A limited partner underwrote the model line by line and never checked what the sponsor actually knew about the asset class

I don't think the lease-up is the whole story. You lost the money at the exit. Selling a 79% occupied facility means you're selling to a buyer who prices it as a repositioning play, same as your sponsor bought it, and that buyer wants the same discount your sponsor got. If they'd held two more years and stabilized it you might have gotten your basis back. Which raises the real question: who decided to sell, and did the LP agreement give the lender or the sponsor that call once cash was trapped?

The four mile detail is the part that stings. Storage demand is a three mile radius conversation in most markets, and two new facilities inside that ring function as a cap on rents. Small operators get flattened that way regularly. Permits are public in most counties and you can usually see what is in the pipeline for free, though how easy it is to search varies a lot by county.

Dumb question since I've never done one of these. What is a supply study, and how would I check it as a passive investor? I can't go count buildings in a market eight states away.

@dpatel_re did the climate-control conversion come in on budget? Because in my world that's where the money leaks. You're cutting into an existing envelope, running new HVAC and new electrical through a building that was never designed for it, and the surprise is almost always the panel or the roof. If they overspent there, you were behind on day one and the lease-up just showed you the hole.

The cross-asset-class record is where the underwriting broke. Lease-up velocity carried the whole model, and it doesn't transfer between property types. In stabilized multifamily you're forecasting renewal spreads on units that are already occupied. In a storage repositioning you're forecasting demand you don't have yet, at a price point you haven't tested, against supply that can be permitted and delivered inside a couple of years in many markets. A supply study that's two years old at closing says almost nothing about what you'll compete with during lease-up.

On the covenant: a DSCR test that lets the lender trap cash turns your equity from a cash-flow position into an option on the exit. Ask for the covenant section of the loan agreement, the cure rights, and whether the sponsor can fund a cure from reserves without calling capital. Loan terms vary by lender and by deal, so get them in writing before you commit rather than from a summary slide.

Two numbers would have shown the fragility. First, break-even occupancy against debt service, meaning the occupancy and rent level at which the covenant is actually met. If the model only clears the test at 88% in month 12, there's no margin in it. Second, sensitivity on the exit cap rate, run at the occupancy you might actually be at on sale day. Many models price the exit as if the asset is stabilized whether or not the plan worked.

Your revised question is the one that does the work. Ask how many deals the sponsor has taken full cycle in this property type and this submarket, and ask what happened in the worst one.

What happened to the fees while distributions were zero? Asset management fees are usually a percentage of something that keeps existing whether or not you're getting paid, so I'd want to know if the sponsor collected through those two dead years.

That is the right question, @aliyah_b. The related one is co invest. If the sponsor had $2m of their own cash in that portfolio they ate the same third you did. If they had $50k and a fee stream, the incentives were pointed somewhere else the whole time. Do you know what they put in, @dpatel_re?

The scary part is that you did more homework than I would have and still got it, and I'm still figuring out where I fit.

This is the kind of writeup that keeps a lot of would-be LPs in analysis, and that reads as a compliment, since it's the clearest account of a bad outcome this room has seen. The hard part is what to do with it. If the failure mode is an assumption buried in someone else's model plus a covenant you'd have to know to ask for, the open question is whether more research actually fixes that or just makes an investor feel better about the same coin flip.

Who checks the numbers in the quarterly reports? I'd assumed there was some kind of independent review, but from this thread it sounds like the sponsor writes the report about the sponsor's own performance and that's it.

@luis_carrera more research doesn't remove the coin flip, it changes which flips you take. The one thing I ask for now that I didn't three years ago: the final investor letter from their last two full-cycle deals, side by side with the original projections from those same deals. Not the IRR they quote on the website, the actual letter they sent LPs at the end. Sponsors who send it usually send it fast. Sponsors who won't have taught me something either way, and @dpatel_re's storage guys almost certainly had nothing to send in that asset class at all.