Strategies for Managing Expenses & Vendor Negotiations

Managing expenses and negotiating with vendors can significantly impact your facility's bottom line. Since facility values are calculated as a multiple of the net operating income (NOI), a penny saved in operating costs can exponentially increase your facility's value.

A $1 saved is $14 earned?

We all know that saving some expenses is a good thing and can increase the monthly profit of a facility. But few storage operators realize just how big an impact expense control can have. Let’s run through an example: 

• Let’s say your Net Operating Income (NOI) is $200,000
• The CAP Rate for a similar facility is 7%
• Then the facility would be worth $2,857,000

If you shave off $20,000 in expenses, the facility value jumps to $3,142,000, an increase of $285,715. That’s right; a $20k saving can result in an almost $285k increase in value. For a 7% CAP Rate property, every $1 saved from the NOI is $14 in increased value.

Of course, other factors go into valuation, but from a pure cash flow valuation, cost savings can have a massive impact on your monthly take-home profit and long-term resell value. That’s why it’s essential you block off time monthly to review the recent or upcoming expenses.

Just cutting costs is not the answer

The challenge lies in reducing costs without compromising on quality. Over time, strategic investments in areas like capital improvements and marketing can lead to better revenues and NOI. This is where a good understanding of your facility, market, and costs will drive your business decisions about which expenses should be cut and where it makes sense to invest back into your facility. 

Understanding Your Costs

The first step in effective cost management is understanding your current expenses. Utilizing accounting software or tools can simplify tracking your financial inflows and outflows. Reviewing the last 12 months of financials can reveal where the most significant expenses lie for those acquiring a new facility or looking to optimize an existing one. This initial analysis is crucial in identifying areas for potential savings.

Prioritizing Cost Reduction

After identifying your significant expenses, the goal is to minimize, reduce, or eliminate unnecessary costs. Surprisingly, even fixed expenses like real estate taxes can be negotiated or appealed, potentially leading to significant savings.

Negotiating with Vendors

Your facility may require various vendor services, including landscaping, trash removal, snow plowing, repairs, and paving. Here’s how to approach vendor negotiations and management:

1. Compare Multiple Vendors
   Always gather quotes from a broad range of providers, ideally three to eight, to compare price, quality, and reputation. The aim is to find a vendor that offers the best combination of reliability, quality of service, and cost.

1. Always Negotiate
   Don’t hesitate to negotiate with vendors. You can often secure better pricing by simply asking. For instance, proposing a contract at 20% less than the quoted price can initiate negotiations, leading to more favorable terms.

1. Value Over Cost:

While finding the lowest price is tempting, the objective should be to obtain the best value. This means selecting vendors who contribute positively to your revenue and NOI, even if their services come at a higher initial cost.

Regular Expense Review and Bidding System

Consistently review your facility's expense ratio monthly and compare it to similar-sized facilities to gauge competitiveness. For significant expenses, implement a bidding system. This ensures you're getting the best price available and allows for regular evaluation of vendor performance and cost-effectiveness.

The Importance of Value

In cost management and vendor negotiations, the focus should always be on value rather than just the price tag. For example, choosing a marketing company solely based on the lowest cost can result in subpar performance, leading to substantial revenue loss compared to a more effective, albeit pricier, alternative. The return on investment (ROI) should always be a key consideration in any expenditure decision.

Here are some examples of expenses that you might want to consider more as investments in your facility.

Investing in a Top-Tier Facility Manager:‍

Hiring an experienced and skilled facility manager may come at a premium, but their ability to effectively retain customers, attract new business, and manage operational efficiencies can lead to significant returns. Their expertise in customer service, marketing, and facility maintenance can increase occupancy rates and rental prices, thereby boosting the facility's net operating income (NOI) and overall value.

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Enhanced Visibility through Signage:‍

Upgrading to larger, more visible signage is a direct investment in your facility's marketing and brand awareness. A well-designed, prominently placed sign can significantly increase foot traffic and inquiries, leading to higher occupancy rates. The upfront cost of the sign is often outweighed by the revenue generated from new rentals.

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Capital Improvements for Competitive Advantage:‍

Investing in capital improvements such as security upgrades, climate-controlled units, and aesthetic enhancements (landscaping, painting, paving) can justify higher rental rates and attract a broader customer base. These improvements increase the property's curb appeal and operational value, resulting in more conversions and a higher overall facility valuation.

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Strategic Marketing and Digital Presence:‍

Allocating budget towards digital marketing efforts, including SEO, PPC campaigns (e.g., Google Ads), and social media advertising, can significantly increase your facility's online visibility and lead generation. While these are ongoing expenses, the return on investment through new customer acquisition and increased rental rates can substantially outweigh the costs, enhancing the facility's income.

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Tax and Legal Structure Optimization:‍

Consulting with tax and legal professionals to optimize your facility's legal structure and tax planning can result in considerable savings and asset protection benefits. This might include forming an LLC for liability protection and tax benefits, implementing cost segregation studies to accelerate depreciation, or exploring 1031 exchanges to defer capital gains taxes. These strategies require upfront investment in professional services but can lead to long-term savings and increased net income, thereby boosting the facility's valuation.

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Conclusion

Effective expense management and vendor negotiations are critical for maximizing the profitability and value of your storage facility. By thoroughly understanding your costs, prioritizing reductions without sacrificing quality, and focusing on value over mere expense, you can significantly enhance your facility's net operating income and, consequently, its overall value. 

Remember, in commercial real estate, especially storage facilities, every penny saved through intelligent management can translate into a more substantial gain in facility value.

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