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Adam Gower: Alan Donenfeld, CityVest. Such an enormous pleasure to meet you. I'm so happy. You sent me a fascinating email. Why don't you start off. Just introduce yourself. Tell me who you are, your name, company. What's your position over there and then I'm going to ask you all about CityVest.

Alan Donenfeld: Sure. Thank you, Adam. Great to be here. Alan Donenfeld, CEO and the Founder of CityVest Capital. We're an online investment marketplace for real estate private equity funds.

Adam Gower: Tell me. Where do you come from? You told me already that you were thinking of snowboarding down to Florida to play golf but something got in the way of that. So tell me about your background. Who are you? Where do you come from? What's your story?

Alan Donenfeld: I got out of business school 40 years ago this year. I started out working in investment banking at Lehman Brothers and Bear Stearns. Two firms that are not around any longer - didn't survive 2008 but I was there...

Adam Gower: When you were at Lehman Brothers. Did they have - it's that long ago. I'm not sure. Maybe just a little bit too long ago but Kuhn, Loeb. Were they part of the shop at that time or no?

Alan Donenfeld: Yeah so. I was there at a period of time that it was called Shearson Lehman Hutton. It was a combination of firms. Shearson had come from about 20 different retail brokerage firms. Lehman, Kuhn, Loeb - Lehman being the trading firm, Kuhn, Loeb being the research firm. In fact, I know the Schiff family who were the owners of the old Kuhn, Loeb.

Adam Gower: You're kidding. Do you really?

 

Alan Donenfeld: I do know them.

 

Adam Gower: Good grief.

 

Alan Donenfeld: One of their sons went to high school with me. But anyways, so...

 

Adam Gower: You're joking. You keep cutting me off. I wrote a book on Jacob Schiff.

 

Alan Donenfeld: Oh. You have it right there.

 

Adam Gower: It's right here, yes. So it's just coincidental that it's right here.

 

Alan Donenfeld: David Schiff.

 

Adam Gower: Yeah.

 

Alan Donenfeld: I believe is his son.

 

Adam Gower: Grandson. Yeah. Schiff died in 1920. Jacob did.

 

Alan Donenfeld: Long time ago. So, Jacob Schiff was actually the founder of the 92nd Street Y, here in Manhattan on the upper east side.

 

Adam Gower: Right.

 

Alan Donenfeld: And so, I do know the family, yes.

 

Adam Gower: Fascinating. Well that's something later alright. Sorry now after Lehman Brothers, then what happened?

 

Alan Donenfeld: So, yeah, I worked in the principal investment group back then and then joined Bear Stearn's merger and acquisition group and did very large deals but was not.. It was a financial transaction and I didn't find just doing financial transactions that rewarding. So I left to start my own company in 1990 and that began the last, whatever it is, 30 years of being an independent financial service entrepreneur. Formed a broker-dealer back in the 90s that I still have today. So I am supervised by FINRA and the SEC. Started a hedge fund in 2005 that I managed for about 12 years, and it was after the hedge fund, took my profits, returned capital to all my investors. Everybody's happy. Ready to start playing golf. And then I got interested in real estate and helping my brother with his portfolio and that was the start of CityVest.

 

Adam Gower: Yeah. So what was the story behind that? You alluded to it earlier. He lost some money. It was crowdfunding. Like.. and when was this actually, when did you start CityVest?

 

Alan Donenfeld: Yeah. So I started thinking about it. I like tax rules and new laws. There's always opportunities coming out of them. Obviously in 2013, we had the change in rules in the JOBS Act, allowing for general solicitation. I saw the early rise of FundersClub, Fundrise, RealtyMogul all and AngelList. Those four were were very important companies in the development of crowdfunding and in the case of FundersClub and AngelList, there were private letter rulings that paved the way for how you can earn fees and and abide by SEC rules. So, my brother had done some investments in real estate crowdfunding. I thought they were great. They turned out poorly. They didn't achieve the kinds of returns that he expected and it was just a case of due diligence had not been done at a proper level. I don't want to call out that real estate crowdfunding firm, but they just were not good deals. And so when I looked at them, I found where the problems were. It could have easily been seen if there had been an audit and an administrator. And so, I went looking for funds. Started with Blackstone, Carlyle, Colony, Angelo Gordon. All of them came back and said, oh, we have a 5 million dollar minimum subscription, million dollar minimum subscription. So, none of that worked for my brother's $100,000 investment. So I looked at smaller funds and the first thing that I noticed was the returns were better for smaller funds. That the gigantic funds are investing in core properties that really don't generate big returns, but a smallish fund of say 50 million, that's on his second or third fund. If he's located in Denver and he's on the ground in Denver and he and his whole staff have always lived in Denver. They're going to find the best deals in that market because they know every broker. They know whether you want to be on the north side of the street or the south side. They know where the good school districts are. They know where you can get higher rent. They know everything about that market. And in fact, Blackstone will co-invest in the deals of that Denver fund because Blackstone knows that that guy generates the better return. So, I didn't want to invest through Blackstone. I want to invest directly into that fund that's in Denver. So I sought them out initially and they have better returns. But I wanted a better deal than the retail terms that might have been offered to a $500,000 investor. So I tried to get my brother's $100,000 in that minimum investment of $500,000 and and they said, no, come back when you have more money. My brother's a doctor. He gave me the name of some other doctors, and before I knew it, we had two million dollars as a group. I then negotiated better investment terms for that group of investors. So I got into the best fund with the best terms. And that was the start of... I did 3 or 4 of those deals for my brother and his fellow doctors and then I decided to make it a company following what Fundrise, FundersClub, AngelList and those guys had done. And I created the website to make it secure, safe, easy using DocuSign, Investment Dashboard, lots of information freely available, the website. So, adopting the best practices of crowdfunding but targeting private equity funds as the best and safest investments.

 

Adam Gower: Absolutely fascinating. So, let me ask you a big question.

 

Alan Donenfeld: Yeah.

 

Adam Gower: You're a finance guy and your brother made some real estate investments that cratered. How did you come to learn about real estate? It's one thing to look at the docs and look at the technical aspects.

 

Alan Donenfeld: Right.

 

Adam Gower: How did you get over that or how did you acquire your knowledge of real estate to be able to assess the competence of a sponsor. Tell me about that.

 

Alan Donenfeld: Right. So while I have learned a significant amount about real estate acquisitions, my expertise is understanding real estate private equity funds. So while I do know value add strategies and the Catalyst fund that we're working on right now has a repositioning strategy for low income housing tax credit. I'm learning from the experts that have funds and have 20, 30, 50 years experience investing capital. I'm not going to any course books, which is really the fundamentals of cap rates and NOI. Everybody can learn that. But the the nitty gritty of a strategy of finding a repositioning and saying, oh, south east Atlanta is a gentrifying neighborhood and that's where there's a lot of low income housing tax rate. I'm learning on the ground from professional fund managers who have been doing this kind of investing. So now I have a body of knowledge from having done 12 of these access funds through CityVest as well as multiple funds for my brother. It's a range of funds, including senior housing distress, lots of multifamily repositioning, industrial properties and now my passion is focused on GP co-invest funds being able to earn a percentage of the profits off of other LPs.

 

Adam Gower: What are your biggest challenges, Alan? Actually, what were the biggest when you started and what are they today?

 

Alan Donenfeld: It has always been finding the best funds. Finding professional managers, finding honest managers. And so that's what I spend most of my time doing. The investors will be there. If you have a great product, the investors will be there. So I spend all my time looking for funds doing that due diligence on the fund documents, interviewing managers, getting behind the story of why they're interested in their properties, their deal structures, knowing that their team has a acquisitions guy, dispositions, the value-add or renovation guy, the person to sell the property. So I want to make sure each of these managers has a group of employees that can manage, start to finish, the task of managing a group of properties. And so that takes a lot of analysis of all of these 700. I, quite frankly, I rule out funds fairly quickly if they don't have the right kind of administrator, the right kind of auditor. Sometimes my due diligence firm will help me rule out a fund if something comes up in that due diligence process: liens,  bankruptcies, litigation. There's always something that might pop up. So, we're looking for the cleanest funds we can find. And then there's always something that might give me pause in their documents that when I try to renegotiate terms, that's in their documents. If they don't agree, then I can't proceed. So, I guess a challenge for me is having a deal available all the time. I don't. I don't have a deal available all the time because it's a little bit lumpy. I might find that I have a deal now and the next one might come along in three or four months because it takes a lot of analysis. Luckily, I have a fairly significant sized investment advisory committee who have a range of experience from the industry, which, you know, ranges from Colliers and a whole group of other real estate investment managers who help me in analyzing funds, understanding particular strategies, keeping me on my toes about what I'm looking at in these funds.

 

Adam Gower: Alan. Do you consider CityVest to be a crowdfunding website?

 

Alan Donenfeld: I really don't, although the element of crowdfunding is that investors come in from the internet and they look at the deals and they can click on an "Invest Now" button and they're part of a group of people that will invest in a property. But I like to call ourselves a online investment marketplace rather than crowdfunding because I'm doing things a little bit different. I'm not just serving up product from someone else. I'm actually improving product from something that I see in the market with significant due diligence that's gone in to finding the best product for our investors.

 

Adam Gower: What are your company's strengths? Biggest strengths.

 

Alan Donenfeld: So, yeah, so I've been in the financial service business for 40 years, looking at the tenure of the management of some of the crowdfunding companies. They might know the internet, but many of them are in their 30s. And so, I don't frankly think that they've figured out what I've figured out. They don't know how to thread the needle of the security laws. They don't totally understand 506(C), 3c-5 funds. So, there are some technical/legal aspects. I don't think that there's this holistic approach looking at investment fund documents and saying, how can I get better terms for our investors? That's my passion. Not just finding a deal and getting investors in it, which is what most crowdfunders do. They're transaction oriented. They have lots of salesmen. They have lots of fees involved because they have to pay their salesmen. We try to stick to: here's the best product we can find. And to date, the investors have been there. We don't have a big "selling" effort. We have investors that have found us and they like our deals.

 

Adam Gower: What are the biggest challenges that you face?

 

Alan Donenfeld: Finding those great deals. It takes a lot of research. Many times we have to call our old managers to ask them, what are they seeing. Asking our investment committee members, what are they seeing in the market? What are the best deals out there? So it does take a lot more work. There are literally 10,000 sponsor deals. They're all over the place. We're not interested in any of them. Every day I see another 5, 10, 20 sponsor deals that are looking to raise money. I'm just not interested in them. I want to find a track record, auditors, administrators who are overseeing these funds so that they're the best funds that I can provide to our investors.

 

Adam Gower: What about opportunities for CityVest, Alan? Would you like to 10x your business? Would you like to invest 100% of the equity a fund needs? Like, what are your aspirations, what are the opportunities for you?

 

Alan Donenfeld: So frankly, I'm pretty happy with our current offering, which is Catalyst, which is targeting a 30 percent IRR for our investors. So, my passion now is to bring investors into that deal, getting that closed. I'm looking at a distressed hotel fund. As you can well imagine, coming out of the pandemic, half the hotels are closed. The other half are distressed. They're operating at 25-50% capacity. I think over the next month that's going to change dramatically. But there are incredible opportunities to acquire some of those hotels. So I'm looking at a really well experienced - a fund that owns well over 100 hotels because they see from the lending groups at banks that they're selling those loans on those hotels, that they can acquire the lien on the hotels to take over the hotels and then restart them as the economy starts up again. So, there's lots of great opportunities over the next year year as the economy comes back. I've never really been a fan of retail. The Amazon effect hasn't just hit in the last year, even though Amazon's revenue in the past year has been more than the revenue in the last three years combined. So Amazon blew up, but that effect has been in play for the last 10 years. Anybody that couldn't see that, I know that a lot of people bought malls thinking that it was a turnaround story. They're not. Malls are dying a slow death. I would never invest in retail. I live in Manhattan. Retail is really suffering here. I just don't see retail coming back. But obviously, senior living, hotels, multifamily and industrial properties all have great opportunities.

 

Adam Gower: Minimum investment. What's your minimum investment?

 

Alan Donenfeld: In our feeder fund, it's $25,000. The average has been around $50,000 because we have a lot of investors who are who started out at 25, quite frankly, and then they got up to 50 and many of those people are now at $250,000 because they see how great these opportunities are and how we've come through for them. So, in total, we have about 100 investors per fund. We're limited to that amount in a 3C1 offering, which is the Securities and Exchange Commission rule that we operate under as an exemption from the Investment Company Act. And so, 100 investors and an average of 50 is about 5 million. But we do let investors in at $25,000 because many people don't know us and they quickly find that they started out at 25 and they're increasing their investment. We're happy to have them on our deals.

 

Adam Gower: And I know we've been talking a long time, so I don't want to wear you out completely. So let me just wrap up a couple of questions here and I'm interested. So, when you're looking at the funds, what kind of debt levels make you uncomfortable, I suppose, that a sponsor might put on their portfolio.

 

Alan Donenfeld: Sure. So, it's usually around 65% debt for the underlying funds, on particular deals. Fund do go up to 70%. I don't  ever see 80% or even 75% so it's usually about 65-70%. I'm comfortable with that level. One of my interests in the real estate business overall is that there is embedded financing that you can get. I started my career back at Lehman and Bear Stearns doing leveraged buyouts. That's what they were called back then.

 

Adam Gower: Oh my goodness. Did you really?

 

Alan Donenfeld: And you had to struggle to piece together the mezzanine and debt level and you had to convince the banks. So, real estate is far easier in that, the banks or other private lenders, Fannie Mae, Freddie Mac, are there with a level of debt that's fairly easy to obtain under right now, incredible terms at rates, you know, around 3% for that financing. So it allows a 5 cap deal with financing that's that cheap to achieve on a levered basis, very early on, cash-on-cash returns of 7%. If you can get the rents up, before you know it, you're at a 10% cash-on-cash return. And if you have in fact gotten the NOI up, when you go to sell that property in 3, 5 years, you can get a higher price. So, layered on top of that 10% cash on cash, pretty easy to get on a safe basis, around a 15% IRR. That's where most regular value-add funds are forecasting. But there are unique funds that have a "differentiated" strategy, whether it's distress or repositioning, that might be able to get something in the 20s or in the case of Catalyst, even a 30% targetted IRR.

 

Adam Gower: Couple last questions. What's been the hardest lesson you've learned? I want to say in real estate, but, you know, throughout your career in business. What's been the hardest lesson you've learned?

 

Alan Donenfeld: Trust but verify. So, in every industry, whether it was when I was doing leveraged buyouts or in my private equity fund, when we're making investments in small public companies, I like to trust people. I like to trust their projections, their models, their growth rate, what a product can do. But frankly, you have to verify that information for yourself. And so, while even the real estate investment managers that we look at. While they have audits and administrators, we have our third party due diligence firm named Buttonwood actually verify the engagement agreement of the auditor. Who does that? Verify the administrator agreement. Call the administrator and auditor. Call the bank. What's your relationship? Doing basic due diligence. Must be done on anything that you invest in or anybody that you're working with. So, the biggest lesson is: you know, you just have to do the work. It takes time. You have to put in the calls. You have to call the bank. Make sure they have the account. You have to call some prior Limited Partners in these funds. You always have to do that. And the funds will often say, well, I don't want to rustle up my investors. I don't want to get them concerned with getting a call. So what? Give me the name of some prior LPs. Now, they're never going to give you an LP that's going to say something bad. I recognize that. But at least give me the names of some people and it will be my job to quiz them. How long have you been invested with this manager? How have they performed? Are the K-1s delivered on time? These are just little things that go into the equation of whether you should invest. That getting that K-1 on time. Crucially important. How timely are they with quarterly information? How timely are they getting your distribution out to you? All are things that are easy to overlook but you have to verify all that information. You get that often from the Limited Partner but there's also a lot of information you can get from that administrator understanding their relationship. If it's a brand new administrator relationship, that might be a red flag. Did they deal with another administrator and that administrator wasn't flexible in how they were working with that manager? So is that a a red flag that maybe they're shopping for new investment managers, changing up their service providers? You have to look at all of that information. Lessons I've learned is: trust but verify.

 

Adam Gower: Last question. What do you enjoy the most about what you're doing over there at CityVest - this phase of your career?

 

Alan Donenfeld: You know, the thing that I enjoy the most is the thing that I haven't even discussed on this call. It's actually speaking with individual investors and telling them what we do. Educating them. A lot of investors will say, you know, will think, for example, that a pref is going to be the distribution in the first year. And it's not. The pref is just a hurdle after which there's a sharing of the profits. But I enjoy educating all of our investors. So I run daily conference calls with any investor that wants to call in to our conference call line and I'm there to educate, answer questions. Oftentimes, I will get my investment manager on the phone so he can explain the deal because the better educated that investor is, the happier they will be, the better they will be in seeing the benefits of our fund if they're educated. Which is, not to invest in a crowdfunded deal because I just don't like deals. I don't trust the deals. They may turn out great. The other site may have great performance. I admit that. But for safety purposes, I'd rather be in a fund with an audit and an administrator.  I can't harp on that enough but I love speaking to the investors, educating them and seeing them invest in good product. I feel good when I know that they're into good investments.

 

Adam Gower: Alan Donenfeld, CityVest. Founder and CEO. What an enormous pleasure meeting you. Thanks so much for being on my podcast today.

 

Alan Donenfeld: Thank you, Adam. It's been a pleasure speaking to you and I hope you've learned a couple of things and I hope I have educated your audience into how to invest safely into real estate.