Equity structure - First big self storage deal

[Wayne Michalak]

Hi everyone.  First post here.  Looking for ideas on how to best structure my first big self storage deal.  I will be brief and provide the facts.  I purchased and have been paying for a large building (65,000sf) for a conversion project.  I have owned it for 12 months.  In that time I've gotten it conditionally rezoned (big undertaking) with the city.  Paid for a feasibility study (very strong demand!).  Hired a GC and am working on site plan approval.    Holding costs are very high right now along with GC bills and attorney fees to date.

I have a couple people that want to jump in at this point to provide money.   I will need help getting the construction financing, etc. moving forward.  One of the potential people has self storage history so it will make the lender more comfortable.   

My question is:  What is a good deal structure to take into consideration all the effort/risk I have done to this point?  At this point it is a turn key conversion project.  I have read/watched all the videos:  Bridger P, AJ Osbourne, etc on funds, and equity waterfalls.  Seems very complex and a bit advanced for me at this moment.  I negotiated a really good deal on the building so the value add is phenomenal.   

I want to be fair (what's a great IRR for this deal?) to everyone but not leave money on the table. Appreciate any advice! Also if you are proposing a structure please feel free to leave examples of how the math would work out with hypothetical #'s. THANKS!!

[Neil Henderson]

This is a really difficult question to answer in a concrete way because there are so many variables. What you are essentially trying to come up with is the cost of capital, and that's going to be based on lot of factors.

The risk profile of your offering, your experience level executing on your proposed business plan, the amount of capital available seeking these types of deals in your immediate network, how well your potential investor knows you and trust you, how much of return is the overall deal going to put off, what other options for investing do potential investors have, what kind of returns are you competing against?

Just like a hard money lender is very often going to charge a lot more points and higher interest rate to an inexperienced house flipper that they've never worked with before, someone bringing capital to your deal is going to want a different return based on the above mentioned variables in order to be enticed to come into the deal with you.

We have a lot of experience doing these type of conversions and we are our own general contractors and property managers, so we are typically able to hold onto more of the general partnership than the average syndication, but even we are competing in the marketplace of Capitol returns against others syndicators. If the investors in our network are able to get a higher return from a comparable syndicator, then very often we aren't going to be where those investors choose to put their money. 

I don't know how many of these conversion projects you have done before, but someone who has successfully executed on three or four of these types of deals is probably going to be able to find investors who are willing to take a slightly lower return because of the lower risk of working with an experienced operator. Then again, perhaps you have someone in your network that knows likes and trusts you and has capital that they are really interested in putting to work. They might be willing to take a lower return.

At the end of the day, if this is one of your first deals of this nature where you are looking to raise private capital, my best advice would be to keep it simple and keep it clear for the investor. I don't think there is a need to create any complicated waterfalls.

"My goal is to give you X percent return on your money over the next X years. We plan to do that in X years or better. I need this much money, I’m going to hold it for this long, here is when I project you will start getting distributions (if at all), the distributions and reporting will be given out monthly/quarterly, and this is what I expect your total equity multiple will be at the end of the deal.“

However you need to structure your GP/LP side to provide those types of returns to your investors that will still allow you to make enough money that it was worth your time, I think there is where you will arrive at some type of answer to your question.