There's a spotlight on self-storage real estate values these days, which means owners need to make sure they're receiving a fair assessment of their property. Consider the following strategies to counteract excessive property taxes.
Since the arrival of COVID-19, no real estate sector has seen property values rise faster than self-storage. It's even outpacing warehouses, which are skyrocketing in the face of demand for fulfillment centers to handle spiking e-commerce volumes.
Simply put, self-storage is booming, and it isn't going unnoticed by investors; nor will assessors, who are charged with valuing properties for ad valorem tax purposes, ignore the trend. For this reason, owners and their advisors should be revisiting tried-and-true tax strategies and considering new ways to combat excessive property assessments.
Historically, many self-storage owners have been content to fly under the radar, accepting their assessed values without protest to avoid drawing too much attention. Given the recent industry growth, however, assessors will likely shine a light on the segment, pushing for higher assessed values. When that spotlight hits, it'll be time for taxpayers to fight for fairness. Until then, you should explore the tactics that have worked previously and new ones that might now be beneficial.
An Apartment for Your Stuff
One traditional method of lowering tax liability is to value self-storage like apartments. Most assessors and multi-family owners rely on the income approach, looking at rents, subtracting expenses, and capitalizing net operating income (NOI) based on the amount of risk in the investment.
The rental rates for apartments, like those for self-storage, are easily obtained online. But a key to accurate valuation is differentiating between asking rents and actual rents. The latter are always lower. If the owner or assessor isn't using actual rents or fails to fully consider all concessions, the property is being over-assessed.
Another strategy is to attack the cost approach, which assessors sometimes use instead of the income approach. It determines the replacement cost as if new of all the property's improvements, depreciates those improvements, and adds in the land value as if vacant. Almost everyone who employs the cost approach uses the Marshall & Swift Valuation Service cost manual (M&S). This practice has flaws, particularly when used by assessors in a mass appraisal setting. While M&S determines physical depreciation based on age, it can't and doesn't consider functional or economic obsolescence.
Functional obsolescence is a method of depreciating replacement cost based on issues within a facility, such as design flaws or property aspects that aren't as desirable in the marketplace as they once were. Economic obsolescence, also referred to as external obsolescence, is a method of depreciating the replacement cost based on factors outside of the property, such as a recession or, say, a global pandemic. Since M&S doesn't take these obsolescence features into account—and neither do assessors—self-storage owners and their representatives had better make sure they do.
If these time-tested methods don't yield the desired market value, the owner may choose to employ newer methods that've helped to achieve assessment reductions for other property types.
A Hotel for Your Stuff
When valuing hotels, many owners and assessors will use the income approach. They'll take the room revenue, subtract expenses, factor in risk and capitalize the NOI to reach a value. The problem with this method is some revenue in the income stream comes from intangible, non-taxable sources.
For example, a hotel's franchise or flag and the management agreement, among other items, can add to the revenue stream. These intangible elements should be identified and removed from the income approach to preclude valuing or taxing something that's intangible and, therefore, non-taxable.
There's a corollary argument to be made when it comes to self-storage. The "Big 5" brands in the market are publicly traded real estate investment trusts, each with an easily recognizable name and reputation that's likely to drive more traffic and revenue than an off-brand or non-branded facility. And a brand is an intangible asset, exempt from property tax.
As the Big 5 are also involved in the management side of the business, they're likely to bring intangible value from their operational expertise into the income stream. That revenue has nothing to do with the property's real estate value. The same can be said of the income generated from the sale of packing items such as boxes, tape and locks. These sales don't indicate value to the real estate, but rather value to the business.
Hotels can also suggest comparison metrics applicable to other property types. In addition to comparisons by price per square foot, hotel analyses can consider value per key, room revenue multipliers and revenue per available room. Like hotels, self-storage properties can be compared to each other in several ways. These can include value per lock, unit revenue multipliers and revenue per available unit. Of course, an appraiser or assessor would need to adjust for factors like interior vs. exterior access, climate-controlled vs. non-climate-controlled space, and single vs. multi-story improvements.
Which units of comparison to use for the most advantageous outcome will vary by taxing jurisdiction and the type of self-storage property. If it's in an area that requires all individual property types to be valued fairly and equitably, these units of comparison and the adjustments become ever more important to arrive at the correct value.
With nowhere to hide from the assessor's spotlight, the hope is that self-storage owners and their representatives will actively protest their increasing assessments. It's time for them to be proactive and creative in their arguments to achieve reductions.