Let's explore real estate opportunities with Colter & Adam!
Tune in to our latest podcast episode as Colter DeVries and Adam Gower dive deep into the world of real estate investments. They're on a mission to help experienced sponsors raise capital from accredited investors, and they're sharing their insider knowledge.
Learn about Reg D 506(c) offerings for general solicitation and how tailoring investment opportunities can attract savvy investors.
Plus, they discuss the fascinating realm of ranch investments, exploring the potential for higher returns and long-term appreciation.
Let's explore real estate opportunities with Colter & Adam!
Tune in to our latest podcast episode as Colter DeVries and Adam Gower dive deep into the world of real estate investments. They're on a mission to help experienced sponsors raise capital from accredited investors, and they're sharing their insider knowledge.
Learn about Reg D 506(c) offerings for general solicitation and how tailoring investment opportunities can attract savvy investors.
Plus, they discuss the fascinating realm of ranch investments, exploring the potential for higher returns and long-term appreciation.
I'm Colter DeVries, owner of Ranch Investor Advisory and Brokerage Services. I'm an accredited land consultant with the Realtor Land Institute and proud member of ASFMRA.
Speaker 2:The Ranch Investor Podcast is the most downloaded and informative industry-specific content that intrigues while entertained.
Speaker 3:So what do you want to do? Are we doing?
Speaker 1:a podcast. No, I would love to hear more. We have some interesting episodes that I want to share real quick with the audience. Seems very insightful, and what you do is for the sponsor, for the GP.
Speaker 3:Yes, that's right.
Speaker 1:You put together the recipe per se about how to structure the investment and raise capital. Is that correct, Adam? Yes, that's exactly right.
Speaker 3:How long have you been at this? So actually, Colter, are we starting the podcast?
Speaker 1:We've been in it.
Speaker 3:Okay, I see, yeah, I see. Okay, fine, so, yeah, I have actually been in real estate, investment and finance for a very long time, since well, I don't even want to tell you when, but since the early 1980s, so 35 plus years in real estate, investment and finance. What's intriguing to me about what you're doing, though, is that we actually we do have a client who raises capital for farmland, and, but he's in California, and I see that you don't. You don't touch California, so it is an interesting field, actually, I think it's. It's it's little understood, but very compelling.
Speaker 1:Well, I'm sure you deal primarily with commercial real estate and there's there's many similarities there. And can you tell me about a few of your more recent podcasts? Because I was I was actually just trying to pull them up and look through them. I can't, I can't walk into gum at the same time.
Speaker 1:So yeah, no, I mean podcast, but some of the titles Now it's commercial real estate obviously, because normally those deals that's traditional syndication. You don't see ranches being syndicated Right All that much. You're starting to see it much more with farmland. Yeah, there's, there's a couple of platforms out there, farm together and acre trader, right, they've been doing it for a few years with farmland Commercial real estate. It seems to me, adam, it doesn't really matter if it's, if it's mini storage or ranches in Montana. The structure, the LP GP, the, the carry, the pref, the IRR hurdle rate, a lot of that is going to be very similar, similar terms. Is that correct?
Speaker 3:Yeah, so I mean it's look, when you, when you form a syndication to raise money for anything related to real estate or really for anything, what you're doing is creating a company, so you create an LLC, typically, or a partnership of some sort, and then you sell shares in that entity. So when you share, when you sell shares in the entity, you have to offer economic returns to investors, and so the way you structure those returns are fairly commonplace. They're just there aren't that many permutations. At the end of the day, you would typically have some kind of preferred return, some kind of split of the profits and a carried interest for the sponsor, based on whatever kinds of returns you deliver to your investors. So, yes, it's exactly the same as any other real estate asset class, whether you're building a storage or apartment buildings or offices or doing value add, or you are selling shares in ranch investments.
Speaker 1:Let's get into value add and some of the other strategies a little later. I wanted to touch on your PhD, dr Correct, so your finance PhD.
Speaker 3:It's actually. Yes, I looked at how banks underwrite risk. It was actually a historical perspective, but I looked at how a bank underwrote risk in the early 20th century. In the early 20th century.
Speaker 1:Yeah, it applies today, though I mean is that how you accumulated $1.5 billion worth of management deals?
Speaker 3:No, so they're not management deals. So my experience is, up until recently, primarily working as typically a senior line manager in some position. So, for example, in the 1990s, I was president of the division of Universal Studios building at… all of their real estate in the Asia Pacific region, headquartered in Tokyo. So I was based in Tokyo and so, in terms of my experience, that is part of my experience. But I've also transacted considerably during downturns. I was hired into a major bank during the global financial crisis, then went on to work for a major private equity shop and worked on their portfolios as well. So that's where the core of my experience comes from, as well as having done some development work on my own account.
Speaker 1:Now I'm gonna go into this one a little more because it touches on I think it touches on part of my thesis. Okay, universal Studios they might have put together a real estate investment trust or real estate syndicate, much like AutoZone Wood or Walgreens, so that their operating entity can focus on the branding marketing.
Speaker 3:I'm gonna cut you off right away. That's nothing to do with what I did so at the time in the 1990s universe. It's a long story. I don't want to get into too much detail because we got into the weeds. But the American studios, the major Hollywood studios, wanted to expand their presence overseas, outside of the United States, in theatrical, in other words movie theaters where people go to see movies, because they wanted more outlets for their movies.
Speaker 3:When you produce a movie in the 90s you would typically I mean the bulk of revenues initially came from theatrical right, people going to see movies at theaters. Well, internationally, in some countries they were very underrepresented or there are very few good movie theaters. So the division of the studio that I ran in Asia Pacific was geared to finding good locations to build large scale what I call multiplex stadium seat movie theaters, really state of the art movie theaters across Asia Pacific. I was headquartered, I lived in Tokyo, so my focus was primarily on the Japanese market. So we would find locations, negotiate leases, build and operate movie theaters. But there was no syndication. We raised the multi-currency fund from well, actually it was from a group of banks, so I suppose you could say that was syndicated, but multi-currency fund to capitalize was able to finance the expansion, but it wasn't syndication in the way that you think of it.
Speaker 1:So they had to finance their own expansion. Exactly. And when it comes to ranches, farms and I think we're seeing a lot more of this with farms that are, since the 70s it's been get big or get out. When you're buying that capital asset, that has a traditionally relatively low annual yield If you're gonna compare it to multifamily or small storage relatively it has a low annual yield. That's not accounting for risk adjust. However, when you're doing that expansion I'm gonna go back to auto zone and Walgreens. Like a ranch, sometimes you are better focused, or a farm you're better focused on the operating entity in it and then. So then you put together a REIT or a syndicate to expand because you have the good genetics or the good equipment, the good operations, sops, whatever's giving you the competitive advantage. It's better suited to reinvesting back into the operating entity rather than the capital asset. Is that kind of the gist of Walgreens auto zone having these four cap and five cap triple net leases out there?
Speaker 3:Well, you know, my focus is on, rather on the large corporate entities, is on individual sponsors like yourself who are wanting to expand a portfolio of real estate, whatever kind of real estate it is, and what they will typically do is go to banks to get debt. But those banks won't provide 100%, as you well know. So they need to bring in equity as well from investors either. Typically it would start if you're a smaller scale, you would typically start with friends and family, but once you exhaust that resource, then you need to go outside of that network and start finding investors from beyond the network that you have your existing network. And that's what we do. We help sponsors Find investors for their individual deals or sometimes for funds. So not really the corporate perspective, it's much it's private equity.
Speaker 1:When you say, start with families, what is so? The average sponsor, what, what kind of? And are these? Are these also emerging managers? Quote, unquote. Are these first time deal makers? What's, what's the size and what are they coming out with their first project at?
Speaker 3:Okay, so we don't. We typically my shop doesn't really work with folk that don't have experience. We get a lot of people that do come to us and we do have a huge amount of resources. There's a lot of free resources. We also offer training, video training, also in person training to help people who are starting out.
Speaker 3:But the core of our business is to build systems to find investors for sponsors directly. So we build websites, we create educational content, we push that content out on social media and we do marketing campaigns to elevate the visibility of the sponsors so they can attract more people to their offerings and raise more capital. So our clients, our main clients, are typically multi cycles sponsors, so they've been through downturns before. They have experience and I would say that probably the smallest it has around 100 million of assets under management, 100 million dollars of assets under management. The biggest are significantly larger. In total, our private clients have in excess of 35 billion of assets under management and in total they've raised probably over a billion dollars using our systems and they raise it from individual investors. So that can mean from it's always from a credit. Typically we work with accredited investors, so typically the minimum investments going to be 25000 dollars and 25000 100000 typically is the range that our clients focus on as far as how much they raise from investors.
Speaker 1:So your, your clients are not putting their offering on Fundrise CrowdStreet. They are the platform that is exactly right.
Speaker 3:Yes, so we build platforms exactly like Fundrise has, exactly like CrowdStreet has, but instead of being marketplace and Fundrise is a bit different they're actually their own sponsor, but CrowdStreet is a better example. So CrowdStreet is a marketplace and when you go onto the CrowdStreet platform, you see multiple opportunities of deals to invest in, like you go to the supermarket, right, there's a whole range of different options for you, and what that and their business model is to attract developers, sponsors who want to list their deals on the platform, and to find investors. So the systems or the platforms that we build are exactly the same, except we build them for individual sponsors who will be listing and promoting only their own deals and who want to go out and find more investors to invest with them. That's what we do.
Speaker 1:Now a little bit in the weeds. So that would be a Reg 506C.
Speaker 3:It's a Reg D506C, correct.
Speaker 1:Because they are the platform and the sponsor.
Speaker 3:Okay, Well, a 506C allows you to do what's called general solicitation. So that means that you can ask anybody, even if you don't know them, to invest with you. If you do a 506B, technically you have to have a preexisting relationship. But that was what changed with the Jobs Act of 2012, was that it permitted sponsors to raise money from people they didn't already have a relationship with. In other words, it allowed them to advertise, to do marketing to everybody.
Speaker 1:Because the pre quote unquote crowdfunding Jobs Act. You'd have to take your deal to a broker-dealer.
Speaker 3:No. Before crowdfunding, before the Jobs Act of 2012, you could only ask people you already knew to invest with you. You could certainly go to a broker-dealer, but the distinction with a 506B is that you are only allowed to ask people you already knew you had to have a relationship with them. The term of arts is a preexisting relationship. You had to have a preexisting relationship. You had to be able to demonstrate that you did. You couldn't say I met the guy yesterday and he invested 10 minutes later. That would not count. You had to have a preexisting relationship. With the Jobs Act, they changed that and they said you don't have to have a preexisting relationship. So now you can ask somebody that you've never met before, have no relationship with, and you can say to them do you want to invest in my ranch? And if they say yes and you don't know them at all, you can give them documents and wiring instructions and that's totally legal. I mean, there are other nuances to that, but that's basically the shift.
Speaker 1:Let's talk about those other nuances, your program. So it sounds like you are responding to an opportunity, a new need. These capital allocators they want to have a captive audience. They kind of want to own their own investors. They don't want to have to go buy them and continually source capital from different means broker-dealers, building relationships. They want to have it centralized in a portal and so you're feeling this niche. Now for someone new who has $200 million assets under management, I suppose they already have their operating agreement prepared, their LP agreements, subscription agreement. You don't get into the weeds, that type of a detail.
Speaker 3:Okay, so we do. Actually, I'm not a lawyer. We don't offer legal advice. We work with some of the top securities attorneys in the country. We can always make introductions, but we do work with sponsors they like to. Well, we work with sponsors to help them structure the economics of the deals that they put forward.
Speaker 3:The offering documents that you put out nothing more than legal paperwork that sits on top of a business model, and so the business model has to be determined. You've got to decide how you're going to structure your business. Before you can put together offering documents right, your lawyers have to know how much interest not how much preferred return do you want? What hurdles do you have? What's the promote going to look like, right? What's the carried interest going to look like? What other terms do you have? So a lot of times our clients will lean into me for advice and guidance on how to structure their deals as well. Because we see so many deals and we work with so many sponsors. We know what works. We know what works well. We can look really get deep into what your business strategy is and advise what kind of structure you want to be putting forward to investors. That will enhance the opportunity that will enhance your ability to raise capital from investors, so we do advise on that.
Speaker 1:Let's go a little deeper into that. That has me interested now. So you with the PhD in finance econ background, you're also modeling this.
Speaker 3:Well, again, we don't model it. I mean, our clients do the modeling, they do the. They'll do the modeling, all right, so I'll tell you. Let me turn it back to you. You're raising money for ranches, right, Correct? Yes? So come and invest what's on offer to me from you.
Speaker 1:If you're the limited partner, the biggest offer of value to you is actually non-financial. It's intangible. So ranches historically appreciate compounded annual growth rate 4% to 6% Annual yield. If you're looking at what we call a sexy ranch, something with timber water milk, you're looking at an annual yield of 1.5%. So that'd be your cap rate. You could probably hit 1.5% after taxes and insurance and not management. Management takes out 75 basis points. So you have this fairly low annual yield.
Speaker 1:It's not an institutional product and that's because people who buy ranchers want to visit it, they want to recreate on it, they want to experience it, play, bring their family. It is historically low volatility as alternative assets are because of liquidity reasons, but it's real assets, low volatility. So you, the LP, I would believe your primary motivation is I want to touch it, I want to feel it, I want to know that I have a tangible asset. I don't want to manage it. I I like the portfolio benefits if it improves my trainer ratio in my portfolio. I like that. But at the end of the day I just want to. I want to go view it. I want to have this in my portfolio because I personally like it and I'm not looking for abnormal returns. I'm not looking for 15% annual yield. 3 year quick flip, 30% IRR. So the IRR is a hurdle rate. On 10 years I can offer 4%, I see.
Speaker 3:And do you find that investors are responsive to that?
Speaker 1:They are when they understand that they're going to access a larger ranch than they could afford on their own. And they're not the type who desire the control, and that's a big thing. What we sell on brokerage as well is people want the control. It comes with freedom, independence and options. You can dig dinosaur bones, mine gravel, develop wind energy. There's many options to a rural land base that are probably priced into the market, although there really isn't a significant regression analysis as to what explains ranch values is predominantly how healthy the United States economy is. That's the largest driving variable, but other than that, you have all these nuanced reasons why someone would buy proximity to Bozeman. That's going to be a big one. I'm sure you're familiar with Bozeman, right?
Speaker 3:I'm actually not. What's Bozeman?
Speaker 1:Well, god bless you. You just I, like you, don't look it up. You don't need to look up what Bozeman Montana is. I think it was the basis for that TV series, yellowstone, oh, okay.
Speaker 3:If you've heard of that.
Speaker 3:Yeah, I know Montana is a very beautiful place. I must confess I've not been there, but I do have friends that vacation there for sure. What we do, colt, I'll just tell you. Typically the clients that we work for are offering outsized risk, adjusted returns. I'll just be straightforward with you.
Speaker 3:If you're investing with something that has one and a half percent return per year and a 4% IRR over 10 years in this market, that's going to be tough because there's always going to be risk. There's always risk, right, it doesn't matter what it is. There's risk. And these days and I'm going to date stamp your podcast, it's November, mid-november 2023, you can deposit money in the bank at zero risk and get 5%. So for investors the kind of investors that typically our clients are looking for are people who want to outpace the kind of returns that they can get with zero risk.
Speaker 3:So if you're looking at a zero risk return of 5%, for example, typically our clients will be not offering but will be working towards delivering significantly higher returns than that, and that's because what they're investing in has risk. So you have to adjust the returns. You've got to have a risk premium over the risk free rate of 5% to entice investors to come in and invest. So typically, our clients will be offering 8% preferred returns. They'll be producing some kind of value that will increase both the ongoing yield and also asset value, with the intent of either selling or holding long term or refinancing out at some point to return equity to their investors. So that is the world that we live in is sponsors who are delivering what are called outsize returns or risk adjusted returns, returns that are significantly higher than the risk free rate, which is 5%. Now, if you're offering significantly less than that, then, just exactly as you've described, your value proposition is very different.
Speaker 3:So to raise money, for example, for you from somebody in California or Florida might not be relevant because they can't come and visit, or at least it's a long shot to come and visit. And is that actually part of the investment? Anyway, if they do invest with you at 1.5% in a ranch, what happens when they show up? Are they going to stay with you in that lovely house you've got there? What are the additional benefits of owning this?
Speaker 3:So it's like you say, it's intangible. That's not typically the market that we work in, and you express concern that I would snaffle all of your investors. It's not going to happen, because the investors that our clients are looking for are looking for financial returns. That's the first thing that they're looking for. They want to know how much am I going to make. And then they want to know how are you going to in this day and age? They're going to ask how are you going to protect my investment, that I'm not going to lose it, and they want to know when am I going to get my investment back at some point in the future. So those are kind of primary drivers.
Speaker 1:Well, I wasn't worried about you snapping up listeners who are potential investors. The majority of my listeners that call me, they're like me when they're trying to crack this egg and figure out how do you institutionalize ranches, how do you create a marketable product given these parameters, given these features and benefits? Because you're not going to change that 1.5% annual yield, you're not going to change significantly that appreciation rate, yet people still buy ranches and so as I said, we do have ranch clients, actually very different kind of ranch that you're describing.
Speaker 3:So what they do is they farm citrus and grapes primarily, and there is a value add component to that. In some cases they'll buy a ranch that requires new planting. It's still a long-term perspective. It's very different, as you know, from buying an apartment building or a self-storage unit that you can start manipulating rents on from day one to increase revenues and increase value. Trees take a long time to grow, so it's a long-term investment, typically 10 years and up, but you can substantially increase value and many of these ranches do have.
Speaker 3:So the ranches that I've been working on, which are, I would say, citrus and grapes in the California Central Valley, they do have ongoing yield. They do offer significantly higher excuse me than 1.5% returns and because they are value add, either through planting new crops, new trees or just allowing existing plantings to mature, those ranches do increase. The cash flow that comes off them does increase and the value of the assets also increases over time. So in my world, or the world that I'm familiar with in terms of ranches and you could call them farms as well, I suppose a little bit different from elk ranches, I think Then there really is. It's very similar to any kind of asset where you have buildings on it, like multi-family or office or self-storage, for example. It looks different physically, but the economics work very similarly, in that you are adding value, building revenues, increasing revenues, increasing value and therefore increasing returns to investors.
Speaker 1:Is value add? Is that relative to the asset or to that risk-free return and your opportunities in the market? Because if you could take this ranch, that's in the ranch next to it, the neighbor, they're all 1.5% annual gross but you increase yours 30%, your annual gross is that significant or is it still so? Quote unquote. Low compared to multi-family.
Speaker 3:No, the deals that we've been working on have significant existing cash on cash returns. So they are I mean I forget the exact numbers, colter, so don't quote me on this but they do pay. I want to say 8% per year going in, and those are with multi-family. You might pay quarterly because you've got cash flow coming every single month from residents, people, tenants, that are living in the property With farmland. You're doing a harvest once or twice a year, so distributions are annual, not quarterly. But going in yields are 8% and above.
Speaker 3:And as the crops grow these are trees, so they're not row crops. This is permanent plantings, yeah, permanent crops. As those mature, the amount that can be harvested the crops that can be harvested goes up in time significantly and as it goes up, the yield goes up and as the yield goes up, the value of the property goes up. So in theory you could refinance at a certain point, pay back all the investor equity and then you're just reaping returns that are above. Now you don't have anything in the deal. That's how we structured these deals Not for a refinance but to pay back investors, pay them 8% annual return, pay back all their capital and then continue paying them a yield. And in 10 years. I think some of our projected yields were. The cap rates were crazy 14%, 15% cap rates in 10 years very, very lucrative.
Speaker 3:So they're taking it up 100%, almost to recap it Well, in terms of we didn't budget any refinances in the deals that I worked on, but the cash flow coming off the crops as that cash flow increased, was enough to pay an 8% return. Well, it should be. We've only been doing it for a year, but it was enough to pay an 8% return to investors and start to return their capital to them gradually during the life cycle of the deal.
Speaker 2:Not for a refinance.
Speaker 3:Anything, any kind of yield above 8% is returned directly to the investors and that pays down. That returns their capital to them until they have no capital left in the deal.
Speaker 1:I'm very glad you touched on that, because I was taking notes, I was writing down cap rates. What are you seeing? What would be an acceptable value add for a ReFi type? That's awesome that you have some experience with farm ground. I've noticed that pursuing some of these labels like organic that's one way to do value add. It sounds like you have to have some sort of value add strategy. Just a traditional commodity cattle ranch ain't going to cut it.
Speaker 3:Well, I don't know, maybe not Again. It's like all kinds of real estate. I will tell you I've got about five minutes left because I've got to call at the top of the hour that I need to prepare for. If you've got any final questions, let me know. But I'll answer your question there.
Speaker 3:Just like any kind of commercial real estate, there are all kinds of ways that you can invest. You can invest in something like, for example, you could invest in a core deal. A core deal is something that is fully mature, fully lease, that has no value add but is just a stable income earner. What you would look at in that case would be okay, we'll go in and we'll buy it at I mean, these days, who knows, 7%, 8% unlevered right, 7%, 8% cap rate, and that's just not going to go up. It might go up. The amounts of yield you get might go up, but it will only go up with rent bumps, annualized rent bumps. So it might just keep pace with inflation, for example. It might outstrip inflation a little bit, but there's very, very low risk because this is high value, typically downtown MSA type of asset you would consider core In ranch investing.
Speaker 3:I presume there are others like that they're fully mature ranch that you would buy at an 8-cap, 7-8-cap, and then you'd be happy with that kind of return from the ranch. And then the next level down is a value add, right Value add where you go in and you might say, all right, we're going to buy this at a 7 or 8-cap, but we're going to replace, you know, 50 acres over here. We're going to tear out what there is in at the moment. We're going to plant a new permanent crop and in three years' time or four years' time we're going to start seeing results coming from that. And so we're going to grow the value of the ranch by adding value to it, by switching up the crops that we're harvesting or growing.
Speaker 1:I wish I had more time. Dr Adam Gower, gowercrowdcom and the podcast again.
Speaker 3:So it's called the Real Estate Reality Show.
Speaker 1:Real Estate Reality Show.
Speaker 3:Yeah, so you can find it on YouTube as well. Youtubecom. Forward slash gower crowd. That's my last. Yeah, that's my company name, gower crowd, but forward slash gower crowd at YouTube.
Speaker 1:Well, thank you for coming on the Ranch Investor podcast and don't you be stealing all of my listeners?
Speaker 3:I'm definitely not. I won't. It's a real pleasure to meet you. I tell you I would love to come to Montana.
Speaker 2:I'd be fascinated. You have an opening invite.
Speaker 3:I would be fascinated to see what you do there. It sounds quite magical, frankly.
Speaker 1:We'll go to the real Montana, not Bozeman. So please, please, let me know if you ever want to see the real Montana.
Speaker 3:I might just do that, colt. Seriously, you're a very nice gentleman and I'm flattered that you would ask me on your show. Delighted to be here and I would love to visit sometime. Thank you.
Speaker 1:Let's stay in touch. Thanks, doctor.
Speaker 3:All right, bye for now.
Speaker 1:I wanted to take a quick break to mention that we have a Discord channel, ranch Investor, where we are going to be posting some behind the scenes content as well as some upcoming blog posts. As always, if you have any recommendations or feedback, please let us know. Thanks for tuning in.
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