Self Storage Investment Equity Preference

[Scott Krone]

We are converting our fourth commercial warehouse into self storage.  We are interested in learning what investment strategy would investors find more attractive.  Here is the scenario.  

Facts

We recently purchased a 70,000 sf empty warehouse.  Our plan is to install ~600 indoor, climate controlled lockers.  We have a national self storage operator lined up to manage the facility upon completion whom we have used before.  The area has over 500,000 people within a 3 mile radius, and 66% of the residents are renters.  The square foot of lockers per capita is under 2.  The national average is between 7-9.  Tremendous demand and very little competition.   We have obtained all the zoning entitlements.  We have an SBA loan structured for 5 years for the construction and lease up period.   The SBA had to be restructured due to size of the loan, so we have to increase our equity by $500,000.  Our plan to hold the property for 5 years.  After year three we have enough cash flow to refinance our investors equity out of the deal, and they maintain their percentage of ownership.  However, we have received an offer to sell the asset upon completion/certificate of occupancy.

Question

Which would be a more attractive option:

A.  Guarantee rate of return of 10% annual on the $500k up to three year (worse case scenario), with no further cash flow or appreciation.

or if we don't sell right away

B. Investor has a membership share in the revenues and profit with the goal of being refinanced out in year three. Upon sale the IRR is 47.6% - however it is a 3-5 year investment to receive profits. Cash flow to begin on revenue in year 4.