A storage lease up assumption of 92 percent against a Murfreesboro comp set stuck at 79 percent

The promote before proof structure is what should kill it. Picture an industrial flex JV where the sponsor hits the promote at month 14 on paper occupancy that collapses to 61% actual by month 20, and by then the waterfall has already paid out. That pattern is common enough to underwrite against.

That 79% comp set sitting flat for two years is the number to keep coming back to. The sponsor assumption that always breaks first is the one about why their asset will outperform the submarket by 13 points. It is almost always "superior amenity mix" or "better digital marketing", and neither of those has ever closed a gap that size in a market where street rates are already under pressure. What happens instead is they hit 82 or 83, declare stabilization close enough, and the promote clock starts anyway because the waterfall language is loose on the definition of stabilized occupancy. Murfreesboro had a real supply wave come in around 2021 and 2022, and that absorption hangover does not clear in 18 months if new deliveries are still in the pipeline within five miles. Find out exactly how the waterfall defines occupancy, physical or economic, and what trailing window it uses, before getting comfortable with where that $340k sits.

That 11% rate drop on Climate Select is the tell. Sponsors almost never update street rate assumptions mid-hold because it would torch the promote math before the promote hits, so the pro forma stays wrong with nobody flagging it. A market clawing back 13 points of occupancy in 18 months is close to unheard of when the comp set has been glued at 79 for two years. The far more common outcome is that the sponsor reaches month 18, reforecasts, and the promote threshold gets waived or renegotiated in their favor. Murfreesboro added a lot of supply off the I-24 corridor in 2022 and 2023, and that absorption drag is real. Ask them specifically what their stabilized comp is and whether it opened before or after that supply wave.

92 to 79 is not a rounding error, that's a structural gap and a 18-month timeline in a market that's been stuck for two years doesn't close it. I'd go back to the sponsor and ask what the waterfall looks like if occupancy plateaus at 81 and street rates drop another 6 before stabilization, because that's closer to what Murfreesboro is actually telling you. If the promote still hits under that stress case, the deal is structured wrong and I'm out.

The flat street rate assumption is the one I keep staring at too. If the comp set has been at 79 for two years that's not a lease-up market, that's an equilibrium, and the sponsor is essentially betting they outperform a ceiling that nobody else has broken through. I looked at a deal in Smyrna about eight months ago where the underwrite had Climate Select at $1.18 per sq ft and by the time I was doing diligence actual asking rents were $1.04, which is almost exactly that 11% gap you're describing. The promote structure pulling $340k of value forward before stabilization is the part I couldn't get comfortable with either, because if month 18 comes in at 83% instead of 92% the sponsor has already been paid on a projection, not a result.

The $340k pulled forward is actually two problems: the promote hits early, and the discount rate used to pull it forward is almost certainly the sponsor's hurdle, not yours.

Say the deal stabilizes at 84% instead of 92%, which is still five points above the comp set. On a 200-unit facility averaging $130 per unit per month, that six-point gap is roughly $18,700 in monthly gross revenue, around $224k annualized. Capitalize that at a 6.5 cap and you've lost $3.4 million in exit value before you touch the rate deterioration you've already documented. The promote structure rewards the sponsor for a projection, and the LP absorbs the correction on the back end when the sale price reflects reality.

The rate assumption compounds it. An 11% decline on Climate Select units that the pro forma marks flat means the revenue bridge to 92% occupancy is partially fictional even if occupancy hits the target, because the per-unit revenue supporting that number has already slipped. Occupancy and rate move together in a soft market, which the Murfreesboro comp set is demonstrating right now.

The question I'd put to the sponsor is whether the waterfall has a clawback provision, and if so, what the lookback period is relative to the projected stabilization date, because that's the only mechanical check on the promote-before-proof problem.

Does the operating agreement have any rate or revenue triggers that delay the promote, or is it purely occupancy-gated?

The thing I'd want to know before anything else is what's underneath that 79% comp figure, specifically whether it's been 79% on falling street rates or 79% held up by concessions burning through operator cash. Because those are completely different situations and they produce the same occupancy number on a market report. I saw this exact thing reading through a smaller Chattanooga deal last spring where the comp set looked stable right up until two facilities dropped rates another 8% to defend share. The market was at 79% on the way down, not 79% parked at equilibrium.

The part I don't see enough people push on in JV structures like this: has the sponsor modeled the promote threshold in nominal dollars or against an IRR hurdle with a lookback? Because if it's nominal and the Climate Select rate continues down another 5 to 7% over the next two quarters, they can still technically hit the promote trigger on occupancy percentage while actual cash yield to LPs is running behind pro forma by a meaningful margin. That's the structure doing exactly what it was designed to do for the wrong person. I'm not in a deal this size yet, still working through my first duplex, but I've read enough of these quarterly update patterns to know that flat rate assumptions in a declining street rate environment aren't conservative underwriting, they're optimism with a spreadsheet behind it.

I sold a 94-unit facility in Wisconsin in 2022 and the lease-up assumptions in the original underwriting were the last thing that came true. We hit 91% eventually but it took 26 months, not 18, and that was in a market that wasn't already sitting at 79% with nowhere obvious to go. Murfreesboro has been absorbing new supply for a while and two years of flat comps is the market telling you something the pro forma is not. The climate-controlled rate compression you're describing, 11% off peak, that's not a blip, that's a reset, and underwriting flat from here is not conservative, it's just wrong. What's the sponsor's explanation for why their asset captures 13 points above the existing comp set, specifically, because "superior amenities" and "better visibility" are not answers?

The sponsor's lease-up curve deserves a month-by-month absorption schedule, not just a target occupancy at month 18, because the waterfall timing depends on when you cross the promote threshold, not on where you land at the end. If net operating income hits the hurdle in month 16 on paper but street rates keep drifting, you are paying a promote on a projection, not a performance.

What I would want confirmed before the next capital call: what is the blended street rate assumption embedded in that 92% pro forma, does it hold Climate Select flat from today or from the original underwrite date, and has the sponsor stress-tested the waterfall at 82% occupancy with rates down another 5%? That last scenario may still work, but seeing where the promote disappears tells you what the deal actually costs you if absorption tracks the comp set instead of the model.

What does the JV agreement say about a promote clawback if stabilized occupancy falls back below the hurdle rate after the promote has been paid?

The assumption doing the most work is not the occupancy number, it is the timeline. Eighteen months to 92% in a market where the comp set has sat at 79% for two years implies your facility absorbs demand that the existing supply has not been able to capture, and nobody in the pro forma is explaining where that incremental demand comes from. Climate Select units dropping 11% in street rate while the pro forma holds them flat is a revenue problem, but it compounds into a valuation problem because the promote is priced off a stabilized NOI that was built before those rate cuts existed. If you apply the current street rate trajectory to the occupied unit count at 79%, the gap between that number and the pro forma's stabilized NOI is probably wider than the $340k figure suggests, because you are getting hit on both occupancy and rate simultaneously. What does the waterfall look like if you cap the promote trigger at, say, 83% sustained for two consecutive quarters rather than a point-in-time 92%?

What's the sponsor's explanation for the 13-point spread against the comp set?

The $340k is only part of the problem; the discount rate applied to that projected NOI is doing just as much work.

Say the pro forma underwrites Climate Select at, call it $1.20 per square foot per month, flat. If street rates are already down 11% and sitting at roughly $1.07, and the comp set has held at 79% occupancy for eight quarters without recovering, the stabilized NOI is not just lower, it arrives later. A discounted cash flow that pushes the promote trigger to month 18 at the original rate assumption is valuing a lease-up that the local market has not produced for anyone. If you rerun the same waterfall at $1.07 and 82% occupancy instead of 92%, the promote either disappears or moves past month 24, which changes the GP's incentive structure through the whole hold period.

The part worth pressing on is whether the waterfall uses an IRR hurdle or a cash-on-cash preferred return as the promote trigger, because those two structures respond very differently to a slower lease-up. An IRR hurdle penalizes the GP automatically if NOI comes in late. A preferred return structure can still hit the promote trigger on paper if the sponsor is accruing and then catching up in a single quarter, even when actual street performance is soft.

What is the promote trigger mechanism in the operating agreement, IRR or preferred return?

Six quarters of diverging data and a flat pro forma is not a lag, it's a decision someone made.

What did the sponsor say when you asked about the Climate Select line directly?