1. Self Storage Real Estate A Land of Opportunity and Land Mines Michael L. McCune, President – Argus Self Storage Sales Network

2. Table of Contents: I. What Creates Value? II. Cap Rates III. Interest Rates IV. Overbuilding

3. I. What Creates Value? Measuring Value Extracting Value What does a Market Look Like? Whats New in the Market?

4. What Creates Value? Commercial Real Estate 90% of value is cash flow! Intangible increments to Value Good maintenance Appearance Attitude of Seller Nice City Impairments to Value Lack of Future Flexibility Zoning Restrictions Land Leases Sometimes Existing Financing

5. Measuring Value Value is essentially the present value of all future estimated cash flow The Three $64 questions! How much cash will there be? When will it come? What is the right discount on future cash? The Answer is only in the Market - Cap Rates!

6. Extracting Value Sales of Real Estate occur when buyers and sellers agree on all three estimates of value! Perhaps not explicitly – but they must agree. In large measure the right discount rate on future cash is set by the market!

7. What Does a Market Look Like? This is a Market Impacts in Todays Self Storage Market Investment Advisors Pension Funds Foundations 1031 Purchasers (TICs) REITs Pilgrims from Other Real Estate Per SFCap Rate $57/SF10.5% $66/SF9.0% $81/SF7.5% 100/SF6.0% $133/SF4.5% Buyers Sellers Equilibrium Where deals are done

8. II. Cap Rates What are they? How to and not to calculate Cap Rates The Component parts of a Cap Rate How do they change over time?

9. Cap Rates – What are they? A Cap Rate is the rate of return on projected income that investors are willing to accept from a project that: 1) Is competitive in the market and 2) Compensates them for inherent risks and deficiencies in the property or location Stabilized NOI is often MORE important than the Cap Rate

10. How to, and not to, Calculate Value When is a higher Cap Rate Better? Base CaseAlternative 1Alternative 2 Stabilized Market Stabilized Occupancy (in 1000s) Stabilized Market Below Market Occupancy Stabilized Market Potential Rent$333 Vacancy 10%($33)20% ($67)10% ($33) Collected Rents$300$266$200 Expenses 33%$100 NOI$200$166$200 Cap Rate7.5% 8.25% Value$2,666$2,213$2,424 Thus, a higher Cap Rate on adjusted NOI may be better than a lower Cap Rate. Raising the Cap Rate to adjust for the increased risk of vacant space or low rates may be better.

11. Cap Rate Components and the Change Over Time These are the lowest spreads and interest rates in 40 years. Some Spreads I have seen: 250 BPs to 300 BPs - Late 80s 300 BPs to 400 BPs – Mid 90s As a general rule all spreads increase as interest rates increase and money tightens. CRBPs 7.8%Spread of Cap Rates Over Loan Rates 150 6.3%Spread of loan over 10 years T Notes 130 5.0%10 year US Treasury Note Current Cap Rate Components

12. What a Difference Cap Rates Make! Back to our example: 3/1/033/1/053/1/08 NOI$200,000$200,000Your Cap Rate9.45%7.5%Guess? Value$2,116,000$2,660,000 Increase in value solely because of change in Cap Rate (26% increase) Increase in equity: 100%+ % increase Loan to Value Ratio Change: 75%, now 59% Source: Self Storage Data Services, Inc. – Pasadena, CA Copyrighted

13. III. Interest Rates A very short history of Interest Rates Impact of increasing Interest Rates on Cash Flow Impact of Increasing Interest Rates on Cap Rates

14. A Short History of Interest Rates

15. Interest Rates Perspective: How extraordinary are these times? Current rates are among the lowest in 40 years. The Rates in the 1960s were a function of the Treasury setting artificially low rates. Average rate over the last 40 years is 7.4%, or 2.5% greater than current rates. 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!

16. Interest Rates So What ? This is What!! Project Example Revenue$300,000 Expenses$100,000 NOI$200,000 Purchase Price @ 7.5 cap$2,666,000 Cash Flow Calculations Loan Interest:6%8%10% NOI:$200,000$200,000$200,000 Debt Service:$154,632$185,232$218,000 Cash Flow:$45,368$14,768($18,000) Return on Equity:6.8%2.2%-0- Assumptions: Loan: 75% of value Amortization: 25 Years Equity: $666,000 Loan: $2,000,000

17. IV. Overbuilding Plague on our House Self Storage Issues Anecdotes that We Have Seen A Look at the Impact on One Market

18. Overbuilding Plague on our House Iron Rules of Real Estate High returns generate new 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.

19. 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.

20. 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 10x10 units went from $145/month to $89/month plus a free month as 9 new projects opened.

21. The Local Market A Sample Market FacilitiesNumberSFTotal SFOccp. %Actual Demand Existing640,000240,00088%211,200

22. FacilitiesNumberSFTotal SFOccp. %Actual Demand Existing640,000240,00088%211,200 New160,000 0%0 A Sample Market, cont.

23. FacilitiesNumberSFTotal SFOccp. %Actual Demand Existing640,000240,00088%211,200 New160,000 0%0 New Total7300,00070.3%211,200 Total demand has to rise 25.1% to get back to the same market. A Sample Market, cont.

24. Impact of Overbuilding Occupancy100%88%70% Rent$300,000$264,000$210,000 Expenses$100,000 Operating Income$200,000$164,000$110,000 Debt Service*$111,000 Cash Flow$89,000$53,000-0- Value**$2,222,000$1,822,000$1,222,000 * Value $1,822,000; 75% LTV, 6.5% INT, 25 year amort. ** Based on 9 CAP

25. Sample Facility Check Up Form 8th & MainAsh & 4thSmith St.New PropertyOur FacilityAverage Location84999 Visibility78776 Access410879 Signage55785 Traffic1048 8 Appearance968108 Total Points433747514544.6 Occupancy83%63%87%N/A91%81% Rates 5x5$28$31$25N/A$30$28.50 10x10$66$70$62N/A$67$66.25 10x15$75$85$73N/A$80$78.25 10x20$95$100$92N/A$97$96.00 For a blank form, visit www.selfstorage.com/argus/toolbox/checkup.htmwww.selfstorage.com/argus/toolbox/checkup.htm

26. A Few Thoughts about Capital Gains A History of Capital Gains Rates Is a 1031 always the best way to sell?

27. Will History Repeat Itself?

28. Second Thoughts Its Worth the Math Reduced tax deductions Lower rates carried over Other Issues The right property Higher capital gain rates Negotiating disadvantage Detailed Analysis at: www.selfstorage.com/argus/online/1031calculations.pdf www.selfstorage.com/argus/online/1031calculations.pdf

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

30. For a copy of this presentation email: info@argus-realestate.com or call: 1-800-55-STORE info@argus-realestate.com