Over the last two weeks, we have been discussing an overview of fundraising for small self storage investors getting into the business or growing their business.
I have organized this large and complicated world of fundraising into three main buckets, syndications, joint ventures, and funds (or private placements).
This is not an exhaustive or complete picture of all the available methods of raising capital. It does not include “Crowdfunding” or “Blockchain,” for example.
But it does touch on the majority of ways I have seen self storage sponsors put deals together.
Today let’s focus on the idea of “joint ventures.”
Joint Ventures
Simply put, a joint venture (JV) in real estate or self storage is when two or more people or groups pool their resources and knowledge for a development project or investment.
In the joint ventures, I have seen people I coach do, they usually JV with a large, well-funded fund or development group that brings experience, expertise, and capital to the deal.
The people I coach bring the deal, the underwriting, and in most cases, the entitlements.
However, this is not the only way, or perhaps even the most common way, JV’s can develop.
Often, people with experience with JV with the sponsors and be part of the sponsor side of syndication.
The ways JVs can form are endless.
I will give two examples.
Example 1:
The “sponsors” were two equal partners who owned a number of small self storage projects.
Their business plan was to buy and develop smaller self storage projects in their part of the country and remotely manage them long before remote management became a thing in self storage language.
However, in their travels, they came across a number of land parcels where they saw that larger, multi-story, 100% climate-controlled facilities would work. They underwrote them and saw the projects could be lucrative but had no experience in developing them and really did not want to manage them and run them on a day-to-day basis.
They contacted me.
After working with them for a little while, given their strengths and weaknesses (yes, we all have them), I suggested they JV. We located a fund at the time (that fund was later sold) that was doing JVs in large, tier-one markets.
They presented their deal, and the JV was interested.
The structure of this JV deal was as follows:
- Sponsors owned 50%.
- JV owned 50%.
- Sponsors put in 10% of the equity needed.
- JV put in 90% of the equity needed.
- JV also provided the loan.
- Sponsors guaranteed loans until stabilization. Then it became non-recourse.
- JV required a REIT to manage the deal.
The benefit to the sponsors (people I coached) were they could take their idea and time spent on entitling a site and turn it into a project.
They didn’t have the expertise or experience to pull it.
The benefit to the JV was they could do their due diligence (someone else had done most of the work), then deploy capital into a project that was within their business plan of project types they wanted to invest in.
With the sponsors I collaborated with, we executed several of these joint venture agreements. After approximately a year of stabilization, they either sold their stake in the partnership or the projects themselves.
In their world, they now had a company with two divisions. The first one was their self storage ownership division that focused on small, remote-managed projects. The second was their development division, which JV’ed and developed multi-story storage projects.
Example II:
One person I know spent ten years or so developing their own self storage brand, then sold it during the height of the low cap rate frenzy.
Rather than just retire, he decided to JV with others. He had a network of potential investors from his original projects.
He set a minimum standard for deals he would consider, such as size, location, population, and populating growth, etc.
He also did not want to share his network with anyone doing their first self storage project. There needs to be something he could point to with his network to show the sponsors were in the business and had had some success.
He also did not want to go on the loans.
He negotiates a percentage of the sponsor’s shares in syndications, then presents the deals to his network. To help raise capital for the deals.
This form of JV fulfills my friend because he gets the experience of sharing his knowledge and network with others and helping them grow, as well as expanding his net worth, albeit on a smaller scale than before.
Conclusion
These are just two examples of an infinite number of ways to JV with people out there.
You are only limited by your imagination.
My suggestion is to always focus on what benefits you can bring the other party first, then see if you will benefit from any joint venture arrangement.
All parties need to receive benefits, and no one side should get proportionally more considering the resources and experience they bring into the deal. Anything less than a true win-win set the stage for problems down the road.
For those of us that want to get in or grow our self storage businesses, Joint Ventures are a really exciting way to consider moving forward.
