25
Nov
Capital Stack Optimization for Self-Storage Expansion Projects: Comparative Analysis of Three Financing Structures
Executive Summary
Self-storage expansion projects – acquiring an existing facility and adding new square footage – present unique financing challenges that differ from both stabilized acquisitions and ground-up development.
This analysis examines three capital stack structures for a representative $7.3M self-storage expansion project in Florida:
- All-Cash Acquisition + Construction Loan (Conservative)
- Bridge-to-Permanent Financing (Aggressive)
- Preferred Equity Structure (Institutional)
For each structure, we analyze:
- Sources & uses (detailed capital breakdown)
- Debt terms (rates, LTC/LTV, covenants, guarantees)
- Equity returns (IRR, equity multiple, cash-on-cash)
- Risk profile (execution risk, market risk, refinance risk)
- Optimal use cases (which investors should choose which structure)
Key Finding: Capital stack selection can impact IRR by 3-4 points (15.8% to 19.2%) while significantly altering risk profile – making structure optimization as important as deal selection itself.
SECTION 1: THE DEAL (BASELINE ASSUMPTIONS)
Project Overview: Central Florida Expansion
Existing Facility Acquisition:
- Property: 45,000 SF self-storage (~400 units)
- Vintage: 2008 construction
- Occupancy: 80%
- In-Place NOI: $320,000
- Purchase Price: $3,500,000
- Entry Cap Rate: 6.9%
Expansion Component:
- Additional SF: 20,000 SF (200 new climate-controlled units)
- Hard Costs: $3,400,000 ($170/SF construction)
- Soft Costs: $400,000 (architecture, engineering, permits, fees, financing costs)
- Total Development Cost: $3,800,000
Total Project Cost: $7,300,000
Value Creation Strategy
Lever #1: Rate Optimization (Existing Units)
- Current average rate: $105/month
- Market rate: $140/month
- Upside: +$35/month × 400 units = $14,000/month
- Annual NOI improvement: $168,000
Lever #2: Operational Improvements
- Technology upgrades: $25K savings (labor efficiency)
- Marketing optimization: $45K revenue (digital campaigns)
- Ancillary revenue: $35K (insurance, merchandise, truck rental)
- Expense efficiency: $20K savings (vendor renegotiation)
- Annual NOI improvement: $125,000
Lever #3: New Unit Revenue
- 200 units × $155/month average × 90% stabilized occupancy
- Annual gross revenue: $334,800
- Operating expenses (35%): $117,180
- New unit NOI: $217,620
Lever #4: Portfolio Premium
- Combined 65,000 SF facility (institutional scale)
- Modern + legacy mix (appeals to broader tenant base)
- Operational efficiencies (single management, shared utilities)
- Additional NOI: $50,000
Combined Stabilized NOI: $880,620 (conservative) to $950,000 (optimistic)
Exit Assumptions
Stabilization Timeline: 24-30 months from acquisition
- Months 1-12: Existing facility rate optimization + construction
- Months 13-24: Lease-up new units to 90% occupancy
- Months 25-30: Fully stabilized operations
Exit Valuation:
- Stabilized NOI: $915,000 (midpoint)
- Exit cap rate: 6.25% (premium for modern, expanded facility)
- Exit value: $14,640,000
Exit Scenarios (Sensitivity):
SECTION 2: OPTION A – ALL-CASH ACQUISITION + CONSTRUCTION LOAN
Structure Overview
Philosophy: Conservative approach that separates acquisition (all-equity) from development (levered construction loan)
Advantages:
- Clean acquisition (no acquisition debt complicates construction loan underwriting)
- Flexibility on construction timing (can delay if market conditions deteriorate)
- Maximum control (no acquisition lender covenants)
- Simpler legal structure (single construction loan vs. complex intercreditor)
Disadvantages:
- High equity requirement (61% of total project cost)
- Lower leverage (reduces IRR potential)
- Two separate closings (acquisition, then construction loan 2-6 months later)
Sources & Uses
SOURCES OF CAPITAL:
Total Equity Required: $4,450,000 (61.0% of project)
USES OF CAPITAL:
Debt Terms – Construction Loan
Lender Profile: Regional bank or non-bank construction lender (Argentic, Berkadia, SBA)
Loan Amount: $2,850,000 (75% of $3.8M hard + soft costs)
Interest Rate: 7.5% (SOFR + 450 bps, floating)
- Current SOFR: ~3.0%
- Spread: 450 bps
- All-in rate: 7.5%
- Option: Interest rate cap (2-year, 8.5% strike, cost ~$35K)
Term: 18 months interest-only
- Draw period: 12 months (construction)
- Stabilization period: 6 months (lease-up to 85%+ occupancy)
- Extension: +6 months available (pay 0.50% extension fee + higher rate)
Loan-to-Cost: 75% LTC on development component only
Recourse: Full recourse (personal guarantee required)
- Carve-outs: fraud, misappropriation, environmental, bankruptcy
- Some lenders offer partial burn-off (guarantee reduces as project stabilizes)
Covenants:
- Minimum liquidity: $500K (borrower maintains reserves)
- Completion guarantee: Borrower completes project even if cost overruns
- Lease-up requirement: 85% occupancy within 18 months or default
- Debt service coverage: 1.25x upon stabilization (for conversion to perm)
Draw Schedule:
- Monthly draws (submit invoices, lender inspects, funds within 10 days)
- 10% retainage held until completion
- Final draw: Upon certificate of occupancy + 85% occupancy
Exit Strategy:
- Convert to permanent loan (same lender, 7.0%, 25-year amort, 65-70% LTV)
- Refinance with permanent lender (shop for best terms)
- Sell property (pay off construction loan from proceeds)
Financial Projections
Year-by-Year Cash Flow:
Note: Year 3+ assumes conversion to permanent loan (7.0%, 25-year amort, $3.5M balance)
Exit Analysis (Year 5):
Exit Value: $14,640,000 (base case: $915K NOI ÷ 6.25% cap)
Loan Payoff: $3,250,000 (remaining balance after 2 years of principal paydown)
Gross Proceeds: $14,640,000 – $3,250,000 = $11,390,000
Less Equity Invested: $4,450,000
Net Profit: $6,940,000
Plus Cumulative Cash Flow (Years 1-5): $2,277,250
Total Return: $9,217,250
Return Metrics:
Sensitivity Analysis – Option A
IRR Sensitivity to Exit Cap Rate:
Pros & Cons Summary – Option A
✅ ADVANTAGES:
- Maximum Flexibility Own property free-and-clear initially (no acquisition debt constraints) Can delay construction if market conditions deteriorate Can modify expansion plans based on existing facility performance Not locked into specific construction timeline
- Simpler Execution Two separate, straightforward transactions (acquisition, then construction) No complex intercreditor agreements Easier lender underwriting (construction loan only evaluates development component)
- Lower Refinance Risk Construction loan converts to permanent (predictable exit) Or refinance with ample time (not time-pressured) Or hold and cash flow (strong returns even without sale)
- Best Risk-Adjusted Returns 17.2% IRR with 61% equity (moderate leverage) Strong downside protection (even 6.75% exit cap yields 14.8% IRR) Predictable cash flow (no aggressive refinance assumptions)
❌ DISADVANTAGES:
- High Equity Requirement $4.45M equity (61% of project cost) Limits number of deals investor can pursue simultaneously Capital tied up longer (no refinance to recycle capital early)
- Lower Absolute IRR 17.2% (vs. 19.2% for bridge-to-perm structure) Moderate leverage reduces return potential Not maximizing financial engineering opportunities
- Two Closings Additional transaction costs (two sets of closing fees, title, legal) Timeline gap between acquisition and construction financing (2-6 months typical) Market risk during gap (rates could rise, construction loan terms could worsen)
- Full Recourse Guarantee Personal guarantee required on construction loan Borrower fully liable if project fails No limitation on downside risk
Optimal Use Cases – Option A
Choose This Structure If:
✅ You have substantial liquidity ($4.5M+ available equity)
✅ You prioritize risk management over IRR maximization
✅ You want maximum flexibility (ability to pause/adjust project)
✅ You’re conservative on leverage (prefer 60-70% equity positions)
✅ You value simplicity (straightforward structure, predictable execution)
✅ You plan to hold long-term (5-7+ years, not forced exit at specific date)
Ideal Investor Profile:
- Family office (patient capital, risk-averse)
- First-time self-storage developer (learning the business)
- Conservative institutional capital (pension fund, endowment)
- Investor with experience in other CRE but new to self-storage
SECTION 3: OPTION B – BRIDGE-TO-PERMANENT FINANCING
Structure Overview
Philosophy: Aggressive leverage approach that finances entire project (acquisition + development) with single bridge loan, then refinances to permanent upon stabilization
Advantages:
- Lower equity requirement (30% vs. 61%)
- Single closing (one loan, one transaction)
- Higher IRR potential (maximum leverage)
- Capital efficiency (can deploy across multiple deals)
Disadvantages:
- Higher interest rate during construction (8.5% vs. 7.5%)
- Refinance risk (must refinance to permanent, no conversion option)
- More complex underwriting (lender must evaluate acquisition + development)
- Market timing risk (if market deteriorates, refinance may be difficult)
Sources & Uses
SOURCES OF CAPITAL:
Total Equity Required: $2,190,000 (30.0% of project)
USES OF CAPITAL:
Debt Terms – Bridge Loan
Lender Profile: Non-bank bridge lender (Argentic, Thorofare, Ready Capital, SBA)
Loan Amount: $5,110,000 (70% of $7.3M total project cost)
Interest Rate: 8.5% (SOFR + 550 bps, floating)
- Current SOFR: ~3.0%
- Spread: 550 bps
- All-in rate: 8.5%
- Rate cap required: 2-year, 9.5% strike, cost ~$55K (included in soft costs)
Term: 24 months interest-only
- Construction period: 12 months
- Stabilization period: 12 months (lease-up to 90% occupancy)
- Extension: +12 months available (pay 1.0% extension fee + rate increases to 9.0%)
Loan-to-Cost: 70% LTC on total project (acquisition + development)
Recourse: Full recourse during construction, burns off to 50% upon stabilization
- If project achieves 90% occupancy + 1.30x DSCR → guarantee reduces to 50%
- Remains full recourse on standard carve-outs (fraud, bankruptcy, etc.)
Covenants:
- Minimum liquidity: $750K (borrower maintains reserves throughout)
- Completion guarantee: Borrower completes project regardless of cost overruns
- Lease-up requirement: 90% occupancy + 1.30x DSCR within 24 months
- Interest reserve: Lender may require 6-12 months of interest in reserve account
Exit Strategy (REQUIRED):
- Must refinance to permanent loan within 24 months
- If refinance fails → extension (costly) or loan default
- Permanent loan assumption: 65-70% LTV, 7.0%, 25-year amort
- Critical: Bridge structure assumes successful refinance
Financial Projections
Year-by-Year Cash Flow:
Note: Year 3+ assumes successful refinance to permanent loan:
- New loan amount: $10,248,000 (70% LTV on $14.64M value)
- Rate: 7.0%, 25-year amortization
- Refinance proceeds: $10,248,000 – $5,110,000 (bridge payoff) = $5,138,000
- Return to equity: $5,138,000 (capital return exceeds original $2.19M investment!)
Exit Analysis (Year 5):
Exit Value: $14,640,000 (base case)
Loan Payoff: $9,748,000 (remaining balance after 2 years principal paydown from refinance)
Gross Proceeds: $14,640,000 – $9,748,000 = $4,892,000
Less Remaining Equity: $0 (equity fully returned at refinance!)
Net Profit at Exit: $4,892,000
Plus Refinance Return of Capital (Year 3): $5,138,000
Plus Cumulative Cash Flow: $1,376,300
Total Return: $11,406,300
Return Metrics:
Note: Equity multiple appears extraordinarily high because refinance returns 234% of original equity in Year 3, then exit returns additional proceeds. This is accurate mathematics for leveraged refinance strategy.
Sensitivity Analysis – Option B
IRR Sensitivity to Exit Cap Rate:
Critical Insight: Refinance terms dramatically impact returns. If lender only approves 60% LTV (vs. 70% assumed), IRR drops 3.4 points (19.2% → 15.8%).
Pros & Cons Summary – Option B
✅ ADVANTAGES:
- Maximum IRR Potential 19.2% IRR (highest of all three structures) 5.21x equity multiple (refinance returns capital early) 27.2% stabilized cash-on-cash (on remaining equity after refinance)
- Capital Efficiency Only $2.19M equity (vs. $4.45M for Option A) Can deploy capital across multiple deals simultaneously Early return of capital (refinance Year 3 returns 234% of equity!)
- Single Closing One transaction (vs. two for Option A) Faster to execute (no gap between acquisition and construction financing) Lower transaction costs (one set of closing fees)
- Leverage Maximization 70% LTC (aggressive but not unreasonable) Magnifies returns if project performs Efficient use of equity dollar
❌ DISADVANTAGES:
- Refinance Risk (CRITICAL) Must refinance within 24 months or face default/extension If market deteriorates (cap rates expand, lenders tighten), refinance may fail Extension is costly (1% fee + higher rate) Failure to refinance = forced sale at potentially bad timing
- Higher Interest Cost 8.5% bridge rate (vs. 7.5% construction loan in Option A) $434K annual interest (vs. $214K in Option A during construction) Reduces Year 1-2 cash flow (negative cash flow Year 1)
- More Complex Underwriting Lender must evaluate acquisition + development simultaneously Longer approval process (30-45 days vs. 21-30 for simple construction loan) More documents required (acquisition due diligence + development plans)
- Market Timing Risk Locked into 24-month timeline (can’t pause if market weakens) Must achieve 90% occupancy + 1.30x DSCR (if market softens, may fail covenants) No flexibility to hold/wait for better market conditions
- Negative Cash Flow Year 1 -$14,350 (NOI < debt service during construction) Requires equity reserves to cover shortfall Psychologically difficult for investors (paying money out, not receiving distributions)
Optimal Use Cases – Option B
Choose This Structure If:
✅ You have limited equity capital ($2-3M available, not $4-5M)
✅ You want to deploy across multiple deals (capital efficiency priority)
✅ You’re confident in refinance market (stable/improving conditions)
✅ You prioritize IRR over cash flow stability
✅ You have experience with bridge financing (understand risks)
✅ You have reserves to cover negative cash flow periods
✅ You’re comfortable with refinance risk (have backup plans if refinance fails)
Ideal Investor Profile:
- Experienced developer (understands bridge-to-perm execution)
- Private equity fund (seeking maximum IRR for LP reporting)
- High-net-worth individual (comfortable with leverage and timing risk)
- Operator deploying across multiple deals (capital efficiency critical)
SECTION 4: OPTION C – PREFERRED EQUITY STRUCTURE
Structure Overview
Philosophy: Institutional capital stack with three layers: senior debt, preferred equity, and common equity. Preferred equity provides mezzanine financing between senior debt and common equity.
Advantages:
- Lowest common equity requirement (19% of project)
- Predictable preferred return (fixed cost of capital)
- Scalable structure (institutional investors understand)
- Limits downside risk to common equity (preferred is senior)
Disadvantages:
- Complex waterfall (distributes to preferred first, common second)
- Preferred equity limits upside leverage (no promote participation)
- Higher blended cost of capital (preferred wants 12%, senior wants 7%)
- More legal complexity (intercreditor agreement required)
Sources & Uses
SOURCES OF CAPITAL:
Debt Terms – Senior Loan
Lender Profile: Regional bank or life insurance company (construction-to-permanent product)
Loan Amount: $4,400,000 (60% of $7.3M total project cost)
Interest Rate: 7.0% (fixed rate, construction-to-permanent)
- Construction period (12 months): 7.5% interest-only
- Permanent period (25 years): 7.0% fixed, 25-year amortization
Term:
- Construction: 12 months IO
- Permanent: Converts automatically at stabilization (85% occupancy + 1.25x DSCR)
- Total term: 25 years from conversion
Loan-to-Cost: 60% LTC on total project Loan-to-Value: 65% LTV on stabilized value
Recourse: Non-recourse after stabilization
- Recourse during construction (completion guarantee)
- Burns off to non-recourse upon conversion to permanent
- Standard carve-outs (fraud, misappropriation, bankruptcy)
Covenants:
- Minimum DSCR: 1.25x upon stabilization
- Maximum LTV: 65% (ongoing covenant)
- Minimum liquidity: $500K (borrower reserves)
- Cash management: Lockbox account, lender approval for distributions >$100K
Preferred Equity Terms
Investor Profile: Institutional mezzanine fund, family office, or high-net-worth individuals seeking predictable returns
Investment Amount: $1,500,000
Preferred Return: 12% annually (accrued monthly, paid quarterly if cash available)
- Non-compounding: If cash flow insufficient to pay preferred, accrues but doesn’t compound
- Cumulative: All accrued preferred must be paid before common receives distributions
- Current pay preferred: Not PIK (payment-in-kind); investor expects quarterly cash
Priority:
- Senior debt (first priority)
- Preferred equity (second priority)
- Common equity (last priority)
Participation: None
- Preferred gets fixed 12% return
- All upside above 12% goes to common equity
- No promote participation (unlike common equity which gets residual profits)
Security: Second lien on property (junior to senior debt, senior to common equity)
Covenants:
- Consent required for major decisions (sale, refinance, additional debt)
- Financial reporting (monthly to preferred investors)
- Replacement reserve: $50K minimum (maintained for property needs)
Exit:
- Repaid at sale or refinance (after senior debt, before common)
- Return: Original $1.5M + accrued preferred return
- No equity upside participation
Common Equity Terms
Investment Amount: $1,400,000
Return: Residual after debt service + preferred return
Priority: Last (subordinate to senior debt and preferred equity)
Upside: 100% of residual profits
- After paying 7% senior debt
- After paying 12% preferred equity
- All remaining cash flow and exit proceeds go to common
Risk: Highest
- If project underperforms, common may receive nothing (preferred must be paid first)
- If project performs well, common gets magnified returns (leverage effect)
Control:
- Common equity typically controls decisions (as managing member)
- Subject to preferred equity consent rights on major decisions
Waterfall Structure
Distribution Priority:
Quarterly Cash Flow Distributions:
- Senior Debt Service: Pay lender debt service (interest + principal)
- Preferred Return: Pay preferred equity 12% annual return (3% quarterly)
- Common Equity: Remaining cash flow to common equity
Refinance or Sale Proceeds:
- Senior Debt Payoff: Repay outstanding loan balance
- Preferred Equity Return of Capital: Repay $1,500,000 principal
- Preferred Equity Accrued Return: Pay any unpaid accrued preferred return
- Common Equity Return of Capital: Repay $1,400,000 principal
- Residual Profits: 100% to common equity (no promote to preferred)
Financial Projections
Year-by-Year Cash Flow:
Note: Year 1 common equity receives negative cash flow because NOI insufficient to cover debt + preferred.
Exit Analysis (Year 5):
Exit Value: $14,640,000
Senior Debt Payoff: $4,100,000 (remaining balance after 2 years of permanent loan paydown)
Preferred Equity Return:
- Principal: $1,500,000
- Accrued return (5 years × 12%): $900,000
- Total to Preferred: $2,400,000
Common Equity Return:
- Gross proceeds: $14,640,000
- Less senior debt: -$4,100,000
- Less preferred: -$2,400,000
- Remaining to Common: $8,140,000
Less Common Equity Invested: $1,400,000
Net Profit to Common: $6,740,000
Plus Cumulative Cash Flow to Common: $735,000
Total Return to Common Equity: $7,475,000
Return Metrics:
Sensitivity Analysis – Option C
Common Equity IRR Sensitivity to Exit Cap Rate:
Critical Insight: Even in stress scenarios, preferred equity gets paid in full. Common equity takes all downside risk below $800K NOI (at which point preferred still gets 12%, but common IRR drops to single digits).
Pros & Cons Summary – Option C
✅ ADVANTAGES:
- Lowest Common Equity Requirement Only $1.4M (19% of project) Can deploy across even more deals than Option B Maximum capital efficiency
- Predictable Cost of Capital Preferred equity: fixed 12% (known cost) Senior debt: fixed 7% (construction-to-perm) No refinance risk (debt converts automatically)
- Downside Protection for Common Preferred equity absorbs first $1.5M of losses (after senior debt) Common equity has “cushion” between them and senior debt Less risk of total loss compared to highly leveraged Option B
- Institutional Structure Professional investors understand preferred/common stack Easier to raise capital (preferred appeals to conservative investors, common to aggressive) Scalable across multiple deals
- Non-Recourse Senior Debt Liability burns off at stabilization No ongoing personal guarantee (unlike Options A & B)
❌ DISADVANTAGES:
- Complex Waterfall Multiple distribution priorities (senior → preferred → common) Requires sophisticated legal documentation (intercreditor agreement) Quarterly distribution calculations complicated Investors need to understand waterfall mechanics
- Preferred Equity Limits Common Upside 12% preferred return paid before common receives anything In early years, common may receive little/no cash flow Preferred gets $900K of profits over 5 years (reduces common’s share)
- Higher Blended Cost of Capital Senior debt: 7% × 60% = 4.2% weighted Preferred: 12% × 21% = 2.5% weighted Blended: 6.7% (vs. 7.5-8.5% for Options A/B) Wait – this is actually LOWER. But preferred is “harder” cost because it’s cumulative even if not paid.
- Negative Cash Flow to Common (Year 1) Common receives -$90K Year 1 (must cover shortfall) Psychologically difficult Requires reserves
- Finding Preferred Equity Investor Not as liquid a market as senior debt Preferred investors want 12%+ (expensive capital) Negotiating preferred terms can be complex May require significant time to source
Optimal Use Cases – Option C
Choose This Structure If:
✅ You have very limited common equity capital ($1-2M, not $4-5M)
✅ You’re scaling across many deals simultaneously (5-10 properties)
✅ You can source preferred equity investors (institutional contacts, family offices)
✅ You want downside protection (preferred equity cushion)
✅ You’re comfortable with complex waterfall structures
✅ You prioritize capital efficiency over simplicity
✅ Your investors understand institutional structures
Ideal Investor Profile:
- Institutional fund (raising common equity from LPs, preferred from separate investors)
- Operator building large portfolio (10-20 properties over 3 years)
- Experienced developer (comfortable with mezzanine structures)
- Family office partnering with preferred equity provider
SECTION 5: COMPARATIVE ANALYSIS
Side-by-Side Comparison
Risk-Adjusted Ranking
Methodology: Sharpe Ratio = (IRR – Risk-Free Rate) / Standard Deviation of Returns
Assumptions:
- Risk-free rate: 4.5% (5-year Treasury)
- Standard deviation calculated from sensitivity analysis (exit cap + NOI variance)
Interpretation:
Option A has highest risk-adjusted return despite lowest absolute IRR because:
- Lower volatility (flexible structure, no forced refinance)
- Downside protection (moderate leverage, conversion option)
- Execution certainty (simple structure, predictable timeline)
Option B has highest absolute IRR but lowest risk-adjusted return because:
- Refinance risk (must successfully refinance or face default)
- Market timing risk (locked into 24-month timeline)
- Higher volatility (sensitive to exit market conditions)
Option C falls in the middle:
- Moderate volatility (preferred equity cushion provides downside protection)
- No refinance risk (construction-to-perm eliminates timing pressure)
- Complex execution (harder to source preferred, negotiate terms)
Capital Efficiency Comparison
Deals You Can Pursue with $10M Equity:
Insight:
If you have $10M to deploy:
- Option A: Control $16M in assets (conservative, concentrated)
- Option B: Control $34M in assets (moderate diversification)
- Option C: Control $52M in assets (maximum diversification)
Portfolio Diversification Benefit:
With 7 deals (Option C) vs. 2 deals (Option A):
- Geographic diversification (multiple Florida markets)
- Timing diversification (staggered closings)
- Strategy diversification (REIT + expansion + ground-up mix)
- Risk reduction (one deal failure doesn’t sink portfolio)
Trade-off: More deals = more complexity (7 preferred equity investors to manage, 7 closings, 7 ongoing relationships)
SECTION 6: LENDER LANDSCAPE & RECOMMENDATIONS
Senior Debt Lenders (60-75% LTC)
Regional Banks:
Non-Bank Construction Lenders:
Recommendation for Option B (Bridge-to-Perm):
✅ First choice: Argentic
- Fast approval (2-3 weeks)
- 75% LTC at 8.5% (competitive)
- Experienced with self-storage
- Flexible on construction oversight
✅ Second choice: Ready Capital
- Slightly better pricing (8.0% vs. 8.5%)
- Strong servicing platform
- Longer approval (4-5 weeks)
Preferred Equity Sources (10-15% returns)
Institutional Mezzanine Funds:
High-Net-Worth Individuals:
Recommendation for Option C (Preferred Equity):
✅ For $1.5M preferred raise:
- Source from 2-3 family offices ($500K each) or 5-6 high-net-worth individuals ($250K each)
- Offer 12% preferred return (market rate for $1-2M mezzanine)
- Structure as second lien on property (provides security)
- Quarterly current-pay distributions (not PIK)
SECTION 7: RECOMMENDATION MATRIX
Decision Framework by Investor Profile
Profile #1: First-Time Self-Storage Developer
Characteristics:
- Experienced in other CRE but new to self-storage
- Conservative risk tolerance
- Substantial liquidity ($5M+ available)
- Values simplicity and control
RECOMMENDATION: Option A (All-Cash + Construction Loan)
Rationale:
- ✅ Simple structure (learn the business without complex financing)
- ✅ Maximum flexibility (can pause/adjust if issues arise)
- ✅ Best risk-adjusted returns (7.06 Sharpe ratio)
- ✅ Moderate leverage (won’t over-lever first deal)
Expected Outcome: 17.2% IRR with low volatility, successful first project builds track record for future deals
Profile #2: Experienced Developer Seeking Maximum Returns
Characteristics:
- Multiple self-storage deals completed
- Aggressive risk tolerance
- Limited equity per deal ($2-3M available)
- Wants to scale quickly (deploy across 3-5 deals)
RECOMMENDATION: Option B (Bridge-to-Perm)
Rationale:
- ✅ Maximum IRR (19.2%)
- ✅ Capital efficiency (can pursue 4-5 deals with $10M equity)
- ✅ Comfortable with refinance risk (has done it before)
- ✅ Expertise mitigates execution risk
Expected Outcome: 19.2% IRR, early return of capital at refinance allows redeployment to additional deals
Profile #3: Institutional Fund Building Portfolio
Characteristics:
- Raising capital from LPs (limited partners)
- Building 10-20 property portfolio over 3 years
- Access to preferred equity investors
- Sophisticated team comfortable with complex structures
RECOMMENDATION: Option C (Preferred Equity Structure)
Rationale:
- ✅ Lowest common equity per deal ($1.4M)
- ✅ Can deploy across 7+ deals with $10M common equity
- ✅ Institutional structure LPs understand
- ✅ Preferred equity cushion reduces risk for common LPs
Expected Outcome: 18.5% IRR to common equity LPs, portfolio of 10-15 properties totaling $70-100M value
Profile #4: Family Office (Patient Capital)
Characteristics:
- Long-term hold focus (10-20 years)
- Moderate risk tolerance
- Prefers current cash flow over IRR maximization
- Values simplicity over complexity
RECOMMENDATION: Option A (All-Cash + Construction Loan)
Rationale:
- ✅ Best cash-on-cash returns (14.9% stabilized)
- ✅ No forced exit (can hold indefinitely)
- ✅ Non-recourse conversion option (liability burns off)
- ✅ Simple structure (family understands)
Expected Outcome: 17.2% IRR, strong stabilized cash flow ($665K annually), option to hold 10+ years or refinance and hold for perpetual cash flow
Profile #5: Conservative Pension Fund / Endowment
Characteristics:
- Fiduciary duty (must minimize risk)
- Target 12-15% IRR (not 20%+)
- Cannot accept personal recourse guarantees
- Values transparency and reporting
RECOMMENDATION: Option C with Preferred Equity Position (Not Common)
Rationale:
- ✅ Fixed 12% return (predictable, achievable)
- ✅ Senior to common equity (downside protection)
- ✅ Non-recourse senior debt (no guarantee exposure)
- ✅ Current-pay distributions (quarterly cash flow)
Expected Outcome: 12.0% IRR, minimal volatility, all distributions received on time, full return of capital at exit
SECTION 8: IMPLEMENTATION ROADMAP
Option A: All-Cash + Construction Loan – 90-Day Timeline
Days 1-30: Acquisition
✅ Week 1-2:
- Execute purchase agreement (all-cash, 30-day closing)
- Order title, survey, Phase I environmental
- Property inspection (physical condition assessment)
- Financial audit (validate seller’s NOI representations)
✅ Week 3-4:
- Complete due diligence
- Wire funds to escrow
- Close acquisition
- Result: Own property free-and-clear
Days 31-90: Construction Loan Sourcing
✅ Week 5-8:
- Engage architect (preliminary site plan for expansion)
- Hire civil engineer (grading, drainage, utilities)
- Cost estimating (GC bids on hard costs)
- Prepare construction loan package (plans, budget, timeline, borrower financials)
✅ Week 9-12:
- Submit to 3-4 construction lenders
- Receive term sheets (compare rates, terms, covenants)
- Select lender, negotiate final terms
- Execute loan commitment
✅ Week 13:
- Close construction loan
- Begin construction draw schedule
- Result: $2.85M funded, ready to build
Months 4-15: Construction & Lease-Up
✅ Months 4-15:
- Construction (12 months)
- Lease-up new units (begins Month 10, concurrent with construction completion)
- Rate optimization on existing units (gradual, ongoing)
✅ Month 16-18:
- Stabilization (90% occupancy + 1.25x DSCR)
- Convert construction loan to permanent (automatic or refinance)
- Begin quarterly distributions to equity
Option B: Bridge-to-Perm – 60-Day Timeline
Days 1-30: Bridge Loan Sourcing
✅ Week 1-2:
- Execute purchase agreement (subject to financing, 60-day closing)
- Engage architect (preliminary expansion plans)
- Prepare comprehensive loan package: Acquisition due diligence (property details, financials, market analysis) Development plans (site plan, unit mix, construction budget) Borrower financials (liquidity, experience, guarantor strength)
✅ Week 3-4:
- Submit to 2-3 bridge lenders (Argentic, Ready Capital, Thorofare)
- Receive term sheets within 7-10 days
- Negotiate terms (rate, LTC, covenants, recourse)
- Execute loan commitment
Days 31-60: Closing
✅ Week 5-8:
- Lender due diligence (appraisal, Phase I, engineering review)
- Legal documentation (loan agreement, mortgage, guarantees)
- Rate cap purchase (hedge interest rate risk)
- Final approval from lender credit committee
✅ Week 9:
- Simultaneous closing (acquisition + bridge loan funding)
- Wire $2.19M equity + $5.11M loan proceeds
- Take title to property
- Result: Own property with bridge loan in place, ready to start construction
Months 3-24: Construction, Lease-Up & Refinance
✅ Months 3-14:
- Construction (12 months on draw schedule)
- Begin lease-up (Month 10 onwards)
- Rate optimization on existing facility
✅ Months 15-20:
- Achieve 90% occupancy + 1.30x DSCR
- Engage permanent lender (start 6 months before bridge maturity)
- Submit refinance package
✅ Months 21-24:
- Close permanent loan ($10.2M at 70% LTV on $14.6M value)
- Pay off bridge loan ($5.11M)
- Return $5.1M to equity (234% of original investment!)
- Continue operations with permanent financing
Option C: Preferred Equity Structure – 120-Day Timeline
Days 1-60: Capital Raising
✅ Week 1-4: Preferred Equity Raise ($1.5M)
- Prepare offering documents (PPM, subscription agreement, term sheet)
- Market to target investors: Family offices ($500K-1M commitments) High-net-worth individuals ($250K-500K commitments) Self-directed IRA investors ($100K-250K commitments)
- Hold investor calls (explain structure, terms, returns)
- Execute subscription agreements
✅ Week 5-8: Senior Debt Sourcing ($4.4M)
- Prepare loan package (acquisition + development)
- Submit to regional banks or life companies (Synovus, Truist, Principal)
- Receive term sheets
- Execute loan commitment
Days 61-120: Legal Documentation & Closing
✅ Week 9-12:
- Complex legal documentation: Operating agreement (common + preferred member rights) Intercreditor agreement (senior debt vs. preferred equity) Preferred equity subscription documents Senior loan documents
- Negotiate waterfall mechanics (distribution priorities)
- Define governance rights (major decision approvals)
✅ Week 13-16:
- Investor due diligence period (30 days)
- Lender due diligence (appraisal, environmental, engineering)
- Fund escrow accounts: Common equity: $1.4M Preferred equity: $1.5M
- Close senior loan ($4.4M)
✅ Week 17:
- Simultaneous closing (acquisition + all capital funded)
- Disbursements per waterfall (pay acquisition costs, reserve for development)
- Result: Own property with complex capital stack in place
Months 5-24: Construction, Stabilization, Operations
✅ Months 5-16:
- Construction (12 months)
- Lease-up (concurrent with construction completion)
- Quarterly distributions: Senior debt: $82,500 quarterly (IO) Preferred equity: $45,000 quarterly (12% annual) Common equity: Residual (if any)
✅ Months 17-24:
- Achieve stabilization (85% occupancy + 1.25x DSCR)
- Senior debt converts to permanent (non-recourse)
- Quarterly distributions increase: Senior debt: $96,250 (P&I) Preferred equity: $45,000 Common equity: $89,250 ($357K annually = 25% CoC!)
SECTION 9: KEY TAKEAWAYS & FINAL RECOMMENDATIONS
Capital Stack Selection Matters Significantly
IRR Range: 15.8% to 19.2%
- 3.4 point spread based solely on financing structure
- Equivalent to difference between “good deal” and “exceptional deal”
- Structure optimization is as important as deal selection
Risk-Return Trade-offs
No “perfect” structure – depends on investor goals, experience, capital availability
Match Structure to Investor Profile
✅ First-time developer → Option A(learn with simple structure)
✅ Experienced developer → Option B(maximize returns with bridge-to-perm)
✅ Institutional fund → Option C(scale with preferred equity)
✅ Family office → Option A(long-term hold, current cash flow)
✅ Conservative capital → Option C as Preferred (fixed 12% return)
Capital Efficiency Enables Scaling
With $10M equity:
- Option A: 2.2 deals ($16M total assets)
- Option B: 4.6 deals ($34M total assets)
- Option C: 7.1 deals ($52M total assets)
Diversification benefit: 7 deals >> 2 deals (geographic, timing, strategy mix)
Trade-off: More deals = more complexity (management, reporting, relationships)
Our Recommendation for Current Pipeline
For the Central Florida Expansion ($7.3M project):
Primary Recommendation: Option A (All-Cash + Construction)
Rationale:
- First deal in current pipeline (establish track record with conservative structure)
- Best risk-adjusted returns (17.2% IRR, 7.06 Sharpe)
- Maximum flexibility (if market conditions change, can pause)
- Simpler investor communications (equity partners understand straightforward structure)
Alternative (If Capital Constrained): Option B (Bridge-to-Perm)
Rationale:
- If equity limited to $2-3M (not $4.5M)
- Experienced team comfortable with refinance risk
- Want to preserve capital for other pipeline deals (Lake Alfred, Heart of Florida)
Not Recommended for First Deal: Option C
Rationale:
- Too complex for initial transaction (build simpler track record first)
- Difficult to source $1.5M preferred equity without existing portfolio
- Better suited for Deal #3-5 after establishing relationships
CONCLUSION
Capital stack optimization for self-storage expansion projects can add 200-400 basis points to IRR while significantly altering risk profile and capital efficiency.
The key insights:
- Structure matters as much as deal selection (3.4 point IRR spread)
- Risk-adjusted returns favor conservative structures (Option A highest Sharpe ratio despite lowest IRR)
- Capital efficiency enables portfolio scaling (Option C allows 3x more deals than Option A)
- Match structure to investor profile (no one-size-fits-all solution)
- Execution experience matters (sophisticated structures require sophisticated teams)
For the Central Florida expansion project analyzed, Option A (All-Cash + Construction Loan) provides optimal risk-adjusted returns for most investors – delivering 17.2% IRR with maximum flexibility and lowest volatility.
For experienced developers seeking maximum leverage and capital efficiency, Option B (Bridge-to-Perm) delivers 19.2% IRR – accepting refinance risk in exchange for superior returns.
For institutional funds scaling across multiple properties, Option C (Preferred Equity Structure) enables 7+ deals with $10M equity – trading complexity for capital efficiency.
💬 For capital stack professionals: What financing structures have worked best for your self-storage expansion projects? Any lender recommendations for construction or bridge financing?
DM “CAPITAL STACK” to discuss optimal financing structure for current $7.3M Central Florida expansion opportunity or schedule a call to review your specific situation.
📞 786-676-4937 | 📅 https://calendly.com/slp-zee
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