What is the Replacement Cost of a Self Storage Facility

I was talking to a new investor who had not yet entered the Texas self-storage investment space, and he was primarily interested in distressed opportunities. And when we talk about distressed opportunities, we talk about properties that have been mismanaged for one reason or another, maybe something has happened. Either way, they are not making any money. We do not necessarily need them to be owned by the bank, but they are nevertheless not making any money. So how do we value them? How do we look at them? How can we give an owner an understanding of what the market may be willing to bear if they chose to sell it? And that was part of the conversation I was having with this investor. The topic we discussed was that of replacement costs.

Replacement cost is a concept that we essentially consider to be, what would it cost you to build this thing if you were to do it from the ground up? The price per square foot, per rentable square foot, not including the purchase of the land, what would it cost you? Vintage property, $30, $40 a square foot, sometimes maybe even lower. Second generation property in the late '80s, '90s could be as much as $50, $60. There are some facilities now that could potentially even be over $100 in terms of how much they spend per square foot to build. So we want to keep our mind and our parameters within the confines of replacement cost.

If you are purchasing a facility and you are betting on the come, as they say, and paying upfront in exchange for the opportunity to generate a future income stream, those can be good deals. Those can be the best deals. But it is important in our view to make sure that your analysis includes that concept of replacement cost. Because if you begin paying a premium above and beyond what it would cost you to build it, then we need to make sure that you are being extremely prudent and cautious and judicious about the evaluation of that projected or proforma income stream. So those are a lot of topics to think about and to talk about. And we would love to talk about them with you. Feel free to reach out to us at karrselfstorage.com.

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