“Risk comes from not knowing what you are doing.” - Warren Buffett

As a continuation from our last post about real estate syndications, we would like to discuss what it means to be an accredited investor.  

Some of this discussion may be a review to many of you as you may already be familiar with the term accredited investor some of this discussion may be a review.  But, in August 2020, the SEC updated the what it means to be “accredited,” so our hope is to provide some clarity on this update and any other nuances to the definition.

(For the purposes of this discussion and our usage of private syndicates, you can assume that anything in this post is relevant to one’s eligibility to participate in CF Capital’s investment offerings.)

Defining “Accredited Investor”

An accredited investor is an individual or a business entity with a status that allows them to buy and sell securities not registered with financial authorities, like the SEC.  This privileged access is given to them by satisfying certain requirements from these same financial authorities.  It is worth mentioning that there is a status above accredited, called “qualified purchaser,” and these types of investors are given the same access (plus more). 

Let’s get straight to the important points and go through the requirements to be labeled an accredited investor (in the US set by the SEC):

1. Income* -  Exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

   OR

2. Net Worth - An individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person.

   OR

3. Financial Knowledge (NEW) - Based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order.  In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons.

If you are curious to learn more about the definition directly from the SEC, click here to go to the relevant page on the SEC website.

Changes to Definition in August 2020 

Historically, individuals who do not meet specific income or net worth criteria, regardless of their financial sophistication, were not given the opportunity to invest in private markets.  However, as of August 2020, new amendments** to the definition of accredited investor have been improved, effectively identifying individuals with sufficient knowledge and expertise to participate in those private market investments. 

Essentially, individuals will be allowed to participate in private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.  

Of course, all of these measures are based on defined criteria of professional knowledge, experience or certifications, such as being a holder of the Series 7, Series 65, and Series 82 licenses.

Understanding Accredited Investors

Many companies decide to offer non-SEC-registered securities to accredited investors directly, known as a private placement.  Because this decision allows companies exemption from registering securities with the SEC, it can save them a lot of money.  

The real privilege is accredited investors’ ability to invest in venture capital, hedge funds, private real estate, angel investments, and complex investments.  With that said, these private placements have the potential to be extremely risky and are often illiquid.  Therefore, it is imperative that financial authorities ensure that accredited investors are financially stable, experienced, and knowledgeable about their risky ventures (a topic that is discussed more in the next section). 

When companies go through with offering their shares to accredited investors, the role of the SEC is limited to verifying or providing the necessary guidelines for determining who qualifies as an accredited investor.

We would like our readers to know that there is no formal process for becoming an accredited investor.  Instead, it is on the seller of the securities to take the necessary steps in order to verify the status of investors who wish to be treated as accredited.  A seller may ask the investor to respond to a questionnaire that may include the following: financial statements; tax returns; W-2 forms; salary slips; and even letters from reviews by CPAs, tax attorneys, investment brokers, or advisors.

In our case, we would need to administer the verification process, which is relatively painless in our opinion.

Why does accredited investor designation exist?

As we alluded to in the previous section, any regulatory authority of a market must safeguard investors.  Although individual investors may receive a large return, private investments, including non-registered real estate securities, are risky, and may be focused on unproven concepts with a high chance of failure. 

For those reasons, we believe it is completely understandable for regulators to create a different class of more qualified investors.  The division exists to protect less knowledgeable individuals who may not have the financial cushion to absorb high losses or truly understand the risks associated with their investments. 

Simply stated, an accredited investor designation exists to protect everyday investors.

We won’t discuss it in this post, but there are new innovative options for non-accredited investors to access the private markets, like real estate.  For instance, the new crowdfunding regulation allows for most investors to access the private markets.  In many cases, these investments may offer a lower return profile, but sometimes with more extensive research you may find the right platform for you to invest in a private placement. 

Main Takeaways

• An accredited investor is one who meets certain criteria regarding income, net worth, and financial knowledge qualifications.  Often, they are wealthy individuals who are allowed access to investments that many people are not allowed.  Investments such as those offered by CF Capital.

• Pros of being an accredited investor include access to private and restricted investments, potential higher returns, and increased diversification to their investment portfolios.  However, these investments can be more risky and can be more illiquid.  Investors in CF Capital offerings will often have their investment capital committed for a (roughly) five-year period or greater, depending on the business plan strategically tailored for the specific offering. 

• The accredited investor exists so that financial authorities (i.e. the SEC) can protect everyday investors from the potentially great risks associated from private market investments.

• The obligation of proving an individual is an accredited investor falls on the seller of the securities rather than the investor.  That means, CF Capital needs to do the verification.

If you, our readers, would like to discuss this further, please feel free to contact us!

*for individuals the requirement is different (i.e. lower) than business entities
** The amendments revise Rule 501(a) of the Securities Act

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“For the strength of the pack is the wolf, and the strength of the wolf is the pack.” ― Rudyard Kipling

“How do I participate in your investments?” This question from one of our loyal readers was music to our ears.

Since one of our readers is asking, there must be others… right?  Absolutely!  

Our post today is dedicated to addressing this question for our entire audience to read.  Of course, our response has a bit more detail than one might think, so let’s start with describing with the means by which an investor accesses one of our real estate opportunities-- a syndication.

What is a syndication? 

A real estate syndication is a group of investors who combine (aka “pool”) their capital for the purposes of making a property investment. This allows individuals access to opportunities that they would not otherwise be able to access on their own, diversify their resources, and leverage a best in class team towards executing a specific business plan.

Why would investors want to participate in a syndication?

By combining capital resources, individuals and companies have more buying power than making an investment alone. Think of the analogy of buying a plane ticket to your next destination. Instead of purchasing the airplane, which could result in tens of millions of dollars plus insurance, a staff, and jet fuel, most people typically invest several hundred dollars in a ticket for one seat (or several, for a family). This easy-to-relate illustration is instructive to understand the power of a syndication; together we can go farther than we could by going alone. Bringing this back to real estate, we can invest in higher quality assets with scale and all enjoy the benefits to a greater capacity than by investing alone.

Understanding the Types of Syndications...

To help our audience understand this a bit further, let’s briefly discuss the history of syndications.  Pooling capital to acquire real estate has a long history, but for most of the 20th Century this type of investment tool was only leveraged by those who had exclusive access to opportunities.

It used to be that real estate investment firms (GPs or sponsors) could publicly advertise their investment ideas to any type of investor.  But the Securities Act of 1933 required all new offerings to be registered with the Securities Exchange Commission (“SEC’) in order to provide oversight and protect investors from fraud.  In turn, the tedious legal and registration process made syndication far less efficient.

With that said, the SEC did, in fact, create “safe harbor” rules, allowing sponsors to avoid registration if they met certain conditions.  Even so, the old days of public solicitation were over.

Now, investment firms and sponsors like CF Capital can either raise money without public solicitation in order to avoid registration or register with the SEC, wait for approval, and then try to raise investment capital from the public.  The former is almost always more efficient.  Hence the reason that many sponsors almost always choose private syndication.

So, how does it all work?

Syndications are commonly structured as limited partnerships (“LPs”) or limited liability companies (“LLCs”).  This is the method by which investors purchase a real estate asset, such as an apartment complex, or even a portfolio of properties.  

In many cases, there is a dedicated investment firm that is in charge of handling the property purchase and managing the investment (e.g. strategic decisions and/or operations).  This investment firm is called the general partner (“GP”) or sponsor.  Sometimes there are multiple sponsors, which are known as co-sponsors.  In our case, we would take on the role as the GP, and we would invest our capital as an LP alongside the other LPs (i.e. pool of investors).  Investment firms, like us at CF Capital, that want to align incentives with investors and have “skin in the game” often put their own capital to work in the real estate syndication.

After some legal paperwork an investor transfers their capital to the entity in exchange for a percentage of ownership in the “company.”  This entitles them to the benefits of capital appreciation and cash flow from the property investment, but limits their downside to the point where they can not lose any additional money beyond the point of their initial investment. After all, all real estate investments come with inherent risk, however investing in this capacity within a syndication does limit that downside for LPs in the event things don’t go as planned.

With the structure there is a profit split between the GP and LPs.  Often the split is 30% to the GP and 70% to the LPs, although every deal is unique based on it’s particulars.  CF Capital even takes things one step further by offering a preferred return to the LPs, meaning our team  only receives  a share of the profits after LPs meet a specific percentage return (e.g. 7%).

Yes, there are plenty of additional intricacies to a syndication, but that’s why our doors are always wide open to you, our friends, colleagues and partners.  Please feel free to reach out to us if you have any questions about real estate syndication or any of the opportunities offered by CF Capital.

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“Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.”  -Phaedrus

A regular reader reached out to us asking how we find the gems.  “How are you able to find hidden value in a multifamily investment that many people fail to discover?”

That question brought a smile to our faces.

We were content because we knew we already covered some of these topics in previous blog posts.  Even though the topics were not consolidated to address “hidden value” specifically, we believe pieces of those posts ultimately contribute to the whole “puzzle.”

Over the past months, we have written about some of the core elements of our investment process (e.g. Vacancy Rates, Rent Growth, Cap Rates, Tax Rates & CapEx).  We have also written about our value-add strategy and execution (e.g. Business Plan, Asset Repositioning, & Marketing an Asset) post-due diligence. 

When it comes down to discovering value, it is all about thinking outside-the-box.  By taking a creative approach, we are able to identify many ways to increase cash flow -- ultimately from both a revenue and a cost perspective.  (ask us about our new e-book, covering this topic)  

Our discussion below covers some of the ways we uncover hidden value in a property.

Ripe Markets

“What markets reveal strong potential for a value-add property investment?”

Before we think about individual property characteristics, we consider a market’s potential.  Part of CF Capital’s strategy is to maximize value creation.  We would evaluate if a market has room for rent growth with limited competition.  We also verify that a market has strong economic fundamentals and a solid demand for multifamily housing.  

How do we do this?

As we discussed in previous blog posts, we start by gathering historical and current data to establish baselines.  From there, we are able to analyze “what the market is telling us” through a cross-market comparison.

It is worth noting that part of CF Capital’s strategy is to maximize value creation.  If we are able to capture the benefits from positive secular trends, we will increase our return on investment even further (beyond any executable items to improve revenue and/or costs).

Below Market Rate

KEY QUESTION: “Are current rents priced to today’s market value?”

One of the simplest ways to find hidden value is determining if a property’s current rental prices are set “appropriately.”  We often run into cases where property managers fail to increase their rental prices to match what the rest of the market is willing to pay.  

Among other more sophisticated exercises and models that we work on to find this hidden value, we place a lot of our attention to market comparables -- what are similar properties charging for their rental units.  If the comparable properties are charging higher rents on average without their occupancy levels going down, this signals to us that we might have discovered hidden value.

Underutilized Space

KEY QUESTION: “Are there any underutilized spaces with the potential to convert to something that is revenue-generating?”

It is common to find a multifamily property inefficiently utilizing the space across the property, as well as in the buildings and individual units.  In order to increase our top-line, some potential improvements we might consider are: creating additional bedrooms in empty (non-revenue-generating) space; creating value and subsequently charging fees for storage units; transforming empty buildings into a revenue-generating clubhouse; or adding other amenities across the property that are designed to create more demand to reside at our community.

Separate Garage Parking

KEY QUESTION: “Can detached garages be rented out separately for a fee?”

If there is a parking garage on the property, we sometimes discover that property managers offer this free-of-charge.  Sometimes, we believe this type of “perk” makes sense.  However, depending on the case, it might be a poor management decision to do so.  

How can we tell?

If other comparable properties are charging a fee without any negative impact on their financial performance, the market is signalling to us that tenants are willing to pay for garage parking.  

By looking deeper into a property, we are able to discover the potential benefits from adding a garage parking fee.

Marketing/Advertising

KEY QUESTION: “Are there opportunities to improve marketing or perceptual positioning of the property?”

In under-the-radar properties, we often find that property managers have plenty of room for improvement on the marketing front.  However, poor marketing efforts would only be revealed after some investigative analysis and due diligence. In some circumstances, our intimate knowledge of the submarket and the demands of the consumers help us identify intangible aspects of the branding of an asset that would benefit the perceptual positioning of the asset in the minds of our target resident. 

In these situations, the hidden value lies within the opportunity to improve presence, awareness, and efficiency of marketing.  

With our trusted property management partners, we unlock this value by executing on a plan to rebrand the property, reposition the property, increase advertising in the proper channels, and/or streamline marketing operations. As we increase the awareness of the fresh brand in the submarket, we then solidify these repositions by ensuring our culture matches the essence of the brand. In other words, our properties truly “become” who we create them to be.

Utility Expenses

KEY QUESTION: “After due diligence, are there opportunities to improve utility charges?”

Occasionally, though not as common in current times, we come across a property manager that bears the costs of utilities.  If we discover this during our investment process, we keep in mind the potential value that we create by reducing the costs of utilities.  In such a case, we might bill utilities back to the tenant, in the event that doing so does not adversely impact tenant retention in excess of the effort.  This could mean making changes to a few areas:

1. The tenant directly pays the bills for all of their utilities with the energy or water provider.

2. Any building or outdoor utility expense is factored into the tenant’s rental prices.

3. Anything outside of individual units that cause a utility expense, can be switched to an alternative to lower total utility costs (e.g. switching outdoor lights to solar-powered lights).

By capturing the value from cost reduction measures in the utilities area, we are able to increase our total cash flow.

Although this is not even close to an exhaustive list, we thought it would be helpful to provide some specific examples of how we discover hidden value to clue you in on a part of our creative process for identifying and capturing hidden value in the assets we invest in. You might consider using these ideas to springboard you towards capturing more value in your portfolio and can further rest assured that the team at CF Capital is tirelessly creating capital appreciation and cash flow generating activities to secure and maximize your investment should you decide to passively invest in our next opportunity.

As the multifamily bull market continues, opportunities to acquire existing properties have become more and more competitive while the increased demand for value-add properties is beginning to lower return potential in many markets.  Finding the right value-add investing opportunity that generates value can be challenging, but can still offer the potential for healthy yield in certain markets.  CF Capital’s goal is to find these markets and unlock any hidden value from our property investments enabling us to offer superior risk-adjusted returns to our partners and investors..

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Leadership - we’re constantly asked about what that means to us and how we approach it in our business. We also consistently challenge our thought process and embodiment as to how we show up as leaders for our investors, our vendors, our employees and the communities we are involved in at large. It’s a topic we’re passionate about and thrilled to have the opportunity to share with you as the topic of today’s blog post. 

To us, leadership is the glue that makes our engine work for the long haul.

 “My own definition of leadership is this: The capacity and the will to rally men and women to a common purpose and the character which inspires confidence.” - General Bernard Montgomery

Another great definition is, “the act of motivating a group to act toward achieving a common goal.”  As you may  know, Leadership is one of our Core Values, which happens to tie to the other three.  An exceptional leader cannot successfully lead without Integrity, Excellence, and Purpose.

We believe  that in order to be an impactful leader, one should be accountable, reliable, have an empowering mindset, they should set the example by their actions, and set high standards for others as well as oneself.  A transformational leader creates bold transformation by setting a vision and inspiring possibilities within others they may not have thought possible themselves. An inspiring leader is empathetic and listens to truly understand. The greatest leaders empower others to be great.

Beyond simply observing and embodying the qualities of great leadership, we believe leadership is essential for our long term success in how we lead our team (whether at the company or property level), how we lead our industry with a bold vision for the future and innovative approaches, and how we lead ourselves by demanding excellence and a constant and never ending commitment for improvement.

Importance of Leadership

“Leadership is lifting a person's vision to high sights, the raising of a person's performance to a higher standard, the building of a personality beyond its normal limitations.”  - Peter Drucker

Fun fact for everyone:  83% of organizations acknowledge the importance of leadership development.  Yet, only 5% have actual leadership development training implemented at all levels.²

After reading that, it wasn’t shocking when we found another survey stating that 38% of new leaders fail within the first 18 months.¹  This is why we hold our ground on emphasizing the necessity to lead by example and prioritize leadership to lift up the people around us. We strive to embody the core value of leadership within all of our team, our vendors, and everyone else around us. Leadership is a way of life for CF Capital.

Leadership: Core to CF Capital’s Philosophy

“A genuine leader is not a searcher for consensus, but a moulder of consensus.”  -Martin Luther King Jr.

How do we lead differently?  We think the appropriate answer is not (entirely) about being different, it’s also about “standing on the shoulders of giants'' that came before us.  In other words, we learn from what other great leaders have done in the past so that we are using real life evidence when we lead ourselves.  

While we aren’t doing things drastically different, we are always continuously working to improve upon the work and philosophies of the successful colleagues who have come before us.  After all, success leaves clues.

With that said, we do believe that it is not always common for a leader to take the time to learn from our world’s most admired and effective leaders.  We also acknowledge that daring to “be different” is inherently the path less chosen, and we like being uncommon. 

But we, at CF Capital, choose “different.”  It wouldn’t be in our best interest to do otherwise, and it would be irrational for us to believe that extraordinary results come from fitting in with the crowd. (See our post about contrarianism).

Why do we spend so much time challenging, training , and inspiring  our colleagues?  Why are we transparent with the public in how we approach everything from due diligence to investor communications?

Because it matters. We believe in the spirit of giving and how embodying the spirit out extraordinary leadership elevates humanity. We know that this is not a zero sum game and that the more we give, the more the rising tide lifts our ships, too, in addition to it being the right thing to do.  

Every time we lead, and lead “right,” it gives us a great feeling of joy knowing that we will leave an impact in small or sometimes profoundly substantial ways. 

Standing on the shoulders of giants of the current and past, we are confident that the output of our leadership actions will bring us a positive future.

Now that’s the way we make real estate and business meaningful in more ways than simply financial.  

1 SOURCE: Compare Camp
2 SOURCE: Leaders Beacon

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There is little to no point in having something of value if you cannot share it.

To set the tone for the rest of the discussion, we wanted you to feel the importance of marketing in our overall investment strategy.

In our stream of various topics over the past months, we have touched on many of the details related to CF Capital’s process, strategy, and execution. All of these topics are foundational to the “value” that we create as a firm when making an investment in a property.

Some say, “Build it and they will come.” While there are cases in which we would agree with this quote, however, we must not forget that tenants won’t initially discover nor continue to discover our property if we don’t cover our bases with marketing. Awareness is always the first step, but from there it comes down to delivering beyond expectations to our target residents.

“What if people drive by and see the newly renovated and beautiful apartment complex from the street -- couldn’t that help people find your property?” The answer is, “yes.” In that case, one is actually talking about marketing, and what many don’t realize is that curb appeal is a small part of the equation. We certainly make curb appeal decisions into account with marketing, but it’s only one small component to an overall comprehensive and integrated approach.

Let’s mention another quote to touch on our philosophy as it relates to marketing:

“The cynic knows the price of everything and the value of nothing.” -- Oscar Wilde

The fact is, nobody would buy into something -- at whatever price -- if they didn’t see the “value” being demonstrated as part of the transaction. Price is one thing, but value is everything.

At CF Capital we communicate value in our apartment complexes in our marketing, but that is backed up with what we’ve strategically implemented to make the property attractive to tenants in a certain market. The perceived value in marketing is actually bigger than whatever we are “selling” to tenants. It is about creating a brand. A narrative, position, or cause that tenants can accept, appreciate, and align themselves with. A community they can be proud to call home.

Essentially, anything done before marketing is an attempt to tailor to market demand. Once we do this, we must craft and execute a strategy to inform the market, “we have built what they’ve been asking for.” When plans are executed properly and we deliver units that are in demand, marketing has a way of supporting itself.

With that said, if our readers have learned anything from our past posts, we hope you’ve gathered that we refuse to accept mediocrity -- we will not settle for just being “good” at marketing.

With a value add strategy, there is an automatic reason to implement some sort of marketing. In our case, we need to let the tenants in our market know what we’ve done in terms of capital improvements.

This is a perfect time to market the property, as it provides a way to completely shift existing sentiment toward the current asset, attract potential new residents, and strengthen resident retention by communicating the vision for the new, improved resident experience.

So what about some examples of the types of marketing that we do?

Curb Appeal

As we mentioned above, one example is the curb appeal. This is essentially the new brand that is visual to the outside world without having to see what’s inside each unit or each part of the apartment complex.

Reveal Announcements

Another example of marketing is launching a reveal announcement with an event so that existing and potential residents understand what they can expect from new ownership. This generates excitement around impending improvements. Individuals today crave community and a sense of belonging and want to be included in conversations regarding improvements or updates.

New Brand Messaging

Building off the last example, a re-brand would make a clear statement to the market that “we're not what we used to be.” In order to execute on the correct re-brand delivery, we must capture what people are saying to shape our messaging around how our new team is poised to solve the problems we are hearing.

The most critical part of the messaging strategy is differentiation. It’s about generating a new identity, or a new essence and feel to the community. This is immeasurable in the purest sense.

Understanding how we rank against our top competitors and how we are viewed in the market allows us to establish the focus of your updated key messaging and can often shape the approach for a new property name, look, and feel. With a new brand in place, a proactive marketing plan can then be shaped to address (not hide from) historical reviews.

One example of brand messaging could be that we provide the best tenant service available in the city. If this is the case, our marketing materials and promotions should incorporate service themes and our pricing should reflect the improved service offering.

Marketing Channels

In this area, we take the newly repositioned brand (see our Asset Repositioning post) and reach new audience groups. On the digital side, social media allows us to communicate to individuals based on geography and demographics, but also interests. Google Ad Placement tactics can be targeted to areas, and are appropriate at times if we’re making a big push for certain leasing initiatives or otherwise. Geotargeting and Geofencing would allow us to target groups around certain areas, businesses, and are tactics we sometimes employ when targeting a certain demographic to begin a conversation about our community and the benefits we have to offer.

Given our asset’s location, unit types, finishes, amenities, and planned capital improvements, we consider the demographic and psychographic of your current and potential residents. We always approach the conversation (and tailor our messaging as a result) from the vantage point of what will make our current and future residents feel safe, experience convenience, and ultimately value as important with regard to where they will call home.

We take the time to define the attributes of the individuals we're targeting. How do they search for housing, and through which communications channels are you most likely to reach them (i.e., social media, search, mobile, etc.)? Where do they shop, eat, live, and work? Are there anchor businesses or resources in your vicinity that are likely to attract your potential residents? Oftentimes, it starts with being in touch with the community and getting a true understanding of what's most important to the people who choose to live where we are. We lean on our property management teams to help us gain this critical insight of the behaviors and ideals important to our desired residents.

Beyond the technology, our goal is to deliver a safe, clean and private home to our residents, so they enjoy their time with us and recommend us to people they care about. While advertising and technology strategies are valuable, what’s most valuable for us is long term relationships and communities built through referrals and delivering exceeding value.

Our extra diligent and thoughtful efforts help us to maximize our return when marketing an asset.