Operational Expenses …From A Real Estate Perspective By C. Pierce Owens

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    OpExWhen it comes to selling a self-storage facility, operational expenses are among the most important considerations for buyers, lenders, and appraisers. The amount of operational expense is directly related to the net operating income generated by a property. Interested parties will carefully consider the relationship between operational expenses and effective gross revenue for a facility that is being sold or where new financing is being pursued. Buyers will compare a subject facility’s historical expense structure with those currently or previously owned. Operational expenses will be projected into future periods. Theoretically, each $1 reduction in annual operating expense can translate into as much as $10 to $13 in value if the reduction is sustainable.

    Consequently, self-storage owners considering a sale of a facility should carefully manage its operational costs to maximize sale proceeds. Likewise, owners considering a refinancing will maximize loan proceeds by optimizing the cost structure. The good news is that carefully managing operational costs will benefit an owner regardless of whether a sale or financing is consummated, because cost reduction ultimately results in higher cash flows to the current ownership. In other words, if a facility never sells, the owner will still benefit from operational expense reductions.

    Understanding The Variables

    Operational expenses vary significantly among self-storage facilities. Some operate at 30 percent of gross revenue with others at as much as 54 percent. Of course, there are several reasons for such a broad range. Facilities located in smaller markets tend to fall in the low end of the range; conversely urban facilities in major markets will tend to fall in the higher end.

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