Cost Benefit Analysis of Professional Commercial Property Management.

Published in Insight – by John Gilliland

At some point in time, every “mom and pop” self storage facility owner wonders whether they want to continue operating their own place. The question then comes up as to where they should turn for help to get rid of their headaches of running a facility, while still maintaining ownership and profit from the property. The main question that persists is how to justify the cost of commercial property management.

Here is where a cost benefit analysis done by a professional commercial property management firm comes in. We do these free for individuals who are looking at possible management.

Recently, we presented a commercial property management proposal to an owner of a 4-property portfolio, and he asked us to prepare a cost benefit analysis to help him in his decision-making process. We looked at the management summaries, potential revenue reports, rent surveys and also visited the sites. What we found was typical of properties that have been operating for a long time, are relatively full, and making a lot of money for their owners. We found the following results.

Occupancy – Most properties in the portfolio were over 90% occupied, but two properties deserved a closer look. The first was 98% occupied. What does that tell us? It says the rents are too low!  If

we raised the rents across the board and maintain a 92% occupancy rate, we would raise the income by $12,000 per year. The second property was at 85% occupancy and has been there for multiple years. The assumption was that the market was saturated and that is the market occupancy rate. What our review of the site told us was that we had a manager who expected that the occupancy should be 85% and managed to that level. With a new sign, new manager expectations and a marketing plan, we can get this occupancy up significantly. If we can get it to 92% in 12 months that means an additional $43,904 to the owner!

Delinquency – You don’t like auctions? This owner only held two auctions per year. What happened is that the tenants figured this out and knew they could wait to pay their rent until the week before the auction. In addition, if they paid their delinquent bill, the manager would waive most of the late fees. With our company, the delinquency rate for May was 2.4%. Our goal is 3% or less. If in four months we can get this delinquency rate to 3%, this will save the owner about $9,600 per year in delinquent rent, not to mention the late fees he will collect each month.

Late Fees – Always charge two late fees per month if your state law permits. This gives your tenants an incentive to pay now versus waiting until the next rent payment is due. It also helps to offset the amount of work your manager and home office staff have in collecting late rent. If the owners adopted our method, the dollars collected on behalf of the owner would be $6,300.

Administration Fees – Do you still take deposits on your rental units? Does your competition? People look at the total move-in cost when considering renting a unit. If you charge a security deposit in addition to the first month’s rent, you may be at a disadvantage against the competition. Additionally, the paperwork reduction by not refunding deposits is truly significant. At $10.00 per unit, the owner will save an additional $9,450 over the course of a year.

Retail Sales – Tenants will go somewhere to buy their locks, boxes and moving supplies. Why not your self storage facility instead of U-Haul? Retail items are typically marked up 75-150% over your cost. If you have any significant drive-by traffic at all, you should have sales of at least $500 per month. Some stores have retail sales over $2,000 per month. For an average, let’s say your property would be $750 per month. That annual income to the owner is $7,000 net per property!

Truck Rental – It may seem like a lot of hassle to set up, but once in place this brings in some additional income. The big advantage is whether your competition has it or not. With offering a free rental truck with each move-in (move-outs have to pay), don’t you think this offer will put you in the number one position against your competition? You can rent or own your own truck and the paying customers will typically cover the cost of owning and insuring it. Extra income for the owner is $2,400 per year. Also put your name on the truck if you can – people are then driving around your advertising for free!

Rental Rates – We referred to this previously under occupancy. If your rates are too high, the competition will take most of the new tenants entering the market – this is really bad for those in a lease-up situation. If you are too low, you are leaving money on the table. Your commercial property management company will monitor market rates monthly and make sure the store is positioned correctly. Increase those rates if you are over 94% in any one unit size. Increased revenues here equal $12,000.

Altered Fees – Is your manager forgiving late fees on a regular basis? We monitor this with the computer software and make sure it is done on a very limited basis. If for every other bill we pay late there is a late fee penalty, then self storage should be no different. This is another $3500 that you could make additional this year.

Lost Units – Have you ever discovered units that were coded out of the computer or were never put in at the initial start-up? How about units that are in maintenance forever or company units that are never consolidated into one? At every property we take over, we find these types of units. Fix them, clean them up, and re-activate them for $7,000 per year.

These all add up to an astounding $94,854.00 per year per property! That will more than offset the professional management fee of $32,000 (6% of gross revenues) per property. There’s more. If we applied a cap rate to this number to determine the value of the increased income, then $94,854 less the management fee of $32,000 equals $62,854. Apply the cap rate and your professional commercial property management has increased the value of your facility by a whopping $661,621. Do these numbers sound too good to be true? Talk to Storage Asset Management or SAMinc. at 717-779-0044 or visit their website www.storageassetmanagement.com for more information on this.