How to Raise Equity for Real Estate Investing and Storage Units

We raise equity, then we get debt placed on these properties. Construction debt is a little bit different than your non-recourse loans. They typically have a step-down recourse. We're signing a recourse on the debt until the certificate of occupancy, and then it steps down to possibly a 75% recourse until we're about 50% leased up, then it goes to 50% recourse. It steps down as the property becomes more stabilized. We're signing on debt and then we're using equity to do the down payments and things like that.

In relation to storage facilities, I don't really know what our smallest facility is, possibly 11 million. We haven't done any smaller mom and pops. I think just based on my understanding of commercial real estate in general, if you're doing a smaller facility then your local community bank would probably be interested in it versus a Marcus Mill Chap, large scale commercial broker, which is where we typically go to get our debt and shop it around. The short answer is, I don't really know, but the type of leverage that we're typically seeing on our ground-up construction is about 70% loan to cost. The first one was 65. Now that we're doing our third one, they're more comfortable with our business models, so they have gone up to 70% loan to cost.

Typically, when raising equity, the investments are up to that 30%. We have investors anywhere from 50 to $250,000 that comes in and we put them in a preferred position. We typically structure our deal as a 12% preferred return per year to the investor and we expect to be able to return capital and interest by month 36 once we're stabilized. Yeah. Okay. So explain this. We give you preferred returns. What does that mean? because we're from the fix and flip world, the investors that followed us into commercial space were looking for security, consistency, stability. They just wanted to see the same thing every year, but we were raising money from about 10% and then we weren't deploying that capital for the entire 12 months out of the year because we were flipping houses.

We would give them their money back. Then after a month, they’d give it back to us. 10% if deployed for 10 months isn't 10, it's eight. They just wanted to see more stable returns consistently. So preferred is the position that we put them in to give them that added level of security. In the operating agreements on these deals, it says that the bank is paid first. The debt has to get paid first, then the preferred equity investors get paid. So as the owner we don't make anything until the preferred payments are made. The owners eat last, they're in a preferred position. If there's cash flow, they get it until they meet their 12% per annum.

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