Price climate control as a capital project: incremental NOI after the fee and the cost of conditioning every foot, against the cap rate, with occupancy kept in the formula.
It is worth adding if the rent premium, after the management fee and the cost of conditioning every square foot whether let or not, pays a return on the capex above the cap rate. On an illustrative 20,000 sq ft floor, a premium of £3.00 a sq ft on £28.00 adds £23,940 of NOI on £280,000 of capex, an 8.55 per cent return that creates £119,000 of value at a 6.00 per cent cap rate. The break-even premium is £2.55, or 9.1 per cent, and losing three points of occupancy on the floor wipes the whole gain out.
Worked in full in Self-Storage Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Climate control, heating and cooling a floor to hold temperature and humidity within a band, is sold to customers storing documents, furniture, wine, artwork and stock. For the owner it is a capital project like any other: money spent now for a higher rent later. The temptation is to compare the extra rent with the capex and stop there. The running cost and the occupancy are where the answer is decided.
| Input | Value |
|---|---|
| Net rentable area of the floor, sq ft | 20,000 |
| Current rent, £ per sq ft a year | 28.00 |
| Climate-controlled premium, £ per sq ft | 3.00 (10.7%) |
| Occupancy, before and after | 85% |
| Capex: plant, ducting, insulation, controls, £ per sq ft | 14.00 |
| Energy, £ per net sq ft a year | 0.90 |
| Plant maintenance, £ per net sq ft a year | 0.30 |
| Management fee, of revenue | 6% |
| Cap rate | 6.00% |
Δ revenue = area × (occupancy after × rent after − occupancy before × rent before)
= 20,000 × (85% × 31.00 − 85% × 28.00) = 527,000 − 476,000 = 51,000
Writing it as two full revenue lines rather than "premium times let area" matters, because it keeps occupancy in the formula. If the conditioned floor lets more slowly at its higher price, the loss falls on the whole £28.00, not only on the premium.
| Line | £ |
|---|---|
| Incremental revenue | 51,000 |
| Management fee at 6% on it | −3,060 |
| Energy on the full floor | −18,000 |
| Plant maintenance | −6,000 |
| Incremental NOI | 23,940 |
Energy and maintenance are charged on the full 20,000 sq ft. Vacant units are conditioned too, because the plant serves the floor, not the customer, so at 85 per cent occupancy the running cost is £1.41 per occupied sq ft, not £1.20.
Return on capex = Δ NOI ÷ capex = 23,940 ÷ 280,000 = 8.55%
Value created = Δ NOI ÷ cap rate − capex = 23,940 ÷ 6.00% − 280,000 = 399,000 − 280,000 = 119,000
Break-even premium = (capex × cap rate + running cost) ÷ (area × occupancy × (1 − fee)) = (16,800 + 24,000) ÷ (20,000 × 85% × 94%) = 2.55
Excel: =(Capex*Cap+Area*(Energy+Maint))/(Area*Occ*(1-Fee))
The project clears its hurdle, with a payback of 11.7 years on NOI. The premium needed is 9.1 per cent of the current rent; the assumed 10.7 per cent leaves a margin of £0.45 a sq ft. That is not much room, and it is the occupancy, not the premium, that eats it.
| Premium, £ per sq ft | Occupancy 82% | Occupancy 85% | Occupancy 88% |
|---|---|---|---|
| 2.00 (7.1%) | −429,333 | −147,333 | 134,667 |
| 3.00 (10.7%) | −172,400 | 119,000 | 410,400 |
| 4.00 (14.3%) | 84,533 | 385,333 | 686,133 |
| 5.00 (17.9%) | 341,467 | 651,667 | 961,867 |
Three points of occupancy move value by more than a pound of premium. Where climate control widens the customer base, a floor that lets to 88 per cent makes the project comfortable even at a £2.00 premium. Where it narrows it, because the price now excludes customers storing garden furniture, a fall to 82 per cent at a £3.00 premium leaves incremental NOI of £6,456, a 2.31 per cent return and a loss of £172,400 of value. Doubling the energy price to £1.80 a sq ft does almost the same damage: NOI of £5,940 and a loss of £181,000.
Comparing the premium revenue with the capex. £3.00 on 17,000 let square feet is £51,000 a year, an 18.2 per cent return and a 5.5-year payback, and the project looks obvious. Charge the management fee, the energy on every foot whether let or not and the maintenance, and the return is 8.55 per cent. Then test occupancy: the premium is usually quoted from competitors' websites, which show street rates, not what the conditioned units actually achieve or how fast they fill. The gap between a quoted rate and the rate the rent roll collects is worked in how to calculate average rent per sq ft in self-storage.
Price climate control as a capital project: incremental NOI after fee and running costs, divided by capex, against the cap rate. Here a £3.00 premium returns 8.55 per cent and creates £119,000, the premium breaks even at £2.55, and three points of occupancy decide the outcome more than the premium does. Self-Storage Real Estate works street rate against in-place rate and the cost base of a 590-unit store, and the free workbook for this case lets you run the floor through the store's own numbers.
Premiums vary widely by market and should be measured from achieved, not advertised, rates. In the illustrative case a premium of £3.00 on £28.00, 10.7 per cent, is needed to create value on £14.00 a sq ft of capex, and the break-even is £2.55 or 9.1 per cent. Below that the conversion destroys value at a 6.00 per cent cap rate.
Plant runs for the whole floor, not just the let units. In the illustrative case energy of £0.90 and maintenance of £0.30 a sq ft cost £24,000 a year on 20,000 sq ft. At 85 per cent occupancy that is £1.41 per occupied sq ft, and doubling energy to £1.80 cuts the incremental NOI from £23,940 to £5,940.
It can widen the customer base or narrow it, and that matters more than the premium. On the illustrative floor, occupancy of 88 per cent instead of 85 lifts value created at a £3.00 premium from £119,000 to £410,400; a fall to 82 per cent turns it into a loss of £172,400.
This article is one calculation from Self-Storage Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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