1. The Three Greatest Risks to Your Value Michael L. McCune, President – Argus Self Storage Sales Network

2. Cannons on the Deck Where they roll, no one knows! Interest Rates Cap Rates Overbuilding

3. A Short History of Interest Rates

4. Interest Rates Perspective: How extraordinary are these times? The Federal Reserve has raised interest rates twice! Current rates are the lowest in 40 years. There have been only four years in the last 40 years when rates were between 2% and 4%: 1963, 2002, 2003, and 2005 – a long run. What in 2006? 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!

5. Computing Value The Perfect Case ! Rents @ 95% occupancy$300,000 Expenses$100,000 (excludes depreciation & amortization) Net Operating Income$200,000 Divided by Buyer Minimum Return 8% (Cap Rate) Value$2,500,000 Other issues that affect Value: Land leases, easements, new construction, property tax increases, loan lock-in, property conditions, proposed sales taxes, excessive expenses – and the list goes on…

6. Interest Rates So What ? This is What!! Project Example Revenue$300,000 Expenses$100,000 NOI$200,000 Purchase Price @ 9.5 cap$2,100,000 Cash Flow Calculations Loan Interest:6%8%10% NOI:$200,000$200,000$200,000 Debt Service:$122,000$146,000$172,000 Cash Flow:$78,000$54,000$28,000 Return on Equity:14.9%10.3%5.3% Assumptions: Loan: 75% of value Amortization: 25 Years Equity: $525,000 Loan: $1,575,000

7. Cap Rates Perspective: Relationship of Value to Income Why does the relationship change? Interest Rates Inflation Risk Perception (Overbuilding) Project Specific Characteristics Range over Q1 2003 to Q1 2006 was 9.45% to 8.27% Which Cap Rate to use Trailing Stabilized “Sounds Low”

8. What a Difference Cap Rates Make! Back to our example: 3/1/033/1/053/1/06 NOI$200,000$200,000Your Cap Rate9.45%8.0%Guess? Value$2,116,000$2,500,000 Increase in value solely because of change in Cap Rate (19% increase) Increase in equity: 76% increase Loan to Value Ratio Change: 75%, now 63% Source: Self Storage Data Services, Inc. – Pasadena, CA Copyrighted

9. Overbuilding “ Plague on our House” Iron Rules of Real Estate High returns generate 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.

10. 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.

11. 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.

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

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

14. 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.

15. 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

16. 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