He Bought a $3 Million Storage Facility With 5% Down

THE SELF STORAGE REPORT — EPISODE TRANSCRIPT Episode: He Bought a $3 Million Storage Facility With 5% Down Guest: Fernando Angelucci — CEO, Self Storage Syndicated Equities (SSSE) Host: Chris Berg — Abernathey Development Recorded: August 13, 2026 Video: https://www.youtube.com/watch?v=19NOGiWu6Qw Key topics: Why the debt structure can be worth more than the asset; 57 facilities across 26 states and roughly $250 million transacted; the affordability squeeze turning storage into a permanent external closet; drive-time trade areas replacing radius; micro-bay flex for HVAC, electrical and plumbing contractors priced out by last-mile logistics; the 30-year Treasury at its highest level since 2007 and what the Paul Volcker era teaches about seller financing; total price versus purchase price and the $4.3 million upper bound on a $3,050,000 deal; DSCR replacing cap rate as the governing metric; substitution of collateral and the step-up rate ladder; bonus depreciation per dollar invested as a capital-raising lever; master lease with purchase option and avoiding property-tax reassessment; seller equity — bringing the seller in as an LP to beat higher competing offers; Rochester, New York at 5% down, 5.5% interest-only, 7-year term. Note: Speaker attribution and turn order reconstructed from raw captions; overlapping backchannel interjections have been merged into the surrounding turns for readability. Light cleanup of transcription errors only; wording preserved. Timestamps removed. Spelled-out figures converted to numerals. ————————————————————————————— Chris Berg: What if, over the next few years, the debt is the deal? And what I mean by that is that, yeah, it's great to own the self-storage asset, but the way you structure the notes sometimes, the way you structure the deal, can be almost just as valuable as the asset — and maybe even more, if you look back at what the 10-year has been doing as of late and where potentially you could go here in the future. We obviously don't know, but it's always good to understand creative financing. We've got a very special guest today that's gonna talk about this and do some deep dives, has done a lot of it, share some great stories, right here on The Self-Storage Report. I'm Chris Berg, head of business development with Abernathey Development. If you've got any dirt in California, Arizona, anything that might work for self-storage, definitely hit me up, let me know. And of course, go check out — we just released this — but it's SelfStorageReport.com. Again, SelfStorageReport.com. Think CNBC meets Wall Street Journal if you want to keep abreast of what's going on there within the self-storage industry. Let's introduce our guest. He's done a lot of deals, got a great portfolio. Fernando Angelucci, he's the CEO of SSSE, Self Storage Syndicated Equities. Fernando, it is great to have you with us. Fernando Angelucci: Yeah, thanks for having me, Chris. Chris Berg: So I saw Fernando recently on Brandon Robinson's webinar — shout out to B Love. And he just had this incredible grasp and sense of how to go out and do creative financing deals. I'm gonna say creative engineering, because he's got an engineering background, but how to structure things so it becomes a win-win-win situation. So Fernando, we want to dive into that. Before we do, just share a bit of your background — how'd you end up in storage, your portfolio, the deals you've done? The floor is yours, my friend. Fernando Angelucci: Yeah. So, going all the way back to when I was 16 years old, I read Rich Dad Poor Dad. I knew that that's the way that I wanted to make money — being a business owner and, eventually, a real estate investor. And unfortunately for my parents, I'm the son of two immigrants, they had the poor dad's lifestyle set out for me. So go to school, get good grades, go to university, get good grades, go work at a Fortune 50 company, retire with a pension. So I actually did that. I got the Fortune 50 job with the pension. But very quickly I realized that I'm not good at having a boss. So I started flipping houses about six months into my professional career, and then by month 13 I quit, because I had replaced my income. And then very quickly I realized that this dream of being a passive income investor by being a landlord is not so passive. I was working 80 hours a week. And then I had the problems that most people that leave residential real estate have, which is kind of the three T's — tenants, toilets, trash. That's what caused basically 90% of my problems. So in 2016, I started winding down the residential portfolio and looking at self-storage. I did a couple wholesale deals, and then in 2018 we bought our first self-storage facility. And then kind of the rest is history — we just closed on our 57th facility. We're in 26 states, just shy of $250 million in self-storage. Chris Berg: Man, congratulations. So why self-storage? Did you build a thesis around it? You're like, hey, there's no tenants, there's no trash, that kind of thing? Or what was it? Fernando Angelucci: Yeah. So I went to a bunch of general real estate conferences trying to find the next venture. And the three that I settled on were data centers — before data centers were cool, this is 2016 — mobile home parks, and self-storage. So right off the bat I realized with data centers, just to even be competitive, you need to start with $100 million in equity. Didn't have that, so I said, all right, that's out. And then I called a couple of my friends in the mobile home space, one of which is a mutual friend of ours, Dan, and he said, listen, mobile home parks, yes, technically you're not a landlord, but then what actually happens is sometimes people don't pay. You have to take the homes over, and now you have what are called park-owned homes, and then you become a landlord again. So I said, okay, that's out. And then that's when I fell on self-storage. I love the model. Easy to build, no one lives in your asset. It's concrete and steel, so very difficult to damage. The laws are in our favor when it comes to state laws, national laws — a lot of the liability is taken away from us or shielded from us as the owners and put onto the tenant. You require tenant insurance, and then you have an insurance policy above that. Usually the insurance policy is cheaper because the tenant insurance is required. And then I realized, hey, this is pretty great. So I went from doing 70 residential transactions a year to five to eight self-storage transactions a year. I went from working 80 hours a week to like 32 hours a week, all while 6x'ing my net worth. So I was like, I think there's something here. This makes sense. Chris Berg: This is working, let's keep doing more of this. So before we dive into your creative finance piece — which again, I just think is fantastic, the way you structure it, the way you look at deals — you said you've done 57. So I'm curious, how many of those are done in a creative way? We'll get into some actual stories for people, because I think facts tell, stories sell. Before we do it, I'm really curious, because I just mentioned, hey, the 10-year's going up. We've seen the housing market. I saw an article today — housing demand is the lowest maybe it's ever been in the history of housing. I mean, it wasn't a great headline for people moving. My question to you is: what's your thesis right now over the next, let's say, five to 10 years on self-storage? Are you bullish? If so, why? Bearish? If so, why? Fernando Angelucci: Yeah, so it's kind of a two-part thesis. So self-storage used to be a trauma-and-transition business. You'd only use it in short stints — maybe death, divorce, demotion. I know there's two other D's that I'm forgetting in there. Then what we've seen recently is, with this affordability problem getting worse and worse in the United States, it is now being used almost as a permanent fixture. So as opposed to 50 years ago, when our parents and grandparents were able to buy a five-bedroom ranch for $25,000, now a five-bedroom ranch is $1.4 million. And starter homes — I believe I saw a report recently that starter homes, the average across the country, now is $430,000 for a starter home. That's a lot of money, and wages have not kept up with inflation over that 50, 60, 70-year period. So what you're starting to see is, instead of someone opting for, let's say, a three-bedroom home to purchase, they will get a two-bedroom, one-bath home or a one-bedroom, one-bath home as a starter home. And then they will allocate a certain portion of their budget to having a permanent self-storage unit almost as an external closet. It's a lot cheaper. Instead of paying that extra $50,000 to $100,000 for that extra bedroom if you're buying, or paying an extra $400 to $700 a month in rent for that extra bedroom, it's a lot easier to go rent a 10x10 — which is that external bedroom for you — for, depending on where you are in the country, $80 to $180 bucks a month. That's a lot cheaper and it makes a lot more financial sense. So now all of a sudden you're starting to see people use self-storage as an external closet, if you will. Holiday decorations. It's your summer closet in the winter, it's your winter closet in the summer. If you're someone that's an outdoorsy type, your bike, your kayak, your longboards — that all stays in the unit as opposed to taking up space in the house. And usually people are going to self-storage facilities that are within five to 10 minutes' drive time of their home or their place of work. So we've seen this kind of shrinking of trade areas. In the past it used to be, hey, your trade area is a five-mile or even a 10-mile radius. Now we're actually using drive time instead of radius. So five-minute to 10-minute drive, that's where you're gonna capture the lion's share of your customer base. So I don't see the affordability problem having an answer anytime soon. The only way to really do that is gonna piss off a lot of existing residential homeowners, because de facto, for the affordability problem to go away, that means that home pricing has to go down, rentals have to go down. So now landlords are mad because they're making less revenue. And then homeowners are mad because now they have less equity in their homes and it's no longer seen as an investment. And then to do that, you need to be able to have partnerships with the local municipalities to be able to upzone into higher-density residential. And a lot of NIMBYs are saying, hey, I have this wonderful neighborhood of all single-family homes on one-acre lots. I don't want you to put up a 32-unit apartment building at the corner of the block, right? So I don't see the affordability problem having any answers anytime soon. So that's one of our theses — making sure that we're going into markets that are growing. And then also focusing now on the input side. Before COVID — what was the street that got — no, the other one, that a ship got trapped in, that one, that canal or strait... Chris Berg: The Suez Canal? Fernando Angelucci: Suez, there you go. So what you're seeing is this massive volatility in construction material pricing, and that is making it a lot more difficult to build the types of facilities and make them profitable that they were before. And then in addition to that, you now have this new wave of AI-powered data centers coming in and just destroying the grid. And in most municipalities, who's actually paying for that are the customers and not the data centers. So what you're seeing is also a rise in electricity cost. So what we're starting to see is we're moving away from this multi-story climate-control model that is more expensive. We're not seeing the pricing premium over construction costs anymore, and we're moving now to a single-story, primarily non-climate-control — or if there is climate control, it's climate control where you can drive your car or truck up to the door, as opposed to having to unload in a bay and then use a dolly to get somewhere. So that's our thesis on the self-storage side. But then the other thesis that is kind of self-storage adjacent is, now we're starting to do kind of micro-bay flex, I guess, if you can call it. And here's the reason for it. COVID changed the way the world worked, and it got a lot of people that were uncomfortable with doing online shopping to become comfortable with that. And then in addition to that, it also spoiled people into wanting to be able to click the button and then have that thing at their residence in 24 hours or 48 hours. And to do that, you've had these distribution companies — not only the Amazons of the world, but the FedExes, UPSes, even USPS — buying these smaller, 1,500 to 5,000 square foot warehouses to use as last-mile shipping. And that priced out a lot of the home services contractors. The HVAC, the electrical, the plumbers, the carpenters. And these guys have AI-resistant businesses, because AI can't change your leaky toilet. AI can't fix your HVAC when it goes out in the middle of winter. So now we're starting to target these types of customers as well. And the reason we like these customers is that they usually stay long term. They're gonna stay in that unit until either the business fails or their business becomes so successful that they can buy or build their own warehouse. They usually prepay their rents. Usually you don't hear any complaints or any problems from them. And they're technically storing stuff, right? Business materials. And you're storing hundreds of thousands of dollars of material. So a little bit of a rent bump here or there is not gonna cause them to move. You think it's hard moving a couch — try moving an entire business. So that sticky factor is even higher than it was with the residential-base tenants. So now we are also building and buying these kind of micro-bay flex, 30x50 and 50x50 units. So call it 1,500 to 2,500 square feet is kind of our sweet spot on that side. So those are kind of my two main theses going forward. Chris Berg: Nice. So I agree with that, obviously, to being bullish. And you're spot on. It's amazing when you look at the SSA demand study how it just shows how usage rates continue to go up. The millennials use at a higher rate. You talk about businesses going up. And I love what you did on Brandon's webinar. And one thing that, when you and I talked offline, that really jumped out to me that I want to share with people and give them some context why I just think what you're about to share today is so incredibly valuable — if I can find this. If you're like me, and I think it sounds like you are, you're watching the 10-year to see, hey, what's happening. And this is sort of the long-term — or actually forever — of the 10-year. And you can see back in early '80s, it was up to 15%. I want everyone to hear me: I'm not suggesting that we're going back to the Paul Volcker days and we're gonna hit a 15% 10-year anytime soon. But I think a lot of people thought they were real estate geniuses over the last, let's say, 20 to 40 years, and when the cap rate continues to go down, it's easier — let's just say — to make money. I don't say it's easy, but it's easier. Fernando Angelucci: You've got the wind at your back, right? Chris Berg: Yeah, thank you. That's a nice way of saying it, right? And this obviously is not the trend that you want to see. And so one of the things you said to me that was really good is, you're like, hey Chris, the people you want to talk to are the guys that were doing deals back in the Paul Volcker days, because they almost had to do deals with seller financing and get creative. And again, I'm not suggesting we're going back to 15%, but if this thing continues to go where I think it's gonna go — with a war and oil prices and everything else I can throw in there — I think creative financing is a really, really important skill set to at least know, if not master, over the next five, 10 years. I mean, this is the 30-year. The 30-year now is hitting the highest level since — wait, 2007? What happened after 2007, right? So I think it's probably a pretty good idea to begin to know some of this information. So I wanted to set that context, give you the floor, and just share creative financing ideas you guys are doing — or engineering, I wanna call it with you — and some stories that you've got around 57 deals. And the thing that I really appreciated about you as well is you were always looking for that win for the seller, win for you guys, win for your investors. I just think it's a really powerful approach. Fernando Angelucci: Yeah. So you hit the nail on the head there. It's so funny, because it's been 45 years, almost 50 years, that people just assume that when you go do financing, financing means you go to the bank. And that was not the norm back then. The majority of real estate transacting was on these seller financing structures, these contract-for-deeds, because they had to make a private market. Or else the sellers couldn't sell for the prices that they wanted, and the buyers couldn't buy to make the cash flow make sense. So once you remove that middleman, which is the bank, things become a lot easier. And then what you realize is: the debt is the deal. Before, everyone just assumed debt was debt and it had no value, you just had to use it. But what you'll see today is that the way that you can structure this, your paper actually becomes valuable. And you'll actually be able to — depending on how we structure this, and I'll go through a lot of examples — the way that you structure these types of deals, you can put in substitution of collateral clauses, you can put in assumption clauses, and now it makes it a lot easier to sell your asset because you can sell it with the existing debt in place. And we'll cover kind of what some of those things mean. So if you want, what I can do is — can I share my screen here for ya? Chris Berg: Yeah, you should be able to, I hope. Should be a share button there at the bottom. Fernando Angelucci: Okay, let's see here. All right, can you see this? Chris Berg: Yes. Yes. Fernando Angelucci: Good? Okay, so let's jump right into it. Obviously, disclaimer: I'm not an attorney. I'm not a financial advisor. I don't play one on TV. So always talk to your people. Our attorneys make us put this in here, so just a heads up. A little bit of our tracker is a little bit outdated, but you get the gist. We covered it before. So here's kind of the agenda. We're gonna go through the talk-off with the seller, how to go through the negotiation to make a win-win. How do you calculate what is a good deal? Because this whole side of the world is a lot different than what people expect. And then the down payment side. And then there's some alternatives that we can cover as well, because this is such a large and encompassing topic that there's no way we can talk about every possible structure that's out there. So I'm just going to go through some of the ones that are easier to negotiate and easier for the seller to understand. So in the talk-off: usually when people are negotiating with a seller on a property, one of the biggest things they always say is, well, I can close fast. All I need is these three numbers and we can close tomorrow. I'm obviously being hyperbolic here. But when it comes to seller financing, you wanna slow down the conversation, because you want to allow space to uncover what are the real whys behind the why, behind the why, behind the why. So there's that strategic fallacy of speed. Slow down to allow information to appear. And instead of trying to have one conversation, move to more regularly spaced conversations. So what we'll usually do is, once we know that a seller is receptive to some type of creative structure, we want to say, hey, let's talk every Friday or every other Friday. And that allows for a lot more information to come up. And the reason I say this is because you have to treat it now like a five-year-old or a four-year-old. When you explain something to them, they say why, and then you explain the why behind it, and then you say why again, and then why, and then why, and then why. So you say, I want to sell for this price. And it says, okay, why this price? Why are you selling? And they say, I just need some cash. It's like, well, why do you need the cash? What's going on? And then you start getting to the real reasons. Well, I'm over-allocated in self-storage, I want to put some stuff in the market. Or I'm burnt out, I'm a tired landlord. A lot of self-storage owners — I think close to 65% — are still kind of these mom-and-pop operators where a lot of them are sitting behind the desk themselves. So they're the ones operating the facility. It's not really a business when you're in the business. It's only a business when you're on the business, working on the business. Sometimes it could be things like, hey, this is my third retirement and I promised myself I would go see the world and travel. And so these types of things, it's like, okay, why do you need $3 million today to go travel? How much can you possibly spend on a monthly basis to go live your dream travel life? I can guarantee you it's not $3 million a month. It's maybe five grand or 10 grand or 15 grand a month. And now you start getting these numbers out of them that will be important later on when you're negotiating these structures. How much cash do you need now, how much cash do you need later, when do you need like a big pop? So these are some of the reasons that I've put in here: liquidity, portfolio strategy, lifestyle. Maybe they just want to take some profit. Maybe they're anticipating a tax situation down the road. So how do you create that win-win deal? You uncover the motivation by finding that root cause, and then you gotta bridge the gap of trying to accomplish their goals without necessarily just giving them all of the cash up front. And you can pull these strategic levers. So you can adjust the total price. And when I say total price, I don't mean the purchase price. I mean the total price of the deal, which incorporates the interest and the principal payments that you're paying. Most people that I talk to that do real estate transactions, they never look at that. They say — what's your total price of the deal? And they say, well, I'm buying it for $3 million. It's like, okay, well, how long do you plan on owning it? Well, I plan on owning this for 10 years. I say, okay, so how much are you gonna be paying in interest and principal over that 10 years? Well, I never really thought about it. And it's like, so you don't really know what your total price is to acquire this asset, right? Cash at closing — let's say they're selling because there's an immediate need for cash. Usually that immediate need for cash doesn't require all of the proceeds from sale. It may be, hey, I have a medical procedure, I need 70 grand or 100 grand. Or, my granddaughter's going to college, so I want to pay for her tuition. It's like, well, do you have to pay for all four years of tuition on the first day of university? Usually the answer is no. You pay in semesters, or you pay yearly, or in trimesters, depending on the type of school that you go to. So again, now you're trying to break down — when do you need that cash? Do you need the cash? How much do you need at closing? How much do you need over the duration of time that you're willing to act as the bank? And then what are those requirements on a monthly basis or a quarterly basis or a yearly basis? So when you go to the negotiation, there's kind of two main things. Usually it's whoever's terms are the ones that get to run the deal, then the other person gets to identify all the other terms. So for example, if it's our price, that means the seller gets to dictate terms, which typically means cash. I want you to cash me out right now. And that doesn't mean you have to bring cash to the table. That just means that you have to replace all of their investment. So maybe you bring another investor, maybe you bring in a bank, whatever it is. Now if it's the seller's price, then it's our terms, which means seller finance. And when we're able to look at a deal like this and look at those four levers — which is total price over the whole period, money today, money over time, and then that term length of how much money would be paid over time — then you can start to really get competitive, where now you're able to offer prices higher than your competition and still walk away with a more profitable deal than they'd be willing to get using just regular bank debt. Chris Berg: Can I interrupt you for a second, Fernando? So can you explain that? Like, how are you paying more for an asset and still having it be a win for you and your investors? Give us an example, or some examples. Fernando Angelucci: Yeah, so we'll go through the calculation here in a couple of slides. But at the end of the day, what you're looking at is: what is my total price to acquire and hold this asset? And if I can get that total price down just because I shift a little bit of that price to the front end — the seller is only looking at the purchase price, or the total price that they're gonna be getting, as opposed to what the total price that we would be paying. So for example, let's say I'm buying something for $3 million, or the seller wants $3 million for an asset, and to buy it with that $3 million purchase price, that means I'm gonna be spending $1.5 million in interest. My total price on that deal is $4.5 million. But what if I'm willing to offer the seller $3.2 million, but in a structure where I'm only paying $900,000 in interest over that hold period? Now my total price is much lower than my competitors' total price to hold and operate that asset, while offering the seller a higher purchase price than any of my competitors are willing to do, right? So there'll be some slides here where I'll show the calculation in depth and how to get to those numbers. But there's kind of two structures. You can seller-finance above market value, which is what we're talking about right now. To do this, there are some strict requirements. It must be a value-add deal, which means that you can force appreciation either through raising rents, dropping expenses, expanding the asset. You cannot do this strategy with an above-market price if you are just buying a stabilized asset and your entire plan is just to let inflation grow rents. That's not gonna work out in your favor. So if the total price is high, the other levers must be favorable. And what you're gonna want is a longer term length in order to force that appreciation and that value. So the standard for us is, when we make an above-market offer, we want 12 years of term, 12-year balloon. And that number is very specifically chosen, because what we have found through our research and through our consultants' research is that once you get around that 10 to 12-year balloon, a lot of sellers usually come back and say, hey, I want a little bit more cash. Can you prepay the last two years or last three years? And we say, hey, we are more than happy to prepay the last two or three years, but in order for that, we want a discount. So let's say, all right, you need $300 grand today, I'll give you $300 grand, but then you wipe out $500,000 of the debt. And sometimes they'd say, you know what, that's fair. So usually around that 12-year mark is when you're gonna get close to about 50% of your seller financings being willing to take some type of discount on the remaining principal balance. Now, if you're seller-financing at or below market value, this does allow you to buy stabilized deals, because you were gonna go buy it at that price anyway using a bank. But if now you can buy it at that price while also paying a lower interest rate, now your total cost of the project is lower. So if we get to dictate the price, usually that means that the seller gets to pull on the other levers. So usually they're wanting a shorter length. They're wanting a higher down payment, which is not a deal killer. A lot of people think, well, if I can't get the seller to agree to 20% or 30% down, it's a dead deal. If the seller comes and says, I want a 70% down payment, that doesn't mean the deal's dead. It just means, okay, now you're gonna have to convince the seller — hey, if you want 70% of your money right now, you're gonna have to sit in the second position, because I'm gonna have to bring in another financier to sit above you, to have the majority of the exposure. If you're only carrying 30% and the other person's carrying 60, there's no way they will agree to sit behind you in the lien order. So these types of deals, you're able to do a shorter term length. And we'll cover some examples where we have done deals where it was a three-year balloon, or a four-year balloon, that type of stuff. So before I get to the calculations, do you have any questions before I move on? Chris Berg: No, keep on rolling. This is great. Fernando Angelucci: All right. So this is where the meat and potatoes is right here. It's how to actually do the calculation. I'm an engineering guy, so these concepts are great in theory, but — like, show me how to do it, Fernando, right? So number one is you have to use a mortgage calculator. This is the only way you're gonna actually see what your total deal cost is. This allows you to run an analysis. And when you're going to run that analysis, first you're going to run it as if you were buying it in a traditional way. You're buying it from the seller at market price with the leverage that is available to you and, more importantly, available to you and all of your competition. Because then you'll see what is the equal footing. Where are we starting at, right? So use current bank rates, use current time horizons that are available to you. If you can only get five-year term debt, use five years. If you can get 10-year balloon debt, use 10-year. And then we're gonna have to shift our thinking from cap rates to debt service coverage ratio, because cap rates really don't mean anything, as we've seen, moving out of the zero percent interest rate policy to a post-policy where now the 10-year's at 4.6%, 4.7%. What this allows us to do is — usually DSCR is the limiting factor. We want to see that we can pay our debt over the lifetime hold of the asset. And usually that in today's world is the main constraint, not cap rate. So let's use an example of a deal that I recently purchased. Purchase price $3,050,000. The bank rate was 6.5%. They gave me a 10-year balloon, and they wanted 30% down, so $915,000. So what you do is you get the mortgage calculator. I use this HP 10bII financial calculator. Some of the old heads that are listening to this podcast, I'm sure they remember the physical version of this, but now there's apps that you can use. I think this is like three bucks. It's like one of the best three dollars I've ever spent in my life, for this application, right? So I plug it all in. So we have a 25-year amortization, 6.5% interest. The present value is not your purchase price, it's how much you're financing, right? So on a 30% down, it's $2.135 million. And then I calculate the payment. That payment comes out to about $14,400 a month. Now, when you do that, you then go and click on the amortization schedule to see what it produces, right? And specifically, when you go into the amortization schedule, I want to see how much I'm paying over the balloon payment period — which in this situation is 10 years. So I say, I want to show payments one to 120, and it updates these numbers up here. So I can see over that hold period, that 10-year period, I'm paying $1.25 million in interest. That's going to the bank. That's gone, right? That doesn't increase the value of my property, doesn't increase the value of my equity. And also during that term, I'm paying about $480,000 in principal. So we're going to focus on that interest, total interest number, over this period. So then what you do is you go back and you say, okay, if I'm paying $1.25 over the total term of that hold, that means my total price is not $3.5 million. It's $4.3 million is my total hold price for this deal, because I'm gonna have to pay that interest regardless. So now we know what the upper bound is on our offer. So you can't just go out offering people $10 million for this guy's property, because your hold cost will never get up to that amount over a 10-year period. So when I say upper bound, I mean, what type of offer can I go up to if the guy is willing to accept zero percent interest? So I can go up to a $4.3 million offer at 0% for 10 years, as opposed to everyone else that's offering $3.5 million where they're paying $1.25 million in interest over that term. So you can see how it's the same thing. I'm paying the same amount on both sides. So once you know the upper bound, then you can use that framework to solve the real seller's needs by pulling some of these levers and landing somewhere between $3.5 million and $4.3 million — and ideally lower than that. So let's look at how we structure these things. If the seller is okay with little to no down payment, then what you're able to do is, it increases the cash-on-cash return for yourself and your investors, if you have investors. It also increases the tax benefits to the investor. This is something that a lot of people don't realize. When you do a cost segregation study to accelerate your depreciation, to get that bonus depreciation, that is a fixed amount on that property. It has nothing to do with how much money you're putting into that deal. So if I'm buying a deal and that deal produces $1 million in bonus depreciation in year one, if I have to put up $1 million, that's — every dollar that is invested gets one dollar in losses. If I have to only put up $200,000, that means every dollar invested produces $5 in paper losses that could be passed on to the investors, or that you can take if you don't have any investors. This makes it very easy to raise money on the equity side, because nowadays you want to raise money from people that have too much money. That's a much easier raise than raising from somebody that doesn't have enough money and they're really just only investing because they want the return. Obviously everybody wants the return, but it's a lot easier to raise from people that need to drop their taxable income, because it's almost like a no-brainer. A lot of times there's these loss funds where you invest a dollar to get a dollar back in 10 years, only to offset your taxes. So there's no return on your capital. Now what that does is it creates a larger loan balance to the seller. That's a good thing, because it increases the total received to the seller — that number that we're gonna offer. And I'll show some examples of what our LOIs look like. It makes that total price offer look better, because now there's a bunch of interest banked into that total price. So when we make these types of offers, I'm not saying, hey, I'm gonna give you $3.5 million. I say, hey, I'm gonna give you $4 million or $4.2 million. How that's broken down is $3.2 in purchase and then $1 million in interest. So that's the number that's bolded on my LOIs — not the purchase price. Now, this does decrease your debt service coverage ratio, which is a test of how healthy a deal is, right? Larger loan amount, that means you have a larger debt payment, which means you need a larger amount of NOI to cover that debt. Now as far as terms go, the seller gets to really determine a lot of the terms, because he's doing you a massive favor on your cash-on-cash return calculation by putting little to no down payment, no skin in the game. So you as a buyer need to be a little bit more flexible on what you accept now. This does not work very well if you have large capex needs. Because if you're going to do a bunch of construction or you're gonna do a bunch of renovation, that money needs to come from somewhere, and it can't come from the seller, because the seller's not gonna give you money to buy his property. So that means you either have to raise it from investors, either as equity, as preferred equity, or even as debt. So in this type of scenario, where the seller's carrying a large amount of the payment and you're putting very little money down into the deal, most likely you're gonna be paying for that construction out of pocket via equity. Now, one of the little tricks that we do: let's say a seller does want a pretty healthy amount of down payment, let's say they want 30% down. I'll say, okay, I'm willing to do 30% down, but I want my capex to count as down payment. Because I'm investing that money into your property, and if I don't hold up my end of the bargain and I miss payments or what have you, you get the property back in an improved state at a higher value. So let's use the capex as part of the down payment. And usually for this, they want to make sure that you're actually going to spend that capex money. So I say, what we're gonna do is, I'm gonna put that money in an escrow account and you'll get reports on a monthly basis from the escrow account as I'm spending that escrow money only for construction purposes, right? Just like you would when you get a construction loan from a bank. The bank doesn't release the money from the construction escrow unless there's an inspection that states, yes, you did the work that you said you were gonna do, we can release this money to pay the sub or the GC, what have you. Okay. So now let's look at the opposite. Because this is the majority of what you're gonna encounter when you're doing seller finance negotiations with sellers — especially if they haven't owned the asset for a long time. They have a very large debt that's still on the property and they're gonna want you to pay that off. They're not gonna seller-finance you and then still have to pay their own debt. There are ways to do that, and we'll explain in a later slide on how to do that. But this is the majority of what you're gonna encounter. So, larger down payment to the seller. That obviously decreases our cash-on-cash return, and it's gonna make it harder to raise equity. Not only because you have to put more down, which means your return goes down, but then you also get less bonus depreciation per dollar invested in the deal. That smaller loan balance may look nice to the seller, but it also decreases the total interest that the seller receives. So that total price offer won't be very different from that purchase price offer. So there's not a lot of cash working in your favor to show a big number to the seller. This does increase, obviously, your debt service coverage ratio, making it a healthier deal. But if your cash-on-cash return is 3%, it doesn't matter what your debt service coverage ratio is, because you could just put the money in the stock market and make — I don't even know how much, in the last couple of years averages like 18%, 22%, whatever it is, right? Chris Berg: Yeah, it's been good. Fernando Angelucci: So the terms, though — because the buyer is determining most of the terms, which means my price and I want a large down payment, that means that you can have less flexibility in what you approve. So right off the bat, I'm saying, hey, that's great, I could definitely give you a 70% down payment. But to do that, because you're only going to be carrying 30%, I'm going to go to a bank to get a first position in front of you. And that's the only way that this deal's going to work, if you want your 70% down and still have a higher purchase price than all my other competitors and receive interest. So this is the only way that I'm willing to do it if you want a massive down payment. And usually it works. And what this allows too is, this allows for heavy capex. Because now your first position you can use for construction proceeds as well. Not only is it a purchase loan, it's a purchase and construction proceeds loan. So you can do a lot of construction, a lot of capex value-add. And when you bring the bank into the first position for that construction loan — typically, if you're structuring the seller financing second in an appropriate way, the bank loves it, because it actually makes their position much healthier. If they were gonna lend all the money to you from the bank alone, you're paying, let's call it, for construction debt right now, 7%, 7.5%. But if you have a 30% kicker on the back end that you're paying 4% or 0% during the construction period — I'll show you all these kinds of terms that we could go through — that makes the bank's combined debt service coverage ratio and combined loan-to-value much better. It puts them into a safer position. So banks love when a seller's willing to take a second at below-market interest rates and better-than-market terms and conditions. So what are some alternatives to a traditional seller financing structure? Well, there is a master lease agreement with purchase option. So this is one of the ones that we like exploring when, let's say, there's a trust gap that we can't necessarily get over for whatever reason. Maybe the seller did a seller financing in the past and it went horribly wrong and they had to foreclose and they couldn't take their property back for three years because the buyer that they seller-financed filed for bankruptcy. Some people have scars from doing these types of structures, right? So an alternative to that is controlling the asset, not necessarily owning it. So now there's more safety for the seller, but I still am able to produce value. And usually in these types of situations, because I'm not technically the owner, I could get into these things with little to no money out of my pocket. So how does this work? It basically mimics seller financing, but it's the best of both worlds. The structure is synonymous with many elements of the seller financing. So instead of a down payment, you have a lease option payment. Instead of interest payments, you have a lease fee. Now the downside is, this does not work very well with heavy construction or large capex budgets, because you don't technically own the asset. So no bank is gonna give you money in this type of structure to do construction. So you're basically gonna have to be paying for that capex out of pocket. The benefits are that, number one, title hasn't transferred yet. So the property taxes are not being reassessed based on a purchase. That's a big issue right now. A lot of municipalities are running out of money after that kind of post-COVID spending spree, and property taxes in some places are doubling or tripling. I mean, in my home city of Chicago, there are some large REITs right now that are trying to divest of a lot of their properties and are just unable to do it, because the second somebody buys it, the property taxes are going to double to triple. And they don't want to sell their facility based on the new tax amount. They want to sell it based on the taxes they're experiencing, which is not going to happen, right? So this is a way to get around it. If they have underlying debt that is very high, there is no due-on-sale clause. So now, instead of when we had that problem before where the seller's like, well, I want you to pay 80% down because I need to pay off my existing debt — and for whatever reason they are unwilling to do a second position — then maybe this is an option. So now you can keep their existing favorable mortgage in place, especially if they refinanced anytime over the last couple years when people were getting 3% and 4% mortgage rates and fixing them for 10 to 30 years. This is a great way to take advantage of that old debt that is no longer available to us and still be able to control the property and make profit. And then there's also this kind of psychology difference. You are renting their facility with the ability to buy it down the road at a predetermined price. And because of that, that allows you to treat it and talk to the seller as if you're renting their facility. So you don't need to put a lot of money out of pocket. When we've done these master lease agreements, we have gone into these things with less than 5% down. Chris Berg: So Fernando, here's what I'd love to do. I'm a big believer — and you've done an incredible job laying this out — but I think stories really help people appreciate what you're doing here. And so if there's some stories that you've got — I know you told one about the grandpa that had to pay, you mentioned tuition earlier, I think that was a great story. I talked to Steven recently and you mentioned at the top with the substitution of collateral situation, I think is fascinating what you guys have done. So if you don't mind, because we've got really less than 10 minutes, if you can just share some stories that can help people kind of process, like, I see how this can really be valuable to me — especially as we showed earlier, if the 10-year continues to do what we think it's gonna do, they're gonna need to have this skill set. Fernando Angelucci: Yeah. So after the next slide, I have all the stories for you. I really want to cover the equity side, because a lot of people think seller financing means seller financing. In reality, we're not doing seller financing, we're doing creative structuring — or creative engineering, as you said. So one of the ways — and if you guys want to screenshot this, this is just like a flow chart of when the MLAs make sense. We just basically covered it. Seller equity. Sometimes sellers don't want to sell because they're gonna have a massive capital gain that they're gonna have to pay off, or depreciation recapture they're gonna have to pay off. So now you gotta realize that you gotta change the way your brain thinks. It's not just, can the seller carry my debt. Maybe the seller can also carry my equity. I always say, okay, you want $3 million — what are you gonna do with the money once we buy it? You gonna put it into a savings account, make 1%? You're gonna put it into high yield at 5% or 4% nowadays? What if I triple that for you? How would you like 12%? And now all of a sudden you have an equity investor that wants less of a return than your true LP investors that want an 18%, 22%, 25%, 27% IRR. You have someone that's willing to take a much lower amount, because for them, the real thing is the taxes. So you come in, you bring them in as a separate LP share class, and you push a lot of the bonus depreciation their way. So now my offer — I can actually buy a property from them at a lower price than my competitors, but they get to keep more in their pocket than if they went with my competitor's price that was $200,000, $400,000 higher than mine, right? So just kind of switch the way that you're thinking. It's not just seller financing, it's creative deal structuring or creative deal engineering. So, stories. I'd say screenshot this first, because these are 25 of those promissory note contract clauses that I was talking about that you can really change the game with. So for example, step-up rate. Let's say you're having a fight with a seller on rate. He wants 8%, you want to pay 2%. You say, okay, you want 8%? How about this — I'll do you better. I'll do a 12% interest rate. And here's how we're gonna do it, because we're financial engineers. We know that when you get loans, all of the interest is front-loaded in that loan. So I say, instead of giving you 8, I'll give you 12, and here's how it's gonna work. The first period I'm gonna pay 0% interest. Then in the next period, I'm gonna pay 1%. And then next period 3%. Or you can even go higher — you can go 2%, 4%, 6%, 8% over that hold period. Because we know that in that period of zero to 1% to 2% to 3%, we are crushing the principal down super fast. So by the time you get to the 10% rates or the 12% rates — if you ever even get there, you may just refinance the guy out — you're now paying 12% on $200,000 as opposed to on a million or $2 million. And that effective rate, when you average it, can be 1.6%, 2.2%, even though at the end of the period you're paying 12% interest. So you just gotta understand how amortization tables work. Substitution of collateral is one that we love. So substitution of collateral — how we came up with this was, sellers see that big number and they say, well, what happens if you refinance me out? Then I'm not gonna get all this interest money over that 10 or 12-year balloon period. And you're like, you are absolutely right. How about we guarantee the interest for you? Would that make you feel better? And they say, yeah, that'd make me feel a lot better. Here's how we're gonna do it. If we ever refinance or sell your asset, what we're gonna do is we're gonna transfer your debt to another self-storage facility of equal or greater value, in the same position that you were here. So if you were a first position loan here, we'll put you into a first position loan somewhere else. If you were a second position loan here, we'll put you into a second position loan somewhere else, at the same combined loan-to-value. And now they are basically becoming your own warehouse lender at 3%, at 4% interest rate, that you can move across multiple deals — allowing you to go do deals on properties that the seller is unwilling to offer seller financing. But now, because you have this substitution of collateral in your back pocket, you can now offer more than all of the competition. So you can get the deal done at a higher price but still pay less over the whole period than your competition, right? So let's look at some stories, some examples of how we put this together. This is what our LOI looks like, or what the calculation looks like to create the LOI. There's a conventional offer, there's a seller finance offer that's amortized, there's a seller finance offer that's interest-only. There's an SBA 504 green offer, which allows you to get 5% seller equity and 5% seller financing, and then allows the SBA to come in with you to bring 5% of your own cash. So you can get into very large deals with a very little amount of money. And then the master lease agreement as well. So here's some case studies. Rochester, New York. We bought this with 5% down, 5.5% interest-only, seven-year term. And because the down payment was so low, every dollar invested in this deal produced two dollars in bonus depreciation to our investors. And because 5.5% is a great deal at high leverage with a seven-year term, we also got that substitution of collateral clause. And what you'll find is, the lower your down payment, the easier it is to convince the seller to do a substitution of collateral clause, because they want to guarantee that interest over that hold period to get that bolded number that you show them. Chris Berg: Wow. Fernando Angelucci: So for example, if you look at this conventional offer, the actual offer price is $2.3 million. And in the seller finance over here — if you look at the interest-only over here, the offer price was actually $3.5 million. But if you look at the total seller-financed amount, how much they're gonna receive over that period, it is $1.165 million, which is lower than that calculation that we showed of being $4.5 million, right? Chris Berg: So quick question for you. Because such a low down payment, and then for you to go and move the paper to another asset — you've got to have the right DSCR so the bank will refinance you, correct? So you felt good about your DSCR here, so it was like, okay, we can make this work. Fernando Angelucci: Yeah, absolutely. I mean, look at 1.2 DSCR walking into the deal, and this is before we do the value-add. Like, that's a deal that a bank would finance all day, you know? Chris Berg: Wow. So good, man. Hey, I'm a big believer, Fernando, leave people wanting more. And so I want to have you back, because I feel like we just scratched the surface. Do you agree? I mean, like, we were just scratching the surface. So if you don't mind — and just because of a time crunch as well — if you can share with people how they can reach out to you, if they're interested in maybe investing. I know you guys have got, I believe, some syndications that are available right now. How do they do that? How do they ask you questions and get in touch with you? Fernando Angelucci: Yeah, easy. Depending on your type of outreach — if you're more of a passive outreach person, you can go to our website, SSSE.com. If you're more of an active outreach, or you listen to it and you're like, man, this is wild, I want to talk to Fernando right now about how to do this — this is my cell phone, give me a call. Area code 630-408-8090. We always have different ways that we can work with people. So we buy self-storage facilities from people, we buy land. We'll help you wholesale deals if it's not a deal that we want. If you bring us a deal you want to co-GP — about 30% of the deals that we do, we will help people raise capital, we'll help them do the operations, get the debt, that type of stuff. And then of course, if you just wanna say, hey, I just wanna be completely hands off, completely passive, we have various vehicles where you can be a limited partner with us. Whether it be you need tax losses or you need a solid return, we have options for all of that. Chris Berg: Fantastic. Again, reach out to him. Obviously incredible, some of the way that they're structuring these deals. Again, if you look at where the 10-year's moving — I'm not suggesting we're ever gonna hit 15, but you definitely want to understand the skill set and become great at it. Fernando's doing some incredible things with it, so reach out to them. SSSE.com. Fernando, I wanna give you the last word. Anything else you want to add or share, my friend? Fernando Angelucci: You know, just go out there and just try. It's so funny how, when I'm talking to people that are first trying to get into the seller finance game, they won't even make an offer or even ask the seller if they're willing to get creative so that they can get a higher price, because they're afraid they're gonna say no. It's like, all right, they say no, then you go back to your original plan, which is to buy it with conventional financing anyway. So just throw it out there. Just try to see if they're interested. And what you'll find is — nowadays, one out of every two to three deals we do has some seller finance or seller equity component now. So we're doing a lot of deals where we don't even need to go out and do the rigmarole of getting bank financing. Chris Berg: I just want to thank you, man, for your insight, your expertise, what you guys are doing, and your time as well. And we look forward to having you back, because again, I think we just scratched the surface. Okay? Thank you very much. It's great to have you. Fernando Angelucci: Sure. Yeah, thanks for having me on. Chris Berg: This is The Self-Storage Report. Again, I'm Chris Berg. I want to invite you to check out SelfStorageReport.com. Again, SelfStorageReport.com. Of course, subscribe to the channel — you'd be the first to know, to get this amazing content from people like Fernando. And we'll see you back here very soon on The Self-Storage Report. — END OF TRANSCRIPT —