Capital Raising & Co-Investing with Mark Purtell & Joseph Harriman

In this episode, special guests Mark Purtell and Joseph Harriman of CTC Wealth Management Real Estate Funds share their criteria for co-investment partners (i.e., syndicators) including asset classes, deal structures and operator experience; and their experience raising capital for nearly $100M in offerings.

The episode at a glance; 

-05:45 - What Mark and Joseph are looking for in operator experience, how they are structured and the role they fulfill for their fund.  

-09:27 - The kind of deals Mark and Joseph are looking for, “we encourage any operator to bring us a deal and let us say no as opposed to assuming we’re not interested.”

-16:04 - Why Mark and Joseph’s fund won’t take the place of finding your own LP 

-25:00 - Fund-raising techniques that have worked for Mark and Joseph

-29:40 - How to build investor and operator relationships 

-42:42 - Proof of funds without a hard arrangement in place

Guest Bio

Joe Harriman joined CTC in April 2006 as Operations Manager and Head of Investor Relations for CTC Alternative Strategies, Ltd. Prior to CTC, he spent several years in Institutional Client Services at Calyon Financial, and the Chicago Board of Trade. Since 2006 at CTC, he has managed the operations of a multi-strategy proprietary trading company focused on global trading in equities, fixed income, and various derivatives. From 2017 to Present, he served as COO of the Manager. In this capacity, he successfully formed two real estate funds acquiring over $500 million in multi-family real estate. He received his B.S. in Finance from Arizona State University in 1995 and his M.S. in Financial Markets from the Illinois Institute of Technology in 2005. He received his CFA Charter in 2004 and is a member of the CFA Society of Chicago.

Mark Purtell joined CTC in June 2001 as a trading assistant and worked on the trading side of CTC until transitioning to Head of Real Estate Acquisitions and Development in 2020.  He has split his time between trading and real estate with CTC since 2018. He expanded the network of operators to increase deal flow. He created the proprietary real estate model and is responsible for tracking existing deals in the portfolio and assisting in quarterly reporting. Since 2002, he has been active in the Chicago market for his own account with a focus on multifamily investments. He received a B.S in Finance from University of Illinois in 2001. He holds Series 4, 7, 24 and 57 licenses.

For more information, head to https://www.ctcwealthmanagement.com/, email wealthmanagement@chicagotrading.com and call 312-863-8079. 

Transcript

Edited transcript from the Raise Private Money Legally podcast episode, “Capital Raising and Co-Investing”

With Special Guests Mark Purtell and Joseph Harriman

Originally recorded: Jan. 26, 2023

Kim Lisa Taylor:

Welcome everybody to Syndication Attorneys’ free monthly podcast, where we talk about topics of interest to real estate syndicators with the opportunity for live questions and answers at the end of the call. 

I am attorney Kim Lisa Taylor. Before we get started, please note that all of our podcasts will be recorded and may be used for future promotion, posted on our website, or broadcast in a podcast available to the public. If you don't wish to have your voice recorded, please schedule a one-on-one consultation instead of asking questions during the live call. You can either ask questions by raising your hand if you want to ask a live question, or you can put questions into the Q&A section. Usually, we're going to have a discussion for 30, 40 minutes with our guest speakers, and then we're going to go to the live Q&A, and we will end right at 1:00 p.m. Eastern Time.

Information discussed during this free podcast is of a general, educational nature and should not be construed as legal advice. Additionally, the views expressed today are not the views personally of our guest speakers, Joseph Harriman or Mark Purtell, nor of their company, Chicago Trading Company, or any of its affiliates. We're all here just to give you some education, give you some introductions. If you want to do follow-ups, you can do one-on-one calls with us or one-on-one calls with them. We'll make sure that you have their contact information. Today our topic, again, is “Capital Raising and Co-Investing” with fund managers Mark Purtell and Joseph Harriman. Joe and Mark, thank you. Welcome to our call, to our podcast.

Joseph Harriman:

Thank you.

Mark Purtell:

Thanks.

Kim Lisa Taylor:

All right, I'm going to ask you just a series of questions. I'm going to try to flesh them out a little bit for our audience. But tell us about yourselves, and a little bit about your fund and its objectives.

Joseph Harriman:

Sure, yeah, I'll start. So my name is Joe Harriman. I've been in finance over 25 years. I've been with CTC for just over 16 years in trading operations. We started a real estate company about six years ago, which I am COO of. We just finished raising our fourth fund, which we closed last November. We've raised about $100 million in equity to invest in multifamily, primarily focused on the GP side of the capital stack, and primarily in value-add deals. We do have discretion in our funds to go outside that box, so we have invested in some development, some student housing, some self-storage, but we're primarily focused on value-add multifamily. Yeah. Mark, do you want to share your background?

Mark Purtell:

Sure. I've been with the company for 22 years, bulk of it on the trading side. But as the real estate side developed, I made the transition over there. I'm currently head of acquisitions and development. And Joe and I are the day-to-day guys on the team here. We definitely look forward to working with different operators on all aspects of multifamily. That's, in a nutshell, of what we're doing here.

Kim Lisa Taylor:

Would you consider yourselves a private equity company, then?

Joseph Harriman:

Yeah, pretty much. Yeah. We run a series of closed end funds, capital commitment schedule. So typically a three-year investment period, we have to invest our funds. Approximately a 10-year life on the total fund. Again, looking at value-add, typically we like hold periods for the underlying investments in that three- to seven-year timeframe. Yeah. Mark, do you have anything to add to that?

Mark Purtell:

No, that's the general strategy. All these funds very much are mirrors of each other, just different vintages. But it's a very much a rinse-and-repeat cycle because we have something that works and we like to grow with it.

Kim Lisa Taylor:

The investment period, just for people who aren't familiar with funds is — and you can correct me if I'm wrong about the way that yours is set up — but when we set up a fund, we'll set up an investment period during which time the fund managers can raise money and then can also make investments. Is that how yours works?

Joseph Harriman:

Correct, yeah. We have the luxury of having just one close. So you can't have multiple closes within your investment period to raise more capital. We had a target raise in this fund of $40 million to $50 million, and we achieved it in our first close. We basically closed November 1st, and now we have this three-year investment period to invest those funds.

Kim Lisa Taylor:

Wow, that's amazing. All right, and so then just to clarify again for the audience, so you've got this three-year investment period during which you can meet operators, you can make investments and co-invest with other people, other syndicators. And then you like to see projects that have a three- to seven-year hold so that your fund has a 10-year lifespan, basically. Everything's liquidated and everybody's paid back, and they've all gotten all their returns within that 10-year life span. Okay, great. Typical fund, that's very typical of the ones that we also write. We didn't write this particular fund, we did do some marketing materials for their fund, but we're always happy to participate any way we can. And that's how we met these guys. They're great guys. All right, tell me what you specifically look for in operator experience.

Mark Purtell:

Sure. The way we structure these deals is as a co-GP. We come in, we provide the bulk of the GP capital and a deal that allows the operator to go out and source a larger institutional type LP, and providing 85% to 90% of this total equity in the deal. A lot of our operators that we work with are either doing smaller deals with their own capital, they're a commercial broker who perhaps wants to get into running and operating their own deals, maybe a property manager. Anybody who's had experience with syndications and underwriting, or raising equity, or working with a shop of that nature.

Mark Purtell:

And then, of course, operators who are in the market right now who are doing deals, raising money, or just looking to scale up to do more of a larger institutional type product. And that's where we step in. And so really, we're open to talking with operators. And just to be clear, a lot of our deals — well, pretty much all of our deals — are working with operators. We need that operator who's going to go out and source the property, who's going to run the property. We understand our role and know our role is to be equity and balance sheet, and that's what service we provide to operators.

Kim Lisa Taylor:

And so when you're providing the balance sheet, then you're also helping qualify for the loan?

Mark Purtell:

That's correct. We will sign on a non-recourse debt, and we use our fund as the signer due to its liquidity and net worth.

Kim Lisa Taylor:

Nice, nice. Yeah, for any of you out there, they're calling operators. Typically, these would be our syndication clients. You're expecting them to bring in 10% to 15% or more of the equity, right? Is that correct?

Mark Purtell:

Well, we'll provide up to 95% of the GP equity. And the operator will bring in that balance up to say 10%. And then the equity, the bulk of it comes from the institutional LP. Grand scheme of things, an operator can contribute .5% to 1% of the total equity and still be very much involved in a large deal.

Kim Lisa Taylor:

You said that some of the asset classes you're looking at (include) multifamily, you've done some student housing, some development projects. Any other types of projects that you do, like self-storage or other things?

Joseph Harriman:

Yeah, the benefit of the way we're structured is we have the flexibility to really look at anything. We have a 20% carve-out for non-multifamily investing in our fund. But our target and our primary objective is workforce multifamily. We look at any region in the country. We were just trying to build a diversified portfolio for our investors. We do avoid some states. Like California, just because of some of the complications there with investing. But we're pretty much open to looking at any region. We do focus on the secondary tertiary markets more than the primary markets. In the Midwest, we'll look at Iowa, Kansas City. For example, Ann Arbor, historic investments. We've invested in Phoenix and the entire Sunbelt. But really, open to any region.

Kim Lisa Taylor:

And what returns does your fund typically look for?

Mark Purtell:

We'll look at any projects with, let's say a five-year hold of a project level of 15% IRR. That's a base case, “Hey, let's take a look at it, let's dive into it.” We really encourage any operator to bring us a deal, let us say no, as opposed to assuming that we're not interested. Especially in the multifamily sector, we can get creative. We do have a hotel conversion project going in our previous fund right now. So it doesn't have to be the standard kitchen-bath remodel and change the management company. We can get creative with our deals.

Kim Lisa Taylor:

And so when you're saying you're looking for a 15% IRR, is that what's going to come back to your fund, or are you looking for that for the overall project?

Mark Purtell:

That's the floor for the project level. We try to avoid talking about terms of a deal before we see the deal, because it just tends to complicate things. Project global, 15% IRR. Yeah, we're happy to dive into it.

Kim Lisa Taylor:

Some of those deals may be out there. And then, what size deals? What's going to be the minimum investment that you would even want to consider?

Joseph Harriman:

In this fund, we're looking to invest usually $2 million to $6 million per investment. Again, we don't want to concentrate the funds, so we do try to be below that $6 million-ish mark. But we can go lower than $2 million, we're pretty flexible on that. We're just trying to have our total fund be diversified with reasonable bond investments .

Kim Lisa Taylor:

So you don't want to go out and do $20 million investments.

Joseph Harriman:

Don't want to do that. And we don't want to do $41 million investments.

Kim Lisa Taylor:

And then is there a specific ... is it more about the price of the project, or are you looking for certain, I don't know, sizes? Does it have to be 15 units or 30 units, or something like that?

Mark Purtell:

The smallest project we'll look at is roughly around $5 million project cost. At that case it's big enough where we can get down of that check size in there that makes sense for the economics. But more importantly, you start to get economies of scale in the project. Even $5 million deals are a little on the smaller side, but that would be the lowest we go. Probably most of our deals are north of $10 million, $10 million to $30 million, but we have done bigger.

Kim Lisa Taylor:

And then, is it a criteria that you're going to put in 95% of what the GP is putting in, or would you consider putting in less if it wasn't needed?

Mark Purtell:

Oh, we'd absolutely do less. In our experience, many operators though, they want to put as little money into the projects as possible because they want to do as many projects as they can. We'd be very happy to take a look at a project to require a smaller GP capital slice. And we can also be flexible on that, the 10%. Because some LPs require the GP to put in 15% or 20%. So we can fluctuate on there.

Kim Lisa Taylor:

You're saying that the rest of the equity is going to be coming from the lender, and then other institutional investors?

Mark Purtell:

Currently, in today's environment, it's going to be the total project cost, we funded roughly 60% debt and 40% or so equity. With about 90% of that, so 36% coming from the LP and then 4% from the GP.

Kim Lisa Taylor:

And then the LP equity, are you guys participating in that or helping to find that?

Mark Purtell:

We usually don't. The operators source that either through their own network or through some type of assistance with a broker.

Kim Lisa Taylor:

OK. For everybody on the call, you're still going to have to raise money. Bottom line, we can help you with the GP, we can help you with the balance sheet, those are important jobs. But you've got to bring in your own investors, they're not going to raise the money for you. And they'll help you get the debt, because that balance sheet is going to be hugely important. OK. How are you structuring your deals with operators? There's a variety of ways that people can do this. They can do it as private equity, they can do it as a joint venture, they can do it with side letters. What's your preferred structure?

Mark Purtell:

We typically structure a joint venture with the operator, which forms a company. And then that joint venture forms another joint venture with a limited partner. At the end of the day you have this new company pricing of the three parties, two joint ventures in total, and they buy the property. And we're not blind, we understand the LP is contributing 85%, 90% of the total equity. They're going to drive the ship in terms of major decisions, they're going to say when to sell, they're going to say when to refinance. And so we definitely respect them, and given that they are large equity in the deal we work with them on that.

Mark Purtell:

And then at the same point too, we look at operators to be a key component of this deal. We look at them to be experts in their markets, we look at them to know what pace the renovation is and how to manage the property. Everybody plays a role in our deals, and we definitely try not to step on anyone's toes in that regard. To your question on pref equity, we are not pref equity. All of our dollars sit in the same risk bucket as the operator and LP. Our capital structure is very simple. In all of our deals, it's debt and equity, that's it. Like I said, we're not pref equity, nor do we want to see it in our deals.

Kim Lisa Taylor:

Got it. OK. Something that everybody needs to be aware of is, this is a tremendous tool to be part of your GP capital stack. But again, they're not going to take the place of the LP, or the... But you would have no problem with... Or I guess, let me ask, would you have a problem with an operator? So you do this JV at the management level, and then they go out, do they have to raise money from one LP, or can they raise money from 60 LPs?

Joseph Harriman:

Yeah, it can vary. We're pretty much indifferent on the LP. We want to work with the LP that makes sense for the deal. If the business plan dictates that it's better to exit in three years and you have an LP that wants to come in and hold it for 20 years, then that might not work. You have to look at the business objectives of the underlying property and align your LP or LP capital stack with what makes sense for the deal. We're pretty flexible on that, but it also has to align with the overall goal.

Kim Lisa Taylor:

So just thinking of how this would fit into the structure with most of our clients, is that you would be a member of the management entity, of a syndicate. And then they would be creating a syndicate that would either have one or however many members, investors, Class A members. We usually split it into Class A, Class B. So the operator is going to be looking for those Class A members, whether they be one investor or be 20 or 30 investors, in order to make up the limited partnership or the actual passive investment portion of the deal. And then the other portion of the capital stack, of course, is the institutional debt that you're getting on that property. And as you guys mentioned before, that has to be non-recourse. So they're not going to participate with anybody who has a recourse debt in their capital stack. That makes sense. OK. So you are guaranteeing loans with operators on non-recourse debt. You guys have a $40 million fund. Is it already partially deployed, or you just still have a wide open slate?

Joseph Harriman:

It's wide open right now.

Kim Lisa Taylor:

Amazing.

Joseph Harriman:

We’re looking at deals. Yeah, it's been a more difficult environment over the last several months to transact, so we're being patient, we're looking at the market, and just trying to wait for the right deal to come along. But we continue to look at many deals a day.

Kim Lisa Taylor:

OK. And how long does it take you guys to make a decision?

Mark Purtell:

We move pretty quick, relative to some other groups out there. We've heard that Joe and I, being the main points of contact, we have an investment committee above us that has final say over of all our deals that we do. But if we see a deal we like, we move quick. And we can have funding and a deal locked up within three or four weeks.

Kim Lisa Taylor:

Great. All right. You got to get these guys in early, you can't show them a deal that's a week away from closing, that's not going to work for them.

Joseph Harriman:

Right. Yeah. We feel like we move fast relative to some of larger institutions. But yeah, we need a little bit longer than a week.

Kim Lisa Taylor:

The way that I can see this working for our clients would be that they would talk to you, develop a relationship with you, make sure that either they already meet your criteria or they bring people onto their team that meet your operational experience criteria, and you guys strike up your relationship. Then they go out and the operator goes out, finds the deal, comes to us. We can either help draft that management operating agreement with you guys as the partners, or you may have your own counsel that does that. And then we could create that syndicate so that you would be able to, as an operator, go out and raise the additional money that's needed to fill the gap between the loan and what Mark and Joe's fund is providing. Can you give us the name of your fund? I don't think we ever actually established that upfront.

Joseph Harriman:

Sure. It's Real Estate Opportunities Fund IV, is the name of the fund. CTC Wealth Management is the investment manager.

Kim Lisa Taylor:

All right. How do you participate as a member of the GP who's putting up the balance sheet, putting up some GP funds? How active are you two in overseeing the operations of the project and conversing with the GP? How does that look?

Mark Purtell:

Usually, once the deal's closed, we take a role of somewhat of a — depending on where they're with the LP spectrum — we're taking a role of, “Hey, we want to see quarterly reports.” We might have a phone call periodically once a month, maybe once a quarter depending on how the project's going. And from there we just let the project grow. We want to see the operators hitting their performer numbers. And if they're doing that and staying on top of the property, we're relatively hands-off in that regard. Obviously, if things start to go a little sideways, we're going to get a little more involved. But generally, we trust the operator to run the project.

Kim Lisa Taylor:

And do you retain in your management operating agreement some takeover in the event that something were to happen to the operator, or they just weren't able to perform?

Joseph Harriman:

Yeah, we typically have that clause in all of our agreements.

Kim Lisa Taylor:

And would the operator also co-guarantee that loan in most of your deals?

Mark Purtell:

Sometimes they do, sometimes they don't. It just depends on the operator and the property and the project.

Kim Lisa Taylor:

OK. Any other things that you want to talk about in relation to your fund, or anything like that? And then I want to change tactics and talk about your money-raising strategies.

Mark Purtell:

One other note too, when an operator has a property, the whole thing doesn't have to be bottomed off through due diligence and very wrapped up. We're happy to talk to an operator even before they've walked the property. Just, “Hey, this property looks interesting, your group might like it.” They send it over to us. We can size up the area, we can size up the property type and give some near-immediate feedback on that project. That way the operator knows where they stand with us, and if it works, great, we'll go to the next step with them. If not, at least they know that we're not a viable option. We're welcome to talk with anybody pre-PSA, post-PSA. And if the operator feels a need, we'll sign a confidential agreement if needed.

Kim Lisa Taylor:

And so, pre-PSA, would you want them to at least have a signed letter of intent, or are you interested in looking at deals before they even have gotten that far?

Mark Purtell:

As long as that first transparency with us where they're at in the process, it lets us know how much time to put on the project. Obviously, if they're through due diligence or in due diligence, this thing has a lot greater chance of actually closing. Where if it's, “Hey, this one just hit the market, we're going to walk through it. Does CTC care about this one?” We can judge accordingly and respond.

Kim Lisa Taylor:

Yeah. But just for the benefit of the attendees on the call, I don't think you should be sending them stuff off LoopNet, right? You really need to be pretty serious about the project and you've got more than just having seen it on the internet, and a better connection. We usually say the time to hire us — and I'm sure you're going to get involved even earlier than that — but the time to hire us is when you have a signed purchase agreement, someone from your team has physically visited the site and you've reviewed the financials. And if you can get the financials early, before you've spent any money on the PSA or gone to the site, that's ideal. But sometimes the brokers won't release that information until there is a purchase agreement, so you've got to get those three things done.

And then our statistics actually show that when our clients do that, then they're 85% likely to close on their deals. Yeah, we want to make sure that you guys don't burn bridges here. Make sure if you're talking to Joe and Mark you've got a viable deal, and it's more than just something you saw on the internet. And I suppose that happens, where somebody sends you a deal that you've already looked at with somebody else. Has that ever happened?

Mark Purtell:

It absolutely happened. It's happened. And at the same time too, we get a competitive landscape and it's going to happen. We get it. We're happy to talk them through with it. Yeah.

Kim Lisa Taylor:

OK. All right. I know that there's a lot of our listeners on this call that are interested in setting up their own funds, and of course all of them are interested in raising money. I'd just like to ask you guys, maybe logistics about your fund and some of your fundraising techniques that have worked for you, and maybe some tips that you'd like to share with our audience. I think that can be really helpful. Do you guys mind?

Mark Purtell:

Sure.

Kim Lisa Taylor:

OK, great.

Mark Purtell:

First of all, state the obvious, raising equity is very hard. From our perspective, we're investing out of our fourth investment vehicle here, which means we've had three previous funds. These have access, they have a track record, and our business model is very similar from fund to fund. So we have a network of investors, some of which have been with us from our first offering. And so we have a level of trust that's been built up there, and they understand the model. And it's very comforting for them and for us knowing that they can count on us to deliver. And likewise. This is contrasting with a single property offering, where an operator can go out and give the offering out, and then there's pictures of the property. The investor can drive the area, they can touch the building, they can even rent a unit if they want in that property. It's a much more engaging process with the property and the investor and the operator.

What we're doing here, it's known as a blind pool offering, and it's a much more difficult. Because the investor basically gets a stack of papers that says the manager's going to do the best to find good deals in the future and hopefully generate positive returns, and sign these papers and that's all you get. There's a much higher level of trust which needs to be established between the investor and the manager when raising a blind pool offering. That's one of the big differences between the single property and a fund. And it's not very easy just to jump from going from not only property into a blind pool offering without some type of intermediary set to build up your investor base and trust with your investors.

Kim Lisa Taylor:

Yeah. And you're mirroring the things that I tell my clients all the time. A blind pool fund, there's people that will tell you, "Well, why don't you just raise all the money for your deals in advance? It's a lot easier than raising after you get deals under contract." But it's actually not; it's much, much harder. A lot of investors will sit on the sidelines until you get deals under contract anyway. As you said, you're raising money based on a business plan that says, “Here's what we're looking for, here's the criteria, here's the geographic areas, here's the operators.” You're just spelling out, “If we can find things that meet this criteria, then we might buy them.” But there's no guarantee that you're going to buy anything.

A fund is hard, and you don't want to attempt it until you have a track record of doing specified offerings first, and that's four or five completed deals. Usually it's going to be enough to attract the investor interest. But we've also had some clients that have tried to do funds, and after they've done many, many tens of deals, and their investors just didn't like it, they preferred the specified offering model. It's always interesting to see how that evolves. But yeah, funds are hard. And I'd like to ask you a little bit about the history of your past funds. Did you start out, was your first fund a $40 million fund?

Joseph Harriman:

No, it was smaller. It was around $20 million. Yeah. Funded by some individual high net worth investors associated with CTC. And it was really a method. Our biggest selling point is we can build a diversified portfolio in an asset class that's uncorrelated to other markets. That's how we started. We had a couple operators that we had established a relationship with, so we had a business plan in place with operators that were trusted. And the trust part is very important to us, so having that established relationship really kicked off the first fund really well. That's how we first started.

Kim Lisa Taylor:

Did you increase the second fund? Was it a bigger fund, or just repeat the same thing over?

Joseph Harriman:

That was about the same size, the first three funds. We really ramped up in this last offering. And we have big plans to continue the growth of the real estate arm here, and our next fund we hope to be a lot larger. And we're going to continue with the same philosophy as we build out our relationships, our operator relationships, trustworthy relationships that are important.

Kim Lisa Taylor:

And how are you building those relationships? Where are you meeting people and how are you developing the relationship and staying in touch?

Mark Purtell:

A lot of it is a lot of repeat investors, and then it's referrals. And so our investor base is growing from the first fund to the current fund, and it takes time. And just want to go on record here that we are not raising money right now for an offering, and at this time we don't have any plans for another offering. So we're not taking on new investors right now.

Kim Lisa Taylor:

But you are looking for operators?

Mark Purtell:

Operators, reach out to us.

Kim Lisa Taylor:

Yeah. OK, great. And is this particular fund, just again talking about the fund mechanics for someone who might want to try a similar fund on their own, is this particular fund a 506(b) or a 506(c)?

Mark Purtell:

Well, this one's a 506(b). Step on your toes a little bit here, Kim, and say, cannot solicit with a 506(b) offering. And then there's a carve-out there that you can't have non-accredited investors in a 506(b). How'd I do? Did I do OK there?

Kim Lisa Taylor:

You did OK. Yeah, that's right. And you took the time to develop the relationship, have suitability conversations with all of your investors prior to showing them your fund docs and telling them about this particular fund.

Mark Purtell:

Totally.

Kim Lisa Taylor:

All right, out of curiosity, this is your fourth fund. How long did it take you to raise the money for this fund?

Joseph Harriman:

It was relatively quick... We talked about our current stable investors. We had about a four- or five-month process of doing some roadshows, some webinars, updating everybody on where we're at with our previous funds and going over the strategy in the fourth, and just having a lot of one-on-one conversations. I'd say it was relatively quick, but I don't know. It worked out well for us.

Kim Lisa Taylor:

And did it take less time to raise a commensurate amount of money for this fund than it did for your first three funds?

Joseph Harriman:

No, it took more time. We really expanded our investor base on this fund, so we did take some more time to do more education.

Kim Lisa Taylor:

OK. And if you don't mind sharing with us just approximately, how many investors are in this $40 million fund?

Joseph Harriman:

We're just over 100.

Kim Lisa Taylor:

100 investors. OK. And do you find that people that have invested with you before invest more? Or the people that are coming in first time, never invested with you before, do they tend to invest the least the amount they can? Or how does that work?

Joseph Harriman:

I think it depends. It's very investor-dependent on how much exposure they have to real estate. Typically, we get an increased allocation, but it really depends on their personal investment situation.

Kim Lisa Taylor:

How about many investors do you think you have in your database?

Mark Purtell:

It's a multiple of 100 or so.

Joseph Harriman:

Several hundred.

Mark Purtell:

Yeah. And one thing to add too is, when talking with investors, you're talking with people who have ranges of experience. Us as the manager of the fund, we need to be in a position to be able to answer very basic questions as well as very advanced questions. It's imperative to understand your business model, your fund docs, and as well as be able to respond to questions. Because if you can't provide an answer to an investor in the first meeting, well, there probably won't be a second meeting.

Kim Lisa Taylor:

Right. And you said you went on a roadshow. Was the roadshow really to just introduce the fund to people that you'd already vetted, or was it to just talk about your company in general to new people?

Joseph Harriman:

It was people we already pre-qualified, so it was really more of knowing that they were eligible to invest and then educating them on what we were doing. That was our process.

Kim Lisa Taylor:

OK, great. And any other tips that you would offer to people who are thinking about doing a fund, or just fundraising in general, even for a specified offering?

Joseph Harriman:

I would go and add on to what Mark said about it just taking a long time. Especially with investors, the due diligence process, especially if you get to an institutional level, it takes a very long time. You really need to start a lot earlier than you even think you need to start, that's my main tip.

Kim Lisa Taylor:

And do you guys have other institutional investors that you've worked with as LPs that are like, “Hey, if you're get into any more funds, offerings, let us know”? Can you help facilitate those introductions?

Mark Purtell:

We've started looking into that process, but we haven't expanded enough to really say we're at that point.

Kim Lisa Taylor:

OK.

Mark Purtell:

One other thing too, to add onto Joe's tip there, is meeting with investors, obviously you want to grow the fund, you want people to invest. But we also spend a lot of time telling people why they don't want to be in this offer. More of just an education, because the last thing we want is somebody to come sign papers and then a month, two months, six months later, go, "Well, I don't want to be in this." So we're very transparent in talking through the risk as well as the benefits of this type of offering and structure. Because put bluntly, these offerings are highly illiquid. It's not like a share of stock on a stock exchange where you click a button on Tuesday and you're out of it. You got to let your investors know where these offerings work and how they work, because many people just don't have experience with them.

Kim Lisa Taylor:

All right. Well, let's go to questions. Hugo asks, "Can you please define an operator?"

Mark Purtell:

Sure. We look at a person as an operator as someone who is out there looking for property, who's looking to buy property. Someone who is going to get a contract on property and run the day-to-day operations of the property, or oversee them. They don't have to actually be the property manager, but they need to be able to contract the property manager. They need to be able to develop a business plan, and they need to be able to run a property from purchase to the sale.

Kim Lisa Taylor:

OK. Daniel asks, "Not sure if it was already mentioned, but is there a minimum unit count for multifamily?"

Mark Purtell:

We did mention the project size of at least say $5 million, preferably $10 million or more. We do pay very close attention to price per unit. Generally we like to see, within a market, we like to see price per unit to be say lower half of the product type. We generally avoid Class A product, which tends to have a higher price per unit.

Kim Lisa Taylor:

Oh, you guys prefer Class A?

Mark Purtell:

No, we prefer B and C. We stay away from Class A.

Kim Lisa Taylor:

Got it. Right, right. Yeah. And that's where most of our clients are, is in the Class B and C space. They're not out trying to buy the Class A properties because the cap rates are usually so low. Yeah. All right. 

And Daniel asks, "Is it only co-GP?" Correct. And I think we answered that, and the answer is yes. You're not bringing in any of the LP money from your fund. That is correct.

Mark Purtell:

That's right. There are some situations where we'll come in as an LP, depending on terms, but our primary focus is co-GP.

Kim Lisa Taylor:

OK. And an anonymous attendee asks, "How high of a loan can you guarantee?"

Mark Purtell:

Well our fund is $40 million, so that's net worth component. The lender sometimes has some discretion on that to go higher, but that's a ballpark range of where we sit.

Kim Lisa Taylor:

And then Rick asks, "How do you typically stack/structure fees and promote?"

Mark Purtell:

It's deal by deal. But we would say that we respect the acquisition to be an asset management fee from an operator. And because these fees that operators need to stay in business, they keep the lights on, frankly. Operators, really, they make money when the property sells. They're not making money from cash flow, just general nature of a pref. It's in their preferred rate of return, that it's very backend loaded. We do respect the fee structure. As far as promote, it's very deal by deal. It's hard to throw out a blanket statement just to an open-ended question like that, but happy to talk through it with anybody who has specific questions.

Kim Lisa Taylor:

All right. And let's see, anonymous asks, again, "Just curious, what are the typical returns to your LPs in your fund? What are you offering your investors?"

Joseph Harriman:

Yeah, as Mark mentioned, we look at these properties at the IRR on a project level. But when we are negotiating the co-GP side, the fund itself is getting part of the promote income, or getting all the promote income from the underlying deal. If you look at the project level of an investment at a 15% IRR, our investors are going to make more than that project level because we're passing through the promoting income to them. Obviously, it varies if you know how well the deal does. But that promote income can add substantial amount to the investor IRR.

Kim Lisa Taylor:

Would it be fair to say, if you bring in 90% of the GP equity to a deal, that you’re going to take 90% of that promote? Is that how it works?

Mark Purtell:

No, it's actually less. It's more in favor of the operator than 90%. And we do this because the operator is running this deal, and so they need to be compensated for it. It doesn't do anybody any good if we attempt to try to keep all the profits, it just doesn't work well. It is not a 90-10. But like I said, it's deal by deal, so that's how we negotiate it.

Kim Lisa Taylor:

I've worked with a lot of private equity companies, and one of the things that we do as a firm is we can represent our clients in a transaction with a private equity company where they're setting up those JV structures, whether it be at the management level or at the LP level. Most of the times we see the private equity coming in at the LP level. And usually there's a whole slew of reports that they want and parameters that you have to meet. And you have to pay close attention to that, because if you fail on any of those things, then they can exercise takeover rights and force you out of the deal, and maybe strip even your investors of the equity. But from what I'm hearing from you guys, it sounds like you have a much more reasonable approach and you also understand that if the operator isn't making money, then the deal and the investors are going to suffer.

And all of you listeners on the call should be aware of that, and you should be explaining that to your investors. So if you have investors that you feel that they're trying to pressure you into giving them everything and you get nothing, those aren't good investors for you. Because if you aren't making enough money to stay invested in the deal, then you're going to have to go out and get a job or do something else to feed your family, and then this investment is going to suffer. And that's how you explain it to investors that pressure you that way. Say, "Look, if I'm not making money on this deal, I'm not paying attention to your investment. You need me to be making money on this deal." That's a good way to counteract that argument. 

Hugo asks, "As part of your vetting process, do you do anti-money-laundering checks and KYC checks, or bad actor checks on the operators?"

Mark Purtell:

We do run a background check on every operator that we do a deal with, so it's fairly comprehensive. But case by case, in terms of the analysis of that background check.

Kim Lisa Taylor:

And then about flipping it the other way, what about when you're doing your own funds and you're raising money for your fund, are you doing anti-money-laundering checks and KYC on your investors?

Joseph Harriman:

Yeah, we do have KYC responsibilities at management level. Yeah, we're required to do basic AML, KYC on our underlying investors as they're coming into the deals.

Kim Lisa Taylor:

Great. OK. And all of you listeners should be doing that as well. 

Hugo says, “Thank you.” Let's see, Luis asks, "Do you only invest in the lower 48? How about in Puerto Rico?"

Mark Purtell:

We could invest there. We've talked with our accountants, they said it's fine, we just haven't. One thing that we are concerned about, especially in the southeast part of the country though, of course, is insurance rates due to climate change and hurricane risk. Those markets are somewhat highly scrutinized. But technically, yes, we could invest in Puerto Rico.

Kim Lisa Taylor:

One of our guests asks, "Are you interested in storage facilities?"

Joseph Harriman:

We have done some self-storage. Again, it's not a primary focus of the fund, but depending on the opportunity, we would look at it.

Kim Lisa Taylor:

Would you please go ahead and give us your contact information? So if anybody wants to get in touch with you, and maybe if you could also type it in the chat, that would be wonderful.

Mark Purtell:

Sure. The phone number is 312-863-8079, and that's a direct line. And you can email us at wealthmanagement@chicagotrading.com. Our website is ctcwealthmanagement.com. Any one of those methods, we're happy to talk with any operator, with a deal or no deal in hand. We also encourage you to just reach out just to have a conversation. Just, let's start the process. And we promise we don't bite, so feel free.

Kim Lisa Taylor:

And then, go ahead and give me a phone number. I'll go ahead and type it in the chat right now. Phone number.

Mark Purtell:

312-863-8079.

Kim Lisa Taylor:

And we've got ctcwealthmanagement.com. And you mentioned another?

Mark Purtell:

The email, wealthmanagement@chicagotrading.com.

Kim Lisa Taylor:

And tell us about Chicago Trading. What is that company's business?

Joseph Harriman:

Sure, yeah. Chicago Trading Company, it's a global options market making firm, proprietary in nature. Really, trades liquidity around the globe in the options markets primarily. It's been around since 1995, over 600 employees, actually 700 now. Offices in London, New York, Chicago, and Colorado. Yeah.

Kim Lisa Taylor:

Very cool. All right. OK, great. And let's see, Daniel asked, “To get in touch...” Let's see. No, we've already answered that one. OK, you've got that information now. Hugo, you want to re-ask that question, you said I was referring to the fund also. If you could re-ask that question, that would be great. And let's see. Do you all consider mixed use as well as multifamily mixed with retail? Would you consider that?

Mark Purtell:

Well, there are some agent requirements to get agency debt with multifamily that it can't be certain percentages of retail. And we will accept some store level, ground floor retail in projects. But for the most part, we want to see the bulk of the revenue from that project coming from multifamily. North of 85%, 90% coming from the multifamily side of the mixed use project.

Kim Lisa Taylor:

Well, and I know you said you would co-guarantee non-recourse debt, so are you only referring to agency debt or will you also co-guarantee CMBS loans if they're non-recourse?

Mark Purtell:

We take a look at those as well as local and regional banks, if that's the case.

Kim Lisa Taylor:

Here's a question. Keith asks, "I have a deal I'm looking at that the seller would finance, but they want 20% down. I'm sure that once we have it under contract, we can find investors to fund the down payment. The seller's asking for proof of funds. Have you seen any way to address this?"

Mark Purtell:

Once again, something like that, we're going to be looking at it from the perspective of, how much are we investing in a project? And where do we line up with that deal. We're not going to just offer proof of funds without having some type of arrangement lined up first.

Kim Lisa Taylor:

So you would look at the deal, and if it was something you were interested in and said, yeah, this is one we'd go forward on, then you could help with that.

Mark Purtell:

Absolutely.

Kim Lisa Taylor:

Yeah. All right. Good question. That was a great question, Keith. OK. And then Hugo said his question was answered. Thanks, Hugo. Michael says, "Any thoughts regarding yesterday's White House statement as to possible rent control or rental cap increases and how it impacts your investment?"

Joseph Harriman:

Yeah. Rent control is definitely something we follow closely in all of the states. That's on the agenda of a lot of states. It's an important part of the analysis, and if there's some stringent rent control that potentially could go through, we have to look at that from an analysis perspective. It is something that we follow closely.

Mark Purtell:

Another thing to add on there too, is depending on your source, there's a shortage of housing units in the United States, somewhere around 4 million housing units needed in the next 10 years. We do see a long-term continued demand for multifamily, and we definitely see our role as a group that provides a safe value proposition for the tenant when they go and run to the property there. We definitely are very top of property maintenance, and we don't want to run a property that's in disarray and getting worse. So we stay very much in close contact with our operators to do the right thing.

Kim Lisa Taylor:

Excellent. Well, we're going to go ahead and wrap up. If you want to reach us, go to syndicationattorneys.com. If you click the button on "Schedule a Call", then you're going to get some options on scheduling with one of our team, or even a scheduling call with me. You have the contact in the chat. Make sure you save the chat. If you don't know how to do that, to the right of where you would type in your chat there's three little dots. If you click on those dots, you'll get a popup that says "save chat." And you should be able to do that. So if you want to save that contact information, or if you want to just save the actual individual chat entries, there's should three little dots next to each one of those that you can click on and save that information.

We thank all of you that came today and took time out of your day to come with us and come see us. If you haven't subscribed to our podcast on your favorite podcast platform, please do so. We actually just got some statistics that said we're in the top 25% of all BuzzSprout podcasts, and that's the software system that we use to put our podcast out on 20 different podcast platforms. So we are growing our audience, and we appreciate all of you that take your time to listen. This is live-streaming on YouTube, so if anybody wants to go and listen to it right after the call again, if you felt like you missed something, it is there. And then, we will be putting out on the podcast platform after it's been edited.

Again, thank you all for your time. Mark and Joe, thank you so much. This was really interesting. Love your concept for your fund. I love that you guys were willing to share with our audience some of your fundraising tips and some of your experience, that's always hugely valuable for our clients and our attendees to listen to. Hope everybody has a really great day, and we will be talking to all of you soon.

Mark Purtell:

Thank you.

Kim Lisa Taylor:

Thank you.