WCI #141: Private Real Estate Access Funds

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dali. This is White Coat Investor podcast 141 Access Funds. Welcome back to the podcast. I missed you guys. I'm glad you're still here. You know who else I'm missing this week is my wife. She's off touring in Vietnam as we record this. So it's Katie Appreciation Week for me and all the kids as I try to hold down this business by myself and try to hold down our household by myself. You forget how much your spouse is doing sometimes. So this is a shout out for those of you who are not the high income professional but are the stay at home spouse supporting that family and that high income professional. Thank you for what you do.

If you're like most doctors, nobody taught you anything about personal finance or investing during your undergrad, professional school or residency. Even though your family and perhaps even your business rely on you to be the Chief Financial officer, you have never been given the tools to succeed. Enroll in WCI Financial Bootcamp, a free educational email series and learn to convert your high income to wealth. You will learn the basics of investing, saving, insurance and more. Your high income alone will not lead to financial success, but as always, we want to help you on your financial journey. Go to whitecoatinvestor.com financialbootcamp to sign up today. You can do this and the White Coat Investor can help.

All right, let's do our quote of the day. This one comes From Robert Dorigazi, MD, who's a cardiologist who wrote a book many years ago about finances for docs. And he said if it is your desire to appear rich and important with all of the luxuries, do not expect financial security. Isn't that the truth? You know, I've been enjoying myself when I go into the hospital these days. It's really a great break from wci. You know, in some ways it's become my recreation rather than my vocation, but it really is fun sometimes to go in and see patients. But on Twitter this last week and by the time you hear this, it'll be a few weeks ago probably there was kind of an explosion with a couple of posts, one of which was an article on some left leaning website that said doctors should be paid less. Basically they should be paid a lot less. And then another one that was related to it said 70% of doctors would not recommend their kids go into medicine. And I'm like, why don't these two people talk to each other and realize that if you lower the pay for docs much more, nobody's going to do it? I mean, imagine if you put in the kind of time and effort that you put into medicine into just about anything else, and how successful you would likely be at it. You know, it doesn't matter what it is, whether it's financial services or real estate or contracting or whatever it is, if you put in that kind of time and effort, you may find that you are just as successful at it. So I hope that most of you do not feel like those apparent 70% of doctors that have answered that survey. They don't want their kids to go into medicine, but are enjoying your career. And hopefully by helping you be a little bit more financially stable, we can help you enjoy that a little bit more. Today we're going to be talking with a real estate company, Allen Donenfeld. I'm going to bring him on here in a minute. But if you want to hear hear more about the types of investments that are being discussed in this podcast, what you need to do is sign up for the White Coat Investor newsletter. So you may already be part of our newsletter, but you may not be signed up for the special Real Estate Opportunities list. Now this is totally free. You can opt out at any time. Not going to spam you on it, but if you notice at the bottom of any email I send you, you will see a link for ADD Real Estate Opportunities Newsletter at the bottom and you can add that. If you're not signed up for the newsletter at all, you can go to whitecoatinvestor.com newslet and sign up for that. But if you want to hear about these sorts of things, I'll send you details as soon as I hear about them so you can be one of the first to know about it if you'll sign up for that newsletter. All right, let's get our guest on here. All right, today we have a special guest on the White Coat Investor podcast. We have Alan Donenfeld, who is the CEO and founder of Citivest. Welcome to the White Coat Investor Podcast, Alan.

Thank you, Jim. Glad to be here.

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

Sure. So I went to way back when in the 70s, went to Tufts University and then Duke University's business school. Worked for about 10 years in large investment banking firms in New York City, Bear Stearns and Lehman Brothers formed a broker dealer, have done several billion dollars of investment and financing transactions ranging from smaller investments on my own, a couple of commercial properties and condos in New York City, many company acquisitions and most recently focused in the city Best company, which is providing real estate investment opportunities for friends, family and other investors.

Now, I understand your decision to start Citivest was inspired by your brother, an anesthesiologist. Can you tell us that story?

Sure. I'm happy to tell it because it led to the founding of CityVest. My brother was retiring with a fair amount of capital that he'd built up, spending grueling hours as an anesthesiologist for about 30 years. Wanted to retire, asked me, his financial services brother, if I could find him safe investments providing a 10% return. And after doing significant research, realized there was no better investment than real estate. And when I went through a variety of real estate investments for him that produced the highest returns, I realized that that group of institutional deal had very high minimum investment requirements. He didn't really want to spend his time searching for individual properties, dealing with tenants, trash and toilets. And so these institutional funds made sense, except they all were seeking 250,000, 500,000 or million dollar minimum investments. And so I got a group of other doctors with my brother. The group was about $3 million. And as a group they were able to invest in some very good institutional real estate funds that have done well, that had a number of institutional qualities like audits and administrators that made him safe and produce a solid return.

So what exactly does Citivest do as a firm?

So, just as I did for my brother, Citivest's mission is to provide individual accredited investors with access to the best real estate investments in the market. So after looking at all these asset classes of stocks, bonds, hedge funds, real estate, we focus exclusively on real estate because of the high returns and low volatility. In fact, those returns aren't just for one year and then move on. But generally real estate has the best long term performance with low risk and volatility. So our mission is to find those institutional funds and provide access to them by pooling a group of investors together who might invest 25, 50, $100,000amounts. We create a special entity called an access fund where we pool that capital. And then as a group, since we're investing say 3, 4 or 5 million dollars as that group, we're actually able to negotiate better investment terms than any one single investor who might be putting in 500,000 or a million. So not only do we provide the access to these institutional funds, but we actually get better terms than what those other investors might get.

So essentially, the big value play here that you're providing is to decrease the minimum amount and maybe get better terms as well in order to get into these institutional private real estate funds. Is that kind of the quick one sentence summary of what citivest does for investors?

Yeah, I would add on one little piece. So not only is it the access and getting the better terms, but these institutional funds typically outperform a syndicated deal, REIT or some other properties. So at the core, they're already providing better returns. We're able to access the better returns and get a notch up on other institutional investors because we're investing a pooled amount of 3, 4, 5 million.

Okay, we're going to get into access funds quite a bit later in the podcast, but let's talk now about these institutional funds, these private real estate funds. What do you see as their advantages over publicly traded real estate investment trusts or the mutual funds composed of these publicly traded real estate investment trusts like the Vanguard REIT index fund? What do you see as the big advantage of private real estate funds over that sort of an investment?

Sure. So the big advantage of a REIT far and above any other reason to buy a REIT is that it's liquid. It's a stock so people can buy and sell it intraday monthly. The stock REIT may go up in price and you can sell it. And so there is a big advantage having that liquidity. However, I looked just this morning and the average REIT dividend today is about three and a half percent. And most private equity real estate funds on the debt side are yielding anywhere between 9 and 11%, maybe some in the 12% range. And many of the preferred equity funds are targeting 12 to 16% preferred equity return. So clearly, the REIT dividends being down at 3.5% and the private equity funds producing returns of 10, 12, 14%, it usually is worth that kind of difference, 3.5% to 10%. It's probably worth investing in some private equity funds because of that much higher return. And part of the reason why REITs underperform is because their legal fees with legal accounting and other public market costs are just astronomical, which brings down that return because they're investing in similar real estate. But with after all those fees, the returns are much less.

So in a lot of ways here, this tilts the investing platform toward those with money in some ways, because all these private Funds are essentially only available to accredited investors, those with an income of $200,000 a year or liquid investable assets of a million or more. Whereas a publicly traded REIT's basically available to everybody.

Well, that's the way a lot of things are. The bigger investors get the better deals and the little investors get REITs, which are public without any sort of requirements. Anybody can buy a REIT, but there's lots of fees associated with accessing the REITs, while the private equity funds there are investing requirements such as income standards, but there are much lower fees because the institutional investors don't allow the private equity funds to charge significant fees, which might bring down those returns.

So let's talk a little bit about buying syndications directly, going directly and buying in with 100 other investors into an apartment complex, for instance. What do you see as the advantages of these institutional funds over these other funds that are available to accredited investors or not funds rather, but these other investments available to accredited investors where they can actually select the property they're going to be investing in, what advantage do you see of the fund over that?

Right, so the bulk of the private real estate market is syndicated direct deals where some group of individuals, one, two, five people in a real estate investment management company might find an individual multifamily that has a acquisition cost of 2 to 5 million dollars, and they go out and form a syndicate, raise money from 100 investors and acquire that property. And then that syndicate management or sponsor will charge fees and acquire the property and do whatever it is they intend to do, whether it's a value add property or run it for a couple of years and sell it. So the multiple problems that I see with that syndicated deal versus the kinds of properties that we're looking at, which are private equity funds, is the syndication of direct deals is not diversified. It's one property. It's focused in one market. So that's great. If you live in Los Angeles and you want to have a syndicated deal in Los Angeles, then you may know where that property is. But otherwise, if you want real estate for diversification, a private equity fund may buy 10 to 20 properties in that fund. In addition, that sponsor group might compose, you know, one, two, five different people. But a private equity fund such as our DLP fund, in total, DLP has 180 employees. So there's a whole hierarchy of acquisition, development, sales oriented people, the value add people. So the level and quality of management in a private equity fund typically is quite a bit bigger and better than in a syndicated direct deal. In Addition, maybe one of the bigger reasons is a syndicated direct deal, that sponsor group typically doesn't have a historical audit, doesn't use an administrator. Both of those are items that an institution requires a private equity fund to have auditors and administrators. So the safety in a private equity fund with that institutional required audit administrator makes the private equity fund quite a bit safer. There's some other very subtle changes. If you're a syndicated deal and there's a sponsor when he's looking for that deal, he's not high on the list from real estate brokers who want to get that deal done. They're representing a seller. They're not first going to go to a sponsor who doesn't have the money, who has to first raise the money. The real estate broker who wants to get that deal done will first go to a private equity fund that's sitting on the capital. They have the credit and banking relationship to get the best possible financing. And so the private equity funds are much more opportunistic in being able to get deals done. They have cash in hand, they can pay all cash if they want and then get financing later. While a syndicated direct deal, it might be great that they describe that specific deal and it might be local to you, but they may need to take 6 weeks, 8 weeks, 12 weeks to pull that money together. Meanwhile, the ability to lock down that deal for that syndicated sponsor is a lot more difficult than that private equity fund who has the capital on hand and the credit and banking relationships.

Okay, now you and I were at the Passive Income MD conference a couple of weeks ago and we heard from some docs who'd basically gone out and bought properties themselves. They found the financing and they bought them and hired managers, et cetera. One was a surgeon who bought four or five different apartment complexes which were enough to, you know, once they were cash flowing, to basically make them financially independent. Another couple of physician investors had become, you know, financially independent within four or five years of getting out of residency by doing these direct real estate investments. What advantage do you see for these institutional level private real estate funds over investing directly like these docs have done?

Right? So I think that it's exciting to own real estate directly. Unfortunately, it's a full time job to search through hundreds of listings, know certain ages of properties which are problems. They might have engineering issues. And buying real estate isn't really a hobby, it's a full time job. It can be difficult buying a property with lots of paperwork. You have to use your credit to go through that financing process. It's a long closing process with lawyers. You're going to have to deal with tenants and leases and repairs. All the people at that conference that we attended, I think almost every one of them have made it more of a full time job than their medical practice. And slowly I think all those people, they've enjoyed investing in property, but I think at this point most of them spend nearly all of their time doing that rather than their old day job which was being the doctor. And if you're buying a property on your own and you're out there looking, typically we'll find smaller properties, not four or 500 door multifamily. If it's your own capital, then it's a smaller property. And typically smaller properties have a lot more competition in buying it because it's just more people that have that smaller amount of money to buy that property. And so you don't get the best pricing. Again, the financing may be difficult for you to get versus a fund that comes in and is competing with you. And even if that fund is at a 10 or 15% lower price, sometimes that seller may want to sell to a fund that is not going to have a financing problem that's putting up all cash versus competing with you. If you've made this your full time job trying to buy real estate directly, the solo benefit that I do see, buying real estate directly is you can keep it in your family forever. You can transfer it through a 1031 exchange and buy other property and there is a step up in basis. If you die, you can transfer that property to your family. So there are some tax benefits to owning it directly. But overall, unless you're going to do it seriously as a full time job and even then if it is your full time job, the properties may be smaller. You're not getting the best kinds of return that you should if you're competing against a real estate private equity fund.

All right, so we've talked a lot about the advantages of a private real estate fund. Let's talk a little bit about the disadvantages. Specifically fees, illiquidity and lack of control that you were alluding to a moment ago, particularly with regards to taxes. Can you talk about the disadvantages and who a private real estate fund really is? Not a good fit for sure.

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

Now, a lot of people get confused on this point, right? Because they go and they look at a Vanguard index fund and they see that it's charging an expense ratio of 3 basis points or 10 basis points, 0.1% per year. And they don't stop and consider the underlying costs. And you know, call them fees, column costs, call them business expenses, whatever you want to call them of the underlying real estate investment trust in that fund. Is it really fair to compare a 1 or 2% fee that a real estate fund may be charging to the expense ratio of a mutual fund? Or is that really just comparing apples and oranges?

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

How much of a portfolio do you think is reasonable to put into private real estate investment funds, in your opinion? For typical doctor, how much of a portfolio do you think is reasonable?

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

But you think 50 or 80% is just too much of a portfolio to have in there, huh?

Yes, way too much. I think that for an average individual, 5 to 10% is good. Now, the other side of that coin is since real estate is less volatile, less risky than the stock market, I'm not advocating putting 50% in the stock market, particularly at times like this. I would say that if you do have that choice, now that you have cash in the bank, that's not a very good place for your money earning less than 1%. I would say, if your choice is today, do you put it in stocks, bonds, or real estate? I would say I would put in diversified funds and several different investments. You may want to put as much as 30% in real estate. I would not overweight in the stock market, particularly where the stock market is at today.

All right, let's change gears here a little bit and talk specifically about access funds. These are starting to crop up here and there. CityVest, this is basically what they do, is create access funds to allow people to invest in these private real estate funds. Now, you mentioned earlier and kind of explained why somebody might want to use one. But it seems to me that the main deal here, what you're doing is you are trading the advantage of a lower minimum investment. Basically, you're getting access to this fund, and in exchange for that, you're paying another layer of fees. You may be getting less liquidity than the fund itself would give you. You may be getting less frequent payouts, you know, quarterly instead of monthly, for instance. And of course, you're one more step removed from the fund manager. Do you think that's a fair appraisal to say for a description of what an access fund is?

Yes. So I spend all of my time looking for the best institutional funds. And there are a class of institutional funds that clearly outperform other funds in real estate. Oftentimes bigger is better. The bigger properties have less competition for buying them. The bigger funds have this greater ability to acquire those properties because brokers bring them the property first. Their ability to get credit or close with all cash is better. And so institutional funds just outperform every other category of funds, with this one significant downside, that an institutional fund would rather go to California State Retirement Teachers association and accept $20 million rather than dealing with hundreds of individual investors at 25 and $50,000. So our mission is to access those best funds through our access funds. And we allow up to 100 investors in each of our access fund vehicles in amounts as low as 25,000. And at the end of the day, even after our fees, I believe that our returns stack up favorably with any other funds because our underlying funds simply outperform. And then along the way you get a range of institutional benefits such as quality auditors, administrators. Each of these funds have their own in house accounting staff. The level of experience of these managers is that much higher. So there's just a variety of benefits from an institutional fund that outperform other funds even after our fees and our access funds.

Okay, so obviously it sounds like you think the trade is worth it. For a typical physician investor with a $500,000 to a $3 million portfolio. This allows them to, rather than maybe put a big chunk of their investments into one single fund at $250,000 or $500,000, but rather now they can spread it among three or four funds at 25,000 or $50,000 a piece.

Absolutely. And many investors are making a first time real estate investment and they'd rather make a $25,000 investment. Even though they may feel comfortable putting 100,000 or 200,000 in one fund. They need to dip their toe in the water and see what it's like. Make sure they're getting distributions, getting information from the managers. They understand what it means to receive a K1 at the end of the year and give that to your accountant. So there is a process of getting comfortable which you and many of your investors have already gotten comfortable. But some investors just starting out should just try it with 25,000. Get comfortable and then search for other funds that you may want to invest in.

Okay. As we record this in mid November, you have two deals up on your platform. Let's talk about each of those individually. First, let's talk about the Arixa Access Fund. 1. So this is an access fund designed to lower the minimum investment into the Arixa Enhanced income fund from $200,000 to $50,000. Can you tell us why you chose the Arixa Enhanced Income fund as an investment for your platform?

Sure. So we feel generally a little bit uneasy about the stock market and the political environment. So the Arixa Access Fund is investing in the Arixa Enhanced Income Fund lp. It is a levered fund focused on California fix and flip properties. So it's a debt fund. They are a lender, like a bank making loans to real estate investors. And so we feel particularly comfortable being the lender having a first mortgage as Collateral. This is for the Arixa Enhanced Fund. They have the collateral of that mortgage. They only charge a 1% fee in their fund and they are experts in making these loans. Typically there's about 65 to 85 loans in that portfolio. And the Arixa Enhanced Income fund pays our access fund a 9% preferred return, after which investors get 80% of profits and Auryxa gets 20%. They do have another fund that I think, Jim, you might be an investor in, called the Arixa Secured Income Fund. It is unlevered, meaning they don't employ debt to make some of these acquisitions. And it does have a slightly lower return. I think the target return for that fund is around 7, 8%.

That's right. They've got two funds. They've got the unlevered fund, which is. They aim for a 7 to 8% return, and they've got this Enhanced Income fund, which is the levered Fund. They target returns of 9 to 10%. I think over the last five years they've averaged a 10.31% IRR in that enhanced fund. So, yeah, I am actually invested in the other one, the unlevered one. I think the investment minimum on that one's a little bit lower. I think it's 100,000 versus 200,000 there, and I'm directly invested there. How much leverage does the Enhanced Income Fund really use? And do you think that's a safe way to boost returns?

I do think it is. In the Enhanced fund, which is the underlying fund to the Arixa Access Fund 1 the loan to value seems to vary between 60 and 70%. It has averaged 60 to 65. I think right now it is on the higher end. And as a result of their borrowing from a bank in order to make some of their loans, they've been able to generate, as you indicated, at 9.5% return over the past year. I think that's a solid return. And we did have a choice of making our investment in the unlevered fund or the levered one. And I think the level of risk is comfortable for me in the levered fund, providing that 9% preferred return. Again, the fees are quite low in the fund. And because these are senior debt loans that a rics is making, the element of risk from the levered nature I don't think is significant.

Okay, so let's talk a little bit about the fees that the citivest Access fund structure layers on top of the Arixa fund fees. So it looks like the fees for the Access fund are 0.75% a year as an annual management fee, $500 per investor per year for administration costs and then a one time fee from the fund of 50,000 for setup costs, which is about 1% of the target raise. So with this fund expected to run for five years, if it raises the target 5 million total, an investor that comes in at $50,000 is basically paying 1.95% per year for the Access Fund. And so if the fund's made 10.3% over the last five years, its targets 9 to 10%, maybe 9.5%. If you subtract out 2% a year from that, that equals about 7.5%. Is that what you would expect someone who invested into Rixa Access Fund 1 to make over the next five years, 7.5% a year or so?

Yeah, that's about it. You laid it out pretty nicely. 75 basis points is the annual management fee, $500 per investor per year as an administrative fee. And then if you amortize the fund setup cost, all of that comes to, I think it's slightly less than 2% per year. And so given the recent performance of the underlying Auryxa fund, investors should expect something around 7.5%. Again, I think that's a very strong return given that they are like a bank, they're making the loans to investors and hold the first mortgage. And I think 7.5% is a good return.

Okay. A couple other downsides of going through the Access fund, the liquidity is a little bit lower. Since it's a five year fund, you really, you can't get your money back for five years. And if you were going directly to the fund, you can actually start cashing out after a year. It would take you two full years to get your money out, but it's a little bit less liquid. And you also can't reinvest your distributions. And those distributions are coming quarterly instead of monthly if you went directly to the fund. Is that all correct?

Yeah, I think our fund is actually a four year fund. But yes, everything was correct. We have a little bit less liquidity than an investment directly in the Arixa enhanced fund. I think that in practice, if an investor does have an issue during those four years that they're invested in our Access fund, while it's not a guarantee, we could redeem out of the underlying Arixa fund. And so if an investor does have an issue, again it's not a guarantee, but we will endeavor to redeem that portion of that investor's funds from the underlying fund. There is this time Period to get your money out of the underlying fund that two year period. But it is possible and so you would not be totally illiquid by investing in our Access fund.

Okay, so let's talk a little bit about the process of building this Access Fund and then go into the underlying fund and investing the money. What happens to an investor's money in between the time they send you cash to invest and when the Access fund closes and makes that investment in the underlying fund, do they earn any interest on that or what happens with the money there?

No, unfortunately we have some paperwork on our side that the securities and Exchange Commission requires, such as anti money launder checking, know your customer rules. We actually use a third party administrator named Assure Services. They check all of our paperwork that we give them. Jim, you may not realize that, but they're located in Salt Lake City where you are. And so there is a little bit of a delay between the time that we receive the signed subscription agreement. We have to go through the accredited investor verification process forms and then send them to assure. And so there is a small period of time, maybe as much as four or six weeks even, depending on when you invest, in which there is no interest being earned on that money that we've been sent. And then the one thing that we do try to do is given that we will be investing a larger amount in that underlying fund, we often ask that fund to get our capital to work immediately upon the investment. Sometimes if you invest in a Rexa in their documents, they put it to work at a point that's convenient to them, that they need the capital. We've asked them to get that capital to work a little faster. But there is a delay in our documentation to get that money into the Arixa fund.

Okay, now the Arixa fund is based in California. It basically makes all of its loans in California. So will non California residents that are investing in the Arixa Access fund have to pay California taxes on that income?

They don't have to. Arixa is making their California state filing. We receive one distribution to the AHCCCS fund and our investors will not have to make a filing for California taxes. And so that is not an issue. In fact I just confirmed that this morning with them.

Now they don't have to file a return, but do they have to pay California taxes or would they be paying in their own state on those returns?

They pay their normal tax in their own state on their income, but they don't pay California taxes on that distribution.

Okay, now one way around those tax consequences, which is probably Pretty wise for a tax inefficient investment like a debt for fund like this where basically all the income is ordinary income, there's no depreciation shelter in it or anything is to invest in it through a self directed IRA or a self directed 401k. Now I understand you can invest in these access funds using a self directed ira. Is there a self directed IRA firm you are recommending?

Yes, we are working with a firm named Rocket$. I think it's RocketDollar.com and their specific product is like a enhanced self directed ira. Their product is called a checkbook IRA and it allows an investor to first set up their self directed IRA and then have a checkbook IRA within their self directed ira. Allowing them to literally write checks and invest that capital into any products that they want without then having to go through the custodian through us. We've negotiated a hundred dollar discount off the set of costs of the Rocket Dollar checkbook ira. Be happy to provide anyone with the link so that you get that benefit. And then whenever you want to make an investment in a City Best fund or anything else that meets the requirements, you obviously can't invest in your own house or anything that benefits you personally, but you literally would write a check to make that investment and going to the tax consequences because Arixa and we haven't really talked about the DLP Access Fund which is also a debt fund because it tends to generate a high level of ordinary income tax. It is beneficial to invest through a self directed IRA account where you then would not suffer any taxes. It's very tax efficient to invest in debt funds like Auryxa and dlp.

Yeah, Rocket dollar is well known to us. We've had an affiliate deal with Rocket Dollar for a long time. You can check that out at White Coat Investor, rocketdollar. Let's turn now to that other fund. Now this is DLP Access Fund 2. Now I invested 100,000 through Citivest in the DLP Access Fund 1 early in 2000. I think the most recent distribution I got on that fund annualizes out to 11% a year. So I was pretty happy with that. But DLP Access Fund II is not investing in the same fund that DLP Access Fund 1 did. It's investing in a different DLP fund. Can you tell us about the differences between those two funds?

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

Now, both of those funds have a 10% preferred return, then split additional returns 8020 in favor of the investor with a target return of 11%. Do you think that's a fair structure?

I do. Most funds tend to provide a 8 or 9% preferred return. So I think that DLP providing a 10% preferred return is on the high side in favor of investors. In addition, the 8020 split of profits in favor of the investor getting 80% is pretty standard for most institutionally oriented funds. There's a lot of funds out there that split 75, 25. So investors are getting a little bit less than 80%, only 75%. Some are even at 70, 30. I don't think those kind of structures are fair. We tend not to want to do any access funds with funds that are anything less than 80% of profits going to the investor. But with that 10% preferred return, I think it's quite high. And again, the fees of DLP and Auryxa, around 1% of AUM, I think, are on the low side. So overall, I think it's a fair structure.

Now, the lending fund had a $500,000 minimum, but the income and growth fund had a $250,000 minimum. Any idea why that was different between the two?

So the lending fund was their core fund, started about five years ago. It's now gotten quite large income and growth as more of an opportunity fund. I think it's only been in existence for two and a half years. I think the reason for the lower minimum is to make it more accessible, raise more capital into the Income and Growth fund and be more of an opportunistic investor with income and growth. And they just set a lower minimum to be able to raise more money faster in that fund.

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

I think it's actually going to be a little bit more, But I think 9% is obviously reasonable given 12.3% is their historical average. They were even a little bit higher than that in the last couple of months. I'm not sure why that is because generally mortgage rates did come down. So I'm surprised that they were able to squeeze out a higher return in the last couple of months. But I think a 9% return is a reasonable target.

Okay, so I understand you have two other funds coming onto the platform soon. In fact, by the time this runs in mid January, I think they'll probably be on the platform. Can you tell us about those two funds?

Sure. We're very excited about them. One is called Apex One Multifamily Fund. It's their third fund. I've known the company for quite a while and my brother was an investor in their fund too. It's producing excellent returns. They're targeting a 13 to 17% net of fees returned. That's actually before our Access Fund fees. It is a preferred equity fund, so a little bit riskier than a debt fund. But they buy fairly large multifamily developments. They've had very large co investments from institutional investors, firms like Tramelcro that's a very large family office in Texas. Other institutional funds like Rock Street, Alfred Beatty is a multibillion dollar institutional investor. And so they're able to improve the returns by having a joint venture co investment partner who they charge fees to. And they're targeting larger, you know, 10, 20, $30 million size properties where there's a little bit less competition and they're finding better returns from those properties. Typically, Apex1, which is based in Houston, is targeting multifamily investments in states like Florida and Texas, Indiana, Tennessee. So the returns in those states are quite a bit higher than on the coast or bigger cities like Denver or Seattle or Phoenix. So they're able to generate higher returns targeting that 13% to 17% return. So we're excited about Apex1. And the other fund is named New Era Medical. They have closed on five acquisitions of medical properties, predominantly behavioral health facilities. And they build and develop those behavioral health facilities primarily for one public company that does not want to develop them themselves because they're public. And having a two year building process for those facilities would be a drag on their public earnings. And so they have a third party company, New Air Medical, build those properties for them and upon completion in about a year, then the behavioral health company that's public will acquire them. New Year is right now targeting a approximately on five different properties, around a 25% IRR. For those acquisitions they're offering us a 15% preferred return, after which it goes to 80% for investors. That's as opposed to an investment directly into New Era Medical's fund where they start out at an 8% preferred return and it does go up, but it's only a 7030 split on profit. So we negotiated a significantly better deal. Direct investors only getting 8% preferred return. We're getting a 15% return and I think that's because they're looking to raise that money fairly quickly. Our target again is going to be around 7 million. Right now they're at about 14 million. And with our capital they will end up fairly close to the maximum size of that fund at around 25 million.

How long do you expect these CityVest Access funds to run for these two funds? Are they going to be four or five years? Are they going to be longer?

Yeah, both of them are longer than the debt funds. The Apex one, I believe is a seven year fund and it has two one year extensions, so that could be as long as nine years. And New Era is a little bit shorter because their investment period is only a year. They've already closed on five of these properties and I think they're looking to sell them to the behavioral health company in year two to three. And so I think the New Era fund is just a five year fund.

And similar fee structures to the debt funds we discussed.

Our fee structure is nearly identical. The 75 basis points per year, annual management fee, $500 per investor, administrative fee, and then that $50,000 organization expense reimbursement. Yes.

Okay. Now, I heard a few complaints from investors in two of your prior access funds about sparse communication. They didn't hear from you quite as often as they wanted to. Can you tell us what CityVest has put in place in the last year to improve that service?

Yeah, so we've raised a bit of capital for our own growth and hired some customer service people. And there absolutely was a couple of people who had sent in emails. Some of them actually were on your blog, I think, and I didn't keep up reading your blog. And so they, they might have asked a question through the blog and I didn't see it and didn't get back to them. I think there was one person that emailed me and I think I just simply overlooked that email. But we've closed that loop and we're much better at being responsive. In addition, we have a much more robust investor dashboard which shows when you invested your money from what account, what your distributions are, all of the documents that you've received. And I think that back when DLP Access Fund 1 was being done, we were upgrading that investor dashboard and in a couple of cases we were not as responsive as we should have been. Always open to getting phone calls rather than text. So on the site is my phone number. Call me directly and I'll be responsive.

Now tell us what to expect from CityVest in the next year. I mean, how many funds do you think will come onto the platform in 2020?

So we have these four funds. Two are on the platform currently. DLP Access Fund 2 and the Arixa Fund, both debt funds. We're excited by Newer Medical and Apex one. I think that we will have a total of maybe six funds throughout 2020. We're looking at a variety of different funds. One is a industrial fund, industrial assets, industrial real estate assets have been performing very well with the number of distribution facilities that companies like Amazon have acquired. So that's one fund that we're looking at. Another is a self storage and mobile home fund that seems to be performing quite well. We're still doing our due diligence on that. We'd like to look at them over a number of months and look at their quarterly reports so that by the time we make our investment, we're very familiar with how that fund is performing. So there's probably about six funds that we're looking to invest in during 2020, and we're currently eyeing those two, but there will be others.

Okay, so where's the best place for White Coat Investors to learn more about citivest and investments available there?

Well, your website is usually the best place. Clicking on the White Coat Investor link to get to CityVest usually provides a little bit of a discount on the management fees in the first year that an investment is made. So that's always the best place. However, if you click on cityvest.com and look at the deals, if you make an investment and you're checking out, there will always be a place that says, where did you hear about us? Or who referred you? And if you put White Coat Investor or just wci, when we see that, you will get the fee discount and being able to invest just 25,000 in our funds rather than 50,000, you don't need to ask whether you're getting those discounts. We know where you're coming from when we see wci and we will provide the ability to invest that lower amount with the lower first year fees.

Okay, thank you very much, Alan Donenfeld, CEO and founder of citivest, for coming on to the White Coat Investor podcast.

My pleasure, Jim. Nice to be here.

All right, I hope you guys enjoyed that brief tour into the world of institutional private real estate funds and access funds in particular. Yes, CityVest is a sponsor of the White Coat investor enterprise here. I do get paid by CityVest to help them get the word out about their investments. So in case that's not totally obvious, I want to make that real clear up front. But I think they're providing a service that I'm really not seeing in other places. I mean, there are these great funds. Yes, they're illiquid, but you know what? Their returns are pretty darn good. And unfortunately it's really hard, especially if you're going to follow Alan's advice, to only put 10% of your portfolio into these things to diversify between them. When the minimums are $250,000, $500,000, a million dollars, et cetera, that just takes a massive portfolio. If you're going to have three or four of them and meet those minimums, it just doesn't pencil out very well for most of us with the typical physician level of assets, much less, you know, a physician in the beginning with a negative net worth. And so the Access fund provides you the opportunity to get into these investments for $25,000 or $50,000 where it becomes reasonable for somebody with a typical physician level of assets. Yeah, it's going to cost you some fees, and I hope I laid those out nice and clearly in this interview, that those fees do directly come from your return. The fact that you have to pay CityVest something to provide this access fund is going to reduce your return by nearly 2%. And so obviously your money is going to compound slower than if you had the money to go directly to these funds. You know, there's no doubt about it, just like in any sort of financial advisor situation or mutual fund expense ratio situation or real estate fund situation, that this sort of fee does lower your return. So be aware of that. Try to minimize your fees as much as you can. That's a core principle in investing. And you can do that by taking advantage of this special WCI deal in that you can have a little bit lower minimum even than what Alan's offering, mostly because he knows when people come back for a second investment and they're a little bit more comfortable now, they invest more than $25,000, but also just because it helps you to get into the investment. And the whole point of an Access Fund is access. So we want to provide that for you. I've also negotiated, as he mentioned, this slightly lower fee. The first year, basically cuts that 0.75% fee in half for the first year, boosts your returns by what does that work out to be? 37%, 1.5 basis points. So that's better than a kick in the teeth, right? At any rate, if you want to hear more about these investments, be sure you're signed up for our newsletter whitecoatinvestor.com newsletter and make sure you're opted into the real estate opportunities part of that newsletter. Now, I consider all the emails I send out to this list. These are introductions, not recommendations. I can't pretend I've done a thorough due diligence background check on every company and every principal of every company that I introduced to you through that list. And so the responsibility still lies on you. But if you want to hear about these investments, that's where you sign up to hear more about them.

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