Partnerships Available to Self-Storage Investors
Benefits and Challenges of Self-Storage Partnerships
A general lack of significant yield available in lower risk vehicles is forcing investors to get creative. Many investors are exploring asset class diversification as an alternative to the stock market. Self-storage is particularly attractive because readily available capital and low interest rates have provided an abundance of opportunity in this sector.
Self-storage development is at an all-time high, and self-storage investment has proven to be profitable for investors who’ve chosen this alternative for stable cash flow and wealth accumulation. Nevertheless, you can’t always do it alone.
As you may already know, there are more than a few ways to partner on a storage asset, and they all bring their own advantages and challenges. Let’s take a more comprehensive look at the options available to self-storage investors.
This is the most traditional form of partnering on a self-storage facility. When you bring on a debt partner, the investment will be funded and paid according to the interest rate for a set period. Think of it as a typical mortgage: someone lends you money that you repay with interest. Debt partners do not provide management advice, fund additional costs, or share any knowledge to move the business forward. Once the loan is repaid, the partner’s has no retaining rights to the business. This can be done through traditional banks; but, more importantly, if you want to partner on storage it can be done in the form of a private loan. The benefit is that risk is minimized because it is secured by the real estate asset.
Equity is defined as ownership interest, usually a percentage or shares of a limited-liability corporation (LLC). Equity partners share in the profits and losses of a business. No matter the number of partners, not all receive an equal share because percentage of ownership is based on the roles and responsibilities of the partners and the amount of capital invested at the establish of the investment. This should all be detailed in the partnership or operating agreement, which should clearly designate the equity shares and profit distributions for all partners. To avoid misunderstandings, this agreement should clearly outline the roles and responsibilities of all partners. Most equity investors are in a passive position which provides the opportunity to participate in the profits with minimal effort.
A joint venture is a quick way to establish a partnership. When two or more entities join for a specific purpose, it results in a joint venture. Either you and a partner use a common entity to establish a joint venture agreement, or you and a partner establish a separate business entity such as an LLC or corporation. Joint ventures are a great way to leverage equity. The operating partner benefits from branding, operational-expense scale and market share as if it owned the entire property; and it accomplishes this with less than 100% of equity. Partners have the benefit of combined experience while equally assuming the liabilities and collecting the rewards. To avoid conflict, be sure that everyone is on the same road to moving the company forward. Joint ventures are normally a larger equity injection and are good for small portfolio purchases versus one off storage asset purchases.
A syndication is an effective method for investors to combine their financial, operational and intellectual resources to invest in properties and projects much bigger than they could afford on their own, allowing for more and larger self-storage facilities to be developed or purchased. Most syndications are formed as an SEC Regulation D filing, meaning that it’s an investment treated as a security. Shares of the LLC will be offered to the public, including accredited investors as well as unaccredited and unsophisticated investors. The SEC has specific rules in place for solicitation requirements to accredited versus non-accredited investors. It is imperative that you educate yourself so as not to place yourself in a negative position with the SEC.
Syndications that are most effective have a mix of individual expertise in acquisition, development, operation, marketing and finance. The challenge with syndications is that they can be costly due to attorney’s fees to set up SEC Regulation D filing. In addition to cost, consistent communication, distribution management, and ongoing reporting can be onerous. Some syndications can be done with friends and family equity injections that allow for accredited and non-accredited investors without the concern of solicitation requirements.
Tenants in Common
Tenants in common (TIC), also referred to as “tenancy in common” is a specific type of simultaneous ownership of property by two or more parties. All tenants hold a separate contract, but the property is owned wholly by all parties. No individual party can lay claim to a certain part of the property, but each party has the right to transfer ownership interest. Tenancy in Common does allow for unequal distributions; the primary partner can own 75% while another partner owns 25%. The primary partner may elect to buy out the other parties. In the event of an untimely death, all partners have the option of leaving their share to a beneficiary. TIC is a popular structure because it increases the borrowing capacity of the entity, but, if a partner defaults on the loan, the other borrowers must cover the payments to avoid foreclosure. As you might imagine, there must be a trust and a contract to ensure the primary partner is a reputable source.
There’s no typical approach to partnering on your self-storage project. The key to developing your self-storage portfolio at a faster pace is leveraging the capital, experience, and creditworthiness of prospective partners. Regardless of how you structure a partnership for your self-storage project, ALWAYS be sure you partner with an individual who understands how to operate the asset. This will make the difference between a successful and an unsuccessful project. As always, all agreements should be drafted by an attorney with expertise in the type of structure that you and your partners choose.