Real Estate Capital Markets: Main Street is ON FIRE

Anthony Kazazis:

Good afternoon everybody. My name is Anthony Kazazis and I am the director of the NYC Real Estate Expo as well as the NYC Network Group. And today I would like to welcome you all to the real estate Capital Markets Main Street is on fire webinar. Main mainstream investors have been flooding the real estate investment opportunities in the recent years, in this webinar we'll sit down with sponsors, operators who have been immensely successful in raising money from high net worth investors and LPs. We'll discuss their perspectives on investors', appetites, motivation, and keys to success in raising money and from the LPs. We'll also talk about weighing the options as it pertains to the LPs slash HNWI versus institutional investors. This webinar is co-sponsored by We Lend and Geraci, LLP. We Lend is a private money lender focused on servicing real estate investors by providing quick and low capital on their investment properties.

We Lend's approach to lending is centered around the investor, therefore allowing the investor to focus more on their investments and less on their loan process. We Lend was founded by a group of real estate investors whose emphasis was on acquiring and improving distressed properties. So whether or not you are an experienced real estate investor, We Lend's team has the qualifications to exceed expectations and can assist in the expansion of the real estate portfolio, your real estate portfolio. Geraci LLP is the nation's largest law firm focus on servicing the private lending industry. Geraci is fully vertical integrated to serve the private lending business from closing documents, national compliance, security expertise, to full closure litigation and bankruptcy. Kevin Kim leads Geraci corporate and security division. They have created thousands of funds, syndications, and other capital vehicles for lenders, developers, and sponsors across the United States. Today we have our speakers, Kevin Kim, partner at Geraci, LLP, Chris hanson, principal at Hanson Capital Group, Tony Ingoglia, Chief Strategy Officer at Socotra Capital. And unfortunately, Steven Fischler, chief executive officer from RMWC, unfortunately will not be able to make it today. Guys, let's start off with you, Tony. Just give us a little one minute breakdown little bio short bio on yourself and your company.

Tony Ingoglia:

Sure. I'm Tony Ingoglia, partner, chief strategy officer here at Socotra Capital. Socotra Capital. We are a direct real estate bridge lender, hard money lender. We've been operating since 2008 closed just over 1,500 loans, just over a billion dollars in loans funded. And we typically target business purpose loans that tend to have a lower loan to value, that tends to be our niche specifically. That's like small balance commercial type properties. Our portfolio average is typically around a 50% LTV. We close these loans primarily through two Reg D funds that we manage here internally. The first is the Socotra fund, which is also has a subsidiary REIT, which Geraci has been very instrumental in helping us get that up and running. That fund has about 200 million dollars in capital. And then we have another Reg D fund we call the Socotra Opportunity Fund, which has just under 25 million in capital. All of it is balance sheet lending. We don't use any leverage. We often like to refer to it as "caveman capital" because it's pretty simple and straightforward. So we also service about 50 million in separately managed accounts, kind of sidecar loans. But those loans are typically ones where they present some type of concentration issue within our funds. So that's kind of our operation and kind of me in a nutshell.

Anthony Kazazis:

Thank you Tony. Chris.

Chris Hanson:

Yeah, thanks Anthony for having me today. So Hanson Capital Group is a firm that encompasses three different lines of business development of apartments and industrial space bridge lending and debt lending through mortgage banking operations and then value add portfolios. So we have funds around all three of those activities. We've been doing hard money lending or private lending since 2008. We operate in California, Arizona, Texas, Colorado, Florida a few other states around the Sunshine Belt about 150 million in assets under management and we focus more on short term fix and flip or commercial stuff. Catering mostly to the residential space, residential home flippers a lot of institutional experience over the years, but predominantly that consumer or small operator focused banker. We do everything from $50,000 stuff up to in excess of 10 million through some agency relationships. Kind of everything in between.

Anthony Kazazis:

Great. Thank you Chris and our moderator, Kevin.

Kevin Kim:

All right. Well, I mean Anthony gave me that wonderful intro earlier, so thank you very much for that. But yeah, hi everyone. My name's Kevin Kim. My area of expertise is corporate and securities. I've been doing this about 10 years now. We've formed, my team and I have formed funds across the country both in real estate finance like Socotra, but also for developers and builders. And then we also do alternative type investment vehicles for hedge funds and stuff like that. We focus in the middle market. We've been very lucky enough to build a very strong presence in the private lending industry, so we're definitely focused on that. And we've been lucky enough also work with sponsors such as Tony and Chris over the years and see them grow and be successful. And so we really wanted to have this webinar. Unfortunately Steven couldn't make it today because of a personal issue and wanted to have the whole country represented, but unfortunately he couldn't make it because of personal needs. But today's webinar will be very focused on capital raising and open discussion about that. So looking forward to having it.

Anthony Kazazis:

Great, thank you. Kevin. Before we get started, please at the end, probably about maybe 10 minutes before it ends, we will answer any questions that you may have. Please put them into q and a and in case we can't answer them all, I will copy them and I will send them to everybody I believe over the weekend. Maybe by Monday you'll get a copy of the webinar, a copy of the video, as well as all the information how to reach out to Tony and Chris and Kevin as well as Steven. Without further ado, ladies and gentlemen, Kevin Kim.

Kevin Kim:

Thank you very much, Anthony. All right guys, let's get started. So this going to, we're going to have a very good time with this. So the market right now, the whole title of this webinar was the market is definitely on fire from a capital standpoint, and you kind of introduce yourselves and your companies of what you guys are doing. But from a capital raising standpoint, just confirming both of you are focused on raising money from high net worth investors, correct?

Correct. Accredit investors. Okay. So let me ask you this. So what is it about real estate and real estate finance that's been attracting high net worth investors? Because I mean, both of you been doing this for 10 plus years now and we've had a lot of ups and downs when it comes to capital and they're always capital constrained. But I feel like lately past year two investors have been flooding the market looking for yield not just from Wall Street, but from Main Street as well. So give us your take on that to start. Tony, you want to start?

Tony Ingoglia:

Sure. So yeah, high net worth individuals, they often have a diverse portfolio to begin with, and our asset class of real estate finance, it tends to offer a little bit of a different flavor of an asset class that they don't traditionally have exposure to. So it's a variation of real estate, but with some downside protection, it's not correlated to the public markets. If things go sideways, you still have a real hard tangible asset. The things that I think that they like about this asset class is that when it is underwritten and addressed kind of conservatively, it can deliver a high risk adjusted return relative to what else is out there right now when you look at other conventional fixed income in this kind of low rate environment. So people are getting creative with their overall portfolios and they look at credit slash real estate finance as a way to augment an overall portfolio. And like I was saying, if you're addressing it in a fairly conservative way, I think it can be a good compliment. So I just always advise high net worth individuals, do your sponsor homework, keep those same principles that you have with the rest of your portfolio, be diversified, be diligent. But I think it has been a growing asset class for high net worth individuals in general,

Kevin Kim:

Chris, because you're on both sides. You're doing the, you're working on equities and debt. So

Chris Hanson:

Yeah, I love that question and agree with a lot of what Tony said there. We spin it a little bit differently. When I started lending and started taking outside money to lend in 2009 it was a totally different environment. We had a fund put together that we were lending out at 18% note rates to the borrower, and we were paying our good old days, the good old days, right? And big rates. And at the time, coming out of the recession, we were lending, we were always LTV constrained and conservative because we were real estate investors primarily before we were bankers. So the banking has just been such a great auxiliary or auxiliary product to us as a place to store capital. We consider it like a high yield savings account. And now with the help of your firm and getting the restructure integrated into that to get the 20% tax benefit it's just one of those things where we take an approach to how people manage money from a conventional standpoint of stocks and bonds and risk allocation and things like that.

We really view lending as kind of our bonds. It's just a really high yield bond because we've got I don't know, north probably 150 loans on the books today. We took one property back in 20 and the first one we took back prior to that was in 14. So we are fairly conservative with our lending and underwriting practices because that's all we want to do is have this business, we collect the payments and if they don't pay or there's an issue, we have a better outcome via fees or defaults or even if we had to take the collateral. The market has been friendly to us in this time. But back to the fundamental of your question, what is it that attracts people? Real estate has always had kind of that I don't know, label of the info guys selling get rich quick and all that kind

Kevin Kim:

Little bit. But lately it's been much more attractive. People are like, I have never as an attorney, investors don't talk to the, they talk to you guys, they don't come to me, but they're coming to me now. And so like I don't know what to hell, how to help you talk to these guys. But to that extent, there's that much appetite and it's been making me wonder they didn't like this stuff two years ago as much. Now they love it. What's going on?

Chris Hanson:

Well, what's even crazier about that is we have a lot of investors coming from your JP Morgans and your UBS and stuff like that, and those guys wouldn't even give us the time of day. They didn't want to talk to us because any money that got sent to guys like Tony or I in the alternative space was money. They couldn't charge a fee on that paradigm has shifted because now it's like, Hey, if I'm not offering a guy in the alternative space, I'm no longer competitive because my peers are starting to work with more guys in the alternative space. So we're having guys who manage capital for wealthy people come to us daily saying, Hey, what kind of products do you have? Which is why we worked with you guys on the debt fund that we launched this year just to have a compelling offering that catered to guys in the R I A space where we could get them exposure to debt.

And then when they talk to us, our narrative is, Hey, you want to do real estate and you don't want to worry about it, we're going to get you better than what the markets typically offer. And it's a fairly low risk scenario. I won't say no risk, but it's definitely lower risk than development. We manage our three buckets in terms of banking is safe, 10% return expectation, value add is a little more risk, but better returns. And you get all the benefit of owning real estate. Like 15% expectation and development is 20 i r r or better. But you've got some cycle risks, so you need to allocate appropriately.

Kevin Kim:

And this goes to another question is, so we we're targeting real estate and real estate debt investments and you're viewing it and you're viewing it as a much more conservative but high yield type product because of the risk adjustment tied to real estate. So that tells me that you guys are both not chasing that high leverage on the real estate. But the common thread also seems to be that you're exclusively working with accredited high net worth investors over the years. You guys have been doing this for some time now over the years, there must have been some, I guess temptation to do the whole crowdfunding or raise money from the masses type arrangement. Why not go that direction?

Chris Hanson:

So Tony, I'll take this one first if you don't mind, please.

Kind of a two-pronged approach to that through the real estate stuff, lending was kind of an ancillary business for us. It facilitated more real estate transactions by having the lending capability. And we worked with institutions extensively in 2010 to 14 and two things happened. One is we got more successful internally. We realized that the better we performed with institutions, you don't get a pat on the back. Whereas with main street investors or high net worth people, they were really thrilled at the results we were producing and there was a lot of gratitude and in turn that was well

Kevin Kim:

Energy, a lot more energy with that

Chris Hanson:

And we get to

Kevin Kim:

Help. But at the same time, the smaller investors, though, the non-accredited investors, the public investors mean those types of investors are not targeted by our industry a lot. And that's the question, how come you guys haven't kind of gone that direction and raised money from those types of folks?

Chris Hanson:

I've watched the guys that run reggae funds and go non-accredited sure and start bringing guys in at a thousand bucks a pop. We start at 50 right across all of our investments. And unfortunately for people that are not accredited yet, I think those are hard because the administration of an account that can invest a thousand dollars, there's no money in it. It's not a big margin business. And I don't think, I mean our company is not geared to be able to take thousand dollars investments and give them the proper customer service and customer experience that they need as well as maintain and manage them into investments. It doesn't pencil for us at those small scales a

Kevin Kim:

Lot of work and not a lot of great return for you guys.

Chris Hanson:

And it's kind of like, okay, if you've got a thousand bucks to invest and we can make you 10% a year on it, that's probably not impactful. So we're also not fulfilling our mission, which is helping our partners achieve financial success, the real estate and real estate investment. We can't help somebody with a thousand bucks that we can that has a hundred thousand or a million bucks not as impactful. So it doesn't serve our purpose as well.

Kevin Kim:

Tony, I know we've had this discussion. I know you, Adam and I have had this discussion about non-res and lower tier investors and so I want to hear your take on it as chief strategy officer. I got to hear it. Yeah,

Tony Ingoglia:

We have debated this. It is appealing in some elements but it comes with a lot of headaches I think as well. There's lots more compliance that you need to do in order to raise on from the smaller and unaccredited market. And I also do think there is a little bit of this asset class behaves very differently than most investments that people are typically exposed to when they first start investing. I think that they're more accustomed to being able to, Hey, I invested in this but my plans have changed and I need to go a different direction. And you can't really do that so quickly in real estate and in real estate finance in our opinion. So echoing Chris's sentiment, there has been a draw or the allure to try and raise capital from this other segment. But when you have a good track record and you're existing accredited kind of network is able to meet your capital needs that you have set forward, it doesn't really make the juice worth the squeeze, so to speak.

Kevin Kim:

And that's a good way to put it. Yeah,

Tony Ingoglia:

If had we had the gaps, Kevin, maybe I'd be much more inclined to go after that market, but a little stress now and then is good in our business, but we're not at a point where we feel like we're failing to meet our pipeline needs and need to go this extra avenue. Right? Because it does entail a lot more compliance. And then the other thing Chris touched on is the economics of it. When you access the more $1,000 type investor, what problem are you really solving for them? And then also just the added costs on you, the sponsor and what does it end up? Does it end impacting the overall investor return? Sure. Profile for the asset clause.

Kevin Kim:

There's the cost of acquisition of that investment,

Tony Ingoglia:

That element as well. So I think it's just a better fit right now. Could that change? Yes.

Kevin Kim:

Yeah. I'm not nixing crowdfunding, I'm not speaking ill of it. I think it's the right fit for the right company if they have the capabilities and back office and the tools to do it. I've seen some great success in companies that pursue crowdfunding or do a public option or something like that. And lately you're starting to see companies eventually go public and stuff like that. It's doable. It's just exactly, I think that you guys hit the nail. Maybe the juice is not worth the squeeze. But another thing that we tell our clients is that especially when you're operating in real estate, it's the transaction size that kind of stops you, right? Because you can't do much with a $5,000 ticket investor. It's really tough. You need a lot of those to fund even one deal. And when you're doing this at scale, it becomes a massive challenge to be able to fund even one deal.

So that's another thing. And on top of that, from a risk standpoint, as the attorney on the webinar, I find that there's a lot more risk in dealing with non-accredited investors that $10,000, that $25,000 is a lot of money to them, which makes it the man more, less likely to be passive, more likely to be activists, more likely to be calling you the sponsor every week wondering what is happening with their allocation. Cool. But I like the response. Let's go into in direction on the capital rate side, and I wanted to bring this up because this has become a much more commonplace strategy even for new sponsors is the, I guess the gatekeepers of the world when it comes to the high net worth investors, the registered investment advisors, the broker dealers, the wealth management companies. Do you currently work with them in raising money and what are your thoughts on working with them For our listeners who are thinking of trying to market to them or work with them?

Tony Ingoglia:

Cool. Yes, we do work with a number of RIAs presently and a couple of multi-family office type advisory firms. I like frankly working with that kind of professional side of the business mostly because they have a clearer picture of the investors overall portfolio. I always tell people I'm an investment manager of just this one asset class. I don't know what your overall portfolio looks like, what your liquidity needs are, what your financial planning picture looks like. So the R I A slash advisory firms, they do a much better job of selecting who within their clientele is a good fit for this asset class and what's the appropriate bite size to start with. So I encourage and appreciate working with that professional side broker dealers, we have not worked with very many. We don't have any listing selling agreements or anything like that. My read so far has been that the fee structures are a little bit different between an R I A and a broker dealer. And it tends to just, I think holistically not be, it's not as conducive to our asset class on the broker dealer side, mostly because they're more of a transaction fee type schedule, whereas the R I A is more of a portfolio holistic, what's of the appropriate liquidity returns. It's a bigger picture type fee structure that I think tends to be a better fit for our asset class. So I don't know if your experience has been the same, Chris?

Chris Hanson:

No, it's funny, Tony, I echo just about everything. Again, we work with the same types of groups on the RIA side and kind of shared family office and I'll say some of these kind of more leading edge wealth managers that focus on finding sponsors and more creative ways to invest outside of the traditional stuff as a component of their practice. They do all the traditional wealth management. It's kind of like the accredited versus non-accredited. One of our core values is creating wealth for our investors. And just like I can't make the economics work to help a guy with a thousand bucks, it's really hard for me to go to a broker dealer and pay a three, five, 7% commission on capital contributed and do the customer a good service. It's just cost prohibitive. For a business that operates on low margins, we're usually somewhere below 2% arbitrage between the cost of capital we're paying to our limited partners and what we're collecting on a note rate.

So we don't have 5% commission to pay raised and usually those guys want it paid out our side, not the client side, which we understand. We also insist on transparency. If there's a fee that's being paid at all, we want it upfront and disclosed on paperwork between the investor and ourselves and whoever the intermediary might be. And we've just had a lot of success with those guys that manage wealth and get it and understand that real estate needs to be a component for their clients. And we love working with those guys because they do a lot of the sale for us. They understand our product, they understand our fund, they understand our docs for a client. A lot of those guys invest themselves like partners at multifamily offices will invest, they'll see how it works and then they start sending guys and then we're not doing much. So it all comes down to that efficiency and the fundamental economics of the business. So when we can get that ongoing referral relationship set up, it's really easy. Our council internally works with Tay a lot at your firm and we've cut down 90% of the coming back to you guys because he can just manage that right directly with those groups.

Kevin Kim:

That's another question that comes with this. So a lot of folks, it's kind of a black box to new sponsors. We want to work with RIAs, but how do we get our foot in the door? And a lot of every group is kind of different. You've got some folks that say, well, you got to be on the Fidelity, Schwab, td, whatever platform you have to, we can't allocate to you if you're not right. And that's one subset of the advisory groups out there. And then there's other groups that say, we don't care, we're an independent, we don't need you to be on the platform. So have you guys had to navigate those headaches and is there a particular size that you need to be able to sit with those guys?

Chris Hanson:

So we've had cursory conversations with those guys a few times and we hear the numbers that get thrown around if you're on those platforms. We haven't gone down the path kind of as Tony alluded to, we haven't been capital constrained where we need to go reinvent the wheel or reinvent that business model. At least at our firm our personal network and community outreach type stuff seems to keep a pretty steady flow of capital coming our way, which has been great organic growth for us.

Kevin Kim:

Tony.

Tony Ingoglia:

Yeah, I mean my experience, the RAs, they want to see the holistic portfolio and so it does become a little bit of, it simplifies their lives to have things run through a custodian. And a lot of them, they're leveraging Schwab or TD Ameritrade like you said, to be their custodian. They like having the recording all in one place to get it all there. It does make their lives easier and we're our client the same as the end allocator. So you try and do as much as you can to make their lives easier. And I have always found that the RIA registered investment advisor community, they've been the most open and have helped also our industry I think go through a little bit of a maturation of this is what we need to see, this is how we do our homework. People that are wondering how do you get your foot into that door?

They are looking to make allocation decisions for a lot of clients, so they want the investment to be a little more accessible. They want there to be a track record, they want there to be data for them to be able to do their compliance and research. And it is a process. It's not something that, and Chris can attest this, you build one relationship, it's like a faucet that's kind of slowly turns on. It's like he was saying, normally it starts with the partners at the firms are the first ones to invest and then they kind of slowly introduce the rest of their clients to it after they themselves have dipped their toe in the water. So you can't have these expectations that you're going to land one client and then they're going to put all everyone in it tomorrow. The simple fact of the matter is not all of their clients are accredited, likely not all of them have a portfolio that's suitable or set up or their needs aren't going to afford them the ability to access this asset class. Yeah, you mean they are more, how should I say? They demand more of you I think as a sponsor, but I think it's all good hygiene for us to do as sponsors because I think it benefits all the investors in the long run.

Kevin Kim:

Great. And that begs the question also the evolution of your guys' capital structures and business because we all start out some way somehow starting in this space as usually investors or operators and then we evolve. And that's the next kind of question I wanted to ask you guys. Tell us a little bit about your guys' evolution in raising capital. What made you choose to go the route of fund? A lot of sponsors still go direct. They still syndicate and in lending it, it's a little more conducive today. There's a lot of opportunities to correspond and stuff like that. So what made you choose the direction of pooling assets and setting up a fund for raising money?

Chris Hanson:

I'll hit this one please. Yeah, so we operate in, I think there's three kind of areas. One, we've got individual deals. We'll still fund an individual loan with an individual investor. And I know we have over 80 loans in that capacity right now and before we launched the fund because we shut our debt fund down in 14 and relaunched it in 21, the economics are better for not only the sponsor but definitely the limited partner by adding the warehouse and the leverage to the fund. And then just the business process of getting a borrower and getting him to agree to terms and then getting an investor and getting that to line up and all that back and forth versus just here's the box we can lend in via the fund. The economics of running the business from a fund is just night and day better.

And with the leverage in the Q B I benefit, it's better for the LPs on the investment side as well. It also becomes truly passive. They don't have to worry about this collateral or that. We've found a lot of our investors are more sophisticated either from being within the real estate community, construction community or even on the advisor side. And as much as they'd like to think looking at each individual deal is keeping them safer, somehow the diversified pool of a fund really has some advantages and not to mention it's totally passive. So we still do that and then we'll syndicate things, but that's more on the real estate side. You guys set up our real estate funds as well. We really like the syndication model, but a fund is more efficient for us. So we can set up a registered offering once and then we can do a whole bunch of transactions in it with all the protections for the sponsor of a PPM that we wouldn't do on a syndication or we might operate on a founder's exemption or something like that. So we kind of play in all the areas depending on what's most price efficient both for ourselves and our partners because I don't want to load up partners with all the fees that come with all the legal compliance when we can set up one fund and then we operate under that. Right.

Kevin Kim:

And there's that efficiency that comes with it. Tony, how about yourself?

Tony Ingoglia:

Yeah, I mean Chris's comment about the industry is competitive. We're all trying to compete on deal flow and the lender that moves quickest and gets terms agreed upon and can perform, they are often going to be the one that wins the loan.

Kevin Kim:

And that's the reasons true for real estate too, right? I mean that's not just for

Tony Ingoglia:

On the debt side, it's same thing. Yeah, you're saying on the equity side, those who met back fast and with purpose and plan, Chris alluded to know their box, they are going to be able to have more conviction and be able to close the deal. So I think that speed of operation execution is very critical for our industry. But then kind of taking the investor's point of view, what draws people to this asset class is preservation of principle and then the income stream. And when you're doing things deal by deal, I'm going back to my early days when I did my first few deals, similar point structure that Chris alluded to back in oh 8, 0 9 they're great when they're paying and they're on and then they pay off and then you're got all this dead cash and now you're hunting for the next deal. Making someone that more passive and also not ever giving off the appearance that you're playing favorites, like, oh, this deal paid off and then I've got this new one and only so many space for this many people.

That was starting to become a more challenging conversation as well, which is hey, whomever responds first. I mean whoever knows who responds first and then people ask, well how do I know that you're not putting your father or your brother or sister, whatever in there instead of me? So just by giving the fund first priority and crack at all of the deal flow, you really get to remove that suspicion that there is any type of sidecar or things that are preferential. And it feeds into the execution comment that Chris and I were talking about. The fun is most efficient at closing.

Chris Hanson:

Go ahead Tony. You hit that me, he help you out. I think it's alignment. Yeah, it's alignment of interest that we get by the fund. That is what I think you're kind of alluding to there. We used to get those questions, we don't get it anymore. But I, I think it comes down to as simply, do you want to pick at each loan and see what's there? Because what you see is what's left that our fund didn't take first off. And second, if it's going in the fund, Mr. Professional or executive, do you want to be an underwriter and understand how to make lending decisions or do you want to use a guy who's done north of a billion dollars of transactions and does this every day? I mean you can either be my partner and I'll manage the loans or you can pick, I mean people have their choices because we have very smart guys with lots of money that insist on, I'll never do a fund, I want to do it myself. And just the economics of what we do with the fund, not to mention no work for them, just run circles around it. I mean we we're open to either way but those guys who have millions into our deals are not, they're not saying, Hey, are you cherry picking this stuff because we just tell everybody the fund's going to have highest priority that's the easiest

Kevin Kim:

I should

Chris Hanson:

Do. Business

Tony Ingoglia:

Should, and I'm sure you're the same. We're all partners. We've all got our own no tied up in it. So rightfully so. We want the fund to have first, right? Selfishly for ourselves. And it's that alignment comment that you said, right? It's aligning our interest critical.

Chris Hanson:

But

Kevin Kim:

Also one thing I want to point out when it comes to the option to go in this direct, so in debt, I think a lot of people who like to go direct to the note they, Tony kind of alluded to this, you're not getting the actual economics you think you're getting right? Because even if the note rate, let's just say it's 10%, let's say 15%, right? In our industry specifically when these loans pay off quickly, we don't know when the builder's going to actually finish. He could pay it off soon. You could pay it off six months and it's a year long loan. You're actually only going to make half of that amount and then now you're scrambling for the next one. You don't get the actual annualized rate of return that you're expecting to get. And I, I've done this myself and I'm like man, I wish that borrower would continue on and he doesn't, right?

But at the same time, on real estate, in a fun structure for real estate, Chris you mentioned this and this is really important. It's that spreading a risk across a portfolio of assets. And the ring is true for any kind of fund, but you get so much more risk absorption. Any if one deal has a little bit of a hiccup or one deal has a delay, you're not going to feel it if you're an lp. But if you're in a syndication, you're on that, you're directly on that deal, you're going to feel it, you're going to feel it in your returns, feel at the end, the end when you liquidate the asset, it's going to impact you. So that's one of the biggest reasons I advocated. But you both indicate something else. And this is interesting because it has to do more now with investor relations. So tell us about how you guys manage investor relations generally. First, and I want to talk to you about some of the challenges and stuff like that.

Chris Hanson:

So investor relations is the highest priority. We say customer experience in our office our reputation is impeccable and we would do anything to defend it. So one of our core values is make decisions with a reputation of excellence in mind. So in any situation, one we try, I use the alignment phrase, all of our deals are set up to be team aligned. And I could get into nuances of this, but we like to remove all doubt. We don't want investors having a question of, well are they doing something that's good for them or doing something that's good for me because we're, we're always set up to be on the same team and we make customer experience or customer responsiveness the highest priority because our customers are our greatest source of new customers. I mean, one, it's the right thing to do, but two, taking care of them is probably the most important thing we can do behind making sure our investments are excellent. So it's a high focus for us and that's everybody in the company from our accounting staff that may deal with people on K one s to reception that answers inbound calls to servicing people. I mean every component of that. And that's not just the bar or the investor. That also includes the borrowers because repeat business from the borrower side is a lot easier than acquiring new customers. So it's just a huge priority for us and we're thankful that some firms don't make it as much of a priority as we do.

Kevin Kim:

It works in your favor.

Tony Ingoglia:

Yeah. I how you treat your partners is makes or breaks your whole business. So I agree with everything Chris said. Our approach is very started very familial and friends and family and as I'm sure almost everyone in this space kind of always starts out and how you service those first handful of people and then who may refer you on to and the circle, it just kind of grows each year, the turn of the lever. But everyone is somehow interconnected and you want everyone's experience to be positive. So what do we do to try and make their experience seamless mean wherever we can do something on their behalf, we try and do that extra step for them to make the ease of it that much simpler. We do a lot of phone calls, we do a lot of forums like this lately it's been on Zoom, but we used to do them in person.

We try to give people access. We try to make our transparency as clear as we can be without disclosing borrower confidentiality type items. So it it's all those things. You have to be a aware and tuned into what it is that your investors concerns are. You have to address those things head on and you have to be honest with them. I think what this past 18 months, if it's proven anything, we increased our frequency and level of communication during the pandemic. And I think some sponsors out there that curtailed and were kind of like, let's do a wait and see.

I don't think it was, that was the right decision. So for us getting out in front and saying, here's what's happening. Here's how many loans are current, here's isn't in forbearance and just laying the cards out there and ask, asking and answering, whatever there are the honest questions that they have at that point in time. It goes a long way to letting them step into your shoes as well. Chris made the comment, do you want to be a lender? I mean, do you want to be in the hot seat making these judgment calls? I have a feeling a lot of folks when they sit back and survey the information that we have when we're making these decisions, they're not always easy. They are challenging. So you do what you think is always in the fund's best interest and then you take the next step to move forward.

Kevin Kim:

And I want to bring the question kind of full circle on you are both managing several, lots and lots of investors. We're talking, I think it's coach you're in the hundreds, Chris, hundred plus hundreds. It's a lot of people. <laugh> a lot of people. And what are some of the challenges you guys have run through and having to make sure you focus on that type of priority on investor relations? What are some challenges and some solutions you guys have come up with?

Chris Hanson:

I, I'll start with because I was thinking as I answered your question, I didn't answer. You asked for strategies on investor relations and one that I think's been instrumental for us it has been the complete lack of pressure. There's ever been a deal where we need money, we're here, we're going to be doing this for the next 20 years. We've been doing it for 13 probably a lot longer than that. We don't ever push for money and we also don't ever push for big money. We start at 50. And that's the strategy that I think has been so instrumental for us because a lot of people, especially ultra high net worth will say 50,000. It's almost like well that's not exclusive. If I can start with 50 and I can't tell you how many of our seven figure relationships started with 50, maybe a hundred.

And anybody who's ever given us 50 or a hundred has always come back and given us a lot more. I mean we never have started 50 and that's where they cap out. And just our willingness to engage on what it is we do and why we're here to do it and how that's a benefit to our customer regardless of the dollars involved. Now caveat being it's got to be 50,000 or more, but that's really just the fact that I can't make impactful difference for an investor with much less than that. And I think that's been a strategy that's been super helpful for us over the years.

Tony Ingoglia:

Yeah, I would echo Chris's comment, our minimums are even lower. It's funny to say that we're 25,000 and we get the same response. It's almost laughed off. Sometimes people go through a phase, everyone's initial investment amount, it's going to be what they feel is appropriate for them. But most folks, as you build rapport and you build that kind of trust relationship, they do exactly what Chris is saying. They get comfortable with you. What's started with one number is likely followed up with follow on investments and then referrals and then how you communicate to those network of referrals. The first person is going to judge you on that as well. So it's just always being, we call it loyal to the absent, even if someone isn't there to hear the conversation, you have to just imagine everyone is in the room and they're all hearing what you're saying to this one individual.

Chris Hanson:

On that note, for the absent we do a monthly zoom call like this with our investors so we can have q and a and kind of have a community vibe. We record that and then we distribute it to all the investors. So if they're unable to attend, they're welcome to shoot us a question that we can answer. But if the timing just doesn't work out, they've got access to that. And we get feedback a lot that kind of our availability and focus on transparency and alignment is very helpful and their comfort in being invested with us

Kevin Kim:

That's so important. Having that level of not just transparency cause you can achieve transparency at the reporting. There's that level of human connection that I think high net worth investors kind of crave because you go to a correlated investment, not going to talk to anybody, you're not going to hear a human story. But also there's a level of, hey, these guys are taking care of me and they're thinking about me. And that's important. And I think that's one thing that people forget when it comes to raising capital in our space is there's that human element and of course commend you guys on doing that frequent level of communication. One of the biggest failures we saw, common failures we saw in the last recession when everything hit the fan in oh eight, you would not believe the number of responses that just dug their head in the sand and said, all right, well we got to figure this out and didn't get in front of their investors.

And I mean lo and behold, those are the ones that really had a lot of problems and lost a lot of money for those investors. So it's so important. Even good times and bad times. And I want to ask this last question because this has been on my mind and I mean Tony, you and I have talked about this at length, private lending and in general I think real estate too, suffering from this problem. Well, not problem, it's not a problem, it's a good thing. The level of attention from Wall Street, it is insane. And the topic of this webinar is that Main Street is on fire and we talk about that, how successfully you guys have been and what you guys have done to achieve that success. But on the flip side, there's this massive temptation for any sponsor, whether you're a builder, whether you invest in real estate, whether you're a lender to now transact with Wall Street, there is just so much opportunity to do so. Their proxies and aggregators are everywhere on the side of real estate on the builder's side, I think Blackstone just bought a whole city in Texas. So it's crazy right now. What is going on in real estate in general? What are you guys doing? I know, okay, first of all, I know you guys don't really deep embedded with those types of opportunities. Why not? And what's keeping you from jumping into that kind of trend? I guess you can say

Chris Hanson:

My answer on this is easy. I've got a lot of friends that manage platforms for institutions. You've named some of them. I won't, I won't draw any names or point any fingers. They make a lot of money and they work for Wall Street and they're not happy. I've been lucky enough to be in real estate for a period that's been very lucrative. I don't have to do anything I don't want to. And I come back to that fulfillment in helping people I know make money that's material for them. And I know my friends don't get that. The allure is there sometimes. I mean we talk to big institutions on our development stuff because the projects we build are 30, 40 million communities and they want to do six year, that's quarter billion. We'll do that and engage with institutions in that capacity. But

Kevin Kim:

You have third hand control, right?

Chris Hanson:

Well, it depends. We have council internally that can negotiate with those guys all day long and it's business. That's a B2B transaction that makes money. It's lucrative. We we'll do it. But as our companies have matured, our purpose is really about helping our partners create wealth. And that's why we're going to stick with that retail high net worth guy. Our first investor was a 50 K investor in 2009. First external guy. I created that guy well into the millionaire status from deals that I did. He was completely passive on. And that's actually a metric we count the millionaires, we create, I know it sounds a little goofy, but that's fulfilling work, making money for Wall Street, which we've done a lot of work with institutions, there's not even a high five. It's like, great, you made 50% a year, why not? 60

Kevin Kim:

Goes back to that human element, right? And there's that fulfillment that comes from that human element of working retail, working on Main Street. But I mean the ease mean especially I know, I mean I'm more in tune with the debt market. I mean the ease, right? I mean Tony, you guys get pitched by every aggregator every single day I'm sure, right? I mean, come on. How do you say no?

Tony Ingoglia:

Yeah, they always say, Hey, just focus on originating. Don't worry about the capital raise. Let us handle that. What it goes back to actually Chris's comment earlier about they ultimately end up wanting to even tell you what it is that you should be making loans on or what projects you should be investing in some cases. And you start to lose. We start to lose our control of what we think is the right thing for our investors. And it's like someone putting an undue kind of pressure on the scale that it distorts our judgment. We don't want to be beholden to anyone. We want to look at the market. We've got our own and we've got our own capital that we would then have to figure out what we want to do with it. And friends and family, if we turn the thing off, you're also to Chris's comment, now you're cashing everybody out and they're sitting around doing, what do I do with this money,

Kevin Kim:

Right? I mean, human right

Tony Ingoglia:

Creates another problem

Kevin Kim:

Altogether. Cause you have a new master in that context and that master one has a different type of priority because at the end of the day, we are serving to our investors and from that context, but you're trying to do the right thing for them as individual, as people, that human element. But then there's that the lure Wall Street where all they want you to do is originate and originate, originate. But that also begs the question, does that force erase the bottom? Right? Because there's, you're going to have to compete and you guys are both conservative lenders and so it's what Kevin though,

Tony Ingoglia:

No one wants to do the grunt blocking, tackling follow up, they all just want to have their money deployed and get the return and they don't understand the time, the effort that goes into prospecting, negotiating, engaging, underwriting, funding, collecting. I mean it, it's a process that I think is more suitable or at least I find that the high net worth crowd understands it better because you get to have this kind of more conversation type approach with them on it. Whereas with the institutional type asset class, what we want and they're almost dictating to you and we're saying, well what you want I don't even think is available in the capacity that you're asking for. You don't see the market on the ground granular level like we do. And they often think they know better than what. I'm not going to tell Chris what are probably the best deals in his local market in the, he wouldn't say the same thing to me. Everyone is so niche oriented in these industries that you kind of have to let the person on the ground be the one making the decisions and institutions tend to be way more prescriptive and as an LP than I have I've ever had to address with high net worth individuals.

Kevin Kim:

Fair enough. Alright, I think that's all the time we have for the webinar. There are probably some questions. Anthony, do you want to chime in with some questions we've gotten from the audience or from other people?

Anthony Kazazis:

Great. Just like said great presentation guys. Really.

Kevin Kim:

Thanks Ron.

Anthony Kazazis:

I think you said you had a little networking group of investors and you guys get together or something. We would love to promote that for you guys if you wanted us to do that.

Chris Hanson:

Okay. Yeah, we've got a community that we put together via email list. Nice. Fantastic.

Anthony Kazazis:

And you'll have an opportunity to send out that information. There's quite a few that did register and you'll have the opportunity to send it out to everyone. Chris, what do you see as the greatest opportunity within real estate and real estate finance spaces right now?

Chris Hanson:

So good question Anthony. I think the kind of convergence of this, and it's been a topic we kind of discussed today, the convergence of the conventional asset management and wealth planning groups opening up to the alternative investment asset class, both real estate via private funds, which is partly spurred by we can register and market to the public traditionally such a closed door investment, being able to make that available to the more common investor accredited mind you. But that convergence of Wall Street finally getting all these guys that are RIAs going, Hey, you should have some real estate exposure that's promoting so many I'll say inexperienced sponsors to go after that money, which creates a risk. But it also is if giving good sponsors like Tony and myself more firepower to do good deals. So kind of the rising group of sponsors that are the good high performing ones, we're getting capital easier than we have in the past, which is allowing us to do bigger and better deals. I just think this is a moment in history that we'll look back on when Wall Street finally said, okay, we've got to start acknowledging this real estate space and getting in, not just leaving it for institutions and endowment funds and things like that.

Anthony Kazazis:

Thank you. Chris. We had a question. Let's sure if you guys answered this already. Risks we 199 A?

Kevin Kim:

Yeah, I was wondering if we had enough time. I started typing the answer for I'm going to butcher this front. Sure, I'll take this one because it's a tax question. So this is actually kind of a confusing issue. 199 A is the QBI I deduction that came with the tax cut and Jobs act. It's an IRS code section. There's two components to it. One is for QBI I and that caps out for high net worth investors after a certain income bracket. So if you're making three 17 or more, what is the three 17 tax bracket Mary filing General, you are ineligible to claim that qualified business income deduction right for pass their vehicles. However, 199 A also creates the same 20% deduction for qualified REIT dividends, which is why you see so many REITs and debt funds going REIT or adding a subsidiary reach to their existing structure.

This is the reason why reach is so popular because qualify re dividends on their own regardless of tax bracket, extend a 20% deduction to the investor. And so that's the explanation for Fran. Sorry if I butchered your name and why any kind of fund manager right now, if you're on debt, definitely you should do it. If you're on equities and you have eligible assets, I strongly recommend you do it because we've got three years left guys under this tax code, four years left and four years of 20%. I mean that if capital gains rate goes up for high net worth investors, which the Biden administration is threatening, if it goes up, then this is going to be something very attractive because this knocks you down close to the old capital gains rate. So this is why we've been doing this and this is why Chris and Tony both did it for their funds and why we've strongly recommended for any kind of sponsor who is in real estate or at least consider it because that 20% deduction is monstrous.

Anthony Kazazis:

Yeah. Thank you Kevin. Thank you Kevin. Hey guys, we, we've come to the end. There will be a thank you letter plus the thank you video that will go out on Monday and everybody will see a copy of this video. And again, guys, if you have any questions again, Kevin, Chris, Tony, we'll have all your names and they will reach out to you and you guys can continue asking them questions. I want to thank guys. Thank you Tony, Kevin, you guys are amazing. Really, Chris, you guys are really, it's good stuff here and we did learn a lot and I want to thank you guys. It was a great presentation and I'd like to thank We Lend and Geraci LLP for putting this webinar together. Thanks guys.

Kevin Kim:

Thank you guys. Thank you very

Anthony Kazazis:

Much. Thank you Kevin, everybody.

Kevin Kim:

Pleasure guys. Take care. Bye everyone.

Anthony Kazazis:

Have a great weekend everybody. Bye. Bye-bye.