Fact: Self-storage development is at an all-time high, and the demand for storage is still on the rise.
Fact: Investing wisely in a self-storage facility has proven to be lucrative for those who’ve chosen this vehicle for cash flow and wealth accumulation.
Fact: You can’t always do it alone.
Whether you need financial backing for a self-storage project, sage business advice or just a swift kick of motivation, you need key players in your corner. Contrary to what those on the “outside” may think, funding your next investment is the easy part. Choosing how to structure your deal and the best ways to launch or scale your portfolio, well, that’s a longer conversation.
As you can imagine, there are many ways to partner on a storage asset. Each type of partnership has its own benefits and challenges, and it’s important to select the best deal structure based on the individual project. You must start by asking the following:
- What are your goals? Do you need funds, framework or freedom?
- How much do you need?
- Are you willing to co-own your business and pay equity?
- With how many partners are you willing to work?
The answers will help you choose the partnership that’s best for you. Let’s take a deeper dive into the options available to self-storage investors.
Having a debt partner is the most traditional form of partnering on a new self-storage facility. Think about it as you would a typical mortgage: Someone lends you money and you repay it with interest. When you bring on a debt partner, it’ll fund the investment and be paid according to the interest rate for a set period, typically established at the onset of the agreement. If you fail to repay the loan, the partner could foreclose on the property.
Debt partners don’t have any say in your business, and they won’t receive any profit from it outside of what’s owed as stipulated in the promissory note and mortgage. They’re simply bankrolling your investment. Once you’ve paid back the loan with interest, your partner’s job is done, and it has no retaining rights to the business.
The caveat: Debt partners only fund the facility. They don’t provide any management advice, fund additional startup costs, or share any knowledge or best practices to move the business forward.
When taking on equity partners, you share in the profit and losses of the business. Equity is also defined as ownership interest, usually as a percentage or shares of a limited-liabilty company (LLC).
Whether there are two or 22 partners in a project, not all receive an equal share. Percentage of ownership is based on a number of factors. Typically, profit is distributed based on the amount of equity each partner contributes, but the percentages may vary based on their roles and responsibilities. For example, one partner may be the operation expert, while another is responsible for raising the capital to fund the deal. The responsibility of each party is spelled out in the partnership or operating agreement.
The caveat: Be certain the operating agreement outlines the equity shares and profit distributions for all partners. It should also include clear roles and responsibilities for all general and limited partners. Perform your due diligence on all parties.
When two or more parties come together for a specific purpose, it’s considered a joint venture (JV). It can be either:
- You and a partner use a common entity to establish a JV agreement.
- You and a partner establish a separate business entity such as an LLC or corporation.
In either case, both partners contribute funds to invest in the acquisition or development. Both also share in the management of the newly formed venture as well as any profit derived from it. Typically, once the goal is achieved, the JV may dissolve.
A JV is usually a quick way to establish a partnership, as all it takes is a written agreement and the establishment of a new entity. It can help you expand your current business or develop one from the ground up. Partners can draw on each other’s experiences while equally taking on the liabilities and collecting the rewards.
The caveat: Sometimes you’ll want to zig when your partner wants to zag. You’ll have to pull your thoughts together and make sure you’re on the same path to avoid conflict and move the business forward.
A syndication can be formed by a group of people or corporations that come together for a specific purpose. Most syndications are formed as a Securities and Exchange Commission (SEC) Regulation D filing, which means it’s an investment treated as a security, as you’ll be offering shares of the LLC to the public. Most are open to accredited investors, but do allow unaccredited and unsophisticated investors to participate.
The pooling of resources, skillsets and knowledge could prove to be a win/win/win for the project. The greatest syndications include a mix of individuals who have various expertise in acquisition, development, operation, marketing and finance. Not all these talents are used at the general-partner level, but even limited partners (though mostly silent) can be tapped to assist in moving the needle. The largest benefit in forming a syndicate, however, is it allows for more and larger self-storage facilities to be developed or purchased.
The caveat: Syndications can be costly due to attorney’s fees to set up an SEC Regulation D filing or similar vehicle. In addition, management of the asset, which includes regular and timely communication with the equity partners, and managing distributions and ongoing reporting, can be a time burden.
Tenants in Common
Tenants in common (TIC), also referred to as “tenancy in common,” is an option whereby two or more people share ownership of the property. Each person’s interests are treated as a separate contract, while the property is owned wholly, in totality, by all parties. In other words, no single party can lay claim to a certain part of the property. One can, however, have unequal distributions of interests. You may own 75 percent of the property while a partner owns 25 percent.
As the primary partner, you do have the option of buying out the other parties should you no longer wish to be TIC. Additionally, each person may leave his share of the property to a beneficiary of his choosing, should an untimely death occur.
This is a popular structure, as it increases the borrowing capacities of the entity. The lender will look to each partner to guarantee the loan. Plus, you’ll divide the cost and maintenance of the facility.
The caveat: Make sure you’re getting into business with a partner you know, like and trust. If things go south, or he defaults on his portion of the mortgage, you’ll be responsible for the entire loan balance.
Getting Across the Finish
Leveraging the experience, capital and creditworthiness of potential partners is the key to growing your self-storage portfolio at a faster pace. There’s no right or wrong approach to partnering on your next venture. It’s a function of determining what’s needed to get the deal across the finish line, assessing the resources each partner brings, and taking into consideration the exit strategy for all parties.
As always, all partnership agreements should be drafted by an attorney, preferably one who’s adept at the particular type of structure you and your partners choose. I strongly suggest each partner also has an attorney review all documents to avoid any potential misunderstandings.
Scott Meyers, founder of Self Storage Profits Inc., has been involved in the self-storage industry as a developer, owner, syndicator and operator since 2005. He owns and operates 22 facilities in nine states. His community, www.thestoragemastermind.com, consists of equal parts owner/developers and private-equity investors who partner on select projects nationwide. To reach him, e-mail firstname.lastname@example.org, or visit www.selfstorageinvesting.com.