-is value based on the hypothetical condition. Argus indicated a $2.31 million value for the as-complete and a $2.75 million as-stabilized. I'm wrestling with the application of a rent-up adjustment in the Cost and Sales. Since the mini-storage units have no lease-up costs or TI expense, the only factor that would warrant a rent-up adjustment would be rent loss. For the as-complete value, I don't believe any rent loss should be applied since during the construction phase there is no building to occupy, thus no income loss to deduct. This would mean that only 12 months of rent loss would be applicable by my calculation. When deducted from the as-is value by sales and cost, the as-stabilized is much lower in sales and cost than the income. I don't feel comfortable with this since A) construction cost will be different 18 moths in the future in the cost approach and B) my sales data is weak with no financial or occupancy data.

Thoughts?
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
I would bet it will take several weeks after construction for the units to be fully leased, perhaps 6 months or more. I would be careful as when the bust came waiting lists went to 50% vacancy in less than a year.
 

aces40love

Freshman Member
Joined
Apr 19, 2012
Professional Status
Appraiser Trainee
State
Tennessee
The owner was projecting a 6 month absorption time for the proposed units. Based on the data we have on the other facilities, newly constructed units took about a year to absorb. Since the bank is wanting the as-is vale to be based on the hypothetical condition the construction is complete, I’m thinking the as-completed DCF should be used in order to compare apples to apples.

I’m really struggling on the rent up for the as-stabilized. The as-is is basically at completion of construction prior to rent up due to the hypothetical and the resulting rent up adjustment would be for the 12 months post construction. This would decrease the value already calculated from cost and would make a great spread between the two approaches. Since I don’t have the type of data required for an as-stabilized sales approach, I don’t see how as as-stabilized value could be produced from this approach.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
Our office recently accepted an assignment of an existing mini-storage facility containing 10 separate buildings. The owner has planned to build another mini-storage building to meet increasing demand as the facility has been at 95% or greater occupancy for the last 3 years. Based on the client's request, we are being asked to provide three values: an as-is, as-complete and as-stabilized. The bank wanted an as-is market value based on the hypothetical condition that all proposed improvements have been complete as of the effective date of value.
For a regulated institution, that doesn't sound right to me.
I would expect them to ask for the as-is condition as it is; before the expansion. If they want, they can also ask for the hypothetical but I believe they need the as-is, as-it-is (no hypothetical). I would double-check that if I were you.

What's the OAR based on the stabilized value and stabilized income/expenses for your subject? Does it make sense?
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
an as-is, as-complete and as-stabilized. The bank wanted an as-is market value based on the hypothetical condition that all proposed improvements have been complete as of the effective date of value.
Didn't catch that, @Denis DeSaix did.

Check the lender.

as is should be today, no construction.
prospective, with assumption of completed and valuation six months later, is an extraordinary assumption, not hypothetical (HC). The EA assumes complete and existing August 19 2018.
the 3rd value thus should be a date when you anticipate stabilization (EA) or a fixed date before stabilization with HC
 

aces40love

Freshman Member
Joined
Apr 19, 2012
Professional Status
Appraiser Trainee
State
Tennessee
For a regulated institution, that doesn't sound right to me.
I would expect them to ask for the as-is condition as it is; before the expansion. If they want, they can also ask for the hypothetical but I believe they need the as-is, as-it-is (no hypothetical). I would double-check that if I were you.

What's the OAR based on the stabilized value and stabilized income/expenses for your subject? Does it make sense?

I will definitely check because I think that is a guideline. I would think that we could maybe do an as-is value based on a direct cap module using the 2017 income and expenses.
The going in OAR was 10% based on the BOI since we didn’t have any market extracted cap rates. The terminal cap on the reversion was a point higher at 11%. We used a discount rate of 12.5% based on realty rates which was slightly higher than the average for recapitalizations.
 

aces40love

Freshman Member
Joined
Apr 19, 2012
Professional Status
Appraiser Trainee
State
Tennessee
Didn't catch that, @Denis DeSaix did.

Check the lender.

as is should be today, no construction.
prospective, with assumption of completed and valuation six months later, is an extraordinary assumption, not hypothetical (HC). The EA assumes complete and existing August 19 2018.
the 3rd value thus should be a date when you anticipate stabilization (EA) or a fixed date before stabilization with HC

We originally using a HC for the as-is based on the improvements being complete as of the effective date and using EA for any prospective dates like the completion of construction and also as-stabilized. It was my understanding any value based on a future date needed an EA.
 

Michigan CG

Moderator
Staff member
Moderator
Joined
Nov 1, 2006
Professional Status
Certified General Appraiser
State
Michigan
Maybe I am not understanding this correctly. There are currently ten buildings and they are adding one more building. How is the NOI negative for two years? That makes no sense at all.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
EAs for the as-complete and as-stabilized (future dates) is the recognized method for prospective values.

There's something going on in the approaches (as you recognize) that hasn't been identified.
The cost approach (as complete) is for the stabilized value (fee simple); once stabilization costs are addressed, this should reflect the as-is value (complete but not stabilized).
Your as-is income approach shouldn't be that far off from the CA once everything is accounted for.
The sales comparable data is low quality. Did you run a pro forma on them (you can get market rents, I would think) to see where they line-up (market rents, market expenses, indicated cap rates)?

My opinion: It is more likely that there is an error in the DCF vs. the other approaches.
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
as-is based on the improvements being complete as of the effective date
? "as is" is "as is". With including a non-existent building, it cannot be "as is" rather is "subject to"
 
Status
Not open for further replies.
Find a Real Estate Appraiser - Enter Zip Code

Copyright © 2000-, AppraisersForum.com, All Rights Reserved
AppraisersForum.com is proudly hosted by the folks at
AppraiserSites.com
Top

AdBlock Detected

We get it, advertisements are annoying!

Sure, ad-blocking software does a great job at blocking ads, but it also blocks useful features of our website. For the best site experience please disable your AdBlocker.

I've Disabled AdBlock
No Thanks