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Itunes – www.TonyJavier.com/itunes
Do you want to learn the secrets behind raising money for commercial real estate?
Seth Porter is the Vice President of Investor Relations for CREC (Core Real Estate Capital). His goal is to offer above-average, risk-adjusted returns on real estate investments structured to put investors’ interests ahead and provide a platform to communicate with them frequently.
If you want to attract significant funds for your investments, you need to stay for this one!
More about him – crecrealestate.com
Welcome to today’s show. We have Seth Porter on the line today. He is vice president of Investor Relations for CREC. They’ve got a few different funds worth tens of millions of dollars. He’s raised a lot of private money and been been in the lending or excuse me, the money raising part of of the business for quite a while and has done a lot to it. So it’s going to be a great conversation for those of you looking to raise money. So Seth, thanks for coming on with us today and taking time to speak to our audience.
Great. Thank you for having me.
Absolutely. Thanks for coming on again. So so you shared some, some numbers with me. You’ve got a couple of different funds. You can share those numbers if you want to pretty decent sized funds. So I guess first start with kind of how you got started in the business and, and kind of how it evolved to where it is now. People kind of like to understand, you know, where people were, where they got to, kind of how they how they got to, where they’re managing tens of millions of dollars in money. And I think you said something about even potentially helping manage a billion dollar fund at one point. So we’ll let you start and kind of give your background and kind of where you got to today.
Yeah, so I came from the bank of New York and prior to that, I was at JP Morgan Citi group. And my onboarding with CREC is really a result of the firm deciding that they wanted to become more of an, a institutionalized security sponsor or investors. Whereas prior to me joining the team there were a bunch of real estate professionals, people that love the actual bricks and mortar real estate and love the investment of real estate, but there no one had a traditional financial background, a wealth management background. And as we became a sponsor four years ago, I think that was a critical thing to have as a part of the team. And that, that was the, the main reason I was able to join the team five years ago. It’s been a great transition for me away from the large money center banks into a small nimble company. And I was able to spend all this time focused on the investor and the assets that the investors own.
So tell us what you invest in. So you’ve got a couple of decent sized funds when you raise that money. I guess we’ll, we’ll kind of fast forward and then we’ll, we’ll backtrack a little bit, but tell us what you invest in when you take that money or have that people invest money in those funds. What, what do you turn around and invest in?
Sure. So the company was formed in 1998 with the initial investment into multi-family developments. So for the last 20 to 23 years, CREC has been investing in multi-family properties. Along the way we’ve made several hospitality investments. We’ve made four senior living investments. We’ve done development, we’ve done value, add acquisition, we’ve done some stabilized cashflow. So we’re really open to anything within those spaces where the investment itself makes sense. The primary the primary driver for us, and whether we decide to make an investment is whether we think the investors are being rewards and the risks that they’re taking. That’s a critical thing for us. There’s a spectrum of risk in the business. And I think you need to get paid for the level of risk that you’re taking. And we’re also looking at various other factors, primarily the market, the city, where the property is located. That’s a big variable for us. We try to find properties where the, the fundamentals of the market serve as a tailwind for the investor and their experience making money. That’s an important differentiator.
When you say invest in those projects, are you the operators of that too, where you actually buy in and, you know, cashflow to reposition it, or do you invest in other operators as well that that operate those properties?
So we have two different silos that we operate in. And the first silo is direct investments. Our team internally is sourcing acquisitions, primarily going directly with brokerage relationships, where we can acquire off market and preempt the market to avoid mass auctions of properties where there’s a bidding war. That’s one channel. The other is a joint venture partnership where we’re finding best in class operators where we can co own the property with them. And they manage the property at the project level day to day, and we provide oversight from our office in Columbus.
Gotcha. Okay. So I wanted people to understand what you’re investing in. So let’s go back again. As far as raising money, I mean, you’ve put together some, some decent sized funds and if you don’t mind sharing those numbers, so people understand what it is. You can tell us how hard or easy that is. So tell us, you know, there’s obviously different kinds of funds, so we can, we can get into that if you want to. But just tell us, like, if someone’s wanting to raise, let’s say even $5 million, like for instance, something I was going to talk to you beforehand. I’ll probably end up talking to you afterwards is I have a funding business where I fund real estate investors down payment money for fixing flip properties around the country. And there’s such a huge demand for it.
And I only have so much money in my investors that partake in those deals only have so much money. So we’re looking to raise a fund of probably, you know, maybe $5 million to start with, but I feel like it could easily be a hundred million dollar fund just because we can do first combined with those seconds. So I guess I’m kind of asking for me too, but I know there’s a lot of other people that are wanting to raise money for their deals. Tell us how you guys do it. What kind of you know, SEC guidelines you have to follow and just kind of the whole process behind what you do.
So there’s an unlimited number of ways to go about doing what you’re trying to do. We chose the path of being, being the most formalized process that you can have. And our first fund we were a registered investment advisor and we raised money through private placement. And we had the benefit of having an existing list of investors all over the world. We at the time had 400 investors that had invested with us in the past. We were able to market ourselves to them with an existing relationship. That’s a huge benefit for us to have, I think it would be very challenging for someone in this environment where the big guys are getting bigger and emerging managers are more, are more and more difficult to come by. So it is a challenge. What we decided to do was to find best in class service providers that allowed us to have not only a credential, but allowed us, allowed us to have the credibility that they represented.
We decided to employ a Deloitte as our fund auditor. We hired SSNC as a third-party administrator. We had Crowe LLP as our, as our auditor or as the accounting firm and all the properties. And I think as we’re going out and talking to investors that were not current investors that was a big differentiator for us to say, these groups are looking over our shoulder. We had a 20 year track record behind us that we could show investors we had performed. The team had largely been together for quite some time. I was really the new addition to the team at that time when we started marketing our first fund, but it is a challenge. It’s a grind. And there’s a fine balance when you’re going out to the investors of getting them interested and getting them to sign on a commitment whether or not you’re is a soft sell. How aggressive do you get? How often do you communicate back to them? It’s a, it’s a, it’s a balancing act to not be too salesy, but also to get the commitments closed. That’s probably the biggest challenge
From a standpoint of returns like everybody, you know, you talk to one investor, they’re like, man, 5% would be great just cause they have money sitting this, not doing anything. And then you have a student investors that may say, I, you know, I won’t do anything less than 20% kind of thing, or maybe 25%. So for your deals what do you typically project for them and or what are the returns that you like to provide for your investors?
So if you looked back at our performance as a sponsor since 2005, we’ve been able to generate a 16.3% annualized return. Our views that as a fantastic return, given the risk profile we have as a multi-family investor where we’re running kind of the range between value add and stabilized. I think the 16% number is very good. What we’ve done with the funds is we’ve talked to investors and we’ve sold them on the idea that it’ll be a blended return. We will have some grounded development. We will also have some cash flow generating properties that are more stabilized in their, in their state of condition and everything in between. And what we’re targeting for fund two is a 12 or 15% AOIs return within that blended portfolio.
Very nice, very nice. So you outsource a lot of stuff. You know, that that’s good, you know, it sounds like the the auditing and the accounting and all that kind of good stuff. So I imagine that probably like, I think you’ve mentioned builds credibility too, because it’s not just, Hey, we’re gonna, you know, have our internal team do this and that it’s like, no, we’ve got these other credible firms that are like overlooking our shoulders, making sure we’re doing things properly. Is that pretty common with, with most funds that they have that many outside people looking at what they’re doing, it
Certainly is you, you definitely want to have a third party auditor. That’s auditing the performance of, of each underlying property that’s underlying or that’s auditing the performance of the operator POS and all the reports that we’re providing. And almost every large group is also engaging a third party administrator. What they are able to do is serve as a second set of eyes on everything we’re doing and all the calculations in terms of internal rate of return and partner capital accounts, all those, those various buckets are calculated by the third party administrator and for medium and large size spawns, that is very standard.
Gotcha. What are some things like? You know, I did, I haven’t started raising a fund yet. We started the conversation with an attorney and I think we’re going to pull the trigger in the next potentially three to six months. Although I do have one big investor that said he may go ahead and just invest all the money we need. So we may not have to, but from what I’ve heard of other people that have raised funds. So a lot of the deals we’ve done have been individual deals. But someone that said, Hey, if you’re gonna raise money for a fund, you need someone like full time working on that fund. Would you agree with that statement? I mean, obviously it’s going to depend on the size, if you do, you know, a few hundred thousand dollars or something or a million that may not be the case, but if you’re raising 5, 10, 15, 20, 30 million, then you probably need someone that is really work that hard and your role as VP investor relations. So I’m guessing for the company, you’re that guy, you’re the one that’s constantly raising the money for, for the company. So I’m guessing you probably agree with that. If you’re wanting to raise some good money, you need someone really dedicated to talking with investors and finding that money.
I definitely agree with that. I I’ve spent, I would guess 50, 50% of my time over the last five years, exclusively raising capital for the two funds. And it’s a complicated process. Like I mentioned, the balance of communicating with people versus over-communicating, under-communicating, there’s a half-life to each of those conversations as time goes on, they lose some of the content of the messaging delivered. So continuing to deliver fresh, relevant content to them and stay on top of them without feeling like you’re smothering them is, is a tough concept. But in terms of legal work, that’s another area where we have outsourced the legal work for the fund. That’s also a very common thing to do. There are capital fund attorneys and all they do is form capital funds, whether it’s real estate or private equity or venture capital for our first fund, we employed a group that has an, almost an off the shelf offering that they can, that you can customize to meet your needs that that worked for fund one for fund two, we decided to take some of the feedback we had received over the prior couple of years.
And we hired a New York city law firm. It’s very expensive, but if you’re trying to attract institutional capital, that has a CIO that has an investment committee, they expect to see some sort of law firm that stands behind the legal work that was done to form the fund. So we did decide to increase the, spend the legal spend on fund two, to be able to check the box of being formed by a reputable capital fund attorney. And we can talk offline about who those groups are, be happy to give you their names.
Fantastic. So as far as the the people that are invested, so you said 400 investors, but if your fund is big enough, there are institutions that will invest in that fund. Do you guys do you guys attract those institutions? And if so, tell us how that process is. Cause you know, some of that’s raising money, obviously if they’re gonna raise it from a big institution, they’re probably gonna have to have a good track record and, and you know, know what they’re doing. Tell, tell us about that. Is it, you know, is it harder to rate it, raise it from, from, from them? Is it easier because they’re big chunks of money? Just kinda jump into that a little bit on, on the experience with that. If that’s, if that is what you guys have done. Yeah. So
In our business, you have to be comfortable knocking on a lot of doors being told no often what we discovered when we started raising capital with fund one, myself and the founder we were out talking to as many people as we can talk to about what we were doing, how we were different and what makes us special come to find out early in the process, we learned that there are groups, a lot of groups and the bigger they are, the more so this holds true, that will not invest in fund one. If you, if you can start calling your fund fund four out of the gate, I think that I’d say a lot of headaches. So we decided to do was to shut our fund down at $30 million and let fund one VR credential going forward and build from there. There are a number of groups that will not invest in fund two, where you really start to attract institutional capital is within fund three often. And the more funds you have in your Roman numeral in the fund name, the more eligible you are to attract institutional capital, where you’re getting those 10, 20, $50 million checks from an insurance company from a pension plan from municipal group, something
Like that, like myself, I’ve been in the business 20 years now, I’ve done close to a thousand real estate deals. I paid my investors back on every single deal. They’ve been all single family. They’ve been investments anywhere from, you know, 50 to a couple hundred thousand a piece something like that. I’ve never had a fun. So even, even if someone’s been in the business for a few years, let’s say you know, using a track record like that, do you feel like that’s going to be tough for an institution? Because you haven’t had a fund before.
Yeah. So when they would consider you and us, you know, as an emerging manager your first two, maybe three funds, no matter what your background is, no matter what your resume looks like, you will always be an emerging fund manager, but the first two or three funds we fit that criteria. You would, as a fund one sponsor, and you really need to work hard to become that. In some cases you can’t overcome that. That’s going to be a, that’s going to be a a deal stopper. It will not, you won’t be able to get past that. Pardon the due diligence. You can’t check that box, that you have a fund sponsorship behind you. I think what you can really do is start small with your first bond and build that as your credential going forward. I know for us, we had a 20 year history as a sponsor, a real estate investments where we had PPMS.
We were a broker dealer for a decade. Prior to that, we had everything we thought we would ever need to become a fund sponsor, come to find out. None of that really mattered. What the first question then one of the big institutional investors is going to ask you is, do you feel audited performance from a major accounting firm? You have a track record as a fund sponsor, all those various questions that you would expect to ask about your credentials as it relates to a fund. And if you don’t have it, you don’t have it and you can talk around it all day and some groups might still make a commitment, but they’ll, they’re hard to find.
What do you think the minimum fund you’d need to start would be to have credibility for the future? I don’t
Know that I don’t know that that matters as much as just having a fun and showing growth. If you could start your first fund for $5 million, and maybe you’re able to get 75% leverage. So you have, you have $20 million of assets within the fund. I think that’s a great headstart and then grow from there because the reality is the $5 million doesn’t go that far when you’re in, you’re putting it to work and investments. And if you’re showing a good return for your investors and they have deep pockets, they can continue to invest in funds two, three, and four. And maybe you just have a shorter life cycle between funds. Maybe you’re doing a new fund every 18 months instead of every three or four years. Yeah. I think that’s probably a reasonable way to approach that issue, but it is tough. That’s why you see, you know, the mega groups out there, the Apollo funds and BlackRock and Carlisle they’re, they’re getting bigger and bigger. There are fewer funds in market today than there were five years ago. The big funds are getting bigger.
You said there’s fewer funds, but you say the fund, the funds that are out there are getting bigger. Yeah,
That’s correct. Yeah. There are fewer emerging managers in the market today than
There were, is it because the market’s been so shaky throughout the last 10, if we had the crash and downturn, that probably took a lot of people out and then even with COVID, there were price and things, people invested in that, you know, didn’t do well. Is, is that probably part of the reason just, you know, through the last 10 to 15 years, just the cycles and the different things that have happened,
That’s probably true. But for whatever reason, I think if you’re looking at someone who’s filling a role as a chief investment officer or a due diligence analysts at a mega firm, or they’re at CalPERS or a Texas retirement teachers, or whoever, whoever they might represent. For them to allocate money, they feel like their job is better protected by getting mediocre modest returns from a mega fund than having the potential to exceed the returns they need from an emerging manager, but also have the potential to lose. If they lose money on a BlackRock or Carlisle or Apollo or lone star, everyone’s like, well, Hey, you know, the fund lost money. What can we do? But if they took a chance on me or on you and they lost money, that could cost them their jobs. I think there’s some job preservation at some of the institutions that lead to that issue.
Wow. That’s very interesting. Very interesting. So let’s talk about a cost perspective. You said you spent a lot of money for this last company on a fund. I know I’ve been, I’ve been quoted, you know, different price points. I think it’s gotten a lot cheaper in the last five years cause there’s so many people that have done funds over the last five years that you know, attorneys have become more efficient at it. So I talked to an attorney probably six years ago about a fund and he quoted me, I think, 40 to 50 talk to him again. I I don’t know, six months ago and he quoted me 17. And I think that’s just because he’s become more efficient. He’s done a lot of these and he probably has templates. What would you say would be you know a price point, are you within that price, price point on the funds that you you guys have done or, or are they more expensive because of the complexity of them?
If you get something that’s basic and off the shelf you could probably get the work done for 30 to $40,000 or all in for fun formation. When just the LPA, the limited partnership agreement and the PPM climate, private placement memorandum the 30, 35 40 in that range for those documents, basic documents is a fair price. If you’re trying to go to one of the major New York law firms that hasn’t been recognized, the sky’s the limit. I mean, you could, you can easily spend a half million dollars getting everything done and formed with their name on it, for you to go to market and everything in between. And each time you go back to the attorney, you go, you run out to the market and you’re showing your documents to potential limited partner. And they tell you, they don’t like this provision. They don’t like your distribution waterfall.
They don’t like this various fee that you slid into your PPM or LPA. And you need to go back and have it modified and changed. Every time you go back to them, there’s an additional additional bill that will come your way from the attorney. And it adds up. And in some cases, the biggest expense that you will pay is if you are in negotiations with a major anchor investor and anchor investor typically invest 20% or more of the total pool of limited partners. And some of those investors can really force you to give up some things in exchange for their capital. And some of those those side letter agreements negotiations for the side letter agreements could cost you 50, 70, a hundred thousand dollars.
It’s expensive. Yeah.
So I think if you’re, if you’re someone like yourself is trying to figure out how to go about forming the fund and what your budget should be. I mean, you need to ask yourself how flexible do you want to be? You want to tell an investor like, look, this is, this is what the fund is. Or do you want to continue to go back and make changes throughout the capital race period?
Well, Seth you’ve, I’ve done a lot of research over the last, you know, five to six years since I’ve been thinking about this fund and talk to a lot of people, but you opened my eyes to a lot of things. So I appreciate you sharing your knowledge. Is there anything else you can think of that would be good to kind of tell our audience before we start wrapping up? Are there any big lessons you’ve learned that maybe that they could kind of take into, into their money raising benchers or any other tips or strategies you can think of that would help them to streamline the process of raising money? Yeah, I think
The, I think the most challenging thing to do beyond what we’ve already talked about is, is finding out how to answer the question. What is your secret sauce? What’s different about you guys? How do you outperform your competitors? What makes you different in any version of that? Same question is very difficult to ask. I think some people view our business as being commoditized. You buy real estate, you either approve it or you hold it and you sell it and you make some money, but finding out a way to articulate how you’re different or how you approach real estate investment differently than others. You need to have an answer for that question because it’s going to come up with any sophisticated investor, not only in real estate, but really anything else, you know, what differentiates you and your firm and, you know, we have a response that we’re ready to, to deliver to somebody when they ask that question. I would just say that someone should always be prepared for that question and have a basic outline ready to address that issue.
Yeah. So just to kind of wrap up some thoughts here, I think, you know, obviously having a track record is going to help. If you don’t have a track record, probably partnering up with someone that has a track record would be would be very beneficial. You know, you’re talking to experienced or student investors. I mean, they’re, they, they’ve got money sitting around, they’re willing to invest in you. So you’ve got to have something very professional put together, and then also a really good team behind it, because, you know, if, if you have a team that people recognize their name, or they, at least they have really good credentials, it sounds like it would be a lot easier to for them to trust you. If you’ve got a really good team behind what you’re putting together, and obviously something we didn’t talk about is, you know, just treating your investors right, being upfront and forthright with them.
For me, I always like to under promise and over deliver. So like right now we’re getting crazy returns on some of the deals we’re doing. So, you know, tell my investors that, you know, expect a 20% return on the money, but we’re getting like, you know, 40 to 60% on some of the deals that we’re doing. So, you know, so we saved to be, or, you know, better to shoot with a low number knowing that you could potentially get higher. Whereas I know a lot of people do the opposite, although, you know, tell them they can do this and something. And then all of a sudden that even if it’s a good return, like, even if you say, Hey, I, you know, we’re going to shoot for 25, 1 25, and then you hit 15, even though 15 is a good mark, right? It’s still just, it still just puts, you know, something to remind that like, man, I was expecting 25, even though fifteens you know, a good return and we
Have the same exact philosophy, what my experience has been, no matter what you tell somebody, if you give them a dollar less than what you told them to expect, they’re going to hold you accountable and not be happy. And if you give them a dollar more than what you told them, there are lot happier than they were the other way around. So if you, if you ever are in a position to under promise and over deliver, it’s always the best position to be in.
Absolutely. Well, thanks again, Seth wealth of knowledge congrats on all the success and, you know, putting this, you know, these big deals together, if someone wants to get a hold of you and you know, maybe someone wants to invest in with you or, you know, has some deals they want to send you with multifamily properties. Where do they get a hold of you?
Sure you can check out our website. crecrealestate.com, C R E C real estate.com or feel free to call me (614) 571-8048.
All right. Fantastic. Well, thanks for being so open and honest Seth and give anybody access to you. So I appreciate your time and hopefully we’ll be in touch again.
Great. Thank you, Tony.