Thread by @sweatystartup

Even better. Buy an 8.5 cap deal, keep debt as your own equity as if investors are buying an unlevered asset, send investors 8.5% every year, and you own 70%.

Investors are thrilled to get 8.5% risk adjusted return in cash virtually tax free for a few years with bonus depreciation.

You take the risk, get the deal, sign the note, do the work and get most of the upside, as you should.

Then turn that 8 cap into a 12 by operating it really well. Value goes up 50%.

ReFi, offer your partners a buyout at new value, if they stay in you get all ReFi money (your 70% grew).

If they want out you get equity and they lock in their 20% IRR and reinvest in next deal.

But the magic happens when they stay in, which all my investors did on my first deal.

They are happy to continue now making a 12% return on cash invested.

I got $2MM in ReFi proceeds in my checking account.

I made this structure up out of thin air in 2015 as a wide eyed 26 yr old with absolutely no PE or real estate experience.

I've been laughed off a lot of calls with a lot of smart people who said I'd never raise a dollar. They said I better syndicate with an 80/20 hurdle...

But...

My cost of LP capital is ~11% over a 5 yr time span, my debt service coverage ratio is >1.5, and 100% of my LPs like doing business with me.

I wonder where they stand on these statistics?

So why do they do it?

Where else can you get an 8.5% cash yield starting on month 1 where 0% of income is taxable for 3+ years?

In an asset class that thrives in recessions and an actual building that has made money for 10+ years.

And that 8.5% cash yield is 12% 2 yrs later.

90% of self storage syndicates can only make any money at all if someone pays a 5 cap 4 years from now. It’s all development. Or they're building something for $150 a foot that gives 4% cashflow.

Your only other option is the dividend you’ll get on Public Storage stock.

This is a note to other GPs, not LPs. I'm not currently raising capital.

Besides, its a wonky, expensive structure anyway!

The best thing about this structure...

I'm encouraged to hold the property for eternity.

I don't have to sell it to realize 100% of the value i've created. I can do it by putting debt on the property and getting TAX FREE capital.

Because when you sell, which as a sponsor you're encouraged to do to hit the promotes, everyone has a problem.

LPs have to find a place for their capital and get hit with big tax bill.

GPs no longer have an asset making cash / fees and also pay EVEN MORE TAXES.