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Creative Investment Strategies for Self-Storage Acquisitions

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By Richard Schontz and Matthew Weckesser

Successful investment in self-storage can be accomplished through several strategies, all with varying levels of risk and reward. Below are three creative options to explore: commercial condominium acquisitions, bridge-loan financing and joint-venture equity partnerships.

Condominium Structure

The creation of a condominium structure can allow for flexibility when investing in a self-storage property that also includes a retail, multi-family or other use component. This concept was recently used to execute the sale of a multi-use property in Cherry Hill, N.J. The former big-box retail site had been converted into three distinct spaces: a 98,000-square-foot, climate-controlled self-storage facility and two retail spaces occupied by regional tenants.

This unique asset provided a challenge for retail investment groups who weren’t interested in owning and operating a self-storage facility as well as self-storage owners who didn’t have interest in retail space. Prior to going to market, the seller was advised to create a condominium structure to allow flexibility in the marketing process. The property was offered as a single asset or as individual assets, which afforded access to the appropriate buyer pool for each use. While fairly time-consuming to set up, the condominium structure allowed separate investors to acquire the assets that best fit their specific investment strategy.

The self-storage portion of the property was acquired by a publicly traded real estate investment trust (REIT), and the two-unit retail condominium was purchased by a private, regional retail operator. The separate purchasers agreed to a formal structure that dictated the rights and responsibilities of each owner. Ultimately, the condominium separation led to a substantial self-storage investment that would’ve been otherwise unachievable. Execution of this type of transaction takes patience and creativity but can serve as a good way for investors to acquire in-fill properties in retail locations without having to purchase significant interest in an asset that doesn’t fit their core strategy.

Bridge Loan

Bridge loans are a flexible source of debt, as these lenders aren’t constricted by the same occupancy and cash-flow requirements faced by permanent loan lenders. They can be the solution when purchasing a self-storage facility that has expansion capabilities, needs to be managerially repositioned or isn’t yet economically stabilized. This type of financing can provide future funding for significant capital expenditures and construction with floating, fixed or hybrid structures that can be tailored to each borrower’s needs.

Some of the biggest advantages of a bridge loan can be:

  • A sub-1.0 debt-service coverage ratio (DSCR), as most permanent lenders will require an initial DSCR of 1.25 or higher
  • A high loan-to-value (LTV) ratio, sometimes upward of 85 percent, as traditional permanent financing won’t exceed 75 percent LTV on a self-storage property
  • The ability to alleviate potential prepayment issues such as costly yield-maintenance or defeasance penalties

Although there can be risks involved, such as an interest-rate increase in a floating rate structure, there’s significant value in the flexibility a bridge loan can provide for specific investments that allow an owner to finance the future potential of a value-add property.

Joint-Venture Partnerships

Performance-based joint-venture (JV) partnerships have become more common as institutional equity continues to expand within the self-storage sector. Penns Trail Self-Storage, a 50,000- square-foot facility in the Philadelphia suburb of Newtown, Pa., recently sold to a JV that exemplifies the continuously growing interest of institutional equity in this bourgeoning real estate sector. Let’s look at how this marriage of an operator, equity partner and debt financing created maximum value for the sellers while allowing interested investors and operators to acquire high-quality assets at a suitable cost to achieve their required returns.

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