Self Storage Syndication

A self storage syndication is a great way to purchase larger self storage facilities by pooling together the capital and experience necessary to obtain financing. 

What Is A Self Storage Syndication? 

A self storage syndication is a partnership between general and limited partners who together purchase a self storage facility. The general partner puts the deal together, forms the syndication, and manages the project. Limited partners bring capital to invest passively in the project. 

What Is The Role Of A Limited Partner In A Self Storage Syndication?

Limited partners typically consist of passive investors who bring capital to fund the part of the project that’s not covered by a lender or bank financing. Essentially, they bring equity to the table. Additionally, limited partners have limited liability in the deal which is different from a general partner who is typically liable for the entire project.

General Partners vs Limited Partners

General Partners find the project and fund the at-risk capital necessary to put the deal together. On the other hand limited partners bring the money to fund the remaining cash needed to close the deal. Limited partners don’t have the operating control, while general partners do. 

As an investor your goal will be to find a trustworthy general partner who presents a solid investment opportunity. Before spending too much time on the asset class, rate of return, equity multiple, or average annual return, you should vet the operator. Schedule informative conversations and be sure you learn from them on both an investment and personal level. Doing this establishes trust and mutual benefit as the deal comes to fruition.

Why Investing In A Self Storage Syndication Is Beneficial?

There are many unique benefits self storage investments offer. Many of them are unique to the industry and are different from standard real estate or rental investments. From recession resistance, to emergent consumer trends, self storage presents steady growth opportunities for savvy investors. 

As an asset class, self storage has historically done relatively well during recessions. It’s not recession proof, but we consider it recession resilient. Moreover, it positions itself as a secure and predictable venture in a volatile market. With interest rates fluctuating and banks bearish on financing projects, the right self storage syndication project offers a fairly secure place to invest your money. Here are a few pros to self storage investing:

Top 6 Reasons To Invest In A Self Storage Syndication

1. Dual Investing In Business And Real Estate – Combining these two ideas allows you to grow your business model while having all of the security real estate provides.
2. Depreciation Is Passed Through Ownership – This gives investors a tax deduction that can potentially reduce their taxable income. 
3. Monthly Rental Contracts Allow for Revenue Control – Operators have the benefit of routinely implementing rate changes or price adjustments. This can optimize the Net Operating Income and value of the self storage facility. 
4. Growth Through Increased Demand – The United States and household expansion continues to grow in terms of material items. Nowadays, almost all material purchases can be financed and storage demand is set to grow substantially over the next decade
5. Remote Management Through Technology – Using self storage software gives you control over the facility while working off-site. Automatic gates allow tenants to enter an exit on their own accord. Security cameras allow you to keep an eye on your facility 24/7. Payment processors allow you to collect payment remotely. These tools make it simple and straightforward for investors. Unlike multi-family apartments, nobody lives there (hopefully), so you don’t have to worry about tenant, toilet, or kitchen issues.
6. Low Maintenance – Maintaining a facility is based on its size, location, and additional features. In general, you should have an individual or maintenance team who tends to the property and monitors tenants issues when needed. 

How Is Funding Structured In a Self Storage Syndication?

In a self storage syndication, the deal is split between debt and equity. Limited partners come in to fill the equity portion (as passive investors) while the debt portion is typically covered by a third-party lender. Alternatively, if the loan can be covered by the Seller, this is called Seller Financing or a Land Contract. 

The most common way a Self Storage Syndication is funded is by a local bank or credit union. Importantly, most banks prefer to finance properties or self storage facilities within their territory. They do this because they are familiar with the area and their loan risk/growth potential is easier to account for.

Bank Funding In A Recession

As the economy shows signs of a recession, the banks get tighter with their money. As a result, they are less likely to lend on properties outside of their own markets. Historically, banks also have a better understanding of their local real estate markets. 

Consequently, your local bank is your best bet to obtain funds for nearby investment opportunities. Having a contact or an established relationship with a local lender gives you added leverage and reputation when it comes to funding a deal. 

What Is Seller Financing?

Seller financing is an agreement between the Buyer of the property and the Seller of the property. In this case, the Seller agrees to act as the bank and hold the mortgage for the debt. This is a beneficial option when a property is not bank-financeable.

Alternatively, the Seller can structure the financing in beneficial ways to avoid paying capital gains tax. They also have the added benefit of receiving a monthly payment rather than accepting one lump sum. To note, it’s somewhat rare to see Seller Financing with a self storage syndication.

Syndication Attorney

One of our top recommendations is to obtain formal legal advice from a syndication attorney. Find one who is familiar with SEC laws. Having someone on your team to assess the details of your investment opportunity will not only give you peace of mind, but help keep you protected from potential ramifications. 

As with any investments, there are serious repercussions for breaking these laws or not abiding by regulations. The average cost for an attorney in the self storage industry is around ten to twenty thousand dollars. The fee is well worth it to keep you within SEC regulations and to avoid any negative ramifications for improperly syndicating a deal. 

506(b) Syndication vs 506(c) Syndication

What Is A 506(b) Syndication?

A 506(b) syndication allows up to 35 non-accredited investors that you already have an established relationship with. An easy way to remember this type of syndication is “buddies” begins with “b”. If you don’t already know the person prior to your syndication, he or she should not be investing in your deal. 

In this type of investment you can’t publicly solicit the investment. It’s considered a private deal that you put together with people you’re familiar with so all solicitation should be restricted to private distribution rather than public advertisement. We find it beneficial to know our investors six months to a year before being an investor in a 506(b). 

The SEC website states, “no general solicitation or advertising to market the securities.”

As non-accredited investors that bring capital to the deal, the investors need to know and understand the risks associated with the investment. Therefore establishing trust and a history of diligence is important. 

The SEC website states, “securities may not be sold to more than 35 non-accredited investors (all non-accredited investors, either alone or with a purchaser representative, must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment).”

Having an SEC attorney to guide you through the syndication process is of the utmost importance. Non-accredited investors must have sufficient understanding of the prospective investment and risks involved. The SEC requires offering disclosure documents and financial statement information to be provided to the investors. 

The SEC website states that if non-accredited investors participate, the company, “must give any non-accredited investors disclosure documents that generally contain the same type of information as provided in Regulation A offerings (the company is not required to provide specified disclosure documents to accredited investors, but, if it does provide information to accredited investors, it must also make this information available to the non-accredited investors as well), must give any non-accredited investors financial statement information specified in Rule 506 and should be available to answer questions from prospective purchasers who are non-accredited investors.”

SEC guidelines on rule 506(b) can be found online at: https://www.sec.gov/education/smallbusiness/exemptofferings/rule506b 

What Is A 506(c) Syndication?

In contrast, a 506(c) syndication is an offering for accredited investors only. You are allowed to publicly talk about or market the investment opportunity. Non-accredited investors are not allowed in this and you don’t have to have a previous relationship with these investors. 

The SEC website states that issuers are permitted to generally solicit the offering provided that “all purchasers in the offering are accredited investors, the issuer takes reasonable steps to verify purchasers’ accredited investor status, and certain other conditions in Regulation D are satisfied”.

SEC guidelines on Rule 506(c) can be found online at: https://www.sec.gov/education/smallbusiness/exemptofferings/rule506c 

Accredited in this context means you either have a net worth of $1 million dollars excluding your primary residence or a net income of $200,000 if you’re single or $300,000 if you’re married.  Individuals may also qualify as accredited investors based on financial sophistication that can be proven by holding specific licenses, being general partners in the project, or meeting other specific criteria. 

The SEC definition of “accredited investor” can be found online at: https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor 

Self Storage Syndication Software

There are several self storage syndication softwares that will make your life way easier when it comes to organizing your investments. Simply put, the top one we recommend is InvestNext.

InvestNext is a communication platform that allows you to send updates to your investors. Moreover, it’s an all encompassing capital-raising platform that allows investors to sign and submit syndication documents online. 

It tracks capital raises, funds received, and funds committed. Moreover, if there is more than one general partner, it also allows you to collaborate and work off the same information.

The software also calculates and processes distributions so you’re not wasting your time manually calculating or wiring money. 

Lastly, they keep your account secure. It’s imperative to have your deal information and investor’s information locked down in order to avoid data breaches or cyber attacks.