DEAL TIME! Co-Sponsor Opportunity

Adam Gower: BRIT properties - co-sponsor deal in industrial real estate. Oh, my goodness. I've been so looking forward to recording this podcast. Let's start off. If you wouldn't mind please, Joel,Eric and Austin. Just give me a quick background: name, rank and serial number, what you do on a daily basis over there at BRIT Properties, then we'll roll into the deal. Joel, why don't you start.

Joel Friedland: Sure. I'm Joel Friedland and I am in the industrial real estate business. Industrial real estate means manufacturing and distribution facilities and we specialize in the Chicago area where we know almost every single broker of the 500 brokers who do the leasing and sales of these properties. But more importantly, we also know a huge percentage of the 20,000 industrial companies that occupy the 1.3 billion square feet of industrial property in Chicago, because we literally have people going door-to-door and making phone calls every day to find deals and find tenants. We're immersed in the market.

Adam Gower: Eric, name...

Eric Schneider: My name is Eric Schneider and I'm one of those people who are going door-to-door every day to find deals. I'm currently managing the BRIT Properties portfolio, handling brokerage and acquisitions as well and I am a partner in BRIT co-sponsors as well as an investor.

Adam Gower: Lovely, Austin.

Austin Garwood: Yeah. Austin Garwood - a bit of a Swiss army knife, over at BRIT Properties and do all of our financial analysis, underwriting - work hand-in-hand with Eric and Joel for asset management and yeah, whatever else that we have going on that we need to figure out.

Adam Gower: Right. Now, you have 15 minutes, plus or minus, to sell me on the co-sponsor deal. So, let's start right at the very top. What's the deal? What's on offer?

 

Joel Friedland: So, Brit co-sponsors is a group of people, mostly our closest friends and investors, but we are looking to open it up to a new group because networking and building our investor base is very important to us. So, we currently have about 20 investors in the deal and we're looking for a few more. But, it's got to be the right fit. It's got to be somebody who understands what our game plan is. We are buyers of industrial properties, individual properties, one by one by one. And, what we've done is put together this group to have the cash, to be able to go buy the buildings very quickly, the quick close. Convincing sellers that we are completely credible. And, when we use the funds from the co-sponsor group, we buy a property and then after we own it, that's when we syndicate it to an outside group. And for putting up the capital with us, those investors share with us in the various fees that we make as the sponsor. The people who get rich in real estate are sponsors. What happens is, if you are a developer and you put deals together, you make fees. And what happens to those fees is they make the one side, which is the group that put the deal together, a lot more money than the people who are the regular investors. This is an opportunity to be with us on the sponsor side and share in those fees.

 

Adam Gower: Right. So, Austin, why don't you tell me the nine ways? Extraordinary number. Nine ways that investors can benefit from participating in your co-sponsor offering,

 

Joel Friedland: Can I add? I would run through them very quickly and then see if Adam picks any of them that he may be most interested in hearing more detail about.

 

Austin Garwood: Sure. Yeah, so just kind of piggybacking on what Joel was saying there you know that, sponsors have a lot of streams of income as opposed to just being a limited partner in a deal where, your returns are based on cash flow distributions and some profits on sales, if any. But, through being a co-sponsor, we've added another seven because these people are getting a piece of all the fees that we're charging along the way, which is typical of sponsors. So, we have properties that we might flip. So, purchasing an industrial building and maybe we're selling it to the neighbor within a short period of time. So, proceeds from flips are split between the investors and then the manager, 80/20. Then, with every property, we have acquisition fees. So, those acquisition fees will be charged to the "later" group of investors. So, the co-sponsors are going to split our acquisition fees 50/50. Then, we have some interest while we're holding the properties before they're syndicated, which is going to be about 4% annually. So, the co-sponsors will get all of their interest on their money. Another fee that we'll have is: assets under management. So, we'll base that off of the equity in each deal. We're going to have a low asset under management fee on all of our deals, probably about half a percent. And those will be split 80/20. And then we'll have property management fees because we are vertically integrated. So, we're owners and managers. So, we do all of our own property management. So. those will split 80/20. So, then we have construction management or project management fees, which is a fee that, we typically charge for large repairs or improvements to a building. Example: putting on a new roof. It's usually 7% of the project cost. That'll be split 80/20. And then, you're also going to partake in your normal limited partner distributions. So you're going to have cash flow distributions from the remaining equity that we have in each of the deals, which will be about 5% that we'll leave in. Then, our waterfall distribution structure for each of the deals, will probably be around a 7% preferred return, with like an 80/20 split. So that 20, of the promote on cash flow, the co-sponsors will take part in our promoted piece. And then, you have promotes on sales. So, they'll just - same as the cash, they'll partake in the promote from sales proceeds. And then obviously as a limited partner, you'll be getting proceeds from any profits that we make on a sale. You know, your pro-rata share. So, those are your nine different streams of income that we've built into this and it should be great.

 

Adam Gower: Right. And, what are your wiring instructions? It's the only question that I have actually. No, I'm kidding. Right. So, the way that this thing works. You've drawn a pretty cool chart of this. So, give me the - actually, Joel or Eric, either of you. Give me a big picture perspective. I'm going to paraphrase what I think it is, that you're doing, but I want you to tell me exactly. So, the co-sponsor interest is a pool of money - tell me how much exactly. And then, as you acquire buildings in short order, the idea is that you will back-fill with individual investors going forward to return that capital so that it constantly is recycled and works long term. It just keeps on rolling. But, as you do that, there are all these fees and there is an ownership tail that stays in each deal. So, just explain to me, kind of, high-level, the structure.

 

Joel Friedland: First of all, though. It sounds like, wow, what a lot of fees. The actual fact of the matter for the investors, in this particular deal, which is the co-sponsor deal, is - we're charging them no fees. I don't think anyone's seen a sponsor put together a deal where the organizer, which is us, charges zero fees to the investor. So, that's the first part. They're sharing in our fees, not being charged our fees - completely different approach. But the idea is that, we find a building, for example, we have one in the city of Chicago that we're buying right now for three million dollars. And, we use this - the total amount of the fund that we're using for this, the co-sponsor fund is 10 million. We take the three million dollars and we close all cash. The seller loves it. We have no bank. We have nobody breathing down our neck, as far as, saying "if this doesn't work out the way it's supposed to, you're at risk of default". There's no default. It's all cash. So, it's great for the investors in this deal because they have the greatest mitigation of all, which is, an all cash deal, until we syndicate it. And, once we own the property, then we put together a private placement memorandum and these investors, in the co-sponsor group, are on our side. They are like - if there was a casino, there's the house and then there's the players. These folks are part of the house. And so, we syndicate the deal and we charge the fees and we figure out the disproportionate shares of profits. And they share in all of that, all the way along the line, as long as we keep doing this. It's a two-year commitment. So, over a two year period, we're going to continuously recycle that money and then, in each deal that we buy, the co-sponsors and we, will own 5% of the equity and every one of those deals is going to be limited to an average of a 30% loan-to-value ratio, for safety's sake.

 

Adam Gower: Plus, of course, investors in the co-sponsor scenario can also invest as much as they want in individual projects as well as investors.

 

Joel Friedland: And in fact, they have a right of first refusal before we go to outside investors. If we hit a home run, the investors in this group are going to say, why would we syndicate it out? It's the greatest deal ever. We once bought a building from the Keebler Cookie Company and we, very luckily, found Comcast, who signed a 15-year lease. If we were in that period before syndicating it, we would give it to the investors in the co-sponsor group, explain the deal and say to them, the return on your remaining equity is going to be 40% a year. Would you like it or not? And that's the opportunity that they have, is to look at the inside scoop before deciding if they want to buy into the deal or if they want to let us syndicate it and they just remain as part of the 5% ownership group that we have collectively.

 

Adam Gower: Right. So now, Eric, why industrial and behind that question actually is, the tenants. So tell me about why industrial, right. We all read about in the news, as being the hot thing but tell us the inside scoop.

 

Eric Schneider: Industrial real estate is the largest real estate sector in the country. In Chicago alone, Chicago is the biggest, the largest industrial real estate sector in the country. There are 1.2 billion square feet worth of industrial space, made up of over 20,000 companies who are using this space. It is the highest returning real estate of any real estate sector. And, we have in-depth and detailed market knowledge of our industrial real estate in the Chicago land area. I mean, super ultra-detailed expertise when it comes to the players in the market, the owners.

 

Adam Gower: Eric. Your connection. We're losing your connection, a little bit. One of the hazards of WFH. Eric, I can barely hear you. Eric, I can barely hear you. Let me, what do you call it, divert the answer to that question back to Joel, if you don't mind, just because of the WiFi. We've gone back to those 60s karate movies - I can barely hear you. Joel, why don't you just jump in and help fill the gaps there, that Eric was talking about?

 

Joel Friedland: Sure. Well, as Eric said, there's over a billion square feet of industrial property in the Chicago market. And, every property has a different kind of tenant. Any product - pick your favorite product. Tell me anything that you like to either eat, or do something with, or that's in a machine that you have, or your car. Every product is made in an industrial building and all of the parts are made in industrial buildings, and then they're distributed in industrial buildings. Of course, the biggest one that everybody knows is Amazon and they occupy - this is crazy - 270 million square feet of warehouses in the Chicago area alone. They've eaten up over 10 million square feet. But that's not our kind of tenant. The  The returns on those deals are not as good because it's Amazon and people say, oh, I'll take a lower cap rate. In our kind of properties, we have very unusual tenants. My favorite story is that, we have a company that was on Shark Tank, in the first year of Shark Tank. They make protein bars and they've got these machines that just pump out protein bars that are customized bars with any kind of ingredients. And they have people working the machines, and they have conveyor belts, and they're in a 50,000 square foot space. And it's funny because, not only was he on Shark Tank and grew the business a 100 times, in terms of revenue, but the tenant that was in the building before that, was a company that made croutons for McDonald's. It was called Best Croutons. So, what happens is, we get these really unusual tenants and each one has a back story and, there's something called onshoring or reshoring, which is where a lot of products that used to be manufactured overseas in China, for example, there's a lot of geopolitical reasons why those companies are coming back and making their products here. And, every one of them needs one of our buildings.

 

Adam Gower: So, let me - let's get back to the co-sponsor. Now, we've been talking about industrial real estate and we have the corporate profile. If you want to learn more about that, got to GowerCrowd.com. You'll find the corporate profile there, of BRIT Properties. Drilling down now on the co-sponsor deal. One of my questions is, what's the exit plan? What does that look like?

 

Joel Friedland: We sell buildings to users. It's a very, very difficult concept to explain to a typical real estate investor because a typical real estate investment is bought as an investment and sold as an investment and it's sold based on Cap rate. So, Cap rate is the multiple or the return on investment. Industrial is so different because we are in what's called B and C industrial. All these buildings are occupied by various tenants. And for them, the building is a tool for their business. They can't run the business unless they have the exact right building. And, it's all about the geometry. If there's a building in the right location, that's the right size, and the right shape with the right amount of parking. I was telling her, this last night, if someone comes and looks at a building and they manufacture some kind of parts that are involved in the - we have someone who makes the machines, that make the cups for yogurt. Yogurt cups get made somewhere and there's someone who makes the machine that makes those. If the company, that's a family business, comes and looks at one of our buildings and it's the perfect building, I could punch the guy in the face and call him names and he'll say, thank you for punching me. What do I need to pay you for the building? It's not like a house. You can go to the next house over, or down the street. Industrial is specific. And so, what happens is, when we sell to users, it's a 30 percent premium over the value that we would sell to an investor. So, of the 73 buildings we've sold over the years, we have sold 68 of them to users. In every one of those sales, for one reason or another, is a triple or a home run because we don't sell them until we find the right user. Meanwhile, it's like a covered land play until we sell them. We've got a great tenant throwing off yield of seven or eight or nine percent. So, people are collecting their distributions until the exit, which is to a user. It's magical.

 

Adam Gower: Eric, I can see you teeing up to say something. I can't hear him at all. Eric, we can't hear you. Your WiFi's dead. Alright. So, let me ask you this - projected returns. What are the projected returns and what's in it for investors? To the nitty gritty. I bought in, but how much am I going to make? Projected returns, please.

 

Joel Friedland: Austin, why don't you cover that one?

 

Austin Garwood: Sure. Our targeted returns annually are 12 and increase every year, up to about 14 percent. Our targeted IRR is 20 - 22%, obviously, depending on certain variables: how many properties we end up getting, you know, vacancy, whatever. But, we've gone through a lot of different scenarios and those are the targets.

 

Adam Gower: And what is the time horizon? What can I expect if I invest $100,000 today with you, or half a million, whatever it is.

 

Austin Garwood: Sure. So, for this structure that we have set up, it's a little different because, your time horizon isn't necessarily when we end up selling a property, right? So, because we're syndicating them out, a lot of our investor's money, unless they choose to keep that in a deal, is going to be returned to them after that two year period. So, 80 - 85% of the money will be returned after two years. And then, the remaining ongoing equity, that equity tail that we have built into there, is about 20% of the initial investment.

 

Adam Gower: Right. Next - and, as we wrap up. A couple of final question here, what's the downside to investing in the co-sponsor deal?

 

Joel Friedland: We call it, getting stuck. It's a bad thing, but it's not very bad. That's the beauty of the structure of this. We buy buildings, all cash and then we go to syndicate them. If there's a problem syndicating a property. When I say a problem, let's say that the market crashes. Let's say the stock market goes down 25% and companies stop expanding and the whole industrial market slows down and the world looks like it did in 2009, which could possibly happen. We then own a building all cash and it gives us a tremendous amount of runway because there's no bank breathing down our neck. We can lease it to somebody and the return may not be as good, but the chances of losing the equity are very, very slim when you have no bank. So, that's the key to this deal is, we've tried to structure it - I know it sounds counterintuitive, but we try to structure a deal that would be a high return and a low risk, and that doesn't happen very often. The only reason that this deal is special in that way is because the investors are not being charged fees, they're sharing in our fees, and that enhances their return while mitigating the risk because the worst case is getting stuck in owning a building all cash.

 

Adam Gower: Yeah, and I know you like to talk about the downside, and to be pragmatic, but, I'm going to ask you to wrap up with the upside, if you don't mind. And in this context, two trillion dollars of infrastructure spending has just been approved. We are coming out of COVID. Two trillion has already been spent - it's just extraordinary numbers, right? You have a building. You talked about it earlier. I'm not sure if it was in the corporate video or if it was in this one. Comcast - coming to the end of their lease. It's, I don't know, 100,000 square feet? Again, you're going to have to fill me in on the details a little bit. You put it on the market for lease. Tell me what happened - the upside.

 

Joel Friedland: Well, nothing's happened yet on that one. But, it turns out that the world has changed since we made our lease with Comcast. Comcast needed a building that had 650 car parking, which is incredibly unusual, in this particular location, for their Xfinity vans and for their warehouse people and for their customer service call center. They signed a 15-year lease and because of COVID, they ended up not needing to keep their call centers all around the country. And so, for 15 years of a lease, we've been getting a wonderful return and they've been a great tenant. But, when they leave, we have to reposition the building. So, we have determined and Eric is frozen there, he would love to tell the story because he's come up with the idea, that we're going to make this into a truck facility. There's a long wall and then there's this giant parking lot where trailers can be parked and we put it on the market and I will tell you, that no less than 40 different trucking companies are banging our door down to either buy or lease that building. So, we're rolling with the times. The trucking business is booming because of e-commerce and because the market's doing well. With the infrastructure dollars and the economy being pumped-up, trucking is just becoming even a bigger industry and we're focusing on what to do to make sure that we get the highest rent from the best trucking companies. It's going to be a home run because of the trends.

 

Adam Gower: And are you seeing this portfolio-wide, in terms of demand for industrial properties?

 

Joel Friedland: Yeah, we're 100% leased right now, which is really, somewhat unusual. We don't go through periods of 100% leased for very long. But, yeah, we see that the demand for industrial right now - industrial is the hottest market, if you read all the periodicals and all the emails - industrial is booming. We just happened to be in this - we didn't jump into industrial when it started booming. We've been doing this for 40 years and now is our time. And so, this is the time to own these kind of buildings. They're clamoring for our buildings. I don't think I've ever seen anything, in my lifetime, like this. Building comes on the market. Dozens of people want to look at it and then they fight over it. So, it's been great and it's because of the trends. The trends in the world have gone our way. So, we're very lucky.

 

Adam Gower: Right. Last question. So, you're raising 10 million. What's the timing? This is for the co-sponsor opportunity. What's the timing of the co-sponsor opportunity? What opportunity to have people to get in?

 

Joel Friedland: We think that the next 60 days will be the period of time that we're going to have the new investors join us. We're going to want some Q&A. We want to get to know an investor personally. We're very hands-on and we really value our relationships. This is not going to be someone who sends us a check. It's going to be somebody who gets to know us and understands and believes in our mission and likes our team.

 

Adam Gower: Fantastic. And on that note, thank you very much indeed. Good luck to you with the co-sponsor deal. It sounds absolutely amazing. For anybody who wants to get in touch with the BRIT Properties team, go to their amazing brand new website: BritProperties.com or to GowerCrowd.com where you will find everything you need to know, including the special sponsor background video that we also just recorded. Thank you very much, gentlemen.

 

Joel Friedland: Thank you.

 

Austin Garwood: Thank you.

 

Adam Gower: If you want more information on this deal and on all the others in this new series, plus, if you want access to the latest news from the real estate crowdfunding industry and if you want to be the first to know about some amazing proprietary industry data that we're putting together for you, subscribe now to the Gower Crowd newsletter at GowerCrowd.com. It's totally free and it is the most comprehensive source of news and information about real estate crowdfunding anywhere on the planet - all there at GowerCrowd.com. Thank you for joining me and for listening in to today's deal. This is Adam Gower wishing you well and signing off.