Podcast #141 Show Notes: Private Real Estate Access Funds

This episode we discuss the advantages and disadvantages of investing in private real estate access funds. What are the advantages of access funds over syndicated real estate deals? How much of your portfolio should be invested in private real estate funds? These are the types of questions that we discuss in this episode with Alan Donenfeld, founder of CityVest.

Regular readers and listeners will know that I have been investing more and more in real estate the last few years. Real estate is one of my favorite asset classes; 20% of my portfolio is invested in it. High returns, low correlation to the stock and bond markets, and some unique tax benefits. What’s not to like? Unfortunately, investing in it is much more difficult than just buying a few stock and bond index funds.

Most of the private real estate funds require an initial investment of $250K+. That is not feasible for most physicians, not to mention people typically want to dip their foot into real estate funds with a smaller amount of money. The big value of access funds is they provide you an opportunity to invest in private real estate by providing access at a decreased minimum amount. For those interested in investing in real estate, this can be a great opportunity.

If you want to hear more about these types of investments that are discussed in this podcast, make sure you sign up for the White Coat Investor newsletter. You may already be part of our newsletter, but you may not be signed up for this Special Real Estate Opportunities list. It is totally free. You can opt-out at any time. I’m not going to spam you. If you notice at the bottom of any email I send you there is a real estate opportunities newsletter that you can add. If you want to hear about these sorts of investments, I’ll send you details as soon as I hear about them, so you can be one of the first to know.

This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. They are an independent provider of disability insurance planning solutions to the medical community in every state and a long-time white coat investor sponsor. They specialize in working with residents and fellows early in their careers to set up sound financial and insurance strategies. He is very responsive to me and to readers having any sort of an issue, so it is no surprise that I get great feedback about him from our readers and listeners. If you need to review your disability insurance coverage to make sure it meets your needs or if you just haven’t gotten around to getting this critical insurance in place, contact Bob at drdisabilityquotes.com today by email [email protected] or by calling (973) 771-9100. Just get it done!

Quote of the Day

Our quote of the day comes from Robert Doroghazi, MD. He is a cardiologist who wrote a book many years ago about finances for doctors and said,

“If it is your desire to appear rich and important with all of the luxuries, do not expect financial security.”

Isn’t that the truth?

Private Real Estate Funds

Private real estate funds like these institutional funds we discuss in this episode typically outperform a syndicated deal, REIT, or other properties. But there are disadvantages to them that we discuss in this episode.

Advantages and Disadvantages of Private Real Estate Funds

REITS

What are the advantages of a private real estate fund over publicly traded real estate investment trusts or mutual funds composed of these publicly traded real estate investment trusts like the Vanguard REIT index fund?

The big advantage of a REIT is liquidity. Like a stock, people can buy and sell it easily. The disadvantage is the lower return. A recent average dividend is about three and a half percent and most private equity real estate funds on the debt side are yielding anywhere between nine and 11%, maybe some in the 12% range. Many of the preferred equity funds are targeting 12 to 16% preferred equity return.

This tilts the investing platform toward those with money in some ways because all of these private funds are essentially only available to accredited investors, those with an income of $200,000 a year or liquid investible assets of a million or more, whereas publicly-traded REITs are basically available to everyone.

 

Syndication Deals

What are the advantages and disadvantages of a syndication deal over these private real estate funds?

A syndicated deal is where a group of individuals or real estate management company finds a property and then raises money from a hundred investors and acquires that property. Then they will charge fees and do whatever it is they intend to do, whether add value or run it for a couple of years and sell it.

The syndication of direct deals is not diversified. It is one property in one market. Whereas the private equity fund may buy 10-20 properties in that fund. Typically the syndicated companies are composed of fewer people than the private funds. Alan feels that  “there is a lot of hierarchy of acquisition development, sales oriented people, the value add people. So the level of quality of management in a private equity fund typically is quite a bit bigger and better than in a syndicated direct deal. In addition, maybe one of the bigger reasons is in a syndicated direct deal, that sponsor group typically doesn’t have a historical audit, doesn’t use an administrator. The institution requires a private equity fund to have both auditors and administrators, so the safety in a private equity fund with an institutional required audit administrator makes the private equity fund quite a bit safer.”

He also feels like a private equity group has an easier time closing the deals with real estate brokers. The private equity fund already has the capital on hand versus the syndicated company that needs to raise the money.

Direct Real Estate

What advantage do institutional level private real estate funds have over investing directly?

Owning real estate directly is a full time job searching for the property, financing, dealing with tenants, leases, and repairs. With your own capital, the properties tend to be smaller and there is more competition for buying smaller properties.

The advantage of buying real estate directly is that you can keep it in your family forever, transferring it through a 1031 exchange and buying other property. There is a step up in basis, and if you die you can transfer the property to your family. There are a lot of tax benefits to owning real estate directly.

Disadvantages of a Private Real Estate Fund

The disadvantages of a private real estate fund are fees, illiquidity, and lack of control.

Most real estate is illiquid with the exception of REITs. A private equity fund is a multi year fund ranging form 3-9 years. So it is quite a time commitment.

Lack of control is a disadvantage of these types of funds. What you are giving up in lack of control of your real estate you are gaining in an experienced investment management company who is managing the buying and selling, fixing up, receiving debt payments from your fund. “So lack of control is a good thing and bad thing. If you’re giving up control to an experienced group, that’s a good thing. If you like to be hands-on and spend your time, then you may desire more control over your investment.”

Fees are a real disadvantage to investing in a fund. CityVest charges relatively small fees and seeks institutional funds that have low fees. But the fact that you have to pay CityVest something to provide this access fund is going to reduce your return by nearly 2%. Obviously your money is going to compound slower than if you had the money go directly to these funds.  Just like in any sort of a financial advisor situation, mutual fund expense ratio situation, or real estate funds situation,  this sort of fee does lower your return.

A lot of people get confused on this fee point. They look at a Vanguard index fund and see that it is charging an expense ratio of three basis points or 10 basis points, 0.1% per year and they don’t stop and consider the underlying costs, call them fees, call them costs, called them business expenses, whatever you want to call them, of the underlying real estate investment trusts in that fund. I asked Alan is it really fair to compare a 1% or 2% fee that a real estate fund may be charging to the expense ratio of a mutual fund or is that really just comparing apples and oranges?

“I think it’s comparing apples and oranges because a real estate private equity fund with an experienced manager may have a value add strategy as a large fund. They may be able to produce levels of returns at 15% versus a Vanguard kind of mutual fund with very low fees, but they’re just not generating the level of returns that institutional funds might. So yes, you can pay low fees, but you’re also going to get lower returns. And I think if you look at what institutional investors are buying such as Yale and Harvard endowment, they are not buying the Vanguard funds. That’s more of a retail product. It’s easy to buy, yes, it’s great that it’s low fees, but it’s easy to buy and sell and has much lower returns as compared to the institutional product with higher returns, but may have some fees associated. The after-fee returns of the institutional product I think is higher.”

 

How Much of Your Portfolio is Reasonable to Put into a Private Real Estate Investment Fund?

Considering the disadvantage to this type of investment of illiquidity, you have to make sure that you don’t put too much in real estate if you might need those funds at a later date. Alan shared some examples.

“The Harvard and Yale endowments, they have 30 and $40 billion in their fund. They typically have about 10% of their $30 billion in real estate. There are many family offices that have as much as 22% of their portfolio in real estate, but those family offices are families that have net worths  of 20-$50 million, and so their need for liquidity is very different than individuals’ need for liquidity that might have $2-5 million. I think a reasonable amount for an individual investor would be somewhere between five and 10%. This is also excluding your home, but you need to make sure that you’re not going to need that capital for kids’ colleges or paying down all of your student debt.”

So 10% at the most. Make sure that 10% is diversified with a variety of maturities of that real estate so that if you do need some money for other purposes in three years, maybe some of your real estate investments will have a shorter maturity date. And others with a longer term and a potential higher return may have as long as seven or nine years.

Access Funds

The big value access funds provide are decreasing the minimum amount you have to invest to able to invest in institutional private real estate funds. Alan at CityVest created an access fund to pull capital together and as a group be able to invest $3-5 million dollars and thus negotiate better investment terms than one single investor could with a $250K investment. Basically, you are getting access to this fund and, in exchange for that, you are paying another layer of fees. You may be getting less liquidity than the fund itself would give you, you may be getting less frequent payouts, quarterly instead of monthly for instance. And of course, you are one more step removed from the fund manager.

But you get someone like Alan working for you who is spending his time looking for the best institutional funds.

“There are a class of institutional funds that clearly outperform other funds. In real estate, oftentimes bigger is better. The bigger properties have less competition for buying them. The bigger funds have this greater ability to acquire those properties because brokers bring them the property first. Their ability to get credit or close with all cash is better. And so institutional funds just outperform every other category of funds with this one significant downside that an institutional fund would rather go to California State Retirement Teachers’ association and accept $20 million rather than dealing with hundreds of individual investors at 25 and $50,000.

So our mission is to access those best funds through our access funds, and we allow up to a hundred investors in each of our access fund vehicles in amounts as low as 25,000. And at the end of the day, even after our fees, I believe that our returns stack up favorably with any other funds because our underlying funds simply outperform. Along the way you get a range of institutional benefits such as quality auditors, administrators, each of these funds have their own in house accounting staff. The level of experience of these managers is that much higher. So there’s just a variety of benefits from an institutional fund that outperform other funds even after our fees in our access funds.”

So obviously Alan thinks the trade is worth it for a typical physician investor with a $500,000 to a $3 million portfolio. This allows them to, rather than maybe put a big chunk of their investments into one single fund at 250,000 or $500,000, they can spread it among three or four funds at 25 or $50,000 apiece. This allows you to get into the funds at a lower minimum and make sure you are getting the returns and distributions you want, before you decide to invest more money.

I wrote a post about the two access funds City Vest is currently offering in November. You can read that post or listen to the podcast to hear about the CityVest Arixa Access Fund I  and the CityVest DLP Access Fund II.  The Arixa Access Fund is investing in the Arixa Enhanced Income Fund LP. It is a leveraged fund focused on California Fix and Flip Property. So it’s a debt fund. They are a lender, like a bank making loans to real estate investors. They feel particularly comfortable being the lender, having a first mortgage as collateral. They charge a 1% fee in their fund. Typically, there’s about 65 to 85 loans in that portfolio and the Arixa Enhanced Income Fund pays our access fund a 9% preferred return after which investors get 80% of profits and Arixa gets 20%.

The fees that the CityVest Access Fund structure layers on top of the Arixa fund fees are 0.75% as an annual management fee, $500 per investor per year for administration costs, and then a onetime fee from the fund for $50,000 for setup costs, which is about 1% of the target raise. So this fund is expected to run for five years; if it raises the target 5 million total, an investor that comes in at $50,000 is basically paying 1.95% per year for the access fund. If the funds made 10.3% over the last five years, its target is nine to 10%, maybe nine and a half percent. If you subtract out 2% a year from that, that equals about seven and a half percent.

A couple of other downsides of going through the access fund. The liquidity is a little bit lower since it’s a four-year fund, you really can’t get your money back for four years. If you go directly to the fund, you can actually start cashing out after a year. It would take you two full years to get your money out, but it’s a little bit more liquid. You also can’t reinvest your distributions and those distributions are coming quarterly instead of monthly, if you went directly to the fund.

I asked Alan to talk about the building of this access fund and then going to the underlying fund and investing the money. What happens to an investor’s money in between the time they send him cash to invest and when the access fund closes and makes that investment in the underlying fund? Do they earn any interest on that or what happens with the money there?

“No, unfortunately we have some paperwork on our side that the Securities and Exchange Commission requires such as anti money launderer checking. We actually use a third party administrator named Assure Services. They check all of our paperwork that we give them. There is a little bit of a delay between the time that we receive the signed subscription agreements. We have to go through the Accredited Investor Verification Forms and then send them to Assure. And so there is a small period of time, maybe as much as four or six weeks even depending on when you invest, in which there is no interest being earned on that money that we’ve been sent.”

The Arixa funds are based in California but you will not have to make a filing for California taxes. You pay your normal tax in your own state on your income and don’t have to pay California taxes on that distribution.

One way around those tax consequences, which is probably pretty wise for a tax inefficient investment like a debt fund, is to invest in it through a self directed IRA or a self directed 401 (k). You can invest in these access funds using a self directed IRA. You can go through Rocket Dollar ($100 off with code WHITECOATINVESTOR). Their specific product is like an enhanced Self Directed IRA, called a Checkbook IRA. It allows the investor to first set up their Self Directed IRA and then have a Checkbook IRA within their Self Directed IRA, allowing you to literally write checks and invest that capital into any products that they want. Debt funds tend to generate a high level of ordinary income tax so it is beneficial to invest through a Self Directed IRA account where it would be tax efficient to invest in debt funds like Arixa and DLP.

Cityvest real estate fund

I invested $100,000 through CityVest in the DLP Access Fund 1 early in 2019. I think the most recent distribution I got on that fund annualizes out to 11% a year, so I was pretty happy with that. But DLP Access Fund 2 is not investing in the same fund the DLP access fund 1 did. It’s investing in a different DLP fund. I asked Alan to talk about the differences between those two funds.

“The fund that you invested in, DLP Access Fund 1 invested in DLP Lending Fund, which is a Straight Debt Fund investing exclusively in first position real estate backed loans. Typically they’re referred to as Fix and Flip Loans. The new access fund, DLP Access Fund 2 is investing in DLP Income and Growth Fund, which DLP often refers to as their Opportunity Fund. And I think what they mean by that is it invests in many of the exact same first lien mortgages that the DLP Lending Fund does, but they are more opportunistic. If they see a tax lien that they can buy at a discount, they will do that in the income and growth fund. If there’s a preferred equity position, which is not a debt investment, it is an equity investment. But if that preferred equity position is particularly attractive, they will make that investment out of the income growth fund. So they refer to it as an Opportunity Fund. I think that just means that it covers a wider cross section of real estate investing. Many are private loans backed directly by real estate, but others are opportunistic investments in liens or other real estate loans, including preferred equity. And over time, I believe that while it’s a little bit riskier, it still includes many of those first lien mortgages and produces nearly an identical return as the DLP Lending Fund.”

The real value proposition here is you’re getting your minimum lowered from $250,000 to $50,000 by going through the access fund. Now the plan is for the access fund to invest in the DLP fund for four years, payout quarterly distributions, then return the capital to the investors. The fees are basically the same as the previous fund with that $50,000 upfront fee spread out over four years. But the target for the fund is 7 million instead of 5 million. So if the fund fills the 7 million target, a $50,000 investor would have annualized fees of about 1.93% per year about the same as the Arixa Access Fund 1. So if it hits it’s 11% target, which doesn’t seem terribly unreasonable given their 12.3% track record, I figured that an investor ought to expect a return of something like 9%.

Two other funds are coming soon.  One is called ApexOne Multifamily Fund. It’s their third fund. They’re targeting a 13 to 17% net of fees return, before the access fund fees. It is a preferred equity fund, a little bit riskier than a debt fund, but they buy fairly large multifamily developments. They’ve had very large co-investments from institutional investors  so they’re able to improve the returns by having a joint venture co-investment partner who they charge fees to and they’re targeting larger 10, 20 $30 million size properties where there’s a little bit less competition and they’re finding better returns for those properties. Typically ApexOne, which is based in Houston, is targeting multifamily investments in states like Florida and Texas, Indiana, Tennessee. The returns in those States are quite a bit higher than on the coast or bigger cities like Denver or Seattle or Phoenix, so they were able to generate a higher return, farther than that 13 to 17% return.

The other fund is named New Era Medical. They have closed on five acquisitions of medical properties, predominantly behavioral health facilities, and they build and develop those behavioral health facilities primarily for one public company that does not want to develop them themselves because they’re public and having a two year building process for those facilities would be a drag on their public earnings, and so they have a third party company. Upon completion in about a year, the behavioral health company that is public will acquire them. New Era is right now targeting approximately,  on the five different properties, around 25% IRR. For those acquisitions, they’re offering a 15% preferred return after which it goes to 80% for investors. That’s as opposed to an investment directly into New Era Medical’s Fund where they start out at an 8% preferred return and it does go up, but it’s only a 70, 30 split on profit. So CityVest negotiated a significantly better deal for direct investors, getting a 15% return. Alan thought that was because they’re looking to raise that money fairly quickly. The target again is going to be around 7 million and the fee structure is nearly identical to the debt funds.

Ending

private real estate access fundI hope you guys enjoyed that brief tour into the world of institutional private real estate funds and access funds in particular. CityVest is a sponsor of the White Coat Investor. I do get paid by CityVest to help them get the word out about their investments. Just in case that is not totally obvious, I want to make that real clear upfront. But I think they’re providing a service that I’m really not seeing in other places. These are great funds. Yes, they’re illiquid, but you know what, their returns are pretty darn good. And unfortunately, it’s really hard, especially if you’re going to follow Alan’s advice to only put 10% of your portfolio into these things, to diversify between them when the minimums are $250,000, $500,000, or a million dollars. That just takes a massive portfolio. If you’re going to have three or four of them and meet those minimums, it just doesn’t pencil out very well for most of us with the typical physician level of assets.

The access fund provides you the opportunity to get into these investments for $25,000 or $50,000 where it becomes reasonable for someone with a typical physician level of assets. Yes, it’s going to cost you some fees. I hope I laid those out nice and clearly in this interview, that those fees do directly come from your return. The fact that you have to pay CityVest something to provide this access fund is going to reduce your return by nearly 2%. So obviously your money’s going to compound slower than if you had the money to go directly to these funds. There’s no doubt about it. Just like in any sort of a financial advisor situation, mutual fund expense ratio situation, or real estate funds situation, this sort of fee does lower your return. So be aware of that.

Try to minimize your fees as much as you can. That’s a core principle in investing, and you can do that by taking advantage of this special WCI deal in that you can have a little bit lower minimum even than what Alan is offering, mostly because he knows when people come back for a second investment and they’re a little bit more comfortable, now they invest more than $25,000. But also just because it helps you to get into the investment, and the whole point of an access fund is access, so we want to provide that for you. I’ve also negotiated, as he mentioned, this slightly lower fee the first year, which basically cuts that 0.75% fee in half for the first year. Boost your returns by 37.5 basis points.

At any rate, if you want to hear more about these investments, be sure you’re signed up for our newsletter. And make sure you’re opted into the real estate opportunities part of that newsletter. Now I consider all the emails I send out to this list as introductions, not recommendations. I can’t pretend I’ve done a thorough due diligence background check on every company and every principal of every company that I introduced to you through that list. And so the responsibility still lies on you, but if you want to hear about these investments, that’s where you sign up to hear more about them.

Full Transcription

Intro: This is the White Coat Investor podcast, where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high income professionals stop doing dumb things with their money since 2011 here’s your host, Dr. Jim Dahle.

Dr. Jim Dahle: This is the White Coat Investor podcast number 141, Access Funds. Welcome back to the podcast. I missed you guys. I’m glad you’re still here. You know who else I’m missing this week is my wife. She’s off touring in Vietnam as we record this, so it’s Katie appreciation week for me and all the kids as I try to hold down this business by myself and try to hold down our household by myself. You forget how much your spouse is doing sometimes, so this is a shout out for those of you who are not the high income professional, but are the stay at home spouse supporting that family and that high income professional. Thank you for what you do. Today’s podcast is sponsored by Bob Bhayani, at DrDisabilityQuotes.com. They’re a truly independent provider of disability insurance planning solutions to the medical community nationwide and they are a long time WCI sponsor.

Dr. Jim Dahle: Bob specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. He’s been extraordinarily responsive to me anytime any readers had any sort of an issue, so it was no surprise to get this feedback about him recently from a reader. “Having had some pretty terrible financial salesman come speak to my residency program. I’m trying to do better now that I curated our conferences achieved. Bob was generous enough to come speak with us last week. He was knowledgeable straight forward and answered all of our questions. I wouldn’t hesitate to recommend him to anyone and his place on your recommended page is well deserved.” So if you need to review your disability insurance coverage to make sure it meets your needs or if you just haven’t gotten around to getting this critical insurance in place, contact Bob Bhayani at DrDisabilityQuotes.com, or by email, at infodrdisabilityquotes.com, or by calling (973) 771-9100.

Dr. Jim Dahle: All right, let’s do our quote of the day. This one comes from Robert Dora Gazi, MD, who is cardiologist who wrote a book many years ago about finances for docs and he said, “If it is your desire to appear rich and important with all of the luxuries, do not expect financial security.” Isn’t that the truth? I’ve been enjoying myself when I go into the hospital these days. It’s really a great break from WCI. In some ways, it’s become my recreation rather than my vocation. But it really is fun sometimes to go in and see patients. But on Twitter this last week, and by the time you hear this, there’ll be a few weeks ago probably, there was kind of an explosion with a couple of posts, one of which was an article on some left-leaning website that said doctors should be paid less, basically should be paid a lot less. And then another one that was related to it said, 70% of doctors would not recommend their kids go into medicine.

Dr. Jim Dahle: And I’m like, “Why don’t these two people talk to each other and realize that if you lower the pay for docs much more, nobody’s going to do it.” I mean, imagine if you put in the kind of time and effort that you put into medicine into just about else and how successful you would likely be at it. It doesn’t matter what it is, whether it’s financial services or real estate or contracting or whatever it is. If you put in that kind of time and effort, you may find that you are just as successful at it. So I hope that most of you do not feel like those apparent 70% of doctors that have answered that survey. They don’t want their kids to go into medicine but are enjoying your career and hopefully by helping you be a little bit more financially stable, we can help you enjoy that a little bit more.

Dr. Jim Dahle: Today we’re going to be talking with a real estate company, Alan Donenfeld and bring him on here in a minute. But if you want to hear more about the types of investments that are being discussed in this podcast, what you need to do is sign up for the White Coat Investor newsletter. So you may already be part of our newsletter, but you may not be signed up for this Special Real Estate Opportunities list. Now, this is totally free. You can opt out at any time, not going to spam you on it, but if you notice at the bottom of any email I send you, you will see a link for add real estate opportunities newsletter at the bottom and you can add that. If you’re not signed up for the newsletter at all, you can go to white coatinvestor.com/newsletter and sign up for that. But if you want to hear about these sorts of things, I’ll send you details as soon as I hear about them so you can be one of the first to know about it if you’ll sign up for that newsletter.

Dr. Jim Dahle: All right, let’s get our guests on here. All right. Today we have a special guest on the White Coat Investor podcast. We have Alan Donenfeld who is the CEO and founder of CityVest. Welcome to the White Coat Investor podcast. Alan.
Alan Donenfeld: Thank you Jim. Glad to be here.

Dr. Jim Dahle: Tell us just a little bit about your background and let the readers get to know you a little bit personally.

Alan Donenfeld: Sure. So I went to, way back when in the 70s went to Tufts University and then Duke University’s Business School. Worked for about 10 years in large investment banking firms in New York city, Lehman brothers. Formed a broker-dealer, have done several billion dollars of investment and financing transactions ranging from smaller investments on my own, a couple of commercial properties and condos in New York City, many company acquisitions and most recently focused in the CityVest company, which is providing real estate investment opportunities for friends, family, and other investors.

Dr. Jim Dahle: I understand your decision to start CityVest was inspired by your brother an anesthesiologist. Can you tell us that story?
Alan Donenfeld: Sure. I’m happy to tell it because it led to the founding of CityVest. My brother was retiring with a fair amount of capital that he’d built up spending grueling hours as an anesthesiologist for about 30 years. Wanted to retire, asked me his financial services brother if I could find him a safe investment, providing a 10% return. After doing significant research, he realized there was no better investment than real estate. And when I went through a variety of real estate investments for him that produced the highest returns, I realized that that group of institutional deals had a very high minimum investment requirement. He didn’t really want to spend his time searching for individual properties dealing with tenants, trash and toilets. And so these institutional funds made sense except they all were seeking 250,000, 500,000 or million-dollar minimum investment.

Alan Donenfeld: And so I got a group of other doctors with my brother. That group was about $3 million. And as a group they were able to invest in some very good institutional real estate funds that have done well, that had a number of institutional qualities like audits and administrators that made him safe and produce a solid return.
Dr. Jim Dahle: So what exactly does CityVest do as a firm?

Alan Donenfeld: So just as I did for my brother, CityVest mission is to provide individual accredited investors with access to the best real estate investments than market. So after looking at all of these asset classes of stocks, bonds, hedge funds, real estate, we focus exclusively on real estate because of the high returns and low volatility. In fact, those returns are in just for one year and then move on, but generally, let’s say it has the best longterm performance with low risk and volatility. So our mission is to find those institutional funds and provide access to them by pooling a group of investors together who might invest 25, 50, $100 amounts. We create a special entity called an access fund where we pull that capital and then as a group, since we’re investing say three, four or $5 million as that group, we’re actually able to negotiate better investment terms than any one single investor who might be putting in 500,000 or a million. So not only do we provide the access to these institutional funds, but we actually get better terms than what those other investors might get.
Dr. Jim Dahle: So essentially the big value play here that you’re providing is to decrease the minimum amount and maybe get better terms as well in order to get into these institutional private real estate funds. Is that kind of the quick one sentence summary of what CityVest does for investors?
Alan Donenfeld: Yeah, I would add on one little piece, so not only is it the access and getting the better terms, but these institutional funds typically outperform a syndicated deal, REIT, or some other properties. So at the core they’re already providing better returns, we are able to access the better returns and get a notch up on other institutional investors because we’re investing a pooled amount of three, four or five million.

Dr. Jim Dahle: Okay. We’re going to get into access funds quite a bit later in the podcast, but let’s talk now about these institutional funds, these private real estate funds. What do you see as their advantages over publicly traded real estate investment trusts or the mutual funds composed of these publicly traded real estate investment trusts like the Vanguard REIT index fund, what do you see is the big advantage of private real estate funds over that sort of an investment?
Alan Donenfeld: Sure. So the big advantage of a REIT far and above any other reason to buy a REIT is that it’s liquid. It’s a stock so people can buy and sell it interday, monthly, this stock REIT may go up in price and you can sell it. And so there is a big advantage having that liquidity. However, I look just this morning and the average week dividend today is about three and a half percent and most private equity real estate funds on the debt side are yielding anywhere between nine and 11%, maybe some in the 12% range. And many of the preferred equity funds are targeting 12 to 16% preferred equity return.

Alan Donenfeld: So clearly the REIT dividends being down at three and a half percent, and the private equity funds producing returns of 10, 12, 14% it usually is worth that kind of difference, three and a half to 10%. It’s probably worth investing in some private equity funds because of that much higher return. And part of the reason why REITs underperform is that their legal fees with legal accounting and other public market costs are just astronomical, which brings down that return. Because they’re investing in similar real estate. But after all those fees, the returns are much less.
Dr. Jim Dahle: So in a lot of ways here, this tilts the investing platform toward those with money in some ways because all of these private funds are essentially only available to accredited investors. Those with an income of $200,000 a year or liquid investible assets of a million or more, whereas a publicly traded REITs basically available to everybody.
Alan Donenfeld: Well, that’s the way a lot of things are. The bigger investors get the better deals and the little investors get REIT which are public without any sort of requirements. Anybody can buy a REIT, but there’s lots of fees associated with accessing the REIT. While the private equity funds, there are investing requirements such as income standards, but there are much lower fees because the institutional investors don’t allow the private equity funds to charge significant fees which might bring down those returns.
Dr. Jim Dahle: So let’s talk a little bit about buying syndications directly, going directly, buying in with a hundred other investors into an apartment complex for instance. What do you see as the advantages of these institutional funds over these other funds that are available to accredited investors, are not funds rather, but these other investments available to accredited investors where they can actually select the property they’re going to be investing in. And what advantage do you see of the fund over that?

Alan Donenfeld: Right, so the bulk of the private real estate market is syndicated direct deals where some group of individuals, one, two, five people in a real estate investment management company might find an individual multifamily that has an acquisition cost of two to $5 million. And they go out and form a syndicate, raise money from a hundred investors and acquire that property. And then that syndicate management or sponsor, will charge fees and acquire the property and do whatever it is they intend to do, whether it’s a value add property or run it for a couple of years and sell it. So the multiple problems that I see with that syndicated deal versus the kinds of properties that we’re looking at, which are private equity funds is the syndication of direct deals is not diversified. One property, it’s focused in one market. So that’s great if you live in Los Angeles and you want to have a syndicated deal in Los Angeles, then you may know where that property is.
Alan Donenfeld: But otherwise, if you want real estate for diversification, a private equity fund may buy 10 to 20 properties in that fund. In addition, that sponsor group, might compose, one, two, five different people, but a private equity fund such as our DLP fund, in total DLP has 180 employees. So there’s a whole hierarchy of acquisition development, sales oriented people, the value add people. So the level of quality of management in a private equity fund typically is quite a bit bigger and better then a syndicated direct deal.
Alan Donenfeld: In addition, maybe one of the bigger reasons is a syndicated direct deal, that sponsor group typically doesn’t have a historical audit, doesn’t use an administrator. Both of those are items that institution requires a private equity fund to have auditors and administrators, so the safety in a private equity fund with an institutional required audit administrator makes the private equity fund quite a bit safer.

Alan Donenfeld: There’s some other subtle changes. If you’re a syndicated deal and there’s a sponsor when he’s looking for that deal, he’s not high on the list from real estate brokers who want to get that deal done. They’re representing the seller. They’re not first going to go to a sponsor who doesn’t have the money, who has to first raise the money, the real estate broker who wants to get that deal done, well first go to a private equity fund. It’s sitting on the capital, they have the credit and banking relations to get the best possible financing, and so the private equity funds are much more opportunistic and being able to get deals done, they have cash in hand, they can pay all cash if they want and then get financing later while syndicated direct deal, it might be great that they describe that specific deal and it might be local to you, but they may need to take six weeks, eight weeks, 12 weeks to pull that money together.
Alan Donenfeld: Meanwhile, the ability to lock down that deal for that syndicated sponsor, there’s a lot more difficult than that private equity fund who has the capital on hand and the credit banking relationships.
Dr. Jim Dahle: Okay. Now you and I were at the Passive Income MD Conference a couple of weeks ago and we heard from some docs who’d basically gone out and bought properties themselves. They’d found the financing and they bought and hired managers, et cetera. One was a surgeon who’d bought four or five different apartment complexes, which were enough to, once they were cash flowing, to basically make them financially independent. Another couple of physician investors had become financially independent within four or five years of getting out of residency by doing these direct real estate investments. What advantage do you see for these institutional level private real estate funds over investing directly like these docs have done?

Alan Donenfeld: Right. So I think that it’s exciting to own real estate directly. Unfortunately, it’s a full time job to search through hundreds of listings, no certain ages of properties which are problems they might have, engineering issues. And buying real estate isn’t it really a hobby? It’s a full-time job. It can be difficult buying a property, lots of paperwork, you have to use your credit to go through that financing process. It’s a long closing process with lawyers. You’re going to have to deal with the tenants and leases and repairs. All the people at that conference that we attended, I think almost every one of them have made it more of a full-time job then their medical practice and slowly, I think all those people, they’ve enjoyed investing in property, but I think at this point most of them spend nearly all of their time doing that rather than their old day job, which was being a doctor.
Alan Donenfeld: And if you’re buying a property on your own and you’re out there looking, typically we’ll find smaller properties, not four or 500 door multi-families.If it’s your own capital then it’s a smaller property. And typically smaller properties have a lot more competition in buying it because it’s just more people that have that smaller amount of money to buy that property. Let’s say you don’t get the best pricing. Again, the financing may be difficult for you to get versus a fund that comes in and it’s competing with you and even at that fund is at a 10 or 15% lower price. Sometimes that seller may want to sell to a fund that is not going to have a financing problem, is putting up all cash versus competing with you if you’ve made this year full time job trying to buy real estate directly.
Alan Donenfeld: This solo benefit that I do see buying real estate directly is you can keep it in your family forever. You can transfer it through a 1031 exchange and buy other property and there is a step up in basis. If you die you can transfer that property to your family. So there are some tax benefits to owning it directly, but overall, unless you’re going to do it too seriously as a full time job and even then if it is your full time job, the properties may be smaller, you’re not getting the best kinds of return that you should if you’re competing against a real estate private equity fund.

Dr. Jim Dahle: All right, so we’ve talked a lot about the advantages of a private real estate fund. Let’s talk a little bit about the disadvantages, specifically fees, illiquidity and lack of control that you were alluding to a moment ago, particularly with regards to taxes. Can you talk about the disadvantages and who a private real estate fund really is not a good fit for.
Alan Donenfeld: Sure. So first off, most real estate is illiquid. Obviously the major exception is REITs which are stocks and they are liquid. So a real estate private equity fund tends to be a multi year fund ranging from three to seven, maybe even nine years. So there is a disadvantage of a private equity fund in the amount of time that you may have to buy it, is that illiquidity problem. On the other hand, many investors who invest in real estate funds, if they are enjoying a solid 10 or 11% kinds of return, they’re happy for it to be illiquid and for that money to be working for them over a longer period of time. Nobody likes to pick an investment for three months and then have to find another investment and another one buying and selling these investments. If you’re a doctor and you have money coming in each year, you may not need the kind of liquidity that other investors might need. So liquidity may not be a deciding point for you.
Alan Donenfeld: There are some additional disadvantages of a private real estate fund such as lack of control. On the other hand, if you invest in a fund, and in the case of DLP, they have 180 employees with 650 million in assets under management. What you are giving up in lack of control of your real estate, if you would invest in the DLP fund, you are gaining a very experienced investment management company who’s managing the buying and selling, fixing up, receiving debt payments from your fund. So lack of control is a good thing and bad thing. If you’re giving up control to an experience group, that’s a good thing. If you like to be hands on and spend your time, then you may desire more control over your investment.
Alan Donenfeld: And finally, the other point that you had raised was regarding fees. CityVest charges relatively small fees and we seek institutional funds that have low fees. I think when you add up all the legal accounting and other fees, both of the CityVest Access Funds and our underlying funds, all of that is probably half the level of fees of a REIT which have the enormous public company related fees for significant legal expenses. And I think that the CityVest fees that we charge in total are a little bit less than 2% per year. And I think that, well that is a meaningful fee for us. We do spend a significant amount of time searching for the best investment funds, conducting due diligence and I think that our returns after all fees are reasonable.

Dr. Jim Dahle: Now, a lot of people get confused on this point, right? Because they go and they look at a Vanguard index fund and they see that it’s charging an expense ratio of three basis points or 10 basis points. 0.1% per year and they don’t stop and consider the underlying costs, call them fees, call them costs called business expenses, whatever you want to call them, of the underlying real estate investment trusts in that fund. Is a really fair to compare a one or 2% fee that a real estate fund may be charging to the expense ratio of a mutual fund or is that really just comparing apples and oranges?
Alan Donenfeld: I think it’s comparing apples and oranges because a real estate private equity fund with an experienced manager may have a value add strategy as a large fund. They may be able to produce levels of returns at 15% versus a Vanguard kind of mutual fund with very low fees, but they’re just not generating the level of returns that institutional funds might. So yes, you can pay low fees, but you’re also going to get lower returns. And I think if you look at what institutional investors are buying such as Yale and Harvard endowment, they are not buying the Vanguard funds. That’s more of a retail product. It’s easy to buy, yes, it’s great that it’s low fees, but it’s easy to buy and sell and has much lower returns as compared to the institutional product with higher returns, but may have some fees associated. The after fee returns of the institutional product I think is higher.

Dr. Jim Dahle: How much of a portfolio do you think is reasonable to put into private real estate investment funds? In your opinion, for a typical doctor, how much of a portfolio do you think is reasonable?
Alan Donenfeld: Yeah, so the biggest consideration is the illiquidity of a real estate. So you have to make sure that you don’t too much in real estate if you might need those funds at a later date. But here’s some examples that I mentioned, the Harvard and Yale endowments, they have 30 and $40 billion in their fund. They typically have about 10% of their $30 billion in real estate. There’s many family offices that have as much as 22% of their portfolio in real estate, but those family offices are families that have networks of 20-$50 million, and so their need for liquidity is very different than individuals need for liquidity that might have two, three, $5 million. I think a reasonable amount for an individual investor would be somewhere between five and 10%, I think 5% is a reasonable number. This is also excluding your home, but you need to make sure that you’re not going to need that capital for kids’ colleges. Obviously pay down all of your student debt, which typically will have a high cost.
Alan Donenfeld: And then when you do invest in real estate, you need to be diversified and make sure that there are a variety of different maturities of that real estate so that if you do need some money for other purposes in three years, maybe some of your real estate investments will have a shorter maturity and others, maybe you want something longer term with a higher return as long as seven or nine years.

Dr. Jim Dahle: Do you think 50 or 80% is just too much of a portfolio to have in there, huh?
Alan Donenfeld: Yes. Way too much. I think that for an average individual, five to 10% is good. Now, the other side of that coin is since real estate is less volatile, less risk than the stock market. I’m not advocating putting 50% in the stock market, particularly at times like this, I would say, but if you do have that choice now that you have cash in the bank, that’s not a very good place for your money earning less than 1% I would say, if your choices today do you put it in stocks or real estate? I would say I would put in diversified funds and several different investments. You may want to put as much as 30% in real estate. I would not overweight in the stock market particularly where the stock market is at today.
Dr. Jim Dahle: All right. Let’s change gears here a little bit and talk specifically about access funds. These are starting to crop up here and there. CityVest, this is basically what they do is create access funds to allow people to invest in these private real estate funds. Now you mentioned earlier and kind of explained why somebody might want to use one, but it seems to me that the main deal here, what you’re doing is you are trading the advantage of a lower minimum investment. Basically you’re getting access to this fund and in exchange for that, you’re paying another layer of fees. You may be getting less liquidity than the fund itself would give you, you may be getting less frequent payouts, quarterly instead of monthly for instance. And of course, you’re one more step removed from the fund manager. Do you think that’s a fair appraisal to say for a description of what an access fund is?
Alan Donenfeld: Yeah, so I spend all of my time looking for the best institutional funds and there are a class of institutional funds that clearly outperform other funds. In real estate, oftentimes bigger is better. The bigger properties have less competition for buying them. The bigger funds had this greater ability to acquire those properties because brokers bring them the property first. Their ability to get credit or closed with all cash is better. And so institutional funds just outperform every other category of funds with this one significant downside that an institutional fund would rather go to California State Retirement Teachers’ association and accept $20 million rather than dealing with hundreds of individual investors at 25 and $50,000.

Alan Donenfeld: So our mission is to access those best fund through our access funds and we allow up to a hundred investors in each of our access fund vehicles in amounts as low as 25,000. And at the end of the day, even after our fees, I believe that our returns stack up favorably with any other funds because our underlying funds simply outperform. And then along the way you get a range of institutional benefits such as quality auditors, administrators, each of these funds have their own in house accounting staff. The level of experience of these managers is that much higher. So there’s just a variety of benefits from an institutional fund that outperform other funds even after our fees and our access funds.
Dr. Jim Dahle: Okay. So obviously it sounds like you think the trade is worth it for a typical physician investor with a $500,000 to a $3 million portfolio. This allows them to, rather than maybe put a big chunk of their investments into one single fund at 250,000 or $500,000 but rather now they can spread it among three or four funds at 25 or $50,000 a piece.
Alan Donenfeld: Absolutely. And many investors are making a first time real estate investment and they’d rather make a $25,000 investment even though they may feel comfortable putting 100 or 200,000 in one fund, they need to dip their toe in the water and see what it’s like, make sure they’re getting distributions, getting information from the managers, they understand what it means to receive a K-1 at the end of the year and give that to your accountant. So there is a process of getting comfortable, which you and many of your investors have already gotten comfortable, but some investor just starting out should just try it with 25,000 and get comfortable and then search for other funds that you may want to invest in.
Dr. Jim Dahle: Okay. As we record this in mid November, you have two deals up on your platform. Let’s talk about each of those individually. First, let’s talk about the Arixa Access Fund 1, so this is an access fund designed to lower the minimum investment into the Arixa Enhanced Income Fund from $200,000 to $50,000, can you tell us why you chose the Arixa Enhanced Income Fund as an investment for your platform?

Alan Donenfeld: Sure. So we feel generally a little bit uneasy about the stock market and the political environment. So the Arixa Access Fund is investing in the Arixa Enhanced Income Fund LP. It is a leveraged fund focused on California Fix and Flip Property. So it’s a debt fund. They are a lender, like a bank making loans to real estate investors. And so we feel particularly comfortable being the lender, having a first mortgage as collateral. This is for the Arixa Enhanced Fund. They have the collateral of that mortgage. They only charge a 1% fee in their fund, and they are experts in making these loans. Typically, there’s about 65 to 85 loans in that portfolio and the Arixa Enhanced Income Fund pays our access fund a 9% preferred return after which investors get 80% of profits and Arixa gets 20%.
Alan Donenfeld: They do have another fund that I think Jim you might be an investor in called the Arixa Secured Income Fund. It is unlevered, meaning they don’t employ debt to make some of these acquisitions. And it does have a slightly lower return. I think the target return for that fund is around 7, 8%.
Dr. Jim Dahle: Yeah, that’s right. They’ve got two funds. They’ve got the unlevered fund, which is they aim for a seven to 8% return and they’ve got this Enhanced Income Fund, which is the levered fund. They target returns of nine to 10%. I think over the last five years they’ve averaged a 10.31% IRR in that enhanced fund. So yeah, I am actually invested in the other ones, the unlevered one, I think the investment minimal, and that one’s a little bit lower. I think it’s a 100,000 versus 200,000 there and I’m directly invested there. How much leverage does the enhanced income fund really use and do you think that’s a safe way to boost returns?

Alan Donenfeld: I do think it is. In the enhanced fund, which is the underlying fund to the Arixa Access Fund 1, the loan devalue, it seems to vary between 60 and 70%. It has average 60 to 65, I think right now is on the higher end and as a result of their borrowing from a bank in order to make some of their loans, they’ve been able to generate as you indicated nine and a half percent return over the past year. I think that’s a solid return and we did have a choice of making our investment in the unlevered fund or the levered one and I think the level of risk is comfortable for me in the levered fund providing that 9% preferred return. Again, the fees are quite low in the fund and because these are senior debt loans that are, Arixa is making the element of risk from the levered nature I don’t think is significant.
Dr. Jim Dahle: Okay. So let’s talk a little bit about the fees that the CityVest Access Fund structure layers on top of the Arixa fund fees. So it looks like the fees for the access fund are 0.75% as an annual management fee, $500 per investor per year for administration costs, and then a onetime fee from the fund to $50,000 for setup costs, which is about 1% of the target raise. So this fund expected to run for five years, if it raises the target 5 million total, investor that comes in at $50,000 is basically paying 1.95% per year for the access fund. And so if the funds made 10.3% over the last five years, it targets nine to 10%, maybe nine and a half percent. If you subtract out 2% a year from that, that equals about seven and a half percent. Is that what you would expect someone who invested into Arixa Access Fund 1 to make over the next five years, seven and a half percent a year or so?
Alan Donenfeld: Yeah, that about it. So you laid it out pretty nicely. 75 basis points is the annual management fee, $500 per investment for a year as administrative fee. And then if you amortize the funds, set up costs, all of that comes to, I think it’s slightly less than 2% per year. And so given the recent performance of the underlying Alexa fund investors should expect something around seven and a half percent. Again, I think that’s a very strong return given that they are like a bank, they’re making the loans to investors and hold the first mortgage and I think seven and a half percent a good return.

Dr. Jim Dahle: Okay. A couple of other downsides of going through the access fund. The liquidity is a little bit lower since it’s a five year fund, you really can’t get your money back for five years. And if you going directly to the fund, you can actually start cashing out after a year. It would take you two full years to get your money out, but it’s a little bit less liquid. And you also can’t reinvest your distributions and those distributions are coming quarterly instead of monthly if you went directly to the fund, is that all correct?
Alan Donenfeld: Yap. I think our fund is actually a four year fund, but yes, everything was correct. We have a little bit less liquidity than an investment directly in the Arixa Enhanced Fund. I think that in practice, if an investor does have an issue during those four years that they’re invested in our access fund, while it’s not a guarantee we could redeem out of the underline Arixa Fund and so if an investor does have an issue, again it’s not a guarantee, but we will endeavor to redeem that portion of that investors funds from the underlying fund. There is this time period to get your money out of the underlying fund that two year period, but it is possible and so you would not be totally illiquid by investing in our access fund.
Dr. Jim Dahle: Okay. So let’s talk a little bit about the process of building this access fund and then going to the underlying fund and investing the money. What happens to an investor’s money in between the time they send you cash to invest and when the access fund closes and makes that investment in the underlying fund, do they earn any interest on that or what happens with the money there?
Alan Donenfeld: No, unfortunately, we have some paperwork on our side that the Securities and Exchange Commission requires such as anti money launderer checking, know your customer rules. We actually use a third party administrator named Assure Services. They check all of our paperwork that we give them. Jim, you may not realize that, but they’re located in Salt Lake City where you are. And so there is a little bit of a delay between the time that we received the signed subscription agreements. We have to go through the Accredited Investor Verification Forms and then send them to Assure. And so there is a small period of time, maybe as much as four or six weeks even depending when you invest, in which there is no interest being earned on that money that we’ve been sent.

Alan Donenfeld: And then the one thing that we do try to do is given that we will be investing a larger amount of that underlying fund, we often ask that fund to get our capital to work immediately upon the investment. Sometimes if you invest in Arixa in their documents, they put it to work at a point that’s convenient to them that they need the capital. We’ve asked them to get that capital to work a little faster, but there was a delay in our documentation to get that money into the Arixa Fund.
Dr. Jim Dahle: Okay. Now the Arixa funds based in California, it basically makes all of its loans in California. So will non-California residents that are investing in the Arixa Access Fund have to pay California taxes on that income.
Alan Donenfeld: They don’t have to. Arixa is making their California state filing. We receive one distribution to the access fund and our investors will not have to make a filing for California taxes and so that is not an issue. In fact, I just confirmed that this morning with them.
Dr. Jim Dahle: Now they don’t have to file a return but do they have to pay California taxes or would they be paying in their own state on those returns?
Alan Donenfeld: They pay their normal tax in their own state on their income but they don’t pay California taxes on that distribution.
Dr. Jim Dahle: Okay. Now one way around those tax consequences which is probably pretty wise for a tax inefficient investment like a debt fund like this where basically all the income is ordinary income, there’s no depreciation shelter in it or anything, is to invest in it through a self directed IRA or a self directed 401 (k). Now I understand you can invest in these access funds using a self directed IRA. Is there a self directed IRA firm you are recommending?

Alan Donenfeld: Yes, we are working with a firm named Rocket Dollar. I think it’s rocketdollar.com and their specific product is like enhanced Self Directed IRA. Their product is called a Checkbook IRA. And it allows an investor to first set up their Self Directed IRA and then have a Checkbook IRA within their Self Directed IRA, allowing them to literally write checks and invest that capital into any products that they want without them having to go through the custodian, through us. We’ve negotiated a $100 discount off the set of costs of the Rocket Dollar Checkbook IRA. I’d be happy to provide anyone with the link so that you get that benefit. And then whenever you want to make an investment in a CityVest Fund or anything else that meets the requirements, you obviously can’t invest in your own house or anything that benefits you personally but you literally would write a check to make that investment.
Alan Donenfeld: And going to the tax consequences because Arixa and we haven’t really talked about the DLP Access Fund, which is also a debt fund because it tends to generate a high level of ordinary income tax. It is beneficial to invest through a Self Directed IRA account where you then would not suffer any taxes. It’s very tax efficient to invest in debt funds like Arixa and DLP.
Dr. Jim Dahle: Yeah, Rocket Dollar is well known to us. We’ve had an affiliate deal with Rocket Dollar for a long time. You can check that out at whitecoatinvestor/rocketdollar. Let’s turn now to that other fund. Now this is DLP Access Fund two. Now I invested 100,000 through CityVest in the DLP Access Fund 1 early in 2019, I think the most recent distribution I got on that fund annualizes out to 11% a year, so I was pretty happy with that. But DLP Access Fund 2 is not investing in the same fund the DLP access fund 1 did. It’s investing in a different DLP fund. Can you tell us about the differences between those two funds?

Alan Donenfeld: Sure. The fund that you invested in, DLP Access Fund 1 invested in DLP Lending Fund, which is a Straight Debt Fund investing exclusively in first position real estate backed loans. Typically they’re referred to as Fix and Flip Loans. The new access fund, DLP Access Fund 2 is investing in DLP Income and Growth Fund, which DLP often refers to as their Opportunity Fund. And I think what they mean by that is it invest in many of the exact same first lien mortgages that the DLP Lending Fund does, but they are more opportunistic. If they see a tax lien that they can buy at a discount, they will do that in the income and growth fund. If there’s a preferred equity position, which is not a debt investment is equity investment. But if that preferred equity position is particularly attractive, they will make that investment out of the income growth fund. So they refer to it as an Opportunity Fund. I think that just means that it covers a wider cross section of real estate investing. Many are private loans back directly by real estate, but others are opportunistic investments in liens or other real estate loans, including preferred equity.
Alan Donenfeld: And over time, I believe that while it’s a little bit riskier, it still includes many of those first lien mortgages and produces nearly an identical return as the DLP Lending Fund.
Dr. Jim Dahle: Now both of those funds have a 10% preferred return, then split additional returns, 80, 20 in favor of the investor with a target return of 11% do you think that’s a fair structure?
Alan Donenfeld: I do. Most funds tend to provide a eight or 9% preferred return. So I think that DLP providing a 10% preferred return is on the high side in favor of investors. In addition, the 80, 20 split of profits in favor of the investor getting 80% is pretty standard for most institutionally oriented funds. There’s a lot of farms out there that split 75, 25 so investors are getting a little bit less than 80% or 75%. Some are even at 70, 30, I don’t think those kinds of structures are fair. We tend not to want to do any access funds with funds that are anything less than 80% of profits going to the investor. But with a 10% preferred return, I think it’s quite high. And again, the fees of DLP and Arixa around 1% of AUM, I think are on the low side. So overall I think it’s a fair structure.

Dr. Jim Dahle: Now the lending fund had a $500,000 minimum, but the income and growth fund had a $250,000 minimum. Any idea why that was different between the two?
Alan Donenfeld: So the lending fund was their core fund started about five years ago. It’s now gotten quite large income and growth as more of an opportunity fund. I think it’s only been in existence for two and a half years. I think the reason for the lower minimum is to make it more accessible, raise more capital into the income and growth fund, and be more of an opportunistic investor with income and growth. And they just set a lower minimum to be able to raise more money faster in that fund.
Dr. Jim Dahle: Okay. So it sounds like the real value proposition here is you’re getting your minimum lowered from $250,000 to $50,000 by going through the access fund. Now the plans for the access fund to invest in the DLP fund for four years, pay out quarterly distributions, then return the capital to the investors. The fees are basically the same as the previous fund with that $50,000 upfront fee spread out over four years. But the target for the fund is 7 million instead of 5 million. So if the fund fills the 7 million target you’re going for, for this access fund, a $50,000 investor would have annualized fees of about 1.93% per year about the same as the Arixa Access Fund 1. So if it hits it’s 11% target, which doesn’t seem terribly unreasonable given their 12.3% track record, I figured that an investor audit expect return of something like 9%. Do you think that’s a fair expectation from this investment?
Alan Donenfeld: I think it’s actually going to be a little bit more, but I think 9% is obviously reasonable given 12.3% is their historical average. They were even a little bit higher than that in the last couple of months. I’m not sure why that is because generally mortgage rates did come down. So I’m surprised that they were able to squeeze out a higher return the last couple of months, but I think a a 9% return is the reasonable target.

Dr. Jim Dahle: Okay. So I understand you have two other funds coming onto the platform soon. In fact, by the time this runs in mid January, I think they’ll probably be on the platform. Can you tell us about those two funds?
Alan Donenfeld: Sure. We’re very excited about them. One is called ApexOne Multifamily Fund. It’s their third fund. I’ve known the company for quite a while and my brother was investor in their fund too which is producing excellent returns. They’re targeting a 13 to 17% net of fees return that’s actually before our access fund fees. It is a preferred equity fund, a little bit riskier than a debt fund, but they buy fairly large multifamily developments. They’ve had very large co-investments from institutional investors, firms like Trammell Crow, there’s a very large family office in Texas. Other institutional funds like Balfour Beatty is a multibillion dollar institutional investor. And so they’re able to improve the returns by having a joint venture co-investment partner who they charge fees to and they’re targeting larger 10, 20 $30 million size properties where there’s a little bit less competition and they’re finding better returns for those properties.
Alan Donenfeld: Typically ApexOne which is based in Houston, is targeting multifamily investments in States like Florida and Texas, Indiana, Tennessee should the returns in those States are quite a bit higher than on the coast or bigger cities like Denver or Seattle or Phoenix, so they were able to generate a higher returns farther than that, 13 to 17% return. So we’re excited about ApexOne and the other fund is named New Era Medical. They have closed on five acquisitions of medical properties, predominantly behavioral health facilities, and they build and develop those behavioral health facilities primarily for one public company that does not want to develop them themselves because they’re public and having a two year building process for those facilities would be a drag on their public earnings, and so they have a third party company.

Alan Donenfeld: You are a medical build those properties for them and upon completion in about a year then the behavioral health company that’s public will acquire them. New Era is right now targeting approximately on the five different properties around it, 25% IRR. For those acquisitions, they’re offering us a 15% preferred return after which it goes to 80% for investors. That’s as opposed to an investment directly into New Era Medical’s Fund where they start out at an 8% preferred return and it does go up, but it’s only a 70, 30 split on profit. So we negotiated a significantly better deal direct investors holding 8% preferred return. We’re getting a 15% return. And I think that’s because they’re looking to raise that money fairly quickly. Our target again is going to be around 7 million. Right now they’re at about 14 million and with our capital, they will end up fairly close to the maximum size of that funded around 25 million.
Dr. Jim Dahle: How long do you expect these CityVest Access Funds to run for these two funds? Are they going to be four or five years? Are they going to be longer?
Alan Donenfeld: Yeah, both of them are longer than the debt funds. The ApexOne I believe is a seven year fund and it has two, one year extension, so that could be as long as nine years and New Era is a little bit shorter because their investment period is only a year. We’ve already closed on five of these properties and I think they’re looking to sell them to the Behavioral Health Company in year two to three. And so I think the New Era Fund is just a five year fund.
Dr. Jim Dahle: And similar fee structures to the debt funds we discussed?
Alan Donenfeld: Our fee structure is nearly identical. The 75 basis points for a year, annual management fee $500 per investor administrative fee. And then that 50,000 organization expense reimbursement. Yes.

Dr. Jim Dahle: Okay. Now I heard a few complaints from investors in two of your prior access funds about sparse communication. They didn’t hear from you quite as often as they wanted to. Can you tell us what CityVest has put in place in the last year to improve that service?
Alan Donenfeld: Yeah, so we’ve raised a bit of capital for our own growth and hired some customer service people and they are absolutely was a couple of people who had sent in emails. Some of them actually were on your blog I think, and I didn’t keep up reading your blog and so they might’ve asked a question through the blog and I didn’t see it and didn’t get back to them. I think there was one person that emailed me and I think I just simply overlook that email, but we’ve closed that loop and we’re much better at being responsive. In addition, we have a much more robust investor dashboard which shows when you invested your money from what account, what your distributions are, all of the documents that you’ve received. And I think that back when DLP Access Fund 1 was being done, we were upgrading that investor dashboard and then a couple of cases we were not as responsive as we should have been. Always open to getting phone calls rather than text. So on the site is my phone number, call me directly and I’ll be responsive.
Dr. Jim Dahle: Now tell us what to expect from CityVest in the next year. I mean, how many funds do you think will come onto the platform in 2020?
Alan Donenfeld: So we have these four funds, two are on the platform currently, DLP Access Fund 2 and the Arixa Fund both debt funds. We’re excited to buy your medical and ApexOne. I think that we will have a total of maybe six funds throughout 2020. We’re looking at a variety of different funds, one is Industrial Fund, Industrial Assets, Industrial Real Estate Assets. I’ve been performing very well with the number of distribution facilities that companies like Amazon have acquired. So that’s one fund that we’re looking at. Another is a Self Storage Mobile Home Fund that seems to be performing quite well. We’re still doing our due diligence on that. We’d like to look at them over a number of months and look at their quarterly reports so that by the time we make our investment, we’re very familiar with how that fund is performing. So there’s probably about six funds that we’re looking to invest in during 2020 and we’re currently eying those two, but there will be others.

Dr. Jim Dahle: Okay, so where’s the best place for White Coat investors to learn more about CityVest and investments available there?
Alan Donenfeld: Well, your website is usually the best place. Clicking on the White Coat Investor link to get to CityVest usually provides a little bit of a discount on the management fees in the first year that investment is made. So that’s always the best place. However, if you click on cityvest.com and look at the deals, if you make an investment and you’re checking out, there will always be a place that says, “Where did you hear about this?” Or, “Who referred you?” And if you put White Coat Investor or just WCI, when we see that you will get the fee discount and being able to invest just 25,000 in our funds rather than 50,000. You don’t need to ask whether you’re getting those discounts, we know where you’re coming from when we see WCI and we will provide the ability to invest that lower amount with the lower first year fees.
Dr. Jim Dahle: Okay. Thank you very much. Alan Donenfeld, CEO and founder of CityVest for coming onto the White Coat Investor podcast.
Alan Donenfeld: My pleasure, Jim. Nice to be here.

Dr. Jim Dahle: All right. I hope you guys enjoyed that brief tour into the world of institutional private real estate funds and access funds in particular. Yes, CityVest is a sponsor of the White Coat Investor enterprise here. I do get paid by CityVest to help them get the word out about their investments. So in case that’s not totally obvious, I want to make that real clear upfront. But I think they’re providing a service that I’m really not seeing in other places. I mean, there are these great funds, yes, they’re illiquid, but you know what? Their returns are pretty darn good. And unfortunately, it’s really hard, especially if you’re going to follow Alan’s advice to only put 10% of your portfolio into these things to diversify between them when the minimums are $250,000, $500,000, a million dollars, et cetera. That just takes a massive portfolio. If you’re going to have three or four of them and meet those minimums, it just doesn’t pencil out very well for most of us with the typical physician level of assets, much less a physician in the beginning with a negative net worth.
Dr. Jim Dahle: And so the access fund provides you the opportunity to get into these investments for $25,000 or $50,000 where it becomes reasonable for somebody with a typical physician level of assets. Yeah, it’s going to cost you some fees. And I hope I laid those out nice and clearly in this interview that those fees do directly come from your return. The fact that you have to pay CityVest, something to provide this access fund is going to reduce your return by nearly 2%. And so obviously your money’s going to compound slower than if you had the money to go directly to these funds. There’s no doubt about it. Just like in any sort of a financial advisor situation or mutual fund expense ratio situation or real estate funds situation that this sort of fee does lower your return. So be aware of that.

Dr. Jim Dahle: Try to minimize your fees as much as you can. That’s a core principle in investing and you can do that by taking advantage of this special WCI deal in that you can have a little bit lower minimum even than what Alan is offering, mostly because he knows when people come back for a second investment and they’re a little bit more comfortable now they invest more than $25,000. But also just because it helps you to get into the investment and the whole point of an access fund is access, so we want to provide that for you. I’ve also negotiated as he mentioned this slightly lower fee the first year basically cuts that 0.75% fee in half for the first year. Boost your returns by what does that work out to be a 37.5 basis points, so that’s better than kicking the teeth, right? At any rate, if you want to hear more about these investments, be sure you’re signed up for our newsletter, whitecoatinvestor.com/newsletter. And make sure you’re opted into the real estate opportunities part of that newsletter.
Dr. Jim Dahle: Now I consider all the emails I send out to this list. These are introductions, not recommendations. I can’t pretend I’ve done a thorough due diligence background check on every company and every principal of every company that I introduced to you through that list. And so the responsibility still lies on you, but if you want to hear about these investments, that’s where you sign up to hear more about them.

Dr. Jim Dahle: This episode was sponsored by Bob Bhayani at drdisabilityquotes.com. They’re a truly independent provider of disability insurance planning solutions to the medical community nationwide, and Bob has been a member of the Facebook group for the last few months. You may have met him in there. He’s been a sponsor in there. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. Contact them today by email at [email protected] or by calling (973) 771-9100. Please leave us a five star review and tell your friends about the podcast. Head up, shoulders back, you’ve got this and we can help. See you next time on the White Coat Investor podcast.
Disclaimer: My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He is not a licensed accountant, attorney or financial advisor. So this podcast is for your entertainment and information only and should not be considered official personalized financial advice.