The Real Estate Syndication Business (REPE) - Chris Powers CEO of Fort Capital, LP - e7

Hey, Michael here. You will now hear some episodes of the Michael Girdley Show that we had branded differently, called Unusual Profits or some such like that. Same show, same person, just me interviewing people and producing content that could be helpful on your journey and mine as well. So with no further ado, here's the episode. Hey, Michael here. Sponsor for today's show is actually a product that I'm a part of called DM Bridge. And what DMBridge is, uh, is a service that we built, uh, to solve the problem that Twitter's direct messaging functionality is a total mess. So we built DMBridge to help you fix that. Um, a lot of the other solutions, uh, do things like requiring you to install a whole nother inbox. We didn't want another inbox, so we created DMBridge. And what it does is it takes all of your Twitter DMs and has them appear inside of your email inbox. So you can reply to them just like it's a regular email. You see them just like it's a regular email. You can search them later like it's one of your regular emails, all just by using DMBridge. So, uh, we're currently live with the product. Uh, would love for you to sign up and become a customer, uh, and check it out. So you can find that at dmbridge.app, uh, and go on there, put in your name, uh, and be either part of the beta or join us as part of the live use of the product. And again, check it out, dmbridge.app. All right. Today is another recording of How My Business Works. I'm Michael Girdley, your host, and I'm very excited to have on today a guest who has interviewed me in the past. And my goal today, Chris, is to be as good as you were interviewing me, or at least getting the same ballpark. So we'll see how things turn out. Um, very excited to have you today, Chris.

Thank you so much for having me. And, um, the bar is set low, so you should be able to crush me out of the water.

Uh, well, you've, you've recorded many more podcasts than I have and you have professional help, which I do not. So I think I'm impressed and hopefully I will reach your level of excellence at some point. So, so yeah, so this is a podcast about, uh, how businesses work, uh, especially niche ones. And, and you're in a very interesting niche in what you do. You know, just to start off, love to get like a 1-minute thumbnail sketch of, of what you do every day and what your business is.

Yep. So we're based in Fort Worth, Texas. We are a real estate private equity group. And I think what separates us from others is, one, we're focused on one asset class, which is kind of Class B industrial. Two, we're focused only in Texas. And then third, I think what we're going to talk a lot about today is how we raise capital. So we're not a fund. Which means we don't have pre-committed capital. We syndicate capital on a deal-by-deal basis. So we find a deal, we raise money for it. It has its own kind of capital structure, financial structure, a different set of investors, possibly different terms. Yeah. So we buy commercial real estate all over Texas and raise capital deal by deal. And, you know, we can talk about kind of our vertical integration, but we acquire, we asset manage, property manage, and construction manage all in-house. And really the only thing we outsource is kind of the leasing and brokerage work. We do not do that in-house. We work with professionals in their kind of submarkets.

Okay, that's good. I love, I love that description because I had like 14 questions as you went through. But before we get to those, how did you get into this business? I know you out of college, you started doing residential real estate, right?

Yeah. So it really is one of those stories of like there was no grand plan. I didn't like love real estate and therefore I got into it. I didn't really even go to school for it. I didn't have a family member in the business. I really was just kind of a serial entrepreneur in college and went to college in '04 is when I started before the great financial crisis and was fortunate enough to be a 17-year-old kid with no background or history that was able to borrow money and was zero down and really over 17 years have just been doing the same thing. And so what turned into like a hobby to make money for college has become a career and a very rewarding one at that. And so, yeah, I've been, I guess I've been doing it since 2004 was the first property I bought. And then I graduated in '09 and really put all my efforts into it since then. So yeah, 17 years.

So in 2004, so you're an 18-year-old kid at that point, is that right?

Yeah, I graduated high school a year early. So I started college when I was 17, but yeah, I was 18. I turned 18 in 2005.

You graduated college a year or high school a year early. How did that happen?

It's a terrible story. Well, actually it's a good story, but you would think, "Oh, this guy must be so smart." You're doing Hauser?

Is that what you're telling me?

No, I was a huge troublemaker in high school. I've beat all odds of what people probably would've bet my life would look like. I got in a lot of trouble one year and was supposed to go on a big trip to Europe, which everybody kind of knows about, even when you're in like 6th grade, it's the sophomore trip. And got in a lot of trouble. My parents finally said, "You are not going to Europe. You're going to stay here all summer." I was like, "I'm going to go to a school and get credit so I can leave the house early, so I don't have to listen to y'all anymore." That's what I did. I graduated a year early. I skipped my junior year that summer. On one end, it was a great decision. It was a very immature way to do it, but I'm really glad I did it in the long run, to be honest.

That's crazy. Will you come over to my house and talk to my son?

Michael Girdley Jr. Yeah.

Well, it is funny. Uh, you know, I, I'm a little bit older and kids these days, I think the bigger problem is I talked to other parents. It's not that kids are out doing bad things. It's that kids are not out. Like they all just want to stay home. And I think you see it in all the stats. Like it's funny how we're all like, oh, I hope our kids don't get into too much trouble as teenagers. And I'm like, I wish my kid would go outside and do something, anything, anything but this. Oh man.

Funny.

So how did you— so you're buying your first kind of residential real estate and stuff like that as your own money, friends and family, is that kind of how that got started? Or I'm curious how we go from transition of small residential real estate to finding this asset class that is so appealing.

Yeah, great question. Well, when I started, this was '04 to '08. So in that period of time, which is, I think, is different from where we're at today. They were handing money out. I mean, I was literally an 18-year-old kid with no experience, no history, no money, no credit. My parents didn't give me the money, but I was able to go into Countrywide Home Loans and get pre-approved for a loan in like an hour. And back then they called them liar loans. So rather than like pull all this credit history on me, they'd be like, how much do you want to make this year? Well, I want to make like half a million. Okay, great. Half a million. And, you know, basically that was kind of the extent of how I got approved. I guess I was kind of coached. And I remember thinking at the time, like, that doesn't seem too honest, but it was like, no, that's what you do. You just tell the loan agent what you want to make, not how much you actually make, which was like negative $300 a year. Right. And it worked.

So it's basically The Big Short, except instead of being an adult entertainer, you are a college freshman.

100%. And I would've been totally screwed had it not been near TCU, which was a growing university in Texas, which is the Texas story. But if I'd been doing this out in Florida or Las Vegas or some of these other markets, I would've gotten wiped out. So everything I bought was student rentals. And then I've always just been a learner. So I just kind of kept growing. And then I came across a townhome development deal that I needed to raise money for. I was going to build a bunch of townhomes around TCU. I remember going like, "Well, how am I going to raise the money?" Because I was still 21 years old, had no credit. That's where I met a guy that was like, "Hey, this is how you structure a deal, and you're going to try and get like $50,000 from 10 different people, and this is how it's all going to work." To be candid, that's what I learned to do, and I was successful. Then I did it again and again, and I started meeting more investors. I never really thought about real estate as, "Oh, I need to have this huge family office or this big institutional partner that backs me on everything. I just kind of thought that's how you did it for a long time. And then once I was aware of what else I could be doing, then I started going like, it doesn't make sense to not do what I'm doing unless I just can't raise capital syndicating anymore. And I can explain the nuance of that if you want. But I, again, I wish I could say it was this grand plan, but it just kind of kept doing the same thing and it's never made sense to me to do anything else.

So you find this Yoda character. How did that go down? This person who kind of showed you the ropes as a 21-year-old kid, who is this person? How did they end up helping you?

So he's on Twitter. He goes by Adam Blake. That's because that's his name. And he goes by his name. Funny, funny. No, he had won TCU Entrepreneur of the Year. He was a year older than me and he had done this before. And he, he's the one that taught me how to buy my first house and taught me how to go to Countrywide and get this loan. He told me how to do this. He had just done it on a different deal. It was basically like, you're going to raise the money and there's going to be a promote, and that's how you're going to make your upside. You're going to pay them a preferred return and you're going to have a split on the back end. Because you go to TCU, I think it's one of the fortunate things. You go to a private university, you tend to meet wealthy. My friends were wealthy, their parents were wealthy. So I just had this access to capital that in hindsight I realized was a really fortunate situation. Not all college networks are that way. But when your 21-year-old roommate can write you a $50,000 check to do a deal, that's an interesting spot to be in. And yeah, so he just kind of taught me. And that's one thing I think I've always lived with is like, I don't spend a whole lot of time dwelling like, "Oh, this could be risky," or, "I'm scared to do it." It's like, "Okay, that's what I do. That's what I'm going to go do. And if I look like an idiot doing it, I'll learn along the way." Yeah.

It's very interesting. So I guess we're coming to the core of what Real Estate Syndication does. So walk me through a little bit the steps of that. So first thing you do is you find a real estate deal, right? Is that where it all emanates from?

Yeah. So you find a real estate deal and you underwrite it. And let's just, for simple numbers, we'll just say it's a $10 million deal. And in a market like right now, that means you have to raise $3.5 million. So syndicating is essentially rather than having just one pool of capital that you pull from, or pre-committed capital, you are going out and basically gathering checks to equal that $3.5 million. And how the syndicator sets the terms on that is totally dependent on what we call the general partner, the person doing the syndication. And so, you know, in a $3.5 million deal, we might have 30 investors each writing like a $100,000 check. We could have 100 investors, or we might have 6 or 7. But we don't know who those investors are going to be before we go to raise. You know, we send a deal out to now 600 investors and only 30 or 40 get into each one. And I couldn't tell you going into it who all 30 or 40 of those are going to be. I could probably tell you a few of those people. And then there's terms. So every— since we do a deal by deal in a fund structure, I might go raise like, you know, like $100 million. And these are the terms of the fund and we're going to buy real estate over the next 3 years. That fit this criteria and we have 10 years to kind of add value and get out. Well, syndication, like every deal stands on its own merits, every financial structure stands on its own merits, and it gives the GP a lot more flexibility on how to run their business. The downside to it is you don't have pre-committed capital. So every deal I go into, I say it like I'm like wishful thinking at this point, we're not, we were for a long, You go into it going like, we don't have the capital raised, so we got to go. That's a huge part of getting this deal done, which is a lot of the reason why some people just don't do it in general. They want the security that the money's already raised before they go to the table. And we just never really did it. I don't have a great answer why.

Yeah. Well, real estate. So there's the general partner. So you're the general partner. So you're the one that manages the whole thing. The other folks are limited partners, right? To make sure. But real estate has an interesting kind of deal where the sellers and the brokers and everybody involved are accustomed to buyers not having their financing lined up before the deal gets agreed to, right? Because they're accustomed that you're going to— well, you said you only have to raise 35% of the money in equity because the rest gets borrowed from a bank or from somebody that's a private lender. But I guess real estate is interesting because there's this process where there's a feasibility period and people expect you to be lining up your financing after the deal is already agreed to. That doesn't happen in most other asset classes.

Why not?

Because the selling process for, like, say, like a big tech company or like a business, for example, the selling process in that type of asset class is much more expensive than it is for a real estate process, is my theory. Yeah. For example, nobody goes in and like pulls up the rugs and carpets in your, in your office building if they're going to buy it, you know, the inspector will do that. But that doesn't cost much to the seller. Whereas if I'm doing diligence on a customer base for a SaaS business, that's expensive. That's expensive to the seller. So I think that happens. But yeah, that's the only theory that I have. If you have another theory, I'm definitely interested in it.

No, I think you're right. I think the truth is the further you move up the chain, call that deal size, I think that's different. So we don't participate in auctions or bid processes. For example, we're selling a deal right now. It's a 600,000-square-foot portfolio. JLL, one of the largest global brokerages, is listing it. Buyers have 30 days to get in the data room and look at all the information. There's a call for offers on April 15th. There will be rounds of interviews of the buyers. And one question I'll be asking the buyers is, where's your money coming from? And is it already good? And I'm speaking out of both sides of my mouth because if you're buying a deal that large from me and you have no pre-committed capital, I'm not saying it's a no, But it's a huge variable. The further down you go— So we don't participate in auctions or bid processes. Everything we do is off market. And that's just our way of doing things. That's how we're set up. So we're not often asked where our money comes from, but the truth is we now have a 16-year track record of closing. And so if somebody asks me, I can give them a list of names of people that invest with us. We now have things like lines of credit to backstop us and things of that nature. But It changes when you get into a big institutional game. Everybody wants to know where your money's coming from. And that's why we got a line of credit and some things, is we were getting into some situations where we were being asked that. And for a while, we're like, "Well, I guess it's time to raise a fund," or, "I guess it's time to raise that pool of committed capital." But that comes with a lot of baggage, as you know, and we can talk about what that baggage is. We said, "No, let's try and solve this with maybe a line of credit because we want to keep syndicating." It's better, I think, for the GP and the LP in a lot of ways.

Yeah. So let's dig into the, let's dig into the fund versus deal by deal. You talked about the syndicating deal by deal. That's where you just raise money on each individual deal. And you've got this like massive institutional following of folks. To me, 600 LPs seems like a lot. So like, that's great. And these are real check writers. So you've got that and you can leverage that. But the other option is you go raise a pool of committed capital and you have all the things that come with that. So walk me through kind of your thinking. Why, why do deal by deal versus versus the fund?

So in deal by deal, one, it allows you to set the terms on each deal. So every deal has its own merits and the success of that deal is the success of that deal or that failure. Whereas as I go through these, I'll kind of give the comparison of each. So in a fund, you set the terms once and those are the terms for basically 10 years. In syndication, it's deal by deal. The second thing would be the success of things. So If I bring you a deal, Michael, and it does really well, that's how I get paid. In a fund, everything's cross-collateralized. So you might have deals that do really well, but you don't get paid until other deals have performed too, because it's all viewed as one big unit rather than 20 different deals. And a fund at the size that we would be doing, we would probably be doing 15 to 20 deals in that fund. Well, again, market cycles, different things could happen where you can crush it on some and just never get paid. Third, and I think this is changing as we sit here and talk, the democratization of capital. I think it's the first time we can really have this conversation. You couldn't have done this maybe a few years ago or a decade ago, but it used to be that if you wanted real money, there was only a few people in the country to go to, these large institutions or these family offices. The internet and crowdfunding and Twitter and all these things are starting to democratize capital to where your average Joe, I shouldn't say your average Joe, but your lawyer, your doctor, somebody that has the money to invest, they've just never had access. So they've always gone to the stockbroker and that's what they've done. Well, that's changing. And so what we're seeing is if I have to go to Blackstone and they're my only source of capital, they call the terms, especially if they're the only investor. But on my end, one, I'm providing access to people that have never had access before. Which represents trillions of untapped dollars that have just never made their way into the market, it gives the GP a little more flexibility to say, "I'm going to help set the terms here," rather than going into your typical institution, which is notorious for slashing fees, cutting your promote, having all these erroneous reporting things that you have to do, things that aren't adding any value, it's just checking all their boxes. And on the flip side, in syndication, we have more flexibility on calling our terms. We have more flexibility on calling who we're going to work with and the type of personalities we're going to work with. We have more decision-making power that I think is like the right decision-making power. I think sometimes you go to these big institutions and they make you do things or they have decision rights that it's like, okay, I get why you're asking that. It'll probably never come up. And it just seems kind of frivolous. Sounds like you have some expensive lawyer in New York that's just making this stuff happen. And in syndication, you really don't see that. We set rules, like very rarely do we let an LP be more than 20% or 30% of the overall equity. As soon as you start giving someone 51%— and look, we're really fortunate to be in that situation. Anybody listening to this can't just go start tomorrow with no track record and do this, but I think we're heading into a world where syndication will be the norm and not the outlier. And I think what you're seeing now is it used to be, oh, well, You only syndicate if you're raising smaller chunks of capital. Well, you go see Keith Wasserman, you're with him on Twitter, that dude does $100 million deals and can syndicate $40 or $50 million in a week. I think that will become more of the norm. A lot of people would say, "Well, why do you want to deal with hundreds of investors and all this paperwork?" That's technology, Juniper Square, all these now back-office SaaS tools that automate all this stuff. I would make an argument it's easier to deal with 200 individual investors than it is to deal with with Blackstone.

Yeah. And it's very powerful in terms of that, right? Basically, we've taken what used to be the old country club syndication and like it's all gone onto the internet and Twitter. So, you know, we're in a world now where like, it seems like the, the solid general partners and opportunities are the limiters, right? Capital is to some extent, not that difficult to come by once you have good deals. Does that— is that translating into better terms for you as a GP than maybe you used to get a decade ago?

It's translating into better terms. And I say that, if you say it, it could be assumed that, oh, well, the LPs must not be getting great terms. And I would say that's not true. The LPs that we're dealing with never had terms at all, period, because they never had access to deals. And so if you are comparing it to, oh, well, Blackstone would've gotten these terms and we're not, like, we're not, I think that's an unfair way to look at it is like, well, your other option was just doing nothing and going to the stockbroker world, which no offense to stockbrokers, they're great too, but they're charging you something. What we're giving you is access, and now it's simple supply and demand. And so there are things that we deal with as a syndicator that we should be paid for that we maybe wouldn't get paid for if we dealt with just one investor. But so my argument is, yes, it is better for the GP but it's also better for the LP because the LP's other alternative is just nothing.

Right. When you're seeing, I think the same thing in venture capital as well, right? The rolling funds for that kind of stuff where there's, I've had friends that are like, hey, I'm an LP in a venture fund now. And I'm like, oh really? Yeah. They're like, yeah, put in $3,000 a month. I'm like, oh, okay. Like, welcome to the club.

I think it's a broader, just what you're seeing in the world in general, whether it's raising money or anything is like, The old way of doing things is slowly being broken down. Transparency is being brought to the world, and it's now giving us this opportunity to go like, we don't have to go to just one of the 10 capital providers anymore. Now we can do it this way. All these arguments of, well, you wouldn't want 200 investors because that's a pain in the ass to manage. It's like, well, it's not anymore. We can say it about a lot of things in society today, but the old way of doing things is slowly shifting. I mean, We've been talking about NFTs and DeFi and this and that. That is the world that's coming, and it's a more transparent world, whether you like it or not. If I was Blackstone or some of these massive companies, and they're smart, they're doing it, but they have to rethink how they're going to start getting into deals. Now, if everything's going to be a billion-dollar deal or needs to be a SPAC, they're going to have some leverage there for now, but I would tell you, we're coming for that too. It might take 10 years, but The less friction that continues to occur in these type of worlds, the more access that the everyday Joe's going to have. Ultimately, I think that's a net win for everybody.

Preston Pysh Yeah. You talked about NFTs. I was just reflecting on your podcast, which you do. You do a podcast called The Fort Podcast, apropos because you're from Fort Worth. I texted you about the enthusiasm of your two guests about NFTs. I was like, "Man." My favorite was there was the one guest who was definitely the hypester, but the other guest was the one who was just like, I don't know anything about this, but it's going great. I was like, this guy's my favorite. I want to buy this guy's art. Uh, so it's funny. It's like early Bitcoin people. Like, I don't even know how this works, but it's fantastic.

I'm making so much money. I love it.

So back to, back to the original topic. So let's say that I have, I'd love to walk through the economics of like how one hamburger is made. So one hamburger, as I look at your company is I have a deal. So I've found this deal and it's a $2 million, let's say, light industrial building. So you do Class B and love to hear what— it's Class B industrial, light industrial. I'd love to hear what defines that. And then I'd love to walk through the economics of, okay, I've found one that's $2 million and then how do I go from there?

Cool. So Class B industrial is really denominated in when it was built. So the vintage of when it was built. So we kind of characterize it as kind of sometime in the '60s to kind of the mid-'90s. And then as far as the economics of a deal, so we'll just stick with my $10 million number just to give round numbers, but—

Well, it's better than 2. Let's do 10.

10's better than 2, right?

Well, it makes me feel like more of a baller too.

Yeah.

Let's make it 100.

Let's make it 100 million.

No, do 10, do 10, please.

So $10 million, here we go. The economics of, we can talk about the financial returns, but let's just talk about maybe some of the structuring of around it And then we'll get into how it'll perform. There's usually an acquisition fee. So that could be— and again, all of these things are not— nobody should take this and go, there's only one way of doing this. This lives in the GP's world. Everybody does it different. There's market norms, which I'll talk about. But don't take what I say today as like, if I don't see these exact numbers pop up in the deals sent to me, something's wrong. There's typically an acquisition fee, 1 to 2%.

And that's paid when, when the deal is paid at closing. Okay. And that's 1 to 2% of the total value purchase price. Okay.

Yep. And the way we define it is if we found the deal and there's no other brokers involved, we directly negotiated with the seller, we'll take 2%. And we justify that by we did the work of the broker. which is 1% and then the 1% that we did just for being Fort Capital out in the market doing their thing.

So at this, at this size, sorry to interrupt, but at this size, so for residential real estate, the brokers are splitting a 6% commission. As you start to get to a big $10 million deal like this, what is market for what the commercial brokers—

Yeah, you'll see, like, for example, we're taking right now, I know we're jumping, but we're doing a $50 million sale, $50, $55 million sale. That'll be 1.75% split between both brokers. And then you kind of work your way back So $10 million is probably, I would say it's probably 3 to 4% max for both brokers. And I would say right now it's probably closer to 3% and that's split.

Okay, great.

So we'll take 1 to 2% that's paid the day the deal closes. And that is, we justify that as the work it took to get the deal done and kind of our incentive fee. Now, a lot of people, you'll see this argument sometimes on Twitter that Oh, is the GP even putting in as much as the acquisition fee? Let me just like, maybe I can speak because I have 25 employees. I think a lot of people think that we charge an acquisition fee and that goes into Chris's pocket and that's what he's using to invest in the deal. That's absolutely, I could not say it's even any more false than it is. That's going to pay for overhead. That's going to pay for the team. That's bonusing people. And so 1 to 2%, then there will be an asset management fee, which is kind of the fee that we charge ongoing throughout the life of the deal that is paying the team members on my team that are working on executing the business plan that we had for that asset. Then that could be anywhere from, call it 1 to 2% of total equity raised. So we raise— and that's annually, that's annually, annual fee. So if we raise call it a $10 million deal, we're raising $3.5 million. Let's just say it's anywhere from a $35,000 to a $70,000 fee per year.

And that's based on the, the LP's equity, not on the total value of the deal. Okay.

Yeah, that's how we calculate it.

And that's market. Is that typically how folks do it? Yeah. Yeah.

Some people do it on a percentage of revenue. Here's my biggest thing. A lot of real estate private equity operators, especially small to medium-sized businesses, really build terrible operating platforms, and they do it because they don't charge market fees. They can never afford to pay their people. They're always paying their people out of the promote just to pay them for day-to-day things. That's because a lot of people that get into the business are not business builders, they're deal doers. When you aren't thinking about building a business, you're not thinking about how much do people cost and what should we be charging? You're just thinking about, "How do we go buy this great deal that's going to make a massive profit?" And that's good. And you can mask a lot of shortcomings of building a business when things are good. But that's typically why you see a lot of companies unravel in downturns is because they didn't know the business they were building. The third fee is property management fees. So that could be paid to a third-party manager or if you have an in-house manager and that kind of varies, that's a very wide range depending on the complexity, the amount of tenants. I mean, if I go If currently, if you and I go buy a single-tenant Walgreens that's on a triple net lease and we're just collecting a check each month, very low property management fee. But like a deal we closed on last week, 60 tenants, you're constantly working with tenants, you're constantly updating vacant spaces, you're constantly doing maintenance. That could be anywhere from 3.5% to 4.5% of gross revenue plus some type of baseline fee if there's a— if there's an allocated employee to that property.

So you're both the asset under management—

asset manager.

You're the asset manager and the operator in this case of the— of managing the thing. How is it set up to keep you from self-dealing and paying yourself above market for the property management?

Yeah, it's a great question. So one is obviously when we show a deal to a prospective LP, I think we do this better than a lot of our competition. I'm not just saying it because I own the business, we put all of our fees on the front page so anybody can see and they're not written in a way that's like, I don't really know if Ford's taken that or so. It's like, here's what it is. The second is we constantly— we just launched our own property management business a year and a half ago, but we would just say, if you don't think we're being accurate, go— you can go talk to other managers in the area and you can tell us if we're overcharging. So we will self-check ourselves and we know what's market. But yeah, it's kind of a conflict that I think a lot of people could have. There can always be self-dealing, and that's where it just gets back to, you know, track record. You know, we've just done it for 16 years and, you know, we've never done egregious. I am a proponent of charging what we're worth. So we're not the cheapest provider, but we also have a better team. I see these people that charge like no fees and yeah, LPs love it, but that's not sustainable. Like I tell people all the time, they're like, well, maybe you're charging a little too much. I'm like, well, do you want an A-team working on this asset or do you want a B-team working on the asset? Over the long run, it shows up in the returns. It's easy to sit here any day and be like, well, they charge less than you do. And I'd say, then you should go work with them and good luck.

Well, hopefully you end up with LPs that get it, right? In terms of how the real returns are created, right? They're created as a multiple of cap rates, which we haven't really talked about cap rates. But if your management can over time push the rents up 15% or 20% higher than another management company, that is a huge amount of value in the grand scheme of things.

Look, it's like we talked about Blackstone and Blackstone because they undercharge fees the whole way and they don't have the talent that they have because they charge light fees. I think fees get really misrepresented as these egregious things that nobody should pay, and it's just simply not true. It's just the way that you have to show it in private equity is like as a fee rather than just as an allocation to people's salaries. It's really interesting. We started calling all of our stuff allocations rather than fees, And the amount of questions dropped by like 75%. So we call it an asset management allocation, not an asset management fee. We are trained as like buyers and consumers that fees are bad for the consumer. We charge it to an allocation and like nobody ever asked about it again.

Right. And it suddenly, it connotes that it's an investment rather than a cost.

Yeah.

So totally makes sense. Okay. So you guys run the building for whatever your hold period's going to be, which might be 3 years, 5 years, 10 years, or is Is there a typical hold period or does it totally depends on the asset type, class, and specific situation?

Another great part of being a syndicator and not a fund. There's no fund document that says when we must start and we must end. We're given the liberty to make decisions at the asset level, what's best for that asset. And look, the stuff we're selling right now, we've owned 19 months, but we're selling into a market with buyers that are borrowing money at 1.75% right now. I mean, that's insane. That's what we were getting on a money market like 7 years ago. How do you not sell into that? We're beating our 7-year pro forma in 19 months. Now, some people might say, "You shouldn't sell," whatever. So your answer of 3, 5, or 10, we estimate holding everything 5 to 7 years. That's kind of our MO. We're not a, "Hey, we're going to hold forever group." We've held things for 10 years and we've held things for 19 months, but we underwrite to 5 to 7 years and we'll rarely sell anything shorter than that unless we're beating our 5 to 7-year pro forma. Or something's not adding up that we thought would and we just think like it's time to move on. Commercial is different than multi. You typically have to put down 30 to 35, sometimes 40%.

Multi is multifamily.

That's multifamily.

Yeah.

And depending on your track record and your balance sheet and everything is— there's recourse loans and non-recourse. So recourse is Chris Powers is signing on the loan and if things don't go well, he's got, you know, he's going to have to do something. Non-recourse, uh, still I'm on the hook, but differently. It can't damage me financially as, uh, as a recourse would. Um, and then when you go to reputational damage at that point, reputational damage, which is the worst damage, uh, in my opinion. And then in multi, you know, there's different structures. There's a lot more government-backed loans, Fannie Freddie, things that give you higher leverage with, with no recourse. So it's, it's a different game. Um, but we'll structure our deals with usually 35% down, We'll raise additional capital for, you know, to have some, some CapEx and some, some reserves. We have two shares of equity. So one is a what I call a pref split. So Girdley, you give me $100 grand and I tell you, look, I'm going to pay you anywhere from a 6 to an 8 pref, which basically means the first 6%. Like if you give me $100 grand, I can pay you $6,000 back this year, but I still have not paid you back any of your principal. I'm just paying you. It's basically interest. And then above, once I've given you all your money back, plus all the pref that you've accrued, I'm going to split with you the remaining dollars anywhere from, call it, 70/30, 60/40. I mean, you can— the split doesn't matter, but that's kind of what we charge. The second share of equity that we have is what we call mezz. It's not debt. It functions like high-yield debt. And it says, Girdley, we're going to pay you 10% current. And as soon as we've paid you your 10% current plus your principal back, you're out. Before that, you get to sit at the front of the equity stack, which means you're the first one paid out before the second share is paid out. And it's usually a very small portion of the capital stack. Again, it functions like a little higher yield debt, but we call it equity because for tax purposes and a lot of banks don't like having second liens. And what we're going to do is we're going to buy this asset. We typically do value add. So there's something we're going to do in the first 24 months. It's going to increase the value of that property. Once we've done that, we'll be left with the option to refinance the property and return capital back to investors, or we could sell it at a higher value. What we do to create value, we can get into, but that's a typical structure. I mean, it's not rocket science.

It's interesting. Basically, this is the same kind of capital structure that happens with a lot of regular old private equities, SMB and mid-market private equity, except just your mezzanine Your mezzanine debt is called something else in practice, but functions exactly the same.

Yep. And we don't put that in every deal, by the way.

Oh, okay.

We only put it in deals that can handle it.

There are— so that you said the banks don't like second liens. What is the reason for that? I mean, it's, it's behind them on the capital stack. So what's the, what's the worry from the bank perspective?

Yeah, I don't honestly, I don't really know. They just— community and regional bankers just would prefer to have a clean, they're the only lien group. And so we just kind of don't fight them on it. So we just call it equity. And it is. And the second part, when I said tax treatment, if it is debt, then distributions made to the MES holder are taxed at ordinary income, interest payments are. But when it's equity, they're seen as distributions and so they're taxed differently. So there's actually an advantage to treating it as equity. So yeah. Yeah.

Well, I guess, you know, I'm working on stuff That's basically the equivalent, but in tech and tech businesses. And in that universe, mezz debt is mezz debt. It's very standard. And it's the same kind of terms you were just talking about. It's like, okay, 12% and 5-year amort, like all that kind of stuff, or interest only for a period of time, then turns into an amortizing loan after that. So weird how they're the same but different, and I have no idea why.

Yeah.

And so then who decides when the sale happens? That's you as the GP?

That's us as a GP. If you are not a syndicator or if you have— again, every set of documents is negotiated on their own merits. But typically, if you have an investor that's 90% of your equity stack, a lot of things they're going to be asking for is major decision rights. And a major decision would be when to sell or refinance. And so there are some GPs that have to get approval from their LP. And in most situations, everybody's aligned. Very rarely does an LP going to be like, "GP, everybody in your team has said they want to sell. We want to hold, but we want you to stay committed and aligned." That's not as typical as it sounds, but you still have to get approval. In more of a syndication model where any one investor is not the majority, we certainly do it out of courtesy. We don't ask, we tell them what we're doing through quarterly reporting and everything, but it's our decision. And we don't have to stay up at night wondering, you know, is some investor going to approve this?

Right. Well, and that's a benefit, I think, of having a relatively fragmented LP base. So I totally dig that. So what is the typical skin in the game for a syndicator? Like how much of each deal is market for like a you or a Nick or somebody like that? Nick Huber, who's Sweaty Startup on Twitter and a Twitter celebrity at this point. What is, what is typical skin in the game in terms of how much personal capital, you know, y'all would put into a particular deal?

I would say it's anywhere from 2% to 10%. And that really is denominated by probably how large the deal is. You know, again, I'm doing 12 to 14 deals a year. So if I was doing one deal a year, yeah, I might go all in. Or if I was a fund, I would be putting a lot of money into that one fund. But we put in anywhere from 2% to 10%. And that's me, my partners, our employees, our key leadership team. And really, it's a function in our case of like, how much are we raising? We're raising $15 million. That's a lot different than raising $2 million. And then the second part is any recourse on the loan. And not every loan we get is full non-recourse. We'll do a lot of burn-off loans where we can get better terms. I'll sign a personal guarantee and that can burn off as we hit certain metrics, but that's always on ours. And then there's like the reputational Skin in the game, which I think some people are like, "Oh, that's the easy answer, reputation," but that's everything you have, especially as an investor. If your reputation's tarnished, your whole business is over. One bad deal that I was honest on that a bank comes after me for isn't going to ruin my career, but if I go screw a bunch of investors or do some shady dealing, I've ruined my whole life. My family's going to have to deal with it. I might be in the press. I mean, there's just a lot of ramifications I would just say, especially in the world today we live in where you have cancel culture and all these— Everybody's waiting for somebody to slip up. I think your reputational risk today is higher stakes than it's ever been, and that's probably a good thing in a lot of ways.

Are you advising me to stop tweeting?

You're in trouble. No, I'm kidding.

It is funny when you tweet something, I'm like, "Am I going to get canceled over this?" It's like, "Oh." Whatever.

No, I love that you do it.

Pretty funny. Well, what— I'm a little older than you, so it's like, you know, I'm starting— like, there's a straight line actually to where, like, you know, when you're 18 and you're super worried about everything that everybody else thinks and not so much you, but definitely me, I was super concerned what other people think. And then to where you're 68 and you're suddenly that guy walking around the gym locker room with no clothes on and no shame. Like, there's just— Let me just tell you, there's a linear path and I'm really scared to eventually get there. I'm 46, so there's, there's a long way to go to get there. But there is, there's a lot of liberation in just being like, just not so worried about all of it.

The interesting part when we were talking about like the— and I'm not to get off topic, but the democratization of capital, you're seeing it now happen even as we're talking about like cancel culture. These big media stations that used to control the whole narrative are slowly being broken down. Now everybody has a newsletter and a Substack, and it's becoming harder and harder to control the entire narrative. I think that is a good thing for getting rid of cancel culture, is you have to have everybody on board to cancel something, and that's slowly deteriorating, not at the rate that I would like to see it happening, but creators are going to be given an opportunity, and people's attention is going to go in a lot more ways than just Fox News and CNN, and that's a good thing.

So here's something I don't understand about cancel culture. Like every other mind virus that you can catch, you know, like religion or CrossFit or veganism, like it encourages the people to go have positive interactions with other people. Like, oh, look how hot I am. I'm a CrossFitter. Every interaction I have where I'm like not perfectly woke is so negative where I'm just like, I don't want to go. I don't want to be part of that club. Like, I don't want to be going around making people feel bad about themselves, which is just the most fascinating, like It's the anti-mind virus in that way. I'm curious if you figured it out because I have no idea.

I haven't. I just see a lot of people that aren't content. I don't think they know what they truly want other than to make sure that other people are as unhappy as they are. I'm not saying that some of the things we haven't canceled probably shouldn't have been canceled, but when I start hearing that Dr. Seuss is getting canceled and Mr. Potato Head, it's funny to say, but it's insanity. The irony of it is it's not like there's these I'm a numbers guy. This is going to sound insensitive. It's going to sound really insensitive, but I'm just a numbers guy. We've had 500,000 people die from COVID-19. That sounds like a lot of people, and it is, and it's a tragedy, and I hate that it happened. But in the context of almost 400 million Americans, it's a blip on the radar. It's 0.1%. I don't know if we need to delete this out of the podcast. You do whatever you want, I think about cancel culture the same way. Most of the things we're canceling are a few thousand people that have gotten the attention of CNN, not millions of people. We live in a country now where we're just solving for the infinite edge of the bell curve, but when you have a media spotlight, it can change things. I don't know where I'm headed with it, but we live in a country right now where we are solving for things that are not— Mr. Potato Head being not the flavor of the day is just not important. But it can be made to feel like the most important thing.

Yeah. Well, Nicholas Taleb, who by the way has blocked me on Twitter for disagreeing with him, welcome to the club, talks about the phenomenon of the tyranny of the minority.

Yeah.

And it's not necessarily tyranny, but it's just how you look at what's happened with every salt is kosher. Well, why is every salt kosher? Well, because a small percentage of the population really cares about it and the rest doesn't. So you might as well just make it all kosher. It's super simple that way. So I think the same thing is happening in the media to some extent. Well, dude, you've been awesome. I have one question for you to close. If you think about it, what is the thing that when you talk about, and we haven't talked about here, what is the one thing when you think about your business and how it works and the market you're in, what is the one thing that people are really surprised by?

Is there anything that we haven't covered that you're just like, when you tell them, they're like, "Oh my God, I had no idea." Michael Girdley I think the thing that's most surprising to people, especially that haven't done it before, is there's a lot of capital out there. And I think the thing I usually get from most people is like, how do I do this? Or like, how would I ever convince anybody? And I think it really rings true is like, if you have a good deal, you're going to find money. There's a lot more money out there chasing deals than there are great operators that can bring deals to the table. And so I tell people more kind of first timers, not even first timers, but this, I think, don't get stuck in your own head that syndicating or raising money is like some gift that just some people were born with and you weren't. Like, if you a really good opportunity, like, yeah, if it's your first deal, it's going to be harder than the guy that's their 100th deal. But that's like anything in life. I would just leave people with saying there's a lot more capital in the world than you think. And if you have a really good opportunity, don't be scared to go start telling people about it because there's money for your deal if it really is a good opportunity.

Yeah, that's great. Well, one of the things that's cool about doing this podcast is I get to talk to people that I would be scared to death to compete against. So kudos to you.

You—

I'm not, I'm not getting anywhere near Real Estate Syndication because I don't I don't want my butt kicked. I think you've wiped the floor with me. So how can people help you, follow you, connect with you? I know you're very active on Twitter and with your podcast. Where can people find you and learn more about what you do?

Yeah. You can follow me on Twitter @FortWorthChris. You can follow our business, www.fortcapitallp.com, or you can check out my podcast, The Fort with Chris Powers. We don't have a website yet. We're working on that, but you can find us on Apple, Spotify, all the major major things.

Yeah, man. Awesome. Well, great job and thanks for spending the time. You're the first guest to have a better microphone than me, so I feel intimidated. That's not a euphemism, that's literal.

It's my goal, man.

Cool. Great job and, uh, thanks for being here.

Thanks, Michael.