| Related Party Transactions | Note 6. Related Party Transactions
Fees to Affiliates
Our Advisory Agreement with our Advisor and dealer manager
agreement (“Dealer Manager Agreement”) with our Dealer
Manager, entitle our Advisor and our Dealer Manager to specified
fees upon the provision of certain services with regard to the
Public Offering and investment of funds in real estate properties,
among other services, as well as reimbursement for organizational
and offering costs incurred by our Advisor on our behalf and
reimbursement of certain costs and expenses incurred by our Advisor
in providing services to us. Additionally, the advisory agreement
(the “Private Offering Advisory Agreement”) and dealer
manager agreement (the “Private Offering Dealer Manager
Agreement”) executed in connection with the Private Offering,
entitled our Advisor and our Dealer Manager to specified fees upon
the provision of certain services with regard to the Private
Offering and investment of funds in real estate properties, among
other services, as well as reimbursement for organizational and
offering costs incurred by our Advisor on our behalf and
reimbursement of certain costs and expenses incurred by our Advisor
in providing services to us.
Organization and Offering Costs
Organization and offering costs of the Private Offering were paid
by our Advisor on our behalf and were reimbursed to our Advisor
from the proceeds of our Private Offering pursuant to the Private
Offering Advisory Agreement. Organization and offering costs
incurred in connection with the Private Offering consisted of all
expenses (other than sales commissions and the dealer manager fee)
to be paid by us in connection with the Private Offering, including
our legal, accounting, printing, mailing and filing fees, charges
of our escrow holder and other accountable organization and
offering expenses, including, but not limited to, (i) amounts to
reimburse our Advisor for all marketing related costs and expenses
such as salaries and direct expenses of employees of our Advisor
and its affiliates in connection with registering and marketing our
shares; (ii) technology costs associated with the offering; (iii)
our costs of conducting our training and education meetings; (iv)
our costs of attending retail seminars conducted by participating
broker-dealers; and (v) payment or reimbursement of bona fide due
diligence expenses. We have incurred and will continue to incur
similar organization and offering costs in connection with the
Public Offering. Pursuant to the Advisory Agreement, our Advisor
must reimburse us within 60 days after the end of the month which
the Public Offering terminates to the extent we paid or reimbursed
organization and offering costs (excluding sales commissions and
dealer manager fees) in excess of 3.5% of the gross offering
proceeds from the Primary Offering.
Advisory Agreement
We do not have any employees. Our Advisor is primarily responsible
for managing our business affairs and carrying out the directives
of our board of directors. Our Advisor receives various fees and
expenses under the terms of our Advisory Agreement and the Private
Offering Advisory Agreement (which terminated upon commencement of
the Advisory Agreement). As discussed above, we are required under
our Advisory Agreement to reimburse our Advisor for organization
and offering costs from the Public Offering; provided, however,
pursuant to the Advisory Agreement, our Advisor will be required to
reimburse us within 60 days after the end of the month in which the
Public Offering terminates to the extent we paid or reimbursed
organization and offering costs (excluding sales commissions and
dealer manager fees) in excess of 3.5% of the gross offering
proceeds from the Primary Offering.
The Advisory Agreement also requires our Advisor to reimburse us to
the extent that offering expenses, including sales commissions,
dealer manager fees and organization and offering expenses, are in
excess of 15% of gross proceeds from the Public Offering. Our
Advisor receives acquisition fees equal to 1.75% and 1%,
respectively, of the contract purchase price of each property we
acquire plus reimbursement of any acquisition expenses our Advisor
incurs pursuant to the Advisory Agreement and the Private Offering
Advisory Agreement. Our Advisor also receives a monthly asset
management fee equal to 0.04167%, which is one-twelfth of 0.5%, of
our average invested assets, as defined. We also pay our Advisor a
financing fee of up to 0.5% of the borrowed amount of a loan for
arranging for financing in connection with the acquisition,
development or repositioning of our properties. Our Advisor may
reallow a portion of the financing fee to a third party in the
event such party assisted us in arranging such financing.
Under our Advisory Agreement, our Advisor receives disposition fees
in an amount equal to the lesser of (i) one-half of the competitive
real estate commission or (ii) 1% of the contract sale price for
each property we sell, as long as our Advisor provides substantial
assistance in connection with the sale. As provided under the
Advisory Agreement, the total real estate commissions paid
(including the disposition fee paid to our Advisor) may not exceed
the lesser of a competitive real estate commission or an amount
equal to 6% of the contract sale price of the property. We also pay
our Advisor or its affiliate a market-based development fee some or
all of which may be reallowed to a third party developer. The
development fee is paid in connection with properties that we
anticipate developing or expanding within 12 months of the
acquisition of such properties. A development fee to a third party
developer may take the form of an up-front fee and participation in
a back-end performance fee. Our Advisor is also entitled to various
subordinated distributions under the Second Amended and Restated
Limited Partnership Agreement if we (1) list our shares of common
stock on a national exchange, (2) terminate our Advisory Agreement,
(3) liquidate our portfolio, or (4) merge with another entity or
enter into an Extraordinary Transaction, as defined in the Second
Amended and Restated Limited Partnership Agreement.
Our Advisory Agreement provides for reimbursement of our
Advisor’s direct and indirect costs of providing
administrative and management services to us. Beginning four fiscal
quarters after we acquire our first real estate asset, pursuant to
the Advisory Agreement, our Advisor is required to pay or reimburse
us the amount by which our aggregate annual operating expenses, as
defined, exceed the greater of 2% of our average invested assets or
25% of our net income, as defined, unless a majority of our
independent directors determine that such excess expenses were
justified based on unusual and non-recurring factors. For any
fiscal quarter for which total operating expenses for the 12 months
then ended exceed the limitation, we will disclose this fact in our
next quarterly report or within 60 days of the end of that quarter
and send a written disclosure of this fact to our stockholders. In
each case the disclosure will include an explanation of the factors
that the independent directors considered in arriving at the
conclusion that the excess expenses were justified.
As of December 31, 2015, we had incurred total operating expenses
for the 12 months then ended that exceeded the greater of 2% of our
average invested assets or 25% of our net income, as defined, in
the four consecutive fiscal quarters then ended by approximately
$255,000 (the “Excess Expenses”). On March 4, 2016, our
board of directors, including all of the independent directors,
determined that there are unusual and non-recurring factors that
are sufficient to justify the Excess Expenses, including but not
limited to: (1) the amounts reflect legitimate operating expenses
necessary for the operation of our business; (2) we are in our
first full year of operations and we are still in the acquisition
and development stage; (3) the start-up costs associated with our
first full year of operations, including the expenses associated
with being a public company (such as audit and legal services,
director and officer liability insurance and fees for directors),
are significant and disproportionate to our average invested assets
and net income; (4) our average invested assets was low due to us
owning between 3 and 12 properties during the four fiscal quarter
period; and (5) our focus on acquisition of self storage properties
that are not yet stabilized.
Dealer Manager Agreement
In connection with our Private Offering, our Dealer Manager
received a sales commission of up to 7.0% of gross proceeds from
sales in the Private Offering and a dealer manager fee equal to up
to 3.75% of gross proceeds from sales in the Private Offering under
the terms of the dealer manager agreement for our Private Offering
(the “Private Offering Dealer Manager Agreement”). In
connection with our Primary Offering, our Dealer Manager receives a
sales commission of up to 7.0% of gross proceeds from sales of
Class A Shares and up to 2.0% of gross proceeds from the sales of
Class T Shares in the Primary Offering and a dealer manager fee up
to 3.0% of gross proceeds from sales of both Class A Shares and
Class T Shares in the Primary Offering under the terms of the
Dealer Manager Agreement. In addition, our Dealer Manager receives
an ongoing stockholder servicing fee that is payable monthly and
accrues daily in an amount equal to 1/365th of 1% of the purchase
price per share of the Class T Shares sold in the Primary Offering.
We will cease paying the stockholder servicing fee with respect to
the Class T shares sold in the Primary Offering at the earlier of
(i) the date we list our shares on a national securities
exchange, merge or consolidate with or into another entity, or sell
or dispose of all or substantially all of our assets, (ii) the
date at which the aggregate underwriting compensation from all
sources equals 10% of the gross proceeds from the sale of both
Class A shares and Class T shares in our Primary Offering
(i.e., excluding proceeds from sales pursuant to our distribution
reinvestment plan); (iii) the fifth anniversary of the last
day of the fiscal quarter in which our Public Offering (excluding
our distribution reinvestment plan offering) terminates; and
(iv) the date that such Class T share is redeemed or is no
longer outstanding. Our Dealer Manager has entered into
participating dealer agreements with certain other broker-dealers
which authorizes them to sell our shares. Upon sale of our shares
by such broker-dealers, our Dealer Manager re-allows all of the
sales commissions and, subject to certain limitations, the
stockholder servicing fees paid in connection with sales made by
these broker-dealers. Our Dealer Manager may also re-allow to these
broker-dealers a portion of their dealer manager fee as marketing
fees, reimbursement of certain costs and expenses of attending
training and education meetings sponsored by our Dealer Manager,
payment of attendance fees required for employees of our Dealer
Manager or other affiliates to attend retail seminars and public
seminars sponsored by these broker-dealers, or to defray other
distribution-related expenses. Our Dealer Manager also receives
reimbursement of bona fide due diligence expenses; however, to the
extent these due diligence expenses cannot be justified, any excess
over actual due diligence expenses will be considered underwriting
compensation subject to a 10% FINRA limitation and, when aggregated
with all other non-accountable expenses in connection with our
Public Offering, may not exceed 3% of gross offering proceeds from
sales in the Public Offering.
Affiliated Dealer Manager
Our President and Chief Executive Officer owned, through a
wholly-owned limited liability company, a 15% non-voting equity
interest in our Dealer Manager through August 31, 2014. Effective
August 31, 2014, SmartStop indirectly owned the 15% non-voting
equity interest in our Dealer Manager, pursuant to the Self
Administration and Investment Management Transaction. Effective
October 1, 2015, in connection with the Merger, the 15% non-voting
equity interest in our Dealer Manager is now owned by our Sponsor.
An affiliate of our Dealer Manager continues to own a 2.5%
non-voting membership interest in our Advisor.
Property Management Agreement
Through September 30, 2015, each of our self storage properties was
managed by our Property Manager under separate property management
agreements. Under each agreement, our Property Manager received a
fee for its services in managing our properties, generally equal to
the greater of $3,000 or 6% of the gross revenues from the
properties plus reimbursement of the Property Manager’s costs
of managing the properties. Reimbursable costs and expenses
included wages and salaries and other expenses of employees engaged
in operating, managing and maintaining our properties. Our Property
Manager also received a one-time fee for each property acquired by
us that was managed by our Property Manager in the amount of
$3,750. In the event that our Property Manager assisted with the
development or redevelopment of a property, we paid a separate
market-based fee for such services. In addition, our Property
Manager was entitled to a construction management fee equal to 5%
of the cost of construction or capital improvement work in excess
of $10,000 and an administration fee equal to $0.50 a month for
each insurance policy purchased by a tenant at one of our
properties in connection with the tenant insurance program.
Additionally, each agreement included a non-solicitation provision
and a provision regarding the Property Manager’s use of
trademarks and other intellectual property owned by SmartStop.
As of October 1, 2015, each of our self storage properties are
subject to separate property management agreements with our
Property Manager, which in turn has entered into sub-property
management agreements with Extra Space, which provides on-site
management of our properties. Such agreements were entered into
effective on October 1, 2015. Under the property management
agreements, our Property Manager receives a monthly management fee
of $2,500 or 6% of the gross revenues, whichever is greater, plus
reimbursement of the Property Manager’s costs of managing the
properties. Extra Space agreed to pay up to $25,000 for each
property managed toward the signage and set-up costs associated
with converting each property to the Extra Space brand (the
“Set-Up Amount”). The property management agreements
have a three year term and automatically renew for successive one
year periods thereafter, unless we or our Property Manager provides
prior written notice at least 90 days prior to the expiration of
the term. We may terminate a property management agreement without
cause at any time during the initial three year term if we pay the
Property Manager a termination fee equal to the Set-Up Amount,
reduced by 1/36th of the Set-Up Amount for every full month of the
term. After the end of the initial three year term, we may
terminate a property management agreement on 30 days prior written
notice without payment of a termination fee. Our Property Manager
may terminate a property management agreement on 60 days prior
written notice to us.
The sub-property management agreements between our Property Manager
and Extra Space are substantially the same as the property
management agreements between us and our Property Manager. Under
the sub-property management agreements, our Property Manager pays
Extra Space a monthly management fee of $2,500 or 6% of the gross
revenues, whichever is greater, plus reimbursement of Extra
Space’s costs of managing the properties; provided, however
that no management fee is due and payable to Extra Space for the
months of January and July each year during the term. Extra Space
has the exclusive right to offer tenant insurance to the tenants
and is entitled to all of the benefits of such tenant insurance.
The sub-property management agreements also have a three year term
and automatically renew for successive one year periods thereafter,
unless our Property Manager or Extra Space provides prior written
notice at least 90 days prior to the expiration of the term. Our
Property Manager may terminate the sub-property management
agreement without cause at any time during the initial three year
term if it pays Extra Space a termination fee equal to the Set-Up
Amount, reduced by 1/36th of the Set-Up Amount for every full month
of the term. After the end of the initial three year term, our
Property Manager may terminate a sub-property management agreement
on 30 days prior written notice without payment of a termination
fee. Extra Space may terminate a property management agreement on
60 days prior written notice to our Property Manager.
In addition, we entered into an agreement with Extra Space and our
Property Manager in which we agreed that, subject to certain
limitations, our Property Manager will retain Extra Space as
sub-property manager for all self storage properties we acquire in
the United States that will be managed by our Property Manager.
Pursuant to the terms of the agreements described above, the
following table summarizes related party costs incurred and paid by
us for the years ended December 31, 2014 and 2015, as well as any
related amounts payable as of December 31, 2014 and 2015 (there
were no related party costs incurred during the period from March
12, 2013 (date of inception) through December 31, 2013):
Year Ended
December 31, 2014
Year Ended December 31, 2015
Incurred Paid Payable Incurred Paid Payable
Expensed
Operating expenses (including organizational costs) $ 421,921 $ 421,921 $
— $ 774,212 $ 748,513 $ 25,699
Asset management fees 36,248
— 36,248 180,060 216,308
—
Property management fees (1) 68,146
— 68,146 378,190 446,336
—
Acquisition expenses 488,660 418,763 69,897 822,798 775,620 117,075
Debt issuance costs
—
—
— 143,773 41,523 102,250
Capitalized
Debt issuance costs 323,822 158,280 165,542
— 165,542
—
Other assets 87,405
— 87,405 20,000 107,405
—
Additional Paid-in Capital
Selling commissions 470,336 442,337 27,999 1,462,535 1,490,534
—
Dealer manager fees 201,572 189,571 12,001 365,634 372,474 5,161
Offering costs 1,422,211 40,001 1,382,210 471,519 1,850,917 2,812
Total $ 3,520,321 $ 1,670,873 $ 1,849,448 $ 4,618,721 $ 6,215,172 $ 252,997
(1) During the year ended December 31,
2015, property management fees include approximately $92,000 of
fees paid to the sub-property manager of our properties.
Tenant Insurance Program
Prior to the closing of the Merger on October 1, 2015, SmartStop
participated in a tenant reinsurance program whereby customers of
our self storage facilities were able to purchase insurance to
cover damage or destruction to their property while stored at our
facilities. SmartStop invested in a Cayman Islands company (the
“Reinsurance Company”) that insured a portion of the
insurance required by the program insurer to cover the risks of
loss at participating facilities in the program. The program
insurer provided fees (approximately 50% of the tenant premium
paid) to us as owner of the facilities. The Reinsurance Company was
required to fund additional capital or entitled to receive
distributions of profits depending on actual losses incurred under
the program. Commensurate with the effective date of the Self
Administration and Investment Management Transaction of August 31,
2014, SmartStop acquired its interest in the Reinsurance Company
from our President and Chief Executive Officer. For the years ended
December 31, 2015 and 2014, we recorded approximately $0.1 million
and none, respectively, of revenue from the program insurer.
Effective October 1, 2015, Extra Space was entitled to all tenant
insurance revenues for properties located in the United States and
we will no longer receive any such tenant insurance revenues.
Extra Space Self Storage
In connection with the merger of SmartStop into Extra Space,
certain of our executive officers, including H. Michael Schwartz,
Paula Mathews, Michael McClure and James Berg, received units of
limited partnership interest in Extra Space Storage LP, the
operating partnership for Extra Space, in exchange for units of
limited partnership of SmartStop Self Storage Operating
Partnership, L.P., the operating partnership for SmartStop, owned
by such executives. |
