How Investing in a Real Estate Fund Really Works

In today’s private real estate landscape, LLC structures have become the standard for many operators thanks to their flexibility. The LLC has steadily replaced limited partnership structures because it offers sponsors and investors a direct, practical framework. In Growth Fund 2, every dollar invested enters the Fund LLC, which acts as the master entity for all investor commitments. Oversight and management flow through a separate manager LLC, ensuring clear accountability for all activities and decisions.

Every property within the fund gets its own special purpose entity (SPE)—an individual LLC that is wholly owned by the Fund LLC. This approach is about more than technical organization; it is fundamental risk management. By keeping each facility ringfenced in its own LLC, any liability or legal issue attached to one property cannot spill over to others. This is practical, tested protection for investors—every asset stands on its own, and fund-level value is preserved.

This straightforward structure is proven and direct. It delivers the sort of operational clarity and risk separation that have defined AAA Storage’s results: 19% IRR, more than 90 deals, and $450 million in exits since 1993.

Capital Commitment, Pro Rata Ownership, and Detailed Fund Allocation

Investors in Growth Fund 2 make a commitment directly to the Fund LLC. The result is simple: if you invest $200,000 in a $10 million fund, you own 2% of the fund—and 2% of every property held at the SPE level. This proportion determines your share of all fund-level flows and distributions.

Once committed, capital is divided into two main pools:

• At the fund level, expenses—including the management fee, administrative fees (with administration by IQ-EQ, a global fund administrator), annual legal fees, tax costs, and annual audits by Cherry Bekaert—are budgeted and reserved from the outset.

• The balance of capital is allocated as equity for property construction and working capital. This covers all projected development costs and ensures every facility can operate through the early lease-up window before self storage cash flow stabilizes. Thorough underwriting and detailed pro formas drive this allocation for every project.

Growth Fund 2 is built for efficient growth and prudent discipline. If capital raised exceeds the original target, additional properties are added; if raise volumes are lower, the fund reduces its project count. The underlying commitment: every facility launched will be fully financed, from acquisition to stabilization. Each allocation is backward-mapped from anticipated costs, working capital needs, and the fund’s real-world ability to get a property through lease-up and ready for performance or sale.

How Investment Lifecycle and the Distribution Waterfall Work

Invested capital is put to work in disciplined phases. Each step is mapped for investor clarity:

• Construction and Equity Deployment: Fund equity, making up about 35% of a project’s total cost, covers land acquisition and the start of construction. Once equity is deployed, banks provide construction financing for the remaining project needs—typically covering 65% of costs.

• Project Lease-Up and Working Capital: Once construction is complete, facilities open with no rental income but ongoing operating expenses. The fund uses reserves to cover interest, staffing, utilities, property taxes, and other overhead for the first 6 to 12 months.

• Stabilization and Phase Two Build: When the property achieves roughly 70% occupancy, phase two construction may begin—typically funded 100% by additional construction loans. In some situations, a small additional equity contribution may be required. Once stabilized at 75–80% occupancy, the facility transitions into profitability.

• Exit and Distribution Timeline: The fund’s strategy is to sell at stabilization. Because properties are developed sequentially, investors start seeing distributions from the fourth or fifth year onward, and the full portfolio exit generally concludes within six to eight years after fund launch.

Waterfall Distribution in Practice: The waterfall in Growth Fund 2 is applied on a property-by-property basis as sales occur. This ensures investors’ interests lead every distribution. The sequence is:

• Return of Capital: Investors receive 100% of their invested principal back first.

• 7% Annualized Preferred Return: Proceeds then go to investors, accumulating a 7% annualized preferred return from the date of investment until the full return of capital.

• Sponsor Catch-Up: The sponsor receives 30% of the distributed preferred return after all investor capital and annualized preferred return are paid.

• Profit Sharing: Remaining proceeds (profits beyond the preferred return) are split 70% to investors and 30% to the sponsor.

As clarified in the source, AAA Storage uses a property-by-property (European) waterfall but runs a final “catch-up” at the end of the fund—a reconciliation across all sales to ensure distributions have been fair and accurate portfolio-wide. If earlier property outcomes would result in over- or undercompensation compared to the whole portfolio, proceeds are adjusted accordingly before final distributions.

This process ensures that every investor receives their full investment back and their 7% annualized preferred return before any additional profits are shared with the sponsor.

Focused Expertise and Direct Investor Benefit

A real estate fund managed by experienced operators like AAA Storage gives investors access to projects, processes, and risk controls that are difficult to achieve independently. The team is always the largest single investor in its own funds, working alongside every participant. Most importantly, the waterfall structure is designed so that investors are first in line, receiving all contributed capital plus a 7% annualized preferred return before sponsors are eligible for further profit participation. This model directly aligns investor interests with the AAA Storage team and supports reliable returns grounded in three decades of operational discipline.