Operating, debt and covenant break-even for an illustrative store, measured on area, with the rent that moves underneath them.
Self-storage break-even occupancy is the store's fixed costs divided by what each occupied square foot contributes after the costs that move with it, expressed as a share of net rentable area. On an illustrative 60,000 sq ft store with £420,000 of fixed costs and £23.77 of contribution per occupied sq ft, operations break even at 29.4 per cent occupancy, the interest is covered at 56.8 per cent and a 1.25x coverage covenant at 63.6 per cent. Those are the three numbers a lender, an owner and a buyer each mean by "break-even".
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 →
A stabilised store with 60,000 sq ft of net rentable area, 85 per cent let by area. Customers pay an average in-place rent of £24.00 a sq ft a year, and the store earns a further £1.80 a sq ft of net ancillary income from contents protection and merchandise. Almost all of the cost base is fixed: staff, business rates, insurance, repairs, marketing and systems do not fall when a unit is vacated. What does move with occupancy is the management fee, charged on revenue, and bad debt and card charges, which follow rent. The store carries a £6,000,000 interest-only loan. All figures are illustrative.
| Item | Value |
|---|---|
| Net rentable area | 60,000 sq ft |
| Current occupancy (area) | 85% |
| In-place rent | £24.00 / sq ft / year |
| Net ancillary income | £1.80 / occupied sq ft |
| Management fee | 6% of revenue |
| Bad debt and card charges | 2% of rent |
| Fixed operating costs | £420,000 |
| Loan / interest rate (interest only) | £6,000,000 / 6.5% |
| Coverage covenant | 1.25x |
Revenue per occupied sq ft = 24.00 + 1.80 = £25.80
Less management fee 6% × 25.80 = £1.55, less bad debt 2% × 24.00 = £0.48
Contribution = 25.80 − 1.55 − 0.48 = £23.77
Every square foot let adds £23.77 to net operating income, and every square foot vacated takes it away. That is the store's operating leverage: 92 per cent of each pound of revenue drops through.
Break-even area = fixed charges / contribution per sq ft; break-even occupancy = break-even area / net rentable area
Operating: 420,000 / 23.77 = 17,668 sq ft = 29.4%
Interest: (420,000 + 390,000) / 23.77 = 34,074 sq ft = 56.8%
1.25x covenant: (420,000 + 1.25 × 390,000) / 23.77 = 907,500 / 23.77 = 38,175 sq ft = 63.6%
Excel: =(Fixed+Cov*Debt)/((Rent+Anc)*(1-Fee)-Rent*BadDebt)/NRA, with Cov set to 0, 1 or 1.25
Interest on £6,000,000 at 6.5 per cent is £390,000. At 85 per cent occupancy the store lets 51,000 sq ft, earns £1,315,800 of revenue and £792,372 of NOI, and covers its interest 2.03 times. The cushion is 28.2 points of occupancy to the interest break-even and 21.4 points to the covenant.
| Test | Fixed charges £ | Area needed sq ft | Occupancy |
|---|---|---|---|
| Operating costs | 420,000 | 17,668 | 29.4% |
| Plus interest | 810,000 | 34,074 | 56.8% |
| Plus 1.25x covenant | 907,500 | 38,175 | 63.6% |
In self-storage, occupancy and rent are not independent. A store losing customers usually responds with deeper move-in offers and fewer existing customer rate increases, so the in-place rent falls at the same time as occupancy. Re-run the break-evens at other in-place rents.
| In-place rent £/sq ft | Contribution £/sq ft | Operating | Interest | 1.25x covenant |
|---|---|---|---|---|
| 20.00 | 20.09 | 34.8% | 67.2% | 75.3% |
| 22.00 | 21.93 | 31.9% | 61.6% | 69.0% |
| 24.00 | 23.77 | 29.4% | 56.8% | 63.6% |
| 26.00 | 25.61 | 27.3% | 52.7% | 59.1% |
A fall in in-place rent from £24.00 to £20.00 moves the interest break-even by more than ten points, from 56.8 to 67.2 per cent. A downside case that stresses occupancy alone, holding today's rent, understates the risk. The rent the store collects, not the price on its website, is the right input; how the two differ is set out in how to calculate REVPAF.
For a development or a store in lease-up, the operating break-even tells you when the store stops losing money each month; the time it takes to get there, and the losses before it, depend on the flow of move-ins, worked in how long a self-storage lease-up takes.
The common mistake is measuring occupancy by units. Small units let first and fastest, so a store that is 90 per cent let by units can be well under that by area, and rent and costs follow area. Compute the break-even in square feet and compare it with square feet let. The second mistake is dividing fixed costs by rent alone, which ignores the management fee and bad debt that rise with every unit let and ignores the ancillary income that comes with every customer. The third is reading the 29.4 per cent operating break-even as the store's margin of safety: with debt in place, the number that matters is the 56.8, and for the lender the 63.6.
The book computes the break-even of its 590-unit store from the same cohort engine as its rent roll, and the free workbook for this case lets you replace these assumptions with your own store's cost base.
It depends on the cost base and the debt, so compute it rather than borrow one. In this illustrative 60,000 sq ft store with 420,000 pounds of fixed costs, operations break even at 29.4 per cent occupancy by area; adding 390,000 pounds of interest lifts it to 56.8 per cent, and a 1.25x coverage covenant to 63.6 per cent.
Area. Rent and costs scale with square feet let, and small units let first, so a store that is 90 per cent let by units can be markedly less let by area. Here each occupied square foot contributes 23.77 pounds, and the break-even is 34,074 sq ft after interest, 56.8 per cent of the 60,000 sq ft net rentable area.
Lower achieved rent raises it, often at the moment occupancy is falling too. At 24.00 pounds a sq ft in-place the store covers its interest at 56.8 per cent occupancy; if discounting to hold customers takes the in-place rent to 20.00, the same costs need 67.2 per cent.
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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