Evaluating a storage development JV where the lease-up curve carries the return

Two things I'd want before anything else. Run it at 42 months to 89% instead of 30 and see what the equity multiple does, because the interest reserve only goes 28 months and after that somebody is writing checks for debt service out of pocket. Ask them directly, in writing, who funds the gap between month 28 and stabilization and whether that funding is a capital call, a sponsor loan, or a preferred slug that sits ahead of you. The second one is simpler. Ask what their last three ground-up facilities actually did on lease-up versus what they modeled at the time. If they can't produce that, the 30 months is just a number they like.

Can someone define yield on cost for me. Is that just net operating income divided by everything spent to build it? And if that's 7.9% and they sell at a 6.0 cap, the value is higher than the cost because the buyer accepts less income per dollar, so the difference is the profit. Am I following that or missing a step.

@bmoreno23 yes, that's the mechanic, and the step being missed is that the 6.0 cap has to still exist in 2029 or whenever the sale happens. Nobody can promise that. @carlos_nunez the thing worth a weekend is supply. Pull the planning and permit records for every jurisdiction within a three mile ring of all three sites, and look at what's approved but not built as well as what's under construction. A facility that opens six months before this one in the same ring will hold street rates down for two years, while the model has rates going up 18% over that same window. This is a common trap, an apartment sponsor underwriting rate growth can lose a full year of it on paper to new supply nobody accounted for.

6% of gross revenue to their own management arm is inside the normal band for third-party storage management, sometimes with a monthly minimum per facility. What I'd hunt for is the second and third fee that don't appear in the summary. Construction management fee as a percent of hard costs is common on ground-up, and so is a disposition fee on the sale. Ask for a full schedule of every payment that goes to the sponsor or any affiliate, at every stage, and ask whether the pref accrues and compounds or just accrues.

Naive question but the piece I don't get is where the tenants come from. A lot of storage demand is people moving house. If moves stay slow, does a brand new facility just sit there, or is there enough demand from other life stuff to fill it slower but still fill it?

@paulgrant17 it fills, generally, it just fills at a worse rate than the model. That's the part that hurts. Lease-up concessions are the release valve when volume is short, so the customer gets signed at a month free and a $79 rate, and then the operator is stuck raising them later. @carlos_nunez from the operations side, ask who is physically there. Three new facilities with a shared district manager and remote leasing is a real model, but the staffing plan drives the payroll line, and payroll modeled at a stabilized-facility number applied to a property in month four is a common trap when it actually needs more human hours, not fewer.

Different angle. Whatever the numbers say, at $200k on a $15.6M raise that's a rounding error with no governance rights, so the question to ask is what comes on paper: quarterly reporting with actual occupancy and actual in-place rate per square foot per facility, the operating statements, and notice before any additional capital is raised above that position in the stack. If the answer is an annual PDF, that tells you how they see small checks.

The spread between a 7.9% yield on cost and a 6.0% exit is about 190 basis points, and development underwriting used to carry more cushion than that on a three-property ground-up program. That does not kill it, it means almost the entire return depends on two assumptions nobody controls: the exit cap holding and the rent curve landing. Sensitize it properly rather than accepting the sponsor's numbers. Exit at 6.6 instead of 6.0 and hold everything else. Then a rent curve reaching only 92% of the modeled stabilized rate. Then both together, because they correlate, weak rents and wide caps show up in the same year. If the both-together case falls below the pref, that is a lottery ticket on cap rates with a storage brochure on it. Also, hard costs. Tariff exposure on steel and on climate control equipment has been moving around, so ask whether the budget has a contingency and who funds an overrun, the sponsor or the LPs pro rata.

@dpatel_re that both-together case is the one sponsors tend to leave out of decks every time. @carlos_nunez when a sensitivity request goes in, watch how fast the answer comes back. A sponsor who already runs it will send a tab. One who doesn't will send a paragraph about how storage is defensive.

One more: is the land bought or under contract, and are the sites fully entitled? Ground-up storage gets fought at the local level more than people expect, and a rezoning or a conditional use hearing that slips two quarters pushes your whole 30 month curve into a different market than the one you underwrote. If the model starts the clock at closing and entitlement isn't finished, the clock is wrong.

Put actual arithmetic on it so the room can argue with the numbers instead of the vibe. $41M cost at 7.9% yield on cost is roughly $3.24M of stabilized NOI. At a 6.0 cap that's $54M of value, so $13M of gross value creation before selling costs, fees, and any carry. Now move the exit to 6.75. Same NOI, $48M, so $6M gross, and $41M of cost carries $25.4M of debt if the sponsor draws the full 62%. Take a 1.5% disposition cost and a 30% promote above pref, and the LP number gets thin over what is probably a six year hold. That's before the case where the rent curve underdelivers, which knocks the NOI down and the cap up at the same time. @carlos_nunez the question worth asking back is what that $200k earns in the thing you already know how to do over the same six years. If a flip business compounds better than the base case here, size this at whatever amount would be genuinely fine to write off, and get the reporting @chriswalton8 listed.