Buying into a single-asset storage LLC as a 12 percent LP, trying to price the illiquidity

Small syndication, one facility, 310 units plus 22 outdoor RV/boat spaces. Sponsor owns it already and is selling down 40 percent of the equity to fund a canopy build and a gate/access system replacement. Purchase basis was $4.1 million in 2021, current appraisal came in at $4.75 million, debt is $2.6 million fixed through 2028.

My piece would be $265,000 for roughly 12 percent of the equity. Pref is 7 percent, cumulative, non-compounding. Waterfall is 70/30 after pref with no lookback and no catch-up.

What I like: it's boring, occupancy has held between 88 and 92 for three years, and the outdoor spaces are effectively no-maintenance income. What I don't like is the operating agreement. Transfer restrictions are total. Right of first refusal to the sponsor at a price set by the sponsor's own appraiser, 60-day cure, and no put right ever. There's no forced-sale date and no defined hold period. The sponsor said verbally he thinks seven to ten years and I believe him, but the paper says forever.

So I'm trying to price forever. If the 7 pref actually pays monthly and the asset does what it's done, I don't hate a perpetual boring 7. If distributions get suspended for the canopy build and the housing market keeps relocations thin, I'm holding an unsellable position with a growing accrued balance and no way out.

I asked for a valuation formula in the ROFR instead of sponsor's-appraiser. He offered a two-appraiser-plus-tiebreaker mechanism. Better. Still not a market.

The decision is whether the pref and the asset quality compensate for a position I genuinely cannot exit. I keep going back and forth.

3 replies

2renee_dubois Get yours

The canopy build is what I'd chase down before the transfer language. You're funding capex out of new equity, which means the sponsor either couldn't or wouldn't get it from the lender or from reserves. Ask what the facility's cash flow after debt service actually was for the last 24 months, not the pref math, the real number. If the answer is that it barely covers, then a suspension during construction isn't a risk, it's the plan, and you should price the accrued pref as something you'll wait years to collect.

1chriswalton8CC1CPRO8

Two-appraiser plus tiebreaker is a real improvement and most sponsors won't go that far, so he's negotiating in good faith. Doesn't fix the absence of a hold period though. I'd ask for a soft one: after year seven, a majority of LPs can require the sponsor to market the asset. Not a put, not a forced sale at a bad time, just a mechanism that exists. If he says no to that, the verbal seven to ten years and the paper are two different deals and you should believe the paper. Have your own attorney read the whole agreement, this is exactly the kind of thing that varies by how the LLC is organized.

1diane_kowalskiPassivePRO9

7 non-compounding cumulative on a boring asset you can never sell is a bond with equity risk and no maturity date. I'd want more than 7 for that.

Buying into a single-asset storage LLC as a 12 percent LP, trying to price the illiquidity

3 replies