There are many ways to lure investors to a self-storage project, but if you want maximize success, it’s best to listen to those who’ve already done so effectively. If you’re looking to fund a new development or acquisition, following is expert advice distilled down to six critical steps.
To assemble this information, I picked the brains of Mark Helm, owner of Q2 Self Storage and author of “Creating Wealth Through Self-Storage,” and John Manes, CEO of Pinnacle Storage Properties. These guys built their portfolios based on deals of $1 million to $10 million with the help of multiple equity partners. Their approaches are similar in that they operate in many market sizes, debt is secured by the assets, and they control their day-to-day business operations. Keep their insight in mind as you try to woo funding for your next self-storage venture.
Step 1: Figure Out What Investors Want
“The first thing we did was study the market to learn what investors were expecting, and then we designed our offering for investors around that,” recalls Helm, noting that when dealing with investors for the first time, you typically have to offer a higher rate of return to compete with other real estate investment opportunities.
When Helm examined the scope of real estate opportunities investors were eyeing, he noted a lot of apartment funds were offering an 8 percent preferred return and a 15 percent to 20 percent internal rate of return. “Because I was just getting going, I realized we would have to beat the market,” he says. “We offered our investors a little bit over what our competition was.”
Step 2: Structure Your Deal
In three years, Manes and his investors have acquired $85 million in self-storage and increased the portfolio’s worth to $110 million. Yes, he added $25 million in value in just three years! How? After debt service, Manes splits cash flow 70/30 between investors and Pinnacle, respectively. He charges 4 percent on the front end in fees and doesn’t take any asset-management fees along the way. On the back end, he splits profit between investors and Pinnacle 60/40.
“I guarantee one thing to my investors, and that is that they could lose all their money. They are not guaranteed anything because it is an investment,” Manes says. “We collect all the revenue, pay all the operating expenses, pay the mortgage, and whatever is left, investors get 70 percent and we, as sponsors, get 30 percent. It benefits me to increase cash flow and decrease expenses on every asset, so we make as much money, too. We are truly partnering with our investors.”
Manes set up his corporate structure as a single-purpose limited-liability company (LLC), in which everybody gets a vote. “If I syndicate a deal at $50,000 a piece, a super-majority vote of 67 percent or more is required to spend a large sum of money for improvements, refinance or to make a sale,” he says. “If the property leases up and we want to cash out in three years, we take a vote. We underwrite to a five-year exit, but it is really dependent on the vote to how long we keep that property.” At the end of five years, the LLC either sells or refinances the property.
Similar to Manes, Helm uses a single-purpose LLC structure. His company owns 60 percent to 70 percent of the LLC shares, and his investors own 30 percent to 40 percent. While investors’ money is in the deal, they get a 12 percent return. In year five, literally at month 59, Helm gives them their cash back, assuming there are no unpaid preferred returns (if there are any accruing, investors receive the balance due).
“At that point, investors are still in the deal, and they own 30 percent,” says Helm. “While their money was in it, they got literally 100 percent of the cash flow because that’s what it took to hit their preferred returns. So, we’re motivated to add value to refinance it. Once they get their money back, investors stay in the deal because, at that point, it’s just like an annuity.”
Helm and Manes agree there’s no one right way to set up a private placement. Under Helm’s method, while the investment is still in the deal, investors have safeguards and rights that they don’t have once he gives them their money back. In other words, to sell, there must be unanimous consent, and he can’t put any more loans on the property against the first mortgage without permission until investors get their money back. “Once their money is returned, then we’re running the deal; and we can decide when it gets sold and for how much,” notes Helm. “Until then, they have a say in it. That’s how we’re structured, but there are a lot of ways to do it.”
Structuring when you don’t have money. Keep in mind, if you’re just getting started, you can still acquire or develop a self-storage facility using investors for the down payment. Many investors are willing to let you set up a deal in which you’re not putting in any equity, but you’re the one who’s on the hook guaranteeing the loan, says Helm. “You get all of your money back, plus you get your preferred term,” he says. “They feel safe because you’re the one signing on the loan.”
Under this scenario, Helm’s investors get a preferred rate of return, usually the first 8 percent to 12 percent of the cash flow. At the exit date, there’s a liquidity event, in which the facility is refinanced or sold to return the investors’ money. Once the investors’ money comes back, they decide whether to stay in the deal or not.
Typically, investors receive the majority of the cash flow until they get their money back. Then the structure changes, in which Helm’s firm gets the majority of the cash flow and the investors are along for the ride for the next few years.
Structuring when you run the facility. Facility operation is one of the areas in which Pinnacle specializes. “The majority of people I meet cannot do storage like we do storage; we are good at it,” says Manes. “Doing deals is not as hard as everybody thinks, but there is a lot of work that goes into structuring the deal and then running the property. If I am a mom-and-pop, I would analyze my risk but also analyze the time, energy and effort needed to manage a property successfully.”
In other words, this is why investors need you. Instead of charging a formation or asset-management fee, Helm charges a property-management fee. If there’s a facility expansion, he also charges a fee based on the cost of construction, though it has a cap. “To build our portfolio using other people’s money, we try to create an investor-friendly investment,” asserts Helm.
In Manes’ case, he charges a gross-revenue asset-management fee of 6 percent or a monthly fee of $1,750, whichever is higher.
Step 3: Set Up a Communication Funnel
Tracking and communicating with prospective investors is an important component to the process. This doesn’t need to be complex and could include one or more of these options:
- Database: Manes enters each new contact into a database, which automatically triggers a series of six e-mails explaining self-storage.
- Social media: Connect with prospective investors through LinkedIn and your company’s Facebook page.
- Text and e-mail: Use these together so news, updates, and first and last names don’t get lost in the clutter. “In my phone contacts, I put ‘investor’ as everyone’s last name who has ever told me they’re interested,” says Manes. “When I’m raising money, I sit on my sofa and type out a text message [outlining the deal]. ‘I’ve got a deal in the pipeline. It’s in Katy, Texas. It’s a $1.5 million raise; we’re selling $50K units. Get back in touch with me if you want to know anything about it.’ One night I texted 98 people while watching a football game. Within five days, I raised $1 million.”
- Referrals: Encourage investors to share your opportunities with friends and family. “A lot of people will invest in deal after deal, and then their friends start investing with them,” says Helm. “The No. 1 concern investors have is they don’t want to lose their money, and No. 2 is they don’t want to miss out on an opportunity.”
- PowerPoint presentation: Helm recommends providing an overview of self-storage as well as the deal on which you’re working or future deals you’re likely to offer. Ask the question: If I came to you with a deal like this or better, would it be one that you would seriously consider?
Step 4: Fish for Investors
Helm and Manes advocate fishing where the ponds are stocked. This includes using MeetUp.com for real estate and investment connections as well as attending conferences, including those for certified public accountants.
“When we’re looking for investors, we’re not looking for people to create their wealth,” explains Manes. “We’re looking for people who’ve already made their money and are trying to put it places where they can beat the market.
“At an investor meetup or conference, there is a preconceived notion attendees are going to be solicited while they are there,” he continues. “Because of that, I can go and solicit investors at these conferences, but you should check with an attorney about disclosures. I meet people and add them to my database. I have over a thousand names in my database right now. When I do get a deal, I e-mail blast those thousand people and, in an instant, I have the money I need.”
Step 5: Keep Kissing Babies
When you’re in acquisitions or development, you’re always raising capital. You want to have a group of potential investors identified, so you’re ready when you actually have a deal. This is why you need to keep your prospect pipeline full. To do that, you need to find more babies to kiss.
It helps to remain visible. Helm and Manes volunteer to write articles. They have blogs, videos and newsletters, and speak at investor and industry conferences whenever possible. Pinnacle even employs a ghost writer to create content. “That’s how I’ve been able to kiss as many babies as I have, so that I get money,” he says. “It’s not as hard as people think. You can’t be shy. If you sit in the corner, you won’t get any money.”
If you don’t know potential investors or aren’t comfortable pitching an opportunity, Helm suggests finding a partner. “Even if you don’t have a partner, you can hire someone to help you. There are people who will raise money for you and charge a fee,” he says. “You can also create a website, post offerings and bring in people you don’t know. You need to talk with an attorney to figure out disclosures, accounting and the process of doing that, but if you don’t know these people, give it to somebody who does.”
Step 6: Rinse and Repeat
Tenacity breeds results. “Don’t shut the hell up about storage. Period. When I sit down at a baseball game, by the time it is over, I know what the person next to me does, where they live, their hobbies and all that. I have all their contact information to put in my distribution list as a potential investor. I keep them all organized, and now I give them to my vice president investor relations. When I started, I kept them all on paper in my day planner,” Manes says.
Helm agrees that it’s important to continually be in “capital-raising mode,” espousing the virtues of self-storage and looking for deals. “I have an investor database, and when I find the deal that works for a particular investor, I know exactly who I am going to go and present that deal to,” he says. “Find the deal that works, then raise the money for that deal; rinse and repeat!”
Helm also recommends characterizing an opportunity as a “solid deal,” rather than a “homerun.” “[With] the few homeruns that I’ve had, I didn’t know in advance they would be homeruns, but I knew they were solid,” explains Helm. “If you put 10 or 20 solid deals together, then you’re going to have good returns.”
The key is to treat your pact with investors as sacred. Don’t take capital for granted. “When someone invests with you, you’ve got to perform pretty much like you said you would,” says Helm. “Not every deal performs as good or better than you predicted, but most of them will if you know how to underwrite them. You should only present deals that you’d have your family put their money in.”
Katherine D’Agostino is the founder of Self-Storage Ninjas, a feasibility-analysis firm delivering unbiased reports resulting in facilities with high occupancy and the highest possible returns. She offers a free, weekly newsletter that provides insider techniques, ready-to-use calculators, downloadable spreadsheets and data sources. For more information, visit www.selfstorageninjas.com.