What Makes a Good Deal?
|Copyright 2014 by Virgo Publishing.|
|By: Benjamin Burkhart|
|Posted on: 11/01/2005|
In any business transaction, investors look for the right mix of critical elements. In self-storage, that mix includes an experienced management team, a good marketing plan, strong cash flow and an ability to adapt in a changing marketplace. At the heart of every deal is a simple agreement among a team of professionals that defines everyone’s responsibilities, risks and rewards.
Getting a deal done in today’s market requires savvy and creativity. In this article, we’re going to look at how deals are put together. We’ll talk about team-building, partnerships and financing.
Ready, Set, Go
A deal can begin in any number of ways. Maybe you’ll find a site you believe is ripe for development or stumble across the opportunity to become a partner. What set your most recent deal into motion? A dream? A desire to achieve business or personal goals? An attempt to keep up with a growing market? Chance? The best deals start with an idea, evolve into a plan, are packaged by a team, and then formed and measured. Where are you on this continuum?
Forming a strong deal is really about team-building. Even if you’re the sole owner, you’ll still need a team to get your project moving in the right direction. So identify the support you need early in the planning stage. First, determine what you bring to the table. Do you have experience, equity, both? Next you’ve got to bring on professionals who have expertise where you don’t, perhaps investors, managers, engineers, architects, contractors, consultants or lenders.
Finally, you need a clear understanding of who is responsible for what. For example, you might hire a consultant to verify your instincts on the viability of a new project or the accuracy in reporting of an existing store. For new construction, your relationship with contractors, engineers and architects should be well-defined to maintain your overall vision of the project.
Equity Partnerships and Joint Ventures
More joint ventures and complex partnerships are being seen in self-storage as the industry gains recognition from other business sectors and investors. Not everyone agrees on what makes a good partnership, but specifically outlining your goals and objectives can be critical to the viability of this type of “marriage.”
In an equity partnership, a group of investors (limited partners) funds the initial equity while relying on a managing partner (or partners) to develop the market, manage the property and provide appropriate returns. In a joint venture, a contractor might team up with a developer to build a project.
Every deal is different, and what makes it successful will vary, even among parties with equal interest. For example, investors with 1031 Exchanges may be looking to park money in a self-storage property for a specified return. Other investors will want some management responsibility. What makes the association work depends on the aims of the partners. Define those in the beginning and measure them along the way.
Protecting Your Interests
Once you understand how to make your deal fly, it’s time to set the wheels in motion. You’ll want to work with a lawyer, who will represent your interests in the partnership agreement and set up the best entity to accomplish your goals. Ask him to help you define profit-and-loss sharing, equity positions, decision-making and an exit strategy.
Make sure you’re protected if your partner or investor wants to leave. Partnerships are formed and dissolved all the time. Anticipate potential deal-changing scenarios, such as tragedy, death, sickness, difference of opinion, future sale, the next deal, etc., and what to do in a time of necessary transition.
It’s a good idea to have a lawyer review your individual, specific interests. Also take your concept to your accountant and make sure he can implement the proper controls in the partnership agreement. Keep in mind a complex agreement could demand additional bookkeeping processes, reporting and expenses.
Funding the Deal
The self-storage industry is fortunate to have many financing options. Several reputable companies specialize in providing capital specifically to storage owners. There’s great advantage in working with professionals who understand the business—you have a lot on your plate when forming a deal, and you shouldn’t have to educate your lender about the industry.
Your lender is part of your team. To ensure he can meet the requirements of your deal, provide him with as much information about your project and partnership as you can, and ask specific questions. Who needs to sign guarantees? What collateral is required? What is the standard equity injection? What expenses (hard and soft costs) will the lender finance in a loan package? What happens when you choose to refinance in a few years? What about financing expansion phases?
At your initial meeting with the lender, determine what outlay of capital will be required on the deal. Most lenders want you to have the cash reserves or income stream to float a new project during lease-up. If you’ve already brought in a lot of capital, ask if you can borrow against your existing equity or the equity in another property to fund lease-up expenses. If you’re buying an existing store, the required funds may impact the terms of any partnership agreement that exists.
Financing for your project may come in an all-in-one construction-permanent loan or in a couple of phases. A new project requires construction financing that allows you to breathe during lease-up. After the project is up and running, you may decide it’s time to lock in your permanent loan.
Depending on the goals of your business, the size of the loan, and your facility’s cash flow, a variety of options are available. For permanent loans, there’s usually a relationship between the flexibility of the terms, the interest rate and the availability of growing equity. When searching for permanent financing, have some well-defined needs in mind when you sit down with your lender. Discuss specific goals, and find out if he can tailor a loan to your particular needs.
The ‘Ahhhh’ Factor
Putting together a deal from start to finish can be exhilarating and stressful. It takes time, effort and creativity. On new construction, even breaking ground can be a seemingly endless process. For an acquisition, finding the right investors and developing confidence in the accuracy of a facility’s reported income and feasibility can be equally hectic.
But when you assemble a professional team and a sound plan, good things happen. Once your facility is fully operational and hitting projections, you know your effort has been worthwhile. And before regrouping your team to do it all over again, you’ll be able to give the universal sigh of accomplishment: Ahhhh...
Benjamin Burkhart is a Southeast self-storage specialist for Wells Fargo Financial’s Self Storage Group, which offers custom-tailored loans to self-storage owners and developers, including construction, permanent and acquisition financing. Mr. Burkhart works to provide refinancing as well as loans for new projects and acquisitions. He can be reached at 804.598.9440; e-mail firstname.lastname@example.org.