From the desk:Self-Storage (Capital Scale)

$50k slot in a storage fund and I can't follow where the money goes

Someone I trust forwarded me a deck for a self-storage fund. Minimum is $50k, which is most of what I have set aside, so I want to understand it before I do anything.

The fees I can find in the deck: 2% acquisition fee, 1.5% annual asset management fee, 6% of revenue property management fee to an affiliate, 1% disposition fee, and then an 8% preferred return with a 70/30 split after.

I can follow each one individually. What I can't do is add them up into a picture of what I actually get. Is the 8% pref calculated before or after all those fees? The deck says "investors receive an 8% preferred return" and I don't know if that means the first 8% of the money coming in the door or the first 8% of what's left after five different fees.

Also the deck says the sector is defensive and recession resistant, and I keep seeing that phrase. What does it actually mean for a fund that's buying with debt?

I'm not in a rush. I'd rather ask the dumb version of the question here than nod along on a call.

Answer

3joe_delgado5AP4CPRO6

The pref is almost always calculated after fees, and that's the answer to your main question. Fees come out at the property level or the fund level before anything is distributed. So the 8% pref is 8% on your invested capital, paid out of whatever cash is left after the asset management fee, the property management fee, debt service, and operating expenses. It is not 8% of gross revenue and it is not a floor anyone owes you. If there's no cash, there's no pref payment, it just accrues.

That last part matters more than the ordering. "Preferred" means first in line, not guaranteed. In a fund with meaningful debt, a soft couple of years means the pref accrues unpaid and you get it later out of a sale, if the sale supports it.

On the fee stack, look at where each one is charged, because that changes the size. Acquisition fee is 2% of purchase price, which on a leveraged deal is 2% of a number much bigger than your equity. Asset management at 1.5%, find out whether it's on committed capital, invested capital, or asset value. Those three produce very different dollars. Property management at 6% of revenue is normal for storage and it goes to an affiliate, so ask whether the fund can fire them.

On defensive, it means demand comes from things that happen regardless of the economy, people dying, divorcing, downsizing, moving. Storage leases are month to month, so operators can raise rates fast when demand is strong, and tenants tend to stay put because moving your stuff again is a pain. What defensive does not do is protect you from a fund that bought at a low cap rate with floating rate debt. The asset can perform fine and the capital structure can still hurt you.

5 replies

1mitchell_ray4 Get yoursPRO6

Worth knowing that month to month also cuts the other way. Rates can fall fast too. In markets that got overbuilt during the boom, street rates dropped hard and stayed down while the new supply leased up.

1nicole_adeyemiPassivePRO5

Ask for the PPM and the LPA, not the deck. The deck is marketing and the fee definitions in it are summaries. The actual answer to your pref question is one sentence in the distribution section of the operating agreement and it will be unambiguous. If they won't send you the documents before you commit, that answers a different question.

1tonyv88SO4CPRO6

@flint is right that 6% of revenue is standard for storage third-party management, but I'd add that in storage the manager also usually controls the revenue management system, meaning the software that sets street rates and pushes existing customer rate increases. So the affiliate manager is deciding the number that their own fee is calculated on. Not sinister on its own, it's how the industry works. Just ask what the rate increase policy is and how often existing tenants see one, because that's the single biggest lever on the income you're buying.

2laurenkim53Passive

$50k being most of what you have set aside is the part I'd sit with longest. These funds lock your money for five years or more with no way out, and secondary sales of LP interests are rare and painful. Fees and prefs matter, and so does whether you'd be fine not touching that money until 2031.