Real Estate Investment Opportunities Series - 37th Parallel

This is a YouTube video titled "Real Estate Investment Opportunities Series - 37th Parallel" recorded in December 2024. It features a webinar conversation between Jim Dahle and Chad Doty, founder and managing partner of 37th Parallel. The discussion covers multifamily real estate investment strategies, tax advantages including 1031 exchanges, fund details, market demographics, risk management, and case studies of past projects. Jim Dahle hosts the session, facilitating a detailed Q&A with Chad Doty about investment opportunities and operational insights in real estate syndications and funds.
Foreign.
Welcome back to another Great White Coat Investor webinar. I'm here with Chad Doty, founder and managing partner of 37th Parallel. Welcome back to our webinar series, Chad.
Yeah, thanks for having me. My pleasure.
All right, what we're going to do today, Chad's got a presentation. He's going to be talking a little bit about 37th parallel as well as real estate in general and some opportunities available with 37th parallel. And then we're going to get into some Q and A at the end. Let me turn the time over to you, Chad, to get us started.
All right, thanks, Jim. All right, folks, again, my name is Chad Doty. I am the CEO or the managing partner and founder of 37Parallel. We've been doing this since about 2008. I am a recovering management consultant. I got into real estate as a chosen profession for several different reasons that I'm going to go through. But appreciate your time. We're going to walk through approximately 20 slides or so about who we are and what we do and what makes us different. And let's go ahead and dive in. So just as a baseline, White Coat and Jim and their team do an incredible job educating physicians and medical professionals on different investments across the board. But they do a ton of work with real estate and have a very good team of real estate professionals and sort of work in and around their environment. So I just want to baseline on a little bit on how multifamily works and some of the benefits of it before we dive into some more specific items. About 37 parallel. So if you look at multifamily, some things that are well documented, it's a proven inflation hedge. It has proven relative performance in recessionary environments. It's completely non correlated to the stock or bond market. So as you look to build diversified portfolios, one of the key reasons why institutions and insurance companies, endowments, pension funds, use alternatives like commercial real estate is because of the fact that it's non correlated. So if you're really trying to get true diversification, that's a key element of it, along with sharing manager risk and asset class risk and et cetera. That non correlation is a key part of it. It's got better long term performance versus stocks and bonds. You look at it over any time period greater than five to seven years. That's general. Just because it's less volatile. The downside is it's less liquid, so you should expect a premium for that. But that lack of volatility is sort of what helps it over the long term. Because losses hurt more than gains. Help. You can get tax advantaged income. In some cases not paying any tax on current income. You can get tax advantaged capital gains. You can get tax advantage, wealth transfer. I talked about the volatility and it's just a food and shelter business. So when you think about whether your business can be horse and buggy, it can't. There's really nothing that we can think of that's going to disintermediate having a room for your stuff and a locked door that you call home. So that's sort of why I got into this business back in 5, 6 and 7 is just I chose it, I wanted those features. And the best combination of those features was commercial multifamily. So that's just a high level of why I'm here, why potentially you might be here. But let's look at some things specific to 37th parallel. So about us and I'll get into more details of who we are, track record, but at a high level, we're multifamily specialists. It's all we do. We've got hundreds of white coat investor clients. We've been working with white coat investors since around 2018. We offer both institutional quality core plus projects and also value add projects. We are demographics focused, risk management led and have a data driven approach. Unpacking that, it means that we're really looking for what are the best markets and submarkets in the United States where we can get the best resident profile and serve that resident. So we kind of work with the middle of the household income curve, average 70,000, 75,000. We want to go up to 95,000, maybe down maybe 10,000. So we work with the largest chunk of the population, bell curve. So we want to find out where they are and the kind of things they want and be in those markets. Then we look at, okay, how can we not screw up? We're, we're not saying we're like Warren Buffett and Munger, but one thing Munger always said was I've created competitive advantage not because I try to be a genius. I just try to be successively less dumb every year and take less risk. And we sort of look at it that way too. We'd rather leave money on the table than screw up. And a lot of that drives how we look at the data in the markets that we're in. And because of that, Today we have 100% profitable track record. We've never lost a deal. Every single deal we've had for investors, we've made Money. We offer both fund and individual asset investments and we are very self directed, IRA friendly. So whether you've got whatever self directed product you've got, if you can invest in real estate, we can work with it. We have 100% transparent reporting process. We deliver reporting and distributions on a quarterly basis. We've got a 24,7 secure investor portal so you can check on your assets anytime you want to. We've got Investment minimums from 50,000 to 100,000 depending on the vehicle. There are special incentives available for white code investors and larger investments. You can talk with our investor relations team to see what are best matches for you on those. We offer preferred returns from 7, 8 and 9% depending on the vehicle with average annualized return targets of 13 to 17%. And then from a waterfall perspective, whether it's a single asset deal or a fund deal, the way it works is on a return basis, 100% of all preferred return flows back to the client, accrued and unpaid, then 100% return of capital, then the profit split. So basically you've gotten your return back, all of your investment back before we share any profits. So we believe that's the best investor aligned waterfall and that's how we're structured. Then if you look at it, and this is really when I talk about some nuances to our platform, we're highly tax advantaged in many ways. We act and look like a family office because we started this business to become a long term tax efficient, income producing, wealth development platform. And that, and that's a lot of what you see in the family office side. Don't screw up, create long term wealth, make it as tax advantaged as possible. So we have this phrase internally that how we look at our deals is what can we do on the tax side to eliminate, reduce and defer. And we there's several ways we can do this. I want to highlight them because they're applicable in most cases to every investor. I'm not a tax professional but we work with thousands of clients with this stuff. We have a fantastic regional tax firm but generally speaking these are some of the things we can do. In any given year where you have depreciation that's greater than your income, you're going to eliminate NIIT which is that 3.8% net investment income tax, basically Medicare funding. You can defer your income tax. If you have from rental income, which is taxed at earned income rates, which for most of you is going to be 35% plus. Well, you're not going to get taxed on it deferred. And then if you choose not to do a 1031 exchange and the deal closes and you sell your interest well then you have to go through what's called recapture tax. Recapture tax is 25%. So that's where you reduce. So you defer and then reduce. You get time value of money and then a lower tax bracket. You can then defer capital gains indefinitely with 1030 ones. And that is a huge accelerator. And I'll show you a case study later in the presentation. And you can eliminate capital gains during state events via basis step up on death. So when you put all that together, that is a incredibly tax advantaged platform. And because of the way we look at this is, you know, myself, my business partner, my other managing partner, our principals Combined, we have $20 million of equity in our portfolio. So we are riding along with everyone. This is a wealth development platform for us too. We're not externally owned, we're not beholden to any other investment group. Basically we invest in and asset manage and construction manage all of our deals. Let me give you a couple things to think about from a case study. So most of our investors pay materially lower effective taxes, if any, on their investment. So let's say someone invested $100,000. They came into a single asset deal. Let's say the preferred return is 8% and the current pay what it's actually paying, which will be a little bit lower than the preferred return typically in the first few years, let's say it's 5%. So for five years they get 5% and then their accrued and unpaid prep on the 8 is 3%. So 3% times 5 is 15%. So combined, let's say we sell the deal in five years. Well, as we sell it, the money that float and they haven't paid in tax, you haven't paid any income tax on it at that time because you've had enough depreciation to offset that 5% a year. Then when you go to sell, you will then use any of the. This is if you don't do a 1031, you use any of the unused depreciation, you lower your tax on the gain, you get all your preferred return, get all of your money back and you have lower capital gains along the way through that process. But the real trick is the second two examples. If you have business interests. So a lot of physicians are going to have imaging centers, surgery centers, some other interest. Even it's other real estate that's passive, but it doesn't currently have Enough depreciation anymore to offset the gain. Well, passive activity gains and passive activity losses net each other out on your tax return. So we have clients that will use the excess appreciation we generate to offset their gain from other taxes. So for example, we have a client who has basically they own a clinic and they has other business partners and they each co invest in their other clinics. So clinic they manage is active, the clinic they invest in is passive. And he offsets basically $300,000 of income a year pass from the passive investments in the other centers by investing in our portfolio of assets to get that depreciation. And so he's not paying tax not only on the investments with us, but also on the incremental $300,000 from those other clinics. Right. And there's a lot of flexibility in this. Again, every case is different. Happy to talk about your situation, but if you think about that not paying incremental tax, $300,000 as a max bracket physician in the west coast or New England, that's saving you $150,000. It's not minor. Okay. The other case is we also have physicians who will, they'll have a medical office building or a practice center, or as part of either a recapitalization, a practice sale, a practice move, they are going to modify the ownership structure of that real estate. Well, depending on how you operated or structured it, you can 1031 that and move that into a multifamily deal. And the difference in our model is we have both funds and we can work with 1031 directly. So in cases where you have a significant enough equity slug from the actual sale of the building, it basically comes like a sophisticated or close knit GP LP relationship. So you can 1031, you can create a new income stream because of that, your practice center that you've sold and you still can retain major decision rights. So yes, you can do a 1031 and go into a DST or some other product, but you're now just a component. You're a cog in the wheel. You're beholden to the choices that everyone else makes. In this particular position, because you have a significant enough equity chunk, you actually retain major decision rights. And that can be pretty attractive depending on the size of your group and the size of the asset you sold. So those are just some ways to think about our tax model again as sort of that long term builder of a passive wealth platform. So enough about those pieces, just high level about us. We started in 2008. I mentioned that our long term average multiple Invested capital is a little over two. So we're basically anytime we do a deal, we're going to double it. We've done over 1.1 billion in transaction volume. Our gross average annual return is 26%. We currently own 650 million of assets and we transacted on 10,000 units. So not our first rodeo. You can see some of the representative assets on the right side of your screen. Ultimately we're, we're buying 1990s to 20052010 deals that may have some value add component. We're also buying some of Those newer projects, 2000, 2010s and a little bit above base as core plus long term holds in great locations. Like we currently have a project in Charlotte, North Carolina right by the lake. And so you've got an opportunity. We have a small sidecar available now that we can talk to investor relations to see if you'd be interested. In addition to the track record and items I noted, we've done 57 transactions. Cumulative team experience close to 4.4 billion. Myself, Dan Chamberlain, the other managing partner, Andrew Pataka, our principal in charge of asset management. I mean he came from equity multifamily running a multi billion dollar portfolio. There's a lot over a hundred years of cumulative real estate experience on our team. We've made Inc. 5006 years. It was four years in a row and then some pauses. But we've done it six times. It's basically that list of the 5,000 fastest growing small private companies. We're a member of NMHC, National Multifamily Housing Council. We are an accredited management organization, meaning we've gone through the certification process as a higher end asset manager. Like I talked about, we are vertically integrated. So we basically do acquisitions. Asset management, construction management and hybrid property management from a timeline perspective in terms of total volume. I mentioned that, but we started back in 2008. So we started when it was difficult to buy deals. Our first three deals were assumptions. You had to be incredibly cautious. Reserves mattered a ton. And as you kind of look through the different cycles that we've gone through, you know we weathered the gfc, we've weathered Covid and we're coming out of this interest rate cycle and we're still providing distributions and have profitable deals. So that's the thing about us is we are willing to make less money to make sure we don't screw up. And it's sort of a singles and doubles business. We want to make sure we make money on every deal. But we're not swinging for the fences. Sometimes home runs happen. We've had deals make 90% as a, as a total return in a three year window. We've had some projects make 6% annualized, but our average is around 17 to 18% net on that 26 or so gross. The reason why that gap is there is you have profit sharing but the big gap is really there were times where it made really good sense to sell a deal early and pay a prepayment or defeat penalty. And that affected some of those, the gross to net split. But typically we're going to deliver 17 for clients in the current market we've. We're sort of looking at 13s to 17s. It's a little bit on the lower end just because of the interest rate cycle. But as that moderates and come back down, we're going to see better spreads on cap rate and interest rates which is basically better positive leverage that'll drive better yields. But ultimately every single deal has made money across all those market cycles. This is just some of the deals that we've closed. I don't need to go through all of them for you, but you can get access to this deck. All you have to do is go to 37Parallel com and you can get access to our overview and approach that has all of this data. I want to talk about our investment process and when I talked about the risk management led piece of it is we want to own in locations where you feel safe walking your dog at night. You're not going to have to collect rent with a shotgun. It doesn't have to be brand new on one end, but we kind of like that space where it's five to eight years old, up to 30 years old. Because you're going to be in that solid B B plus, A minus neighborhood that's going to have good schools, it's going to have good median household income. And by doing that and being those locations and understanding the competition around you, you can find out what part of that in that three to five mile area around your asset that you want to own. Then you can go through and look at what can I do to the property to improve its noi, what can I do to improve its rent growth? And these are all the questions we're asking ourselves all the time. To generate a return on our, on our buildings we, we have a process we call rent and design and it's basically an in place improvement program we do at our assets. And it's a really nice way for us to drive NOI growth in slower markets. And also do it at a faster pace because we can then provide to the resident an option to increase, you know, improve the flooring or the hard surfaces or lighting upgrades or flooring upgrades. It's this curated list of improvements that they basically say, yes, I'm willing to pay a higher rent today for that. Now it increases resident retention, increases resident satisfaction, improves NOI and rent growth. A win, win, win. And we rolled that out to all of our assets and you can get more detail of that too on our website on an exit perspective. So our hold period has, is, is based, is basically long and then it contracted during 2021 and 22 because of where interest rates were and the market pricing and then it's extending again. We don't go into a deal thinking this is going to be a five year deal. We underwrite everything to a ten year hold. We want to be able to hold through market cycles. For example, right now our first loan maturity isn't until 2027 because cycles happen. And we don't know buying a deal whether in three years or four years we're going to hit an interest rate cycle like what we're all experiencing and expect to come down here shortly. But we will. So we're underwriting to a 10, but we will sell opportunistically any time really in the hold period as long as we believe we can get outsized gains for the client. So whenever you see our hold period start to get shorter, what that means is we're capturing market opportunity that's greater than our underwriting. If you see that our whole time is expanding, then we're basically just managing to our underwriting and that's just really just being smart. I think about managing the portfolio assets. I'll talk about the 1031 example here in a minute. When I talk about integrated approach. Like I said, we cover acquisitions, asset and property management, construction management and fund management accounting. It's all done in house. We don't use third party auditors and we use third party fund management to check what we do. But ultimately the team that we have, and I'll show you that team here in a minute, does a fantastic job of running that portfolio. And again we run it like a family office is. We're trying to reduce transaction costs, we're trying to reduce taxes, we're trying to generate long term wealth and do it in ways that don't keep anybody up at night because we're in markets that we would want to live in ourselves. So let me talk about this example for a minute. We've done about $400 million in 1031s, exchanged 100 million in equity. And when you look at a comparison of, if you look in the bottom left corner, if you look at comparison across multiple, 1031 jumps, okay, not just one, but three. So if you look at a taxable sale, you might be, you'd be looking at 2.3 multiple across a 3 asset hop from the 1031, it's 30% better, it's 3.07. So you're tripling the investor's dollar annual return comparison 14% to 22% net profit difference 1.3 million to 2 million. This is based on a million dollar investment. If you look on the right hand side, we basically bought a deal in Louisville, Kentucky and a million dollar investor who sold and paid taxes would have $1.347 million. The investor who wrote the 1031 exchange into a deal in Dallas had $1.475 million to invest in that new deal. That new deal then grew to 2 million, then grew again to 3 million. This hop, this, this all, all by staying within the 1031 exchange model. Because the way we do it is when you join one of our projects, you have to know going in that we are going to 1031, that project you will have the right to opt out. But that is our default scenario. It's never a, hey, we might do this, it's no, we are going to do this and we're investing with that goal. So some people that's a match, for some people that's not, that's perfectly fine. But that's the way we do it. As part of that 37 parallel process, from a market perspective, some of the usual suspects we are in, we started really in Texas. So we're in the Texas triangle. Dallas, San Antonio, Houston, Austin. We've expanded into Georgia, we've expanded into North Carolina, we expect to expand into South Carolina and Virginia. But ultimately we're in these target markets because of the metrics that matter to us in terms of population growth and job growth and landlord tenant laws and taxes. So they're not here because, oh, they seem like a good idea. We were in Texas back in 2008. We were in looking in the other markets. All demographics we've seen and been looking at for years. And here's sort of the model. If you look at population growth, you've got the US national average from 2013 to 2023 is about 5.9% over that time period. Okay, not per year, but through that entire 10 year block. Then if you look at Austin, Dallas, Houston, San Antonio, Charlotte, Raleigh, all those locations, you have more than double okay the population growth in those markets compared to the national average. That's primarily because of net domestic migration. People are moving from, from other parts of the country into those locations. What's interesting from a, the interesting phenomenon about that is the net domestic migration is going to these markets. The international migration is outsized to some of the markets that US citizens are leaving. So it's interesting how that is working out. But for us, we are looking at what part of the US population that fits our demographic profile is more is moving to what markets and why and can we be there and serve them in a way that they want to consistently live at our places. We give them a nice safe, clean place to live and treat them like family and it's a home. And we have a dual client mandate. You as investors are clients and we also have residents who are clients and they're equally as important as we both have jobs to do. So that's a key part of it is the population growth. The other piece is employment growth. People move to these locations because of jobs and weather and tax profiles and all these other factors. But employment is a huge factor to it. So again, you look at these markets, Austin, Dallas, Houston, San Antonio, you're going to see population growth that is typically 30% more to more than double what the national average is of that 10 year period, 2013 to 2023. We expect these trends to continue. There will be some softening of it. But if you're still meaningfully above the national average, you're going to drive better rent growth. Now the bogey here is the supply and demand in those markets. And in this, if you, if you download or over overview and approach, we go through a lot of the supply and demand nuances of it. But as you oversupply markets and Austin's wildly oversupplied right now, you're going to get lower vacancy and lower rent growth, sometimes slightly negative rent growth. But that oversupply is going to fade because no new construction is really happening right now. So you'll get a lot of new stuff coming in the market this year and a little bit of next year. Then in late 25, 26 and 27, nothing's coming in the market. So the market normalizes. And this is sort of how the cycle works in multifamily is the supply and demand piece is they will get outsized in different locations. So when supply increases above demand and demand by the Way in these markets is greater than anywhere else in the US The Southeast is a huge demand driver. They just oversupply, pass that demand. Once that demand shrinks or that supply shrinks, that demand then will now have pricing power. You'll then have occupancy will go up to that 95, 96, 97 ratio and then rents start to go up again. So you're able to work with and ride those markets. That's why we love multifamily too is because we get sort of this Goldilocks scenario, the middle of the road and how long our lease terms are. Lease term for an apartment building is one year or a hotel, it's a day. All right. For office and retail, five, seven, nine, 10 years. And you would think that might give you pricing power when things go bad, but it doesn't. It's just that office and retail clients just can renegotiate their lease or leave. Right. And we're seeing that right now. Office occupancies are horrible. We'll see when that bounces. I'm not sure when that's going to be. But that's the nice thing about being in multifamily is you've got this just right lease term to manage ebbs and flows in the economic cycle and supply demand cycle. But you have persistent demand. So that's again why we chose the space and why we're still in it. Three quick case studies. So this is a project Presidio in Texas. We acquired in 2018. It had it needed. It was is absolutely a value at play. We sold it in 2022. 86.7% equity increase for the clients grew NOI by 29% equity. IRR was 29% equity multiple 2.58. Very, very good deal. Hold period was less than four years. That was atypical from a hold period perspective. But this is one where the market was telling us that we could achieve a return that we probably wouldn't get until per the pro forma, until year year five, potentially year six. So basically at that point the investors would have thought we were stupid by not selling it at that point in the market cycle. Another case study, Billows of Henderson Pass is in San Antonio. We bought this in 2016, held it for about five and a half years. This was a three multiple. Very kind of a similar story. Purchased from a reit. They really hadn't done anything with it. They most were just a long term holder that was looking to print, you know, coupon clip, hadn't done much to raise Rents. We went in, renovated the property, renovated the exteriors, redid enough interiors to prove out the rent growth play, and then put that on the market and got a very good return for clients. And then sorry about that. Summit a Thousand Oaks and Hillcrest. Thousand Oaks, these are sister properties or side by side. We bought Hillcrest first, had no intention of actually acquiring Summit. What happened though is we were. There was a deal on it that had fallen through and we were. Because we had such a good reputation in the market, we got a call to pick that back up and it made perfect sense to buy at that point in time. We analyzed, we put them both together and make them one larger complex. Wasn't feasible to us, but we did want to still sell them as portfolio. That worked out well. You know, we bought these over a couple of years, ultimately sold them in 2023 and these became a 1031 into another project which was Grays harbor, which is the project in Charlotte, North Carolina. So those investors took that gain and are now in a institutional quality deal that was previously owned by Blackstone. Getting pro forma yield right now in a fantastic suburb of Charlotte, North Carolina. Rabbi Lake Norman. So those are just three kind of ideas about the kind of stuff we do. Some will have a value add component, most will. What of a value add component? Just depends on the investment. But ultimately we're trying to get those. We're trying to get some level of consistent yield starting in day one. And we're trying to get some, you know, trying to get in the low, you know, 13 to 17% range, total return. Some do better, some do a little bit worse. That's the average again, 100 profitable track record from a team perspective. I'm the gray haired gentleman on the left. Dan Chamberlain, my business partner. He basically he and I started the firm back in 2008. Andrew Pataka is a certified property manager. He runs our asset management prior equity multifamily portfolio manager. Amy is. Amy and Dan and I are all prior management consulting folks. Dan and I come out of Arthur Anderson. Amy was with, I think Eny. She might get mad at me for not knowing. She's the prior big five audit and tax person. Fantastic. CPA Don is our principal in charge of investor relations. He's been working in this space in terms of capital development for years. One of the nicest gentlemen you'll ever meet. And then Doug Frazier runs acquisitions and dispositions for us. He is an incredible resource, highly well regarded in the broker space. And that's sort of our leadership team combined though we also have a remaining rest of the team in terms of client relations, construction management, acquisitions, analysts. So we have a fantastic team that's here to take care of our customers, resident clients as well as our investor clients. That's really it. I didn't want to spend a ton of time. Jim, I know you know you've got, you only want this to be so long and I just want to give a taste of who 37th parallel is and the kind of things we do and how we look at the world. But that's basically it. If folks want to learn more, they can go to 37Parallel.com wci on that page you can download this presentation. You can also we have an educational resource called the Passive Investor Guide to Multifamily Real Estate. We do a ton of educational work. If you look at our resource section, you'll see dozens and dozens of information based posts. We're not trying to hype anyone really on what we do. We just want to point out the things to you that are compelling to us about the space educationally. And if they resonate with you, you can join us. If not, no big deal. So thank you much. And Jim, on that note, I think I'm going to go ahead and stop sharing on this.
Yeah, let's move into the Q and A portion. Thanks Chad for such a great presentation. 10:31 Exchanges are a big part of what 37th Parallel does. Talk about how easy that is to do a 1031 exchange. When a syndication or a fund wraps up with 37th parallel. Sounds like it's pretty darn simple to go from one syndication 37th parallel is running to another one that 37th parallel will be doing. What about going to like an outside fund or syndication? Do you help facilitate that?
So when you're in a single asset deal with us, that one will pretty much go. When we sell that project, it will 1031 into another project and you'll get to evaluate what that project is and decide do I want to be in this deal or not? If you don't, then you'll get bought out. Right. So we've done that on most of our deals in the past six years. So you'll have that opportunity. Then once you have those funds, you can do whatever you want with them. Okay. If you require, if you have a significant enough portion, you require like a drop and swap where you have to get a tick component. We can work with you assuming it's enough juice, where it's worth the squeeze. Right. On the fun side, what we do that's a little bit different is we create almost like a 1031 model at the end of a fund life. So Both for Fund 1 and Fund 2, they're structured such that at the end of fund life, some of those projects we may want to keep and recapitalize. Well, instead of just trying to close out the fund and creating a capital gain for every single investor in that fund, we can take those deals, the investor can put in their pro rata share of the deal, contribute that capital, we eject it from the fund, then it gets recapitalized, run on its own. It didn't sell. All right, so it's not creating a gain. And now you take that and then that can 1031 later. So the idea is that at every single case we at the end we want to allow someone to move into that capital gain deferred model. Okay.
So when the fund wraps up, it would be like part of the money would potentially be able to be 1031 exchange.
Yeah, because you don't know, you don't know whether with all those deals, whether you're going, let's say you have 10 assets, right. You might only want to keep or it might only make Sense to recapitalize 5. So we don't want to say, hey, we're going to 1031 exchange the entire model, but we do at least want to do it here. So if you think about a traditional non DST fund, it's atypical to be able to do that. Typically when a fund closes, it just wraps up the sponsors trying as quickly as they can to get the prep back, get to their promote and then close out. And they basically make most of their money at the end. In this model, we're still looking to do that, but we'll contribute our gain into a deal and eject it and into a tax deferred model. So it goes to a fund to. So it's 10 deals, becomes five individuals and five sold. So you might cut your capital gains in half and you extend the rest.
But there's no anticipation that you'll be able to go straight from Fund 1 to Fund 4 or something without any sort of capital gains of it.
Yeah, you'd have to create a different structure to do that. That might not provide some of the same tax advantages in the fund life too.
Have investors tried to 1031 exchange out of a syndication into a syndication run by another operator? Have they been successful being able to do that?
In the past we've had a couple of larger players do that. Where at the time that we were going to sell the deal, they wanted to move into a different market. And we were able to drop them into a tick component where they could on their own. So they've got to manage their own timing. But if they need to structure to a tic component on sale, then they can have that option. We just have to talk that individual and see what the sizing looks like.
What about any options to 1031 in to a syndication with you or to 1031 into a fund coming from another operator?
Yeah, no, because we're doing exchanges all the time, but when we do them, let's say that we're bringing 30 million of equity into a deal to buy a $70 million project, and it might need 5, 10 million of incremental equity. Well, we have folks who reach out to us all the time about, hey, I want to do an exchange. Can I exchange into one of your projects? And they want to be in a single asset project they don't want to fund. They want sort of address control. And we can absolutely do that. You have to match timing. You know, 1031s can. Can. They can be fun to deal with. So you never want to get a call and someone says, hey, I've got $5 million and my naming window closes tomorrow. Right. But if we know in advance, we can work with them to do that. We've done that probably a dozen times.
Let's talk a little bit about Fund 2. Can you talk with us a little bit about where Fund 2 is at right now?
Fund 2 is currently invested in two projects. It's in Grays harbor at Lake Norman, which is a Charlotte deal. It's also in Bridgehead Trade Winds, which is an Austin project that we own. So it's sort of that one started. It's funny, both of our funds started at, I think, the worst possible time. Fund one started in 19, right before COVID but it filled at 40 million. And then fund two started right before the interest cycle. So it's currently at 14 million and has invested only about 11 million of it. But we expect that to accelerate as interest rates start to come back down.
And what's the goal to raise for Fund II?
40 to 80.
Okay, and what's the date on when you expect that to close?
We are likely going to close that end of next year. So we may or may not hit target on that, but we don't want to extend it to too long because fundraising. Fundraising for everyone basically slowed down dramatically with the interest rate cycle. And we totally understand that. Someone says, okay, I can get 5% risk free in the bond market. Why would I put it in real estate? But that's going to change. And when that does, if you wait too long, you're going to be staring at income funds that have sunk a lot more than you wanted. And you might miss some of the timing opportunity that's currently coming up in multifamily.
How many states do you expect Fund II to be investing in? All five of those that you mentioned earlier.
North Carolina, South Carolina, Georgia, Texas, at least those four we'll see about Virginia. I mean we live in Richmond, Virginia. It's home for us, but it's a demographically sleepier town. And Northern Virginia and Fredericksburg are fantastic. It's just whether their population growth continues depending on what happens with the next president and how hiring goes in the government side, because that really drives a lot of that.
Let's talk about K1s. When do you guys typically get K1s out for the syndications and for the funds?
We are have a pretty good track record of By March 31st we had our first delay ever this year because we had to fix a tax problem. So three assets got delayed. But every year prior to that, we've hit the target of March 31 for every single deal.
And let's talk about liquidation events you mentioned. Sometimes it ends up, you know, a ten year deal ends up ending in three or four. How much variation should investors expect to see there? How often does it liquidate early? How often does it go past 10 years?
We haven't had any go past 10. I would say the, I think the general. You should generally think 5 to 7, I think is probably the fairest estimate. And if they go sooner, they're going to be going at a very, very. It'll be have been a fantastic deal because it's not the way we're buying. It would take. It would be anomalous to have a submarket shift on you so much in a three year window that you're like, hey, we need to get out. So really the early sales are really a function of the fact that someone was willing to buy at a level we didn't expect and it would be dumb for us not to take that.
Let's talk about liquidity options during the hold period. Obviously the paperwork says there's no guaranteed liquidity. Practically speaking, how often does a person or their estate actually get a liquidity option?
We get requests probably four or five times a year. Typically they're due to hardship if they're on a Single asset deal, because we do both single assets and fund. If they're in a single asset project, it's more often than not they're able to sell and get back what they invested. They'll basically sell apart. And we have that occur, like I said, a few times a year. The way the process will work is we can't guarantee a market and you kind of don't want us to because that means we have to hold dollars that aren't working for you just to create liquidity. But what'll happen is the investment group gets offered, and this is in the LLC document this person would like to sell. Here's the amount. If you're interested, let me know. We'll put the two together, help them complete the transaction, and then they're out. So it doesn't happen very often, but it does happen on. And on the fund side, those are trickier. Typically, we don't see a lot of fun liquidations. If it's in a fund vehicle, you should expect that illiquidity to be a stronger feature.
And let's talk about the debt being used on the syndications as well as the ones that are in the fund. Is that mostly fixed? Is that mostly variable? How much is variable? Where are you getting the debt from? Let's talk a little bit about that leverage risk.
So we're. We're not quite preferred with Fannie and Friday, but we're close, meaning just we've done so much business with them. We are primarily a fixed interest rate shop. There were some deals we did in 22 and 21 where at the time it made sense to go floating with rate caps. And so we probably, I think we have five projects that have floating rate debt with caps. And so that became interesting as they hit their caps and went. And you reset that market for estros. And it impacts cash flows in the short run. But once that interest rates start to come back down, all those escrows get released, then your cash flows increase and you sort of get to play catch up. Grays harbor, the current deal is fixed rate debt. Bridgehead trade winds is floating rate debt. But those costs are actually already starting to come down. So I think you're going to see that that floating rate that you'll actually see some of that come back in. It'll just depend on when the Fed gets to a low enough level. But for the most part, we're a fixed shop. And for the most part we're getting 10 years of term. Anytime we do five, we're having an expectation of getting incremental five at the tail end of that with. We've got a MetLife deal, we've got another deal with Fannie, that's a five year deal, but most of them are sevens to tens.
And how much leverage are you putting on most of the projects?
60 to 65. We're not a high leverage shop. We don't do bridge lending, we don't do med stats. It. We're very boring about it. We don't want to create risk from the leverage perspective. And your three biggest risks are the manager of the market and your debt structure and reserves. And so you want to take. You want to have moderate leverage to get increased returns when you have the right reserves for your approach. You want to have a manager that has success doing what you want to do in the best markets you can. If you kind of do all those things, you put the odds of success on your side. Mix with one of those variables and your risk goes up.
Can you talk about the most challenging property that you're dealing with right now?
That would probably be Heights of City View in Fort Worth. That deal was a floating rate project that just dealt with. It was bought at a level, pretty much at the low and had to ride all of the increase. So it's performing operationally, but because of its financing, it's just not distributing right now, which is atypical. I mean Prior to 22, I think we had a 90% distribution rate. We only had one or two properties that weren't distributing at any given time. We have another Fort Worth property Depot, which you're in. That one is just. There's so much supply coming in that market that until they stop generating new supply, it's just going to slightly trail the market until that slows down. But we still go ahead.
I think the cash flow on that one's been below pro forma. What's typical on the pro forma cash flows are most of them at pro forma, half above, half below. What's happened in the last few years.
I would say prior to the interest rate increase, we were probably at 80%, let's call within a percent of pro forma or above. So and that window is going to be just noise. And then you have 20% that would be below. I think with the rate cap market, when interest rates went up, then we probably went to a third below and then a third just a little bit below below pro forma and then a third act. So we just kind of shifted down a little bit. And primarily driven by the ones that had Floating rate debt.
Okay, what have we not talked about that you think White Coat investors ought to know about 37th parallel or about multifamily in general?
I mean multifamily I think a lot of your folks are going to get, you know, it's food and shelter. It says features to it that other commercial real estate asset classes don't have. We have a ton of literature on our website just about the third party statistics about multifamily for 37th parallel. I think, you know, you have some fantastic members of your real estate team. Our differentiator, our differences is when you're investing with us, you're sort of investing with almost like a family office. Someone who is treating money just like theirs. They're in deals just like theirs. Like I said, we have $20 million across portfolio in these projects too. We eat, drink and sleep this stuff and all we do is multifamily. And so if you look at you want multifamily, you want sort of that family office treatment and you want the most tax advantaged position. You can get the. But that's what we do. That would be our difference.
Awesome. And you can get more information on them. You can go to 37Parallel WCI, you can go to whitecoatinvestor.com 37Parallel. They'll both get you to the same place. Thanks so much Chad for your time and for this webinar.
Thanks Chad. My pleasure. The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
More from Jim

Physician Takes a Youth Sports Team to the State Championship - MtoM Podcast #236









