Inside Self-Storage

JAN 2019

Inside Self-Storage (ISS) is an information source for industry owners, managers, developers and investors covering news, trends, facility operation, finance, real estate, construction, development, marketing, technology, insurance and legality.

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Joint Ventures When two or more parties come together for a specific purpose, it's considered a joint venture (JV). It can be either: • You and a partner use a common entity to establish a JV agreement. • You and a partner establish a separate business entity such as an LLC or corporation. In either case, both partners contribute funds to invest in the acquisition or development. Both also share in the management of the newly formed venture as well as any profit derived from it. Typically, once the goal is achieved, the JV may dissolve. A JV is usually a quick way to establish a partnership, as all it takes is a written agreement and the establishment of a new entity. It can help you expand your current business or develop one from the ground up. Partners can draw on each other's experiences while equally taking on the liabilities and collecting the rewards. The caveat: Sometimes you'll want to zig when your partner wants to zag. You'll have to pull your thoughts together and make sure you're on the same path to avoid conflict and move the business forward. Syndications A syndication can be formed by a group of people or corporations that come together for a specific purpose. Most syndications are formed as a Securities and Exchange Commission (SEC) Regulation D filing, which means it's an investment treated as a security, as you'll be offering shares of the LLC to the public. Most are open to accredited investors, but do allow unaccredited and unsophisticated investors to participate. The pooling of resources, skillsets and knowledge could prove to be a win/ win/win for the project. The greatest syndications include a mix of individuals who have various expertise in acquisition, development, operation, marketing and finance. Not all these talents are used at the general-partner level, but even limited partners (though mostly silent) can be tapped to assist in moving the needle. The largest benefit in forming a syndicate, however, is it allows for more and larger self-storage facilities to be developed or purchased. The caveat: Syndications can be costly due to attorney's fees to set up an SEC Regulation D filing or similar vehicle. In addition, management of the asset, which includes regular and timely communication with the equity partners, and managing distributions and ongoing reporting, can be a time burden. Tenants in Common Tenants in common (TIC), also referred to as "tenancy in common," is an option whereby two or more people share ownership of the property. Each person's interests are treated as a separate contract, while the property is owned wholly, in totality, by all parties. In other words, no single party can lay claim to a certain part of the property. One can, however, have unequal distributions of interests. You may own 75 percent of the property while a partner owns 25 percent. As the primary partner, you do have the option of buying out the other parties should you no longer wish to be TIC. Additionally, each person may leave his share of the property to a beneficiary of his choosing, should an untimely death occur. This is a popular structure, as it increases the borrowing capacities of the entity. The lender will look to each partner to guarantee the loan. Plus, you'll divide the cost and maintenance of the facility. The caveat: Make sure you're getting into business with a partner you know, like and trust. If things go south, or he defaults on his portion of the mortgage, you'll be responsible for the entire loan balance. Joint ventures are a great way to leverage equity. Just like the public companies, the operating partner benefits from branding, operational-expense scale and market share as if it owned the entire property; and it accomplishes this with less than 100 percent of the equity… Of course, there are issues regarding control, decision-making, property management and other factors that some privately held companies want to avoid. But generally, when interests are properly aligned, joint ventures enable operators constrained by limited equity to grow at speeds much faster than they can grow organically. As the joint-venture equity partner gains comfort and confidence in its operating partner, broadening the geographic focus of a partnership can further widen the scope of opportunity. Getting Across the Finish Leveraging the experience, capital and creditworthiness of potential partners is the key to growing your self-storage portfolio at a faster pace. There's no right or wrong approach to partnering on your next venture. It's a function of determining what's needed to get the deal across the finish line, assessing the resources each partner brings, and taking into consideration the exit strategy for all parties. As always, all partnership agreements should be drafted by an attorney, preferably one who's adept at the particular type of structure you and your partners choose. I strongly suggest each partner also has an attorney review all documents to avoid any potential misunderstandings. Scott Meyers, founder of Self Storage Profits Inc., has been involved in the self-storage industry as a developer, owner, syndicator and operator since 2005. He owns and operates 22 facilities in nine states. His community, www.thestoragemastermind.com, consists of equal parts owner/ developers and private-equity investors who partner on select projects nationwide. To reach him, e-mail scottm@selfstorageinvesting.com, or visit www.selfstorageinvesting.com. Source: insideselfstorage.com, "Joint Venture Structures in Self-Storage: Partnerships Provide Investors With Less Risk, Greater Reach," by Aaron Swerdlin Joining Forces With REITs 20 ISS I January 2019 www.insideselfstorage.com

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