The Three Greatest Risks to Your Value Michael

The Three Greatest Risks to Your Value Michael L. Mc. Cune, President – Argus Self Storage Sales Network

Cannons on the Deck Where they roll, no one knows! • Interest Rates • Cap Rates • Overbuilding

A Short History of Interest Rates

Interest Rates Perspective: How extraordinary are these times? • The Federal Reserve has raised interest rates twice! • Current rates are the lowest in 40 years. • There have been only four years in the last 40 years when rates were between 2% and 4%: 1963, 2002, 2003, and 2005 – a long run. What in 2006? • Over the last 40 years rates were 3. 5 times as likely to be in the 6% to 8% range as where they are today! Rates were equally likely to be in the 12% to 14% range as where they are today!

Computing Value The Perfect Case! Rents @ 95% occupancy Expenses $300, 000 $100, 000 (excludes depreciation & amortization) Net Operating Income Divided by Buyer Minimum Return $200, 000 8% (Cap Rate) Value $2, 500, 000 Other issues that affect Value: Land leases, easements, new construction, property tax increases, loan lock-in, property conditions, proposed sales taxes, excessive expenses – and the list goes on…

Interest Rates So What ? This is What!! Project Example Revenue Expenses NOI Purchase Price @ 9. 5 cap $300, 000 $100, 000 $2, 100, 000 Cash Flow Calculations Loan Interest: NOI: Debt Service: Cash Flow: Return on Equity: 6% $200, 000 $122, 000 $78, 000 14. 9% Assumptions: Loan: 75% of value Amortization: 25 Years Equity: $525, 000 Loan: $1, 575, 000 8% $200, 000 $146, 000 $54, 000 10. 3% 10% $200, 000 $172, 000 $28, 000 5. 3%

Cap Rates Perspective: • Relationship of Value to Income • Why does the relationship change? • Interest Rates • Inflation • Risk Perception (Overbuilding) • Project Specific Characteristics • Range over Q 1 2003 to Q 1 2006 was 9. 45% to 8. 27% • Which Cap Rate to use • Trailing • Stabilized • “Sounds Low”

What a Difference Cap Rates Make! Back to our example: NOI Cap Rate Value 3/1/03 $200, 000 9. 45% $2, 116, 000 3/1/05 3/1/06 $200, 000 Your 8. 0% Guess? $2, 500, 000 • Increase in value solely because of change in Cap Rate (19% increase) • Increase in equity: 76% increase • Loan to Value Ratio Change: 75%, now 63% Source: Self Storage Data Services, Inc. – Pasadena, CA Copyrighted

Overbuilding “Plague on our House” Iron Rules of Real Estate • High returns generate development • Supply of real estate is often money driven, not demand driven • Pent up demand is about gone – growth is based on more users not their new uses.

Overbuilding Self Storage Issues • The “Learning Curve Demand” is about over • “Build it and they will come” is over • Information on Supply is poor • Understanding of Demand is poor • Prediction of markets is difficult • The fastest growing MSA in the US (population) was growing 3. 9%/year – the average was 1. 3%/year.

Overbuilding Anecdotes (Some Local Conditions) • Current market is 93% occupied. Site specific projects planned equal 150% of current projects. • Previous Market (3 -mile radius) had 338, 590 SF and 85% rented (290, 000 sf) New projects opened in last 12 months 221, 000 SF (76% of existing demand) • Rates on Climate Controlled 10 x 10 units went from $145/month to $89/month plus a free month as 9 new projects opened.

The Local Market A Sample Market Facilities Number SF Total SF Occp. % Actual Demand Existing 6 40, 000 240, 000 88% 211, 200

A Sample Market, cont. Facilities Number SF Total SF Occp. % Actual Demand Existing 6 40, 000 240, 000 88% 211, 200 New 1 60, 000 0% 0

A Sample Market, cont. Facilities Number SF Total SF Occp. % Actual Demand Existing 6 40, 000 240, 000 88% 211, 200 New 1 60, 000 0% 0 New Total 7 300, 000 70. 3% 211, 200 Total demand has to rise 25. 1% to get back to the same market.

Impact of Overbuilding Occupancy 100% 88% 70% Rent $300, 000 $264, 000 $210, 000 Expenses $100, 000 Operating Income $200, 000 $164, 000 $110, 000 Debt Service* $111, 000 $89, 000 $53, 000 -0 - $2, 222, 000 $1, 822, 000 $1, 222, 000 Cash Flow Value** * Value $1, 822, 000; 75% LTV, 6. 5% INT, 25 year amort. ** Based on 9 CAP

Question & Answer For more information contact: Michael L. Mc. Cune Argus Self Storage Sales Network 1 -800 -55 -STORE mccune@argus-realestate. com www. selfstorage. com