When a storage fund's going-in cap is an assumption about deals that do not exist yet, the exit cap deserves a hard stress test

Consider a $75m storage fund raising its second close, blind pool apart from a couple of seed assets. The model shows a weighted average going-in cap of 6.1% on the target pool and an exit at 5.9%. The development sleeve is underwritten to a 7.4% yield on cost with a 30 month lease-up to 90% physical, rent growth at 3% annually starting in year two and flat in year one, expense growth at 3.5%. The issue worth sitting with is that the 6.1% going-in is an assumption about deals that have not been sourced yet, and the 5.9% exit is an assumption about a market five years out. Two of the three biggest return drivers are inputs the sponsor is choosing, not facts. The third, the lease-up curve on the development sleeve, is the one thing the sponsor actually controls, and it is often underwritten faster than the seed assets themselves have leased historically. Running the exit at 6.4% instead of 5.9% and holding everything else constant is a useful test. It typically drops net-to-LP from a low teens IRR to high single digits, still above an 8% pref but with most of the promote gone. That tells an investor the GP is being paid for cap rate compression more than for operations. The better move is to ask the sponsor to re-run the model at a flat exit cap and see what changes. A sponsor confident in the operating thesis should be able to answer that cleanly; one who cannot is telling you where the return actually comes from.