What Happens to My Money in a Real Estate Fund? | AAA Storage

On our latest podcast episode, Paul Bennett answers the question every investor eventually asks out loud: I give you money, and you give me money back — how does that actually work?

This article is for growth-minded investors who have read a private placement memorandum and still want the process narrated in plain terms. It follows one asset from the decision to sell it to the wire landing in an investor's account.

Why the exit matters more than anything else

Because in this strategy it is the entire return. "The exit in any real estate investment is where the bulk of your return is gonna come from," Bennett said. "It doesn't matter whether you buy an existing asset or you do ground-up development."

But the two differ in an important way. A stabilized asset produces cash flow along the way, and that cash flow is part of the return. Ground-up development doesn't. AAA Storage develops, stabilizes and sells in order to harvest the profit created in construction and lease-up — and it sells "at about the time they would be able to start distributing cash to our investors," which makes the exit, in Bennett's words, "our only source of return, essentially."

That is the trade in a merchant development fund: no interim income, one larger event at the end. It is also why the process leading to that event gets so much scrutiny.

How the decision to sell actually gets made

On a schedule, by committee, against a number. AAA Storage reviews performance monthly and formally reviews every project quarterly, measuring each against its projections and its position on the value-creation curve. The asset managers recommend; the investment committee approves.

The test is deliberately not occupancy alone. "We just don't say, 'Well, it's 85% leased. Let's sell it,'" Bennett said. "We look at what market cap rates are. We look at what we think is a reasonable value, and then we compare it to the returns we projected in the model and say, 'Okay, are we there yet?'"

Two things override the schedule. First, inbound demand: institutional investors who know AAA Storage develops and sells call several times a week asking what is reaching maturity. Second, lease-up velocity — a facility filling faster than underwritten can be sold for full value at 65% or 70% occupancy rather than the 80% to 85% that normally counts as stabilized, because a buyer reading a strong lease-up curve sees almost no remaining risk to price for. Bennett named the Lago Vista facility, covered in our project-by-project update on Growth Fund 1, as a candidate to sell at 70% if its pace holds.

Finding a buyer: two stages, and the first one saves the most money

Stage one is direct, and it is where AAA Storage prefers to finish. The firm packages the asset's performance, location and market and sends it straight to institutional buyers it has transacted with before — publicly traded REITs and large private real estate firms among them. No broker.

Only if that produces no serious interest, or values below what the asset is worth, does a broker get engaged for broader exposure. The sequence is arithmetic: "If we can get a sale transaction done without involving a broker, then we save three, four, 5% of the purchase price," Bennett said — money that stays in the fund.

Asked whether relationships are the real moat, Bennett was measured. Plenty of buyers transact on the numbers alone and "really don't care if Attila the Hun owns it." What an existing relationship changes is the path: "They know they can trust the data we give them." That is the difference between selling direct and paying a broker.

From letter of intent to closing

With multiple interested buyers, AAA Storage runs an auction — a best-and-final deadline, then analysis of the letters of intent. Price leads, but deposit size, the buyer's financial capability, the length of due diligence and speed to close all count.

The LOI is non-binding but for an exclusivity clause that stops AAA Storage shopping the property while it stands. The binding document is the purchase and sale agreement: usually drafted by the buyer, negotiated back and forth, and where every detail lives.

Once it's signed, escrow is deposited and due diligence runs 30 to 60 days — 45 on average — while the buyer verifies tax returns, financials, major expenses, insurance and the site itself. AAA Storage's VP of Property Management, David Lutz, and its director of construction run that period. At expiration the contract goes hard and the deposit is at risk; before that, a buyer can walk and recover it.

Then transition planning, prorations and closing calculations. The close is virtual now and takes an afternoon: the construction loan is paid off by wire, and the buyer's funds land in that property's account.

What happens to my money in a real estate fund once the sale closes

It takes about thirty days, and the calculations are done by someone other than AAA Storage. The fund administrator, IQEQ, applies the waterfall using the fund's private placement memorandum.

Much of the math is settled before the sale. Each project has an exact amount of capital allocated to it from accounting records, and each investor's pro-rata interest is known — so return of capital is, in Bennett's words, "a simple multiplication exercise." Then the 7% preferred return, the sponsor's catch-up, and the remaining profit split 70/30 in favor of investors.

Two details worth knowing. Investors are told when a property goes under contract, not before — and told plainly that a contract is not a closing, because a buyer can still walk. And once the numbers are final, IQEQ notifies investors and wires funds to the account on file in the investor portal. "The investor doesn't have to send us information or do anything," Bennett said.

Distributions happen per property, not per fund. Growth Fund 1 expects seven or eight such events, with the objective of exiting everything within six to eight years.

On the tax side, Bennett was emphatic: "I am not giving tax advice, I can promise you that." The mechanics, briefly — in a year with an exit the K-1 reflects both the fund's operational result and the capital gains from the sale, and most proceeds are either return of capital or taxed at long-term capital gains rates. The bonus depreciation question is more involved, and it's covered in the FAQ below. Take all of it to your own CPA, alongside our due diligence questions for vetting a sponsor.

Why exit timing matters as much as exit price

Because returns are measured against time, not just dollars. AAA Storage maintains month-by-month projections for each project's full life and reports actuals against them throughout, tracking whether every asset is on pace to deliver what was underwritten.

"A dollar that you get today is more valuable than a dollar you get next year," Bennett said. Exiting in three years instead of four moves time-valued returns materially, independent of sale price. "It's all about velocity."

It is also the argument for a fund over a single asset. "Every deal isn't a good deal, and there are so many things you can't control," Bennett said. Some assets beat expectations and some miss; the blend across a portfolio raises the probability of reaching the 20% target IRR that a single asset either hits or doesn't. AAA Storage has completed this process 94 times.

Key Terms

Merchant development: A strategy of developing an asset, stabilizing it, and selling it to harvest the value created in construction and lease-up, rather than holding it for income. Because the asset is sold at roughly the point it would begin distributing cash, the sale is the primary source of investor return.

Letter of intent (LOI): A short, largely non-binding document setting out the headline terms of a proposed sale. Its one binding element is typically an exclusivity clause preventing the seller from marketing the property to others while it stands.

Purchase and sale agreement (PSA): The binding sale contract, usually drafted by the buyer and negotiated between the parties. It contains the full detail the LOI omits.

Due diligence period: The window after a PSA is signed in which the buyer verifies the seller's representations. Typically 30 to 60 days, averaging 45. Until it expires the buyer can withdraw and recover their deposit; after it expires the contract is "hard" and the deposit is at risk.

Waterfall: The order in which sale proceeds are distributed — return of capital first, then the preferred return, then the sponsor's catch-up, then the remaining profit split between investors and sponsor. AAA Storage's structure pays a 7% preferred return and splits residual profit 70/30 in favor of investors.

Fund administrator: An independent third party that performs the distribution calculations using the fund's offering documents, rather than the sponsor calculating its own compensation. AAA Storage uses IQEQ.

Time-valued return (IRR): A return measure that accounts for when money is received, not only how much. It is why the speed of an exit affects the outcome as much as the sale price does.

Frequently Asked Questions

How long does it take to get my money after a property sells?

About thirty days from closing. Once the sale closes, proceeds are held in the property's account while the fund administrator, IQEQ, applies the waterfall from the fund's offering documents. Most of the inputs are already known — the capital allocated to that specific project and each investor's pro-rata share — so the calculation is largely mechanical. Investors then receive a notice that a distribution is coming, and funds are wired directly to the account on file in the investor portal. No action is required from the investor.

Do I get paid when the fund closes, or each time a property sells?

Each time a property sells. The waterfall is applied per asset, so a distribution follows every individual sale rather than waiting for the fund to wind down. Growth Fund 1 anticipates seven or eight such events, with the objective of exiting all assets and returning all capital within six to eight years.

Will I know before a property is sold?

You'll know when it goes under contract, not before. AAA Storage does not tell investors a sale is coming while it is still being negotiated. Once a binding purchase and sale agreement exists, investors are informed — along with the caveat that a contract is not a closing. A buyer can walk during due diligence and recover their deposit, and even after the contract goes hard a buyer can abandon the deal and forfeit it.

Why sell a facility before it's fully leased?

Because a strong lease-up curve removes the risk a buyer is pricing for. Occupancy of 80% to 85% is generally considered stabilized, but a facility leasing at above-average speed can command full value at 65% or 70%. A buyer who can see the pace of leasing in that market concludes the remaining lease-up carries little risk, and prices the asset as though it were already stabilized.

How are sale proceeds taxed?

Paul Bennett stated on the recording, "I am not giving tax advice," and nothing here is tax advice — take these questions to your own CPA. In a year with an exit, your K-1 reflects both the fund's operational result and the capital gains from the sale. The majority of proceeds are either return of capital or taxed at long-term capital gains rates. Separately, AAA Storage expects to claim bonus depreciation of roughly 35% of fund equity following cost segregation studies. Because those passive losses can only offset passive income, AAA Storage suggests investors ask their advisor about rolling the loss forward and applying it against the passive gains an exit produces.

Talk to Us About Your Investment Strategy

The exit process above is the same one AAA Storage has run 94 times. Contact our team to talk about how a ground-up development fund in self-storage and small-bay industrial fits your portfolio.