With private real estate syndications and funds there are generally two sides to the deal, a deal provider and a capital provider. The deal provider is generally referred to as the “GP”, or the general partner in the partnership or managing member of the LLC. The capital provider is the “LP”, or the limited partner or member of the LLC. The deals are generally structured such that when it goes round trip, the money is distributed as follows:
- The lender(s) is paid back
- The GP and LPs get their capital back
- The LPs get a “preferred return” of 6-10%
- Remaining profit is split somewhere from 50/50 to 80/20 between the LPs and the GP
What is “Promote” in Real Estate?
This 50% (actually typically 20-30%) is called “the promote.” Its purpose is to incentivize and compensate the deal provider for doing the work in the deal. The incentive with this structure is for them to create a really good deal since the better the deal is, the better they do. The effect, at least on a deal that does well, is that the GP has a better return than the LPs. Perhaps you have wondered, “How can I get in on the GP side and get me some of those GP returns?” but then were dissuaded by the difficulty of acting as the syndicator or fund manager. I mean, you're a busy doctor. Well, here is your chance.
It turns out that with a lot of these deals the GP is expected to bring some capital to the deal too. However, they often have a better use for their money and would rather not put it into the deal. A company has stepped in to solve this problem for the GP.
Clairmont Capital [**These Funds No Longer Available**]
Clairmont Capital Group is a Los Angeles-based real estate private equity firm, specializing in General Partner (“GP”) equity co-investments alongside well-known commercial real estate operators, developers and institutional capital partners in major U.S. markets. Basically, they provide some of the capital the GP is expected to bring in exchange for getting the extra return from the promote on that capital. So for their investors, it's the best of both worlds–the higher return available to the GP without the hassle of being the GP.
Clairmont’s executive team has overseen origination, structuring and active management of 37 unique GP equity investments across 4 investment vehicles representing more than $2.33 Billion worth of notional real estate exposure and 14 operating partner relationships. It's not their first rodeo. 4 of their 48 “Co-GP” investments have already gone round trip with an average gross (before fee) IRR of 31%.
Frequently asked questions about “Co-GP” Investments can be found here, but a picture may be worth 1,000 words.
The idea is that if the LPs make 18%, you might make 24% on the GP side, as shown here:
Pretty appealing right?
Fund III
Clairmont's current available investment is what they call Fund III. This is a 6-8 year fund. It began in December 2018 and has a 30 month “investment period” before distributions will start being made. It has already raised 75% of its projected $40 Million and deployed 33% of it. The benefit of getting in at this point is that you already have good visibility into what you are buying as there are already 15 projects purchased with several more coming online this month. Investments so far are found in 13 states from California to Pennsylvania. Some of these investments are in income tax free states, some are in states that allow the fund to file composite returns, and some are in states that do not allow composite returns and so may require you to file state tax returns for those states.
Fund III’s investment strategy results in concentration bias toward development and value-add acquisition strategies (i.e. riskier strategies) with a predisposition towards four key asset classes: Senior Housing, Student Housing, Industrial/Logistics, and Workforce Housing.
Don't expect any liquidity from the fund for 6-8 years. The fund requires a published minimum of $250K, although they tell me they will drop that as low as $100K (keep reading for a $25K minimum option). It has fees of 2% per year plus 20% of profits after an 8% preferred return. This layer of fees is in addition to whatever the sponsor charges on each individual project in the fund. The fund projects gross returns of > 25%, which would be reduced by the fees.
The “Fund of Funds”
In addition to investing directly into Fund III, there is an additional opportunity here that Clairmont is offering that they are calling the “fund of funds.” Like “Access Funds” that I have written about before, this vehicle allows for a lower minimum investment, at $25K. Naturally, you would expect to pay an additional layer of fees for the privilege of a lower investment amount. However, this fund of funds actually has LOWER fees. Instead of 2 and 20, you would be paying 1.55% and a 16.2% “promote.” The fund of funds is a slightly different investment though. Instead of just investing into Fund III, it invests partially into Fund III (40%) and partially into 5 already identified “sidecar” investments (60%) in student housing and senior housing that are not in the main Fund III. So instead of having visibility into 33% of what you will be investing in, you get to see 75% of what you will be investing in.
They just opened up the Fund of Funds last week and they had already filled 55 of the 99 spots in a week before I sent out that email to those on my Real Estate Opportunity list, so it may be full by the time you read this. They plan to make an initial closure this month and perhaps a second closure next month (although if they hit 99 investors this month I don't know that there will be a second opportunity.)
The advantages of the Fund of Funds over Fund III include:
- Lower minimum investment ($25K instead of $100-250K)
- Lower fees (1.55% and 16.2% promote vs 2% and 20% promote)
- More visibility into investments (less of a “blind pool” effect)
- More exposure to the more defensive asset classes of student and senior housing
My Thoughts on GP Co-Investment Real Estate
Overall, I find this particular investment fascinating, albeit more complex than most of these. This is the first time I've seen the opportunity to invest on the GP side of the ledger, which should result in higher returns. I see the big advantages of this investment as:
- Access to the additional return from the “promote” of the individual deals in the fund. You can read more details about this here.
- The ability to invest alongside some of the “big names” in the industry who are providing the LP capital into the deals. While they didn't let me publish those on the site, they will tell you who they are as part of the due diligence process. They feel that these companies will help minimize the layer of fees at the deal level and provide you access to a high caliber of sponsor, equity partner, and deal structure than you can get elsewhere (i.e. higher returns).
- Broad diversification. Instead of owning one property, you will own dozens.
- Relatively low minimum into a fund like this
So what are the downsides?
- Illiquidity. This isn't a publicly-traded REIT. You do not get your money back for half a decade or more and you won't even get a distribution for another year or two.
- Tax complexity. With diversification comes additional state tax returns.
- Two layers of fees. While it's nice to see an 8% preferred return, “2 and 20” is a big fee and that's in addition to the individual deal fees. The after-fee return is what really matters, of course, but these are not the lowest fees I've ever seen on an investment. If the gross return is really 25%+ then I don't think anyone will be complaining about the fees, but you can be assured Clairmont will make their 2% no matter how poorly the fund does.
# 1 and # 3 actually don't bother me all that much given this rare opportunity to come in on the GP side of the deals. # 2 could be a bit painful on a small investment amount where the tax preparation costs and hassles can add up relative to the earnings. I suppose that provides some incentive to invest a little bit more money. This is really no different from any other multi-state equity fund though. Katie and I are still discussing investing in this one.
[Update Dec 17 2019: Don't rush anything with your investments, but as of today the Fund of Funds only has 19 spots left in it.]
Sign-up to Learn More About Clairmont Capital Fund III and its Fund of Funds!
What do you think? Would it be worth the fees, tax hassle, and illiquidity to be on the GP side of the ledger? Why or why not? Comment below!
Do you feel ready to learn more about real estate? WCI's No Hype Real Estate Investing course is the best on the planet. Taught by Dr. Jim Dahle and more than a dozen other experts, this course is packed with more than 27 hours of content, and it gives potential investors the foundation they need to learn about all the different methods of real estate investing. If you’re interested in real estate investing, you can’t afford to miss the No Hype Real Estate Investing course.
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No offense WCI, but this reads like an advertisement.
Thanks for the feedback.
I find it hard to believe you can talk about and promote things like this, but yet be against investing in individual stocks. It seems to go against the general overall investing philosophy of the site as a whole. On top of the risk of something like this compared to a REIT or REIT fund, you are paying hedgefund style fees.
I’m no prude-ish hardcore boglehead either as I factor weight and am thinking about adding some leverage to my portfolio.
Thanks for the feedback. The difference I see is that the real estate market is far less efficient than the stock market. Publicly traded real estate makes up only about 3% of the real estate market. The private real estate market is the other 97%, and your skill or lack thereof can have a significant effect on your return when investing there. In the stock market, the right move is quite clearly to index. In the private real estate market, I don’t think “the right move” is nearly as obvious and it’s more about finding your fit.
2 and 20 is definitely high compared to 0.03%, but where is the vehicle that allows you access to these investments at that level of expense? I haven’t found it yet. The lowest level of fees I’ve seen on a direct syndication is 1 and 20 after an 8-10% preferred. If you want them lower than that, you’re going to have to invest directly and do a lot of work.
I would agree there about the skill part, but to me, that would be the people that are more hands-on and do this for a living. I’m not sure the passive investors have that skill. I think there is money to be made in owning actual real-estate, but I’ve finally determined that I’m just too lazy to do it myself.
So the big question is whether there is something reasonable to do between the Vanguard REIT Index Fund and buying the house down the street. I think there is. It sounds like you’re skeptical, which is fine. We all have to make these decisions ourselves.
Here are the real cons:
1. If the deal is so can’t miss why are they crowdfunding it? Big money should be all over this.
2. For docs, this is high risk but there is opportunity here no doubt. Problem is you are wetting your feet with what 25K? Diversifying ? Are you really though? On 25K investment you made 2.5x your money (reasonable?) lets say at 6-8 years!( the real risk is time—-loooong hold period) so you are at 50K. Ok, great, and with index investing you get to 2x in 7 years…I mean more risk here than just index investing. Its not much different. With larger sums this strategy would be good, but would you take that risk then?
I am sure not many here will just shell out 100K in this deal alone for it to really mean something.
3. A more interesting question: Would the 2011 WCI even run this post? (open ended question that poster can ponder and reply). I am leaning NOT. This is not to say that this may not be a good investment, it just seems to me that focus has been bringing these long term RE hold investments as an additional “arm” of WCI “empire” i.e. this reads like an ad to me.
1. Always a great question. They give an answer in their FAQ that I linked to. Here it is:
Q: Why aren’t more people in the Co-GP space? Who are Clairmont’s competitors?
A: The Co-GP investment space is fractured and exceedingly inefficient. Because the investment
mandate is so narrow and the investment size per transaction so small relative to traditional LP interests,
Clairmont Principles have had to approach over 4,000 Operators nationwide over the past 4 years in order
to unearth fourteen (14) GPs that fit the business model.
Clairmont’s primary competition is the Family Office universe. Often, Clairmont will encounter an
Operator who is an ideal candidate for the platform but who has structured a direct relationship with a
Family Office who offers a lower cost of capital and, perhaps, the ability to provide credit enhancement, a
service Clairmont does not offer its partners.
For the large institutional Fund investors keenly focused on growing Assets Under Management
(“AUM”) the check size per deal is simply too small to warrant the time/effort.
2. Yes, you’ve properly identified the dilemma. Is it worth the illiquidity, risk, and fees in order to try to get a 15-20%+ return and some diversification away from your stock portfolio instead of 8-10% by just putting more money into stocks? I also don’t know how many white coat investors will choose this sort of investment either, but obviously I’ve judged it to be enough that it’s worth partnering with them. We’ll only know in retrospect, but I can assure you that a significant part of this community is interested in this sort of deal. I’ve got 1700 people on an email list that have specifically asked me to tell them about deals like this. You may want to work your way through this flowchart to decide whether you should be on the list or not:
https://www.whitecoatinvestor.com/wp-content/uploads/2019/04/Real-Estate-Flowchart.pdf
3. Yes, real estate partnerships are a “product line” at WCI and have been for the last 5-6 years. I have been focusing on this product line more the last 12-14 months and particularly the last 6 and lined up several new agreements recently so expect 1-2 more posts similar to this one in the next few weeks. As you’ve no doubt noticed, WCI LLC is a for-profit business with lots of ads, although my goal with content on the blog and podcast is not for anything to sound like an ad. Sounds like I didn’t manage to pull that off with this post based on feedback in the comments. At any rate, if you really like hearing about these opportunities, sign-up for that part of the newsletter list. If you don’t like them, it’s pretty easy to stop reading a blog post that talks about them after the first paragraph and you can quickly go read one of the other 1800 posts on the blog or go read something on the WCI Forum, subreddit, or Facebook Group or wait until the next day when something else is published. No, I did not have this product line in 2011 so I probably would not have run this post. Not to mention the 2011 Jim Dahle didn’t have the money to meet the minimum investment on these deals and still be diversified so he wouldn’t have been investing in them. In 2011, he wasn’t even an accredited investor. And that’s likely the case for a big chunk of my readers. But it’s a rare blog post that actually applies to every one of my readers, no? I bet you have very little interest in refinancing your student loans or getting a doctor mortgage either, right, but I write about those all the time too? So take what you find useful and leave the rest.
Note that my own portfolio is still 85% index funds. My asset allocation is 60% stock, 20% bond, and 20% real estate of which 5% is publicly traded REITs via an index fund. I invest in these private investments in hopes of higher returns than I’ll get from the Vanguard REIT index fund, lower correlation with the overall market, and to earn an illiquidity premium. But if every single one of them goes to $0, I’ll still be financially independent. Don’t take on risk you can’t afford.
“I am sure not many here will just shell out 100K in this deal alone for it to really mean something.”
I would disagree with this. I would be willing to bet that many readers of this site frequently participate in deals with 50, 100, 250K investments into one fund or project. These deals are pretty common.
Once you get to the point of having millions in the market (index funds), you actually get more scared about a serious turn in the market. Whether it is rational or not, seeing a 10 million dollar retirement fund lose 3-4 million dollars over the course of a year or two is tough to think about. Having money tied up elsewhere where it is hopefully not losing a crap ton of value is what is enticing about these deals. As I said, it might not be rational, but when a draw down occurs, rational thoughts often go out the window. Tough to pull out if you are locked in for 6-8 years. The lack of liquidity is why these funds exist. Most people (including the companies themselves) don’t want to tie up all of our/their money into a 6-8 year fund and not be able to touch it. However, it works well for good return and diversification as WCI has mentioned.
While most docs, even those who save, only invest $50-100K/year, making $25-100K minimums a bit unpalatable, after 10-20 years of saving, you can use existing savings instead of new savings to make these investments. But I agree if you have a $300K portfolio and are saving $50K/year, these aren’t for you, at least not yet.
I disagree with your disagree.
10 million portfolio? How many docs do you know who have that?
And yes, I can confidently bet that many readers on this site would NOT invest 100K in a single deal. What WCI is saying actually more practical where a few will do 25K in a deal.
I think it’s an interesting opportunity. I don’t think there’s anything wrong in advertising since it not only educated you on a concept or opportunity but also immediately gives you an opportunity to be part of it. There’s no doubt it carries its own risk because it places you higher up on the capital stack which promises higher returns if it goes through, but also higher risks since the Senior and junior debts are first compensated if it doesn’t go through and then the LPs before the GPs. I personally appreciate the education and article above. Now I know I can get in on the GP profits as long as I’m willing to take the risk without handling the responsibility of the typical initiator or GP.
Not quite true, and this is important. The GP money ALSO gets the 8% preferred. So you get your capital back AND your preferred return back at the exact same time as the LPs. You get the promote piece afterward.
Did you end up investing with Clairmont? If so, what has been your experience? I am considering investing with them.
People would be wise to heed the adage “don’t invest in anything you don’t fully understand.”
Agreed. Lots of moving parts in this one.
To invest in the Fund of Funds with the lower minimum, does one still need to be an accredited investor?
Yes.
This is the line that made it sound like a paid advertisement, “Clairmont Capital Group is a Los Angeles-based real estate private equity firm, specializing in General Partner (“GP”) equity co-investments alongside best-in-class commercial real estate operators, developers and institutional capital partners in major U.S. markets.”
“best-in-class” is probably what put it over the top.
But count me as one of those that is looking into investment opportunities like this. I am invested in a strict 3 fund portfolio, but have always desired to branch out into real estate. I have several friends who own multiple rental units, and I have been testing those waters recently, but have not yet found a deal that I think makes sense for my situation. I do not want to be a long distance landlord. I also do not see enough diversification value in REITs. So this is the type of real estate investment I might be interested in.
Even if I do not invest in this particular company, thank-you for writing about other options.
I’ll remove the phrase, although I thought it was a pretty good description of what they do so I lifted it from them. Beats me how anyone defines best in class though, although the LPs and the GPs in the deals they go into are pretty big names in the space, which probably entitles them to use that phrase.
Personally, not for us during this season of life. But in the same breath, however, I’m always confused when others gripe at you when you write about investments like this. Advertisements are a part of this site (just look at the sides of the webpage), and you also frequently dive into various investing approaches from (what I believe to be) a balanced pro-con perspective.
It’s always been a balance between our missions on this site, and I’ve certainly gotten the balance wrong before. (Check out this post that I leave up to remind me of some of my mistakes: https://www.whitecoatinvestor.com/medelita-scrubs-review/, not that the scrubs aren’t fine, but it didn’t fit the site).
But let’s be honest, without the for-profit mission of this site, 99% of those who it has helped would have never been helped because I would have quit 7+ years ago before most people found me.
WCI,
Regarding state tax implications, sounds like state tax fillings likely necessary when assets in said state are sold. What about during the hold period, would you anticipate state tax fillings related to the 8% pref being paid?
FYI, I have spoken to several CPAs regarding additional fees related to additional state filings, responses varied from 50-250$ for each additional state. At potentially, > 10 additional states, that is expensive and may be prohibitive at lower investment levels if one is not using an IRA or similar.
Remember the 8% is not some sort of promised yield. It’s the return that goes to the LP before the promote starts getting split up. Some of that will be yield that comes out every year, but if you are expecting an 8% yield you’re high likely to be disappointed. Much of the income will be sheltered by depreciation until the end, so you may not need to file for the first several years, especially if you don’t want to be claiming losses on those state tax returns. It just depends. I just want investors to be aware that they’re going to have file multiple state tax returns at least once due to owning this investment and probably several times. I see that as a significant downside to a multi-state fund. I keep hoping to find one that only invests in Utah, Wyoming, Washington, Florida, Texas, Nevada etc but nobody seems to care about that as much as I do. 🙂
These investments almost always have some expenses that are deductible before the building becomes operational after construction or renovation. On a yearly basis, once the building becomes operational, there is almost never positive taxable real estate income until the building is sold, especially in NYC (the main reason is depreciation, which can be substantial if a cost seg study is done on the building). It is important to file state returns to make sure your Passive Activity Loss carryovers are correct (also important for your federal return), which you can then deduct when your K-1 shows Section 1231 gains when the building is sold (unless you are a Materially Participating Real Estate Professional, in which case you can deduct the real estate losses each year).
This also assumes the real estate deal is for a rental property and not a condo development, which would be classified as ordinary income, as opposed to real estate income and 1231 gains (even though they both deal with constructing or renovating buildings). Returns are normally much higher in condo developments as it is a significantly more risky endeavor.
What are the legal liabilities involved when investing in real estate this way?
In a normal partnership the liability for the GP is much much greater than for the LP, which can be part of the reason for the higher return to the GP. Depending on the state, there can be unlimited liability for the GP.
So I’m left at a loss how much exposure one would be subject too by investing with Clairmont in this manner. Can you help clarify Jim? Thanks.
The entity coming in on the GP side is still an LLC with a GP and an LP (and you’re the LP), so your liability is limited in the usual way. Your risk is 100% of your investment, but no more.
Incorrect. As a co-GP you are liable to the LPs in case of sponsor’s default. Additionally, the co-GP may be liable under financial guaranties such as bad boy carveouts, environmental indemnities or completion guaranties.
I see major redflags with this offering. 1- inexistent track record 2- high fees 3- liability exposure to sponsor performance and financial guarantee 4- lack of transparency and institutional reporting
The promised returns doesn’t cut it from a risk adjusted perspective
For the passive investor, an average infrastructure or industrial REIT offers a much more compelling profile with high liquidity and lower beta
The company may have that liability, but due to the structure, your personal liability is limited to your entire investment.
Is it possible you have become a commissioned salesman?
Become? I’ve been a commissioned salesman since May 2011 when I put my first Amazon affiliate deal on the site. Did you think a blogger has some sort of fiduciary duty to their readers or something? Or did you think I was working for free? I assure you I am not working for free, do not have a fiduciary duty to you, and will continue to sell things (for commission) on this site. I considered a subscription (fee-only) model but it turned out none of my readers were willing to pay me enough to justify my time doing that.
I’m selling (via affiliate agreements) all kinds of products here on this site- books, online courses, conferences, student loan refinancing, financial advice, contract review, loans, tax services, credit cards, insurance, investments etc. This is neither new, unique, nor hidden. I fully disclose it at least once a year on the site with the state of the blog post. Here’s the last one which includes an extensive discussion of my conflicts of interest:
https://www.whitecoatinvestor.com/state-of-the-blog-2019/
There will be a new one next month.
While investing in Syndications may not be for everyone, it does make sense for some super savers who want more diversification and less correlation with the market. So thanks WCI for posting some deals that you screen and do some due diligence on.
After working as a CPA for a large regional accounting firm in NYC that specialized in real estate, I can say these deals are incredibly risky, especially on the GP side. Everyone sees the huge returns from these types of real estate deals and wants in. What they don’t see is the massive amount of work that goes into putting these deals together from a GP’s standpoint. It is insane that a GP would give up a chunk of their promote. As stated on the FAQ page, there are usually multiple tiers to the promote (which isn’t drawn out on the page), but the IRR required to get into these higher tiers is usually fairly high and where most of the money is made.
Overall, it seems like this is just like any other crowdfunded real estate company, although with higher barriers to entry and the possibility of a higher return. The real estate industry is dominated by a very small group of people/companies, especially in large cities like NYC (where returns are typically the highest). These people/companies are investing in the very best deals and the ones with the best chance of a large payout, which leaves these crowdfunding companies to fight for the lower-quality projects.
The payout structure for this investment is also a promote within a promote. Better hope they have a good internal finance team making sure the upper tier waterfall calculation is correct. The main LP fund will usually have their own team make sure the lower tier promote is done correctly, but they don’t care at all if your upper tier promote is done correctly (as it is a separate promote in a separate entity that has nothing to do with the main LP’s promote calculation). Not saying this company doesn’t have a competent team, but I’ve seen many instances where the waterfall calculation was calculated incorrectly (although it was eventually fixed before final distributions were made).
This company also has zero history or information available on them on The Real Deal website. Not necessarily a bad thing, but strange. The site is a great source for all things real estate for major US markets and a great place to start reading if you’re interested in learning about how the real estate world works/current trends/major deals/etc.
Thanks for sharing.
Reminds me of what I used to see on bogleheads. But I wanted to become a millionaire faster so I got into REI and CRE.
Any chance of connecting w/ Mug171 for purpose of recommendations for further reading and education? Was about to jump into Clairmont Capital but now unlikely to do so after reader comments, particularly Mug171. Much appreciated!!!
WCI – Thanks for taking the time to write this. I wanted to chime in after seeing all of the comments:
The article explained the “capital stack” pretty well, I financed projects like this for years in my career and want to reiterate what you’ve already said: This is the high risk/higher return section of a commercial real estate investment.
Companies issue common stock, preferred stock, and debt – the most risky to least risky.
Real Estate Developers have GP equity, preferred equity, and debt – the most risky to least risky. The only way to get into the risk/return that a general partner makes is to either 1) become a developer yourself or 2) invest in a private equity fund that’s willing to take a co-developer role (co-GP).
There is no similarity between this and a REIT – Most REITs aren’t developers, they are the low risk/low return buyers of the properties post development.
There’s a reason this type of investment is only available to people with seven figures of net worth or high incomes and is probably only appropriate to folks in the mid seven figures and up, but the upside is attractive and the fund manager is promising 8% before they scrape their fees.
Well….at least the promote. There’s usually at least one fee that the manager gets no matter what the performance is.
It’s been awhile since my BA class, but if the deals go TU I’d rather not be the GP on the wrong side of the v against the LP’s looking to get some money returned. Especially if I’m essentially just an LP (no control of the deal and perhaps limited understanding.)
My friends lost most of their retirement savings in an events center deal and now I think it’s being litigated.
For some reason it reminds me of POF’s saga as a hospital board member.
Not sure you understand what’s going on here. Your capital, even on the GP side, still gets the preferred return. You just don’t get the promote if the investment doesn’t beat the preferred return.
But you’re right that you shouldn’t invest in something you don’t understand AND that there are significant risks here. But I see little parallel with PoF’s hospital board lawsuit. He wasn’t an investor in an LLC that owned the hospital, he was on the MEC/hospital board.
The parallel is having personal liability (beyond your investment of time or money) for someone else’s poor business decisions.
I suppose if the business is an LLC then being called a general partner isn’t meaningful as it would be in a traditional partnership.
As a physician who has roughly half my net worth in equities and the other half new real estate, I’m happy to see this site evolve and educate the readership more on the different ways to invest in real estate.
I have participated in an apartments syndication that went through the full cycle including a successful sale. While I did not get any distributions for 2 years due to higher than anticipated expenses, I ultimately made a return in the mid 20% range that was essentially tax free and it wasn’t in a qualified account. Not too many other asset classes can offer that.
Interesting that you see it as an “evolution.” We’ve been talking about real estate here since at least early 2013 when the site was less than 2 years old:
https://www.whitecoatinvestor.com/investing-in-commercial-real-estate/
Here’s another post from the 8th month of the blog in early 2012:
https://www.whitecoatinvestor.com/great-real-estate-investing-book/
If you were reading the blog before that date, you’re in a pretty select group. While it’s true that I’ve put more effort into this product line from a business perspective in the last year, it certainly isn’t a new subject on the blog.
Indeed I was not reading the blog quite that far back.
I wondered how your distributions at sale could be tax-free without 1031’ing into another property.
Depreciation or if 2018-2019 he might’ve deferred capital gains into OZ.
Too poor right now, but thanks for the education. I would appreciate help running through some numbers.
Let’s assume an investment of 100k, with 2% annual fees, 20% promote fee, and a 25% return in 8 years.
Does this mean that the gross return on the investment is 25k; with the investor’s return being preferred return of 8k and 80% of the remaining 17k=13.6k, totaling 21.6k?
In terms of fees, does this mean 2k/year x 8 years = 16k, and then 20% of 17k= 3.4k, totaling 19.4k?
The 25% refers to an IRR, i.e. 25%/year Taking this sort of risk and hassle for a $25K return on $100K over 8 years seems pretty dumb.
So let’s assume it’s a one year investment that makes 25% gross. 2% goes to the GP as a fee, leaving 23%. Then it’s 80/20. 23% * 80% = 18.4%. That’s your return.
Now if the investment only returned 8%, the GP would get their 2% fee, leaving 6%. All 6% would go to the investor as the preferred return.
Hope that helps.
That makes much more sense. Thanks.
A large part of the appeal is apparently diversifying away from stocks. Does anyone have data on how well these deals do that? What is the correlation with returns of the stock market? I would have thought this would be quite sensitive to economic trends. Higher returns when the economy is doing well, potential bankruptcy when it does badly.
Do these deals really offer diversification? How much? How much more than a REIT index fund?
I think the case for lower correlation with stocks than publicly traded REITs is quite good, but don’t expect much data. Certainly if real estate does poorly a vehicle like this will also do poorly.
I suppose. But if one does not have a reasonable estimate of risk, return and covariance with other investments, how can one decide they want an investment? In this particular case, one needs to know a lot more than only the promised 8% and possibility of more. What is the risk of not getting the 8%? What is the risk of not getting the “more?” What is the risk of taking a loss? Of losing the entire investment? How does this investment correlate with returns of REITS? Of stocks? What is the volatility of the value?
Hard to know without data, but this seems to be a leveraged bet against increases in inflation and against declines in the demand for this sort of real estate. Either a downturn in the economy or an uptick in inflation would punish this sort of investment- I think. Would it be worse than for a REIT index fund? It is certainly less diversified, so the idiosyncratic risk of the properties would remain. Even if one could find unbiased data about the returns to this sort of investment, there would still
be a great deal of uncertainty not present in a REIT fund. This is not an investment in the structure overall. It is an investment in one specific set of deals. These may or may not be representative of the space overall. In this case, one neither knows the risk and return characteristics of the space overall nor how closely this offering parallels the overall performance.
Given this near complete lack of data, it is not possible to decide whether this has a role in one’s portfolio at all, let alone deciding on an allocation figure.
You’re asking a lot of questions that can only be known in retrospect, for any investment. If you won’t invest in something before knowing all of those, you’ll never invest. Even with two decades-old mutual funds, you still only have the retrospective data, not what you actually want to know.
Real estate generally does fine in a long-term inflationary environment, especially if leveraged with fixed interest rate debt. Only TIPS really do well in a short-term unexpected inflationary environment. In an economic downturn, real estate doesn’t tend to do as well.
I disagree with your last generalized statement, but if you’re uncomfortable with an investment and its risks, I certainly agree YOU should not invest in that investment.
So I am a syndicator and the insider secret that when the GP sells off their shares in this form and gives sutto shares it is usually to get additional debt. Most deals are done with 80% leverage via bank note and LP/GP comes in with the other 20%.
What I suspect is going on here is the operator is getting “pref equity” which is again effectively getting another layer of even more debt. I am not debt adverse (70-85%) but I think personally when you add in pref equity and go 90-95% leverage that makes me uncomfortable.
The second reason for bringing in this pref equity group like Claremont is so the GP can say they are bringing in more skin in the game when its really another group (within the GP). A little sneaky and misleading to LPs.
I don’t think most deals are done 80% ltv. Most sophisticated investors I know won’t even consider greater than 70% ltv. For example, sponsors that don’t fund raise because they have investors constantly knocking on their door, keep their ltv below 65%.
Great post/comments.
Just wondering what you think the minimum dollar amount is one should invest in a multi-state real estate fund to justify the expenses of filing taxes in multiple states.
I realize there are many variables here, but just trying to see if you have any general numbers or rules with this.
Thanks!
Adam
Hard to say, but it’s almost surely above $100K.
Some Qualified Opportunity Zone Funds (QOF) work with lower dollar amounts of investor capital gains, especially if the funds are used to capitalize a GP Co-Invest for a Qualified Opportunity Zone Business (QOZB). Our fund offers units as low as 10k to accredited investors. Direct investments in real estate syndications are usually much higher ($50-100k), as real property is much more capital intense for the LPs & sponsor to meet the equity piece of the capital stack requirement.
Contact brett (at) whitecoatinvestor.com if you’re interested in advertising here.