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July 1st, 2013

Memo From Frank & Dave

It was reported recently that Kanye West and Kim Kardashian have three different self-storage units. That’s not really unusual, as 10% of all American families also have some of their possessions in a self-storage facility. American self-storage is the largest in the world, but there are several factors that would suggest that it is getting set to expand again. One if the fact that 10,000 baby boomers per day are retiring, and many will be moving to new, smaller homes – and moving is nearly #1 on the list for why people get a self-storage unit. The second phenomenon is that real estate prices are high and getting higher in many markets – and most people realize that they are foolish to waste $300 per square foot housing room for items that could be put in storage for a fraction of that amount. Finally, it just keeps getting easier and more attractive to get a self-storage unit. The marketing is better, the facilities are cleaner and brighter, and the specials are attractive. I’m sure that Kanye West would not be using self-storage if it was the 1970’s-style unit with poor lighting and gravel streets. But the modern self-storage industry has a very high level of play, and is well positioned for the changes in America.

The Dangers Of Pro-Formas

Have you ever looked at the numbers on a self-storage facility for sale, and noticed that they are labeled “Pro-forma”? Or noticed that the numbers show the revenues based on 100% occupancy, and then subtract out vacancy to bring them back to where they actually are today? What you are seeing is the standard practice of offering the potential buyer “pro-forma” calculations, which are often a clever way to get you into trouble. So what is the “pro-forma” dilemma?

An Inaccurate Viewpoint

So what’s the problem with pro-forma numbers? Nothing legally. But they imply current conditions and potential that is erroneous. Let’s just look at the implications from a pro-forma analysis of a normal self-storage facility. Let’s assume that the occupancy at the facility is 70%. Then that should be the number that is used in the calculations for current net income. However, the “pro-forma” analysis is going to show what “could be” at 100%, and then back into the real net income after 30% vacancy. This extra step is designed to give your brain the erroneous concept that the numbers are much stronger than they really are, and that there is much more potential than the numbers reflect. In many markets, there is general vacancy of 30% or more that is probably never going to improve. Setting the first impression that there is 100% occupancy as a target gives the buyer a bad grasp of the situation.

Often An Attempt to Mislead the Buyer

So if “pro-forma” numbers are bad, then why do sellers dispense them? Some sellers might give “pro-forma” numbers as a realistic viewpoint that their failure to hit the desired occupancy should not be held against the property. But others – perhaps the majority – have no other purpose other than to mislead the buyer into over-paying for the property. It’s the same sales pitch they use to sell exercise equipment, showing the “after” you at your perfect weight and all pumped up. But the reality is that you are not going to probably ever hit those stats, and you may decide that the exercise equipment is not really that great to buy or use unless you buy into the idea that you can hit perfect. Basically, the fact that “pro-forma” numbers are given with bad intentions should make every buyer suspect of the motive.

Disturbing to Lenders

Many self-storage facility buyers simply pass the numbers they are given on to the proposed lender. Nothing disturbs a lender more than financials that are not 100% accurate, and pro-forma numbers are not the way they want information presented. In addition, the buyer often becomes brainwashed into believing the pro-forma numbers are the actual results – albeit after some additional effort – and this flavors their discussions on the property. Nobody that we know uses “pro-forma” numbers in their actual discussions and analysis of a property – and that includes banks and appraisers. So the “pro-forma” disease can actually trickle down to others in the acquisition pipeline and infect the whole process.


Analyzing self-storage facilities is hard enough without having to unravel “pro-forma” numbers given by the seller. When you receive a package on a facility that contains “pro-forma” analysis, don’t give them any credibility – focus solely on the current, actual performance. And don’t disseminate those pro-forma numbers to anyone else on your team, as they are as tainted and dangerous as avian flu. Stick with real numbers, and not the fantasy numbers that “pro-forma” numbers project.

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