Professional Documents
Culture Documents
States in which we
About PGP Valuation Inc… have recently
appraised
–
PGP Valuation Inc was established in 1978 and is now
one of the largest and most successful appraisal firms in Alabama
the world, with approximately 30 members of the Alaska
Appraisal Institute (MAI) and 150 professional appraisers Arizona
on staff in the United States and Canada. Arkansas
California
In November 2006, FirstService Corporation acquired a
controlling interest in PGP. FirstService is the parent Colorado
including appraisal and consulting, commercial brokerage 27,650 small business entrepreneurs (90% of all Illinois
and management, and lending. self-storage companies) who own and operate just Indiana
one “primary” self-storage facility. Kansas
Our Role With the FDIC… Louisiana
• More than 700,000 self-storage units nationwide are Maryland
PGP Valuation is the contracted Quality Control and rented to military personnel (4% of all units);
Massachusetts
Consulting firm for all real estate related issues for the however, in communities adjacent to US military
bases, military occupancy can range from 20%-95% Michigan
FDIC. Our Scope of Work is to provide, monitor, and
assist the FDIC in the following areas: of all rented units. Minnesota
Mississippi
• Appraisal Reviews • Nationally, at year-end 2008 primary self-storage Missouri
• Establish/Monitor Quality Control Process facilities employed approximately 160,000 persons, Montana
• Appraisal Ordering or an average of 3.1 employees per facility
N Carolina
• Monitor the REO and Loan Process
• Coordinate and Interact with Asset Managers • During the peak development years (2004/05) New Hampshire
and PCAM (Post closing Asset Managers) to approximately 8,700 new self-storage facilities, or New Mexico
Establish QC Protocols 480 million square feet of space were added. New Jersey
New York
This involves the REO properties (non-performing and • Gross square footage of self-storage “per capita” in Nevada
bank owned assets) non REO (performing or troubled the US (at the state level) ranges from 1.60 to 18.65
N Dakota
assets) under FDIC receivership. square feet 83.9 percent of all US counties (or
2,634 out of 3,141) have at least one “primary” self- Ohio
Spring 2009 Newsletter COPYRIGHT © 2009 PGP VALUATION INC. ALL RIGHTS RESERVED
UNDERSTANDING OPERATING EXPENSES
Per SF
recent Self Storage Almanac. Possible considerations for comparing $0.60
operating expenses are discussed below. $0.40
Real Estate Taxes: Every state has its own method for calculating property $0.20
taxes. There are several states (like Michigan and California) that reassess $0.00
facilities based on sales price. Therefore, since the definition of “Market
Value” assumes a sale, appraisers are forced to use an amount calculating
ll
su s
in i n g
e
Pa t
e
a g t.
Ad y r o
ie
en
xe
the value of the property and the tax rate. Each local jurisdiction must be
nc
t iv
a n a in
ili t
s
Ta
em
ra
ra
reviewed and understood. This can oftentimes cause headaches for
Ad e r t i
Ut
is t
refinances and construction loans.
&
v
In
irs
m
M
pa
Insurance: Rates are fairly similar across the nation. Special consideration
Re
should be given to flood, earthquake, hurricane, or other natural disaster
areas. Typical range for this category is $0.15 to $0.25/SF. It is typical for PGP Valuation SS Almanac
lower rates to be achieved through blanket policies. It will be interesting to
see if or how much policies rise over the next couple years due to a variety of
factors.
Utilities: Both location and climate play a role in this category. Densely On-Site Management: This category is greatly impacted by location and
populated areas typically see higher energy costs. The number of climate average living expenses. Unless zoning restricts, it is common for resident
controlled units at a facility should also be considered. Typical range for this managers to live on-site. Expenses are often higher for facilities not offering
category is $0.15 to $0.40/SF. living accommodations for managers. Typical range for this category is $0.75
to $1.25/SF.
Repairs and Maintenance: This category includes cleaning out the units,
replacing doors, landscaping and any maintenance associated with the Advertisement: The amount of competing facilities and the property’s access
facility. Areas that require a snow removal expense and/or elevator servicing and exposure are primary considerations for this category. Typical range for
are typically higher. Long term expenditures are also affected by climate; this category is $0.20 to $.40/SF.
however, these expenses are typically covered in the reserves category.
Typical range for this category is $0.15 to $0.30/SF. Age and physical General/Administrative: Fairly comparable from region-to-region. This
characteristics play a part in budgeting for this category. expense includes accounting, legal fees, other professional fees, and general
administrative costs. Typical range for this category is $0.25 to $.40/SF.
Off-Site Management: This is typically done on a percentage basis (EGI).
Therefore, areas with higher rents result in higher management costs. Typical Reserves: This category takes into consideration capital improvements over
costs range from 4% to 6% of Effective Gross Income. This expense is not to a holding period. For self-storage facilities, it would typically include replacing
be confused with General/Administrative expenses. the roofs, resurfacing the streets, and replacing the fencing and storage
doors. Typical range for this category is $0.10 to $.20/SF.
There have been fewer sales in 2008 than seen in previous years. The reduced number of sales owes in some degree to the lack of credit available and the
particular aversion to risk on behalf of lenders as well as investors in the current market. The uncertainty surrounding the ultimate fallout from the downturn in
the national economy has led to a pullback from both lenders and investors. While buyers view the market with some skepticism and expect an increase in
rates, sellers have remained optimistic or are unwilling to believe that capitalization rates may have risen from historic lows of the mid-2000s when many
properties traded in the 6.0% to 7.0% range.
These rates were driven down by equally historically low interest rates spurned by the Federal Reserve Bank’s lowering of the Fed Rate to help jumpstart the
economy after the 9/11 terrorist attacks and earlier downturn in the dot.com market. While the lower rates did promote more debt by consumers and made
housing more affordable, the subsequent housing boom was not built on solid economic drivers (job gains, increase in exports, etc.) and the run-up in housing
prices was not supported. The hastily prepared, adjustable rate loans were bundled together and sold on Wall Street, incorrectly rated and sold to uninformed
investors. The US economy, that was held up primarily by the housing market (mortgage companies, lenders, developers, home-builders, contractors, etc. all
experienced substantial growth over this period) became very unstable when supply exceeded demand and home prices began to fall. Concurrently, the
adjustable rate loans began to see large rate increases that the unqualified buyers were unable to keep pace with. As housing prices declined, borrowers were
unable to refinance their loans resulting in defaults. The loans sold on Wall Street were spiraling in value and almost overnight, investors in the large conduit
loans stopped buying the paper. Lenders that were not prepared to carry and service the massive amounts of residential and commercial paper were now
burdened with loans that had no buyers at rates that were too low to sustain.
The mounting loans that were going into default coupled with the growing uncertainty surrounding the economic outlook and crashes in the global economy
caused many banks to stop lending altogether. In late 2008, the Federal Government again interceded to create TARP, a $700 billion dollar bail-out for many of
these lenders that had created the market instability, fearing that these companies collapse would spark further economic decline through job losses, lower retail
sales and a further decline in housing prices. The government’s primary concern was the lending environment had seized up after Wall Street stopped buying
paper. The uncertainty on the part of lenders continues today with some lenders quoting 600 to 2,000 basis points over the historically low Treasury rates for
new loans, with only the most qualified buyers and the safest of loans being written. At the same time, loan to value ratios decreased from 90% to 100% down to
50% to 60%.
Spring 2009 Newsletter COPYRIGHT © 2009 PGP VALUATION INC. 2
SELF-STORAGE CAPITALIZATION RATES (CONT.)
As a result, only well capitalized buyers even qualify for a loan in the current environment. While sellers have been reticent to sell, since few buyers are even
less credit are available for deals priced below 7.0%, qualified buyers have realized that they now control the market and many also fear the uncertainty
surrounding pricing. Investors have reported equity return requirements near 12% with limited risk to venture from the sidelines. Consequently, a stalemate
between buyers and sellers has taken hold of the commercial real estate market. The standoff will likely continue until sellers, some that have already lost up to
20% in book value on their investments, need to either refinance their existing loans or cannot afford the new payments as rates adjust upwards and, in either
event, are forced to sell.
In a published article by Royce Rowles of PGP Valuation Inc, Royce discusses the ratio between annual net income and sales prices.
“While the NOI may be falling at many properties (due to increased vacancy rates and/or more competitive rental rates), it almost certainly does not
account for the entire value decline in this market. Major value declines also come from the changing status quo between buyers and sellers. Buyers
have become much more patient and are expecting a much more favorable ratio between their NOI and purchase price. In other words, when there
are fewer buyers (as often is the case in a down market) capitalization rates move upward. In situations where there are recent comparable sales,
anyone valuing a property can easily extract and apply very current and realistic capitalization rates to estimate Market Value. This is because during
times of appreciation, the market is usually active. Extracting supportable capitalization rates is easy. However, when transactions are scarce finding
market capitalization rates can be significantly harder. When this happens, oftentimes sellers have an unrealistic opinion of value because they are
relying on dated capitalization rate sources.”
The following is a sample of recent self-storage sales collected from across the United States by PGP Valuation.
How have the Capital markets affected lending With the single-family market struggling, how
for the self storage industry? do you think this will affect the self-storage
Like most other income property classes, with the exception of apartments,
industry?
financing for self-storage properties has been hard hit with limited capital
The self-storage industry in difficult economic times historically has
available in today's market. Because of the management intensive nature
increased in revenue and occupancy. In 2009, we have seen the same
of self-storage, lenders including banks and insurance companies who
monthly trends; but to increase revenue and occupancy we must improve
once were willing to fund loans on this property type have either taken self-
every skill; customer service, phone etiquette, collections, marketing and
storage off their lending list or have tightened up underwriting parameters
maintenance of the properties. Along with improved skills; we have to
by decreasing loan to value ratios and increasing debt service coverage
offer specials that attract the struggling families. The current specials for
requirements. In general, underwriting Cap rates exceed 8.50%, loan to
the new tenants range from 3 months 1/2 off to rent one get a second unit
value ratios cap out at 60% and debt service coverage requires a minimum
for free for 6 months. All current tenants can pay for three months and get
1.30x. Only well located, seasoned and stabilized properties with sound
the 4th month free. If any tenant asks for a discount we give 10% no
management qualify for and have access to the lowest priced capital which
questions asked and with a smile on our face. The managers must be in
in today's market comes from a small group of insurance company
continual training on customer service, collections, reporting and most
lenders. Ten year fixed rates, in general start at 7.50% with the only non-
importantly cleanliness of the property. Everything counts to gain the
recourse money coming from insurance company lenders.
tenant in a struggling market. Limited dollars means more price shopping
and good customer service comparison for the single family looking for
Kenneth M. Fox, Cohen Financial
storage.
(415) 591-3111
Daniel “Skip” Elefante, Platinum Storage Group
Due to Wall Street exiting, the financing arena for commercial real estate
(949) 770-2232
has created a huge void to be filled by banks and life insurance
companies. Since capital is at a premium, lenders have become The difficulties with the single family market translates to difficulty in the
significantly more selective with the sponsors they elect to do business self-storage market with respect to the ability of self-storage owners to
with and more conservative on their underwriting of commercial real obtain financing for their project whether it is to take out an existing
estate. In today’s lending environment, leverage on self-storage is construction loan coming due, obtain a loan in order to acquire an existing
typically in the 65% to 70% range with a 20 to 25 year amortization facility, or procure a construction loan. The popular wisdom and the media
schedule and a debt service coverage ratio of between 1.20x to 1.30x on a have been playing on the historical assumption that when people lose their
trailing 12 month basis. We are having tremendous success with larger homes they automatically move into a small apartment and store their
owner operators with significant experience and financial wherewithal with excess belongings in a storage facility. The driver in this case has more to
our life company and strong banking relationships on a national basis. do with that individual losing his/her job and thus their home. If that is the
case, it becomes difficult to find the funds to pay rent on a storage facility
James Elmore, Tavernier Capital Partners, LLC as well. The entire process, in my opinion, is driven by job losses that
(561) 998-8300 translate into home forclosures that result in banks not having funds to
loan to self-storage operators. Until we can restore the job markets I do
As the credit crunch continues to impact self-storage lending, one of the not see the banks recovering and being able or willing to return to the
biggest risks right now facing a self-storage owner is the ability to business of lending to self-storage owner/operators.
refinance. Great rates with unbeatable terms are now a thing of the past
and self-storage owners have got to reposition themselves in this new
financial environment. Owners must be fully aware of impending Kenneth E. Nitzberg, Devon Self Storage
maturities and now more than ever allow themselves plenty of time to find (510) 450-9204
financing for their facilities that are coming due. As lenders continue to
preserve the cash they have, seeking loan options sooner rather than later
is crucial and will allow an owner to fully assess all financing alternatives
and possibilities. With the conduit market being no-existent, borrower’s
should begin with their local banking relationships and extend their search
to include regional commercial banks and life insurance companies.
These lender’s criteria seem to get more stringent as the months pass with
quality and leverage being heavily scrutinized. Even your favorite local
bank might not be in the market when it comes to refinancing your current
loan. The best advice I can give is to start early and identify as many
lenders as possible up front that will give you a couple of different options
and provide backstops in case potential deals fall through the cracks.
The conduits are gone. Regional and local banks, credit unions and life
companies are where the money is at. Also underwriting has tightened and
they are looking closely at the sponsor. Only a handful of lenders are doing
non recourse loans. Regarding financing in the upcoming year - you can
still get recourse financing at 65%. 3, 5 & 7 year terms and 25–30
amortization are available.
A core strength of PGP Valuation Inc has long been its Who Do I
belief in specialization. With teams of individual Contact?
specialists devoted to every major asset class, PGP
has redefined the valuation process. In particular, the
Self-Storage Team has become a model for the Jeffrey Shouse
(Sacramento Office)
industry due to its sweeping market knowledge, 916.996.0638
intimate awareness of self-storage trends, and
efficiency.
Royce Rowles
The Self-Storage Team is headquartered out of PGP (Denver Office)
Valuation Inc’s Roseville location under the leadership 303.217.7552
of Jeffrey Shouse, Self Storage Director. His team of
self-storage specialists has appraised facilities in nearly
Stan Mastelerz
every U.S. state. In 2008 the Self-Storage Team looks (Seattle Office)
to expand their global market share. 206.965.1110