DEAL TIME! KCAP Access Fund LLC

Adam Gower: Alan, so what's been going on? How have you been doing and how's the world seem to you at the moment, the real estate world?

Alan Donenfeld: Yeah, everything's been excellent. We continue to find particular niches in real estate, specifically in real estate private equity funds that we think are attractive. Obviously, we all know the history that during inflationary times, which we clearly are in now and likely inflation will accelerate over the next couple of years with the Build Back Better and infrastructure spending. So, as inflation continues, history has shown that real estate performs extremely well and we're picking out various niches in real estate that we think will follow that trend with increasing rents and high internal rate of return performance.

Adam Gower: Ok so, why don't you drill down a little bit and didn't officially start but, we did officially start because that's a really interesting point, so let's just stick with it. Tell me, why - just explain for that one guy that doesn't know why real estate performs well during times of inflation. Why is it a good hedge against inflation?

Alan Donenfeld: So, as individuals incomes go up during inflationary times. So we all know that unemployment rates are at extremely low levels. That employers across the board, particularly companies like Amazon, that have grown so rapidly, as they look for new employees, they have to pay them more to attract them. We know that the minimum wage is going up. So, across the board, middle income, even lower middle income, wages are rising the fastest. And as those individuals have more income, they will, as we're coming out of the pandemic, they will go to restaurants more often. They will buy more goods from Amazon and elsewhere. And so, that amount of money, chasing goods and services, will cause those goods and services to go up. It's also exacerbated by supply chain problems, where there's fewer goods available to buy, and so, those that have the goods to sell are increasing prices. So across the board, we have inflation from both wages and prices going up. In addition, when those people have the capital to spend from higher wages, the landlords feel empowered to increase rents. Sometimes they have to, because their own goods and services of operating a real estate business will go up in costs. Such as, whether it's property taxes or maintenance or gas, whatever those costs might be of a landlord, they are going up. But that is also the tenants wanting to live in better housing and willing to spend more of that money as their incomes are going up. So, across the board, rents are going up, which is increasing the value of properties. And, we're looking for niches that will benefit from those increasing rents.

Adam Gower: Now are there any asset classes that you like more than others, during inflationary times, or is it kind of a blanket - all real estate is good during inflation.

Alan Donenfeld: You know, there have been times, over the past five years, that different sectors have far exceeded what they were anticipated to - how they were anticipated to perform. So, industrial has performed extremely well, given the demand for distribution facilities and primarily from online merchants having to distribute goods. So, industrial has done extremely well. However, we have found that our favorite sector is multifamily. It's a much more prevalent asset class because everybody has to live somewhere and housing is ubiquitous. Industrial properties is a little bit more selective and while we hear that industrial is doing well, you have to know where to buy. So, do you buy warehousing in New Jersey, or in Memphis, or in Phoenix. It's a little harder to pinpoint where that industrial property is going to do well. But with housing, it has been across the board. I think we've all seen a general shift away from the very large cities like New York and San Francisco, where millennials are migrating out of those high-cost cities where they move to, 10 years ago, when they just first entered the job market and they're moving to places like Charlotte and Durham, North Carolina and Tampa. We've all seen the migration from San Francisco and Silicon Valley to Austin. Denver has done extremely well. So multifamily, if you can pick those cities and states that are favorable to jobs, employees - that would be a place to buy multifamily real estate. And there are specific metrics. The two that I like to look at are wage growth and population growth. Because, when you have the two of those combined, it's an accelerant to rent growth. So, when you have a rising population like people moving from Silicon Valley to Austin. So now you have more people moving there, plus the wages of those employees is higher than the average. So the average employee in Austin has, there's more of them and there's more money to spend. So rents in Austin have gone up significantly over the past two years.

Adam Gower: Now, Alan, your company specializes. It's quite - I hate to say "quite unique". I think that's called an oxymoron. Isn't it? It is unique in that you specialize in, essentially crowdfunding, but you look for funds to invest in. Just talk to me about your strategy and what your company does. Give me, kind of, high level. We've already got the corporate overview that I share with everyone. But just give me the high-level overview of what you do and why you do it.

Alan Donenfeld: Well, the pain point was, individual investors trying to find the best real estate investments. With a choice being REITs or dealing with sponsors directly or crowdfunded deals. And what we found is that, the most sophisticated investors, the real estate private equity fund managers have the best capability. The best structure. The cash on hand. Everything is better and bigger with a real estate private equity fund manager. Given the feeding frenzy of acquiring properties these days, if there's a sponsor without cash in hand, or a sponsor trying to raise money through a crowdfunding financing and next to him is a fund manager with $50 million in the bank, that fund manager is going to have the leg up in both the ability to move faster, offer maybe a discounted price, because he can close in a week. He can easily refinance and get his mortgage after the transaction is closed. And sellers would just rather deal with somebody that has the cash in hand, they can close quickly. Certainty of close. So, but the pain point was, how do we find the best real estate private equity fund managers? And what I found is, as the best fund managers get larger and larger, their minimum subscription amount or the minimum investment into their fund was going ever higher.

Alan Donenfeld: So, when those rose to $500,000 million dollar amounts, individual investors got frozen out of the best investments that were out there. We wanted to change that dynamic so that we provided access to those best real estate private equity fund managers and we do that through setting up feeder funds, our own funds, which we call "access funds" and allowing individual investors at $25,000, $50,000 amount, to subscribe to invest in our access fund and then we pool that capital. It usually is around a 4-6 million dollar amount, and then we invest in that underlying real estate private equity fund. The advantage is not just that access, which should be good enough, but because it is a 4-6 million dollar amount, we also negotiate enhanced better terms. So rather than agreeing to an 8% preferred return, we usually get a 12%  preferred return. And oftentimes real estate private equity fund managers have a split of profits after that preferred return, which might be 75/25 split or 70/30. We've gotten, in every case, an 80/20 split. So, more of the profits for the investor. A little bit less for the private equity fund manager.

Adam Gower: Now the other thing that makes you very different. I hate to use the word unique. I know you want me to but you never know because one other guy out there is not unique. But I know that you're very, very different.

Alan Donenfeld: Yeah.

Adam Gower: In the way you charge fees, as well. So tell me about how you structure your fees. An interesting structure.

Alan Donenfeld: Well, it's fairly transparent. It's 1.75% of the amount that the investor puts into our fund, and that's an annual fee. We don't do what a lot of real estate fund managers do and charge six different kinds of fees: a property management fee, an asset fee, you know, a disposition fee. We just charge that one fee so that you know what the amount is and because it's 1.75% and we've gotten a 4% higher pref, there is a natural improvement on what you could have gotten if you invested directly into the fund, if you even had the $500,000 or million dollar amount to access that fund. So, in every case, there's at least a 2% advantage in our fund, of an improved pref. But,  in addition, we also are getting an 80/20 split, rather than the 75/25 or 70/30 and  there are other rather esoteric terms that we've improved, which a lot of people won't understand, like a rebalancing contribution, which is like an interest rate. If you're getting into the fund late in their capital-raising period, we often have that waived. We eliminate call features, which are cumbersome for individual investors. So there are a number of little improvements that we make, to the investment process, in our access fund as opposed to a direct investment in a fund.

Adam Gower: And you take no share of the promote, do you? It's just a straight, single one fee and that's it.

Alan Donenfeld: Yeah. A lot of people ask that question. We don't currently take any percentage of the profits. We don't think that's fair to the individual investors. In the future, that may change if we can get even better terms from the underlying fund. Maybe we'll add a percentage of the profits. As long as it's fair to the underlying investor, then we'll do that. I do know that there is a couple of different crowdfunders out there that are charging a percentage of profits. We just don't think it's fair at this time.

Adam Gower: And do you co-invest in the deals, Alan, yourself?

Alan Donenfeld: We do invest in our deals. It's not a significant amount that we put in them, because we've done more than a dozen of these funds. So, you know, at $100,000 each, it's more than a million dollars at this point. So, we do put in some money, but it's not, you know, we're not putting in a million dollars into each of 12 different funds.

Adam Gower: Now. You also, not only do you do the underwriting, you talk a little about how you do that. But, you also have a third party that you bring in to examine all the funds that are past your screening. So, why don't you - actually start with your screening. How do you find deals that you want to invest in? How do you find funds and then we'll talk about Buttonwood. First, tell me about your layers of analysis.

Alan Donenfeld: Yeah. So, as you've highlighted in some of our previous video calls, we look at around 700 funds a year. I'm not going to explain exactly how we find them, but it's a fairly meticulous process. Every private equity fund that is making an offering, has to file with a Securities and Exchange Commission. And, we have access to their database and can see everybody who is making an offering to raise capital, whether it's a fund or even an individual deal. Everybody has to file with the Securities and Exchange Commission. We look at all of those deals. We speak to about - it's about two or three funds a day. It's not 360 days a year that we're looking at funds. But, it's a lot of funds that we're looking at. And, we try to pick out the funds that have a more "institutional" focus. So, if it's a one-property entity, we're really not looking at that. We want to find a diversified investment fund manager. We're looking at managers that have had several funds in the past - more than $50 million in assets under management, in prior acquisitions. And overall, we want that return to be over a 20%  IRR track record because the last 5 and 10 years has been that attractive for investment fund managers. And, we're finding a fairly large number of fund managers that have had that kind of performance, and that's who we want to back with our own capital.

Adam Gower: So, that's your first layer of screening. Now you find somebody who is willing to accept your terms. I know not everybody does. So that they accept your terms and your modifications of their contracts, etc..

Alan Donenfeld: Right.

Adam Gower: And now, it's time to get into the nitty gritty, isn't it? And you bring in a shop called Buttonwood. So why should investors care about Buttonwood?

Alan Donenfeld: So, it's one thing to rely on our own due diligence and I imagine other crowdfunding sites have their due diligence team, but we add this extra layer of "trust but verify" where Buttonwood will do a background check through TransUnion and other services to look at whether there's any bankruptcies, liens, unpaid amounts, lawsuits. They look at SEC and FINRA records to see if there's any negative information. They make sure that the sponsor or the investment fund manager has so-called skin in the game, and we require a minimum amount of investment by that manager. We verify that there is a Key Man Life Insurance Policy. We look at the amount of transactions and years of experience of the team. So, they look at all of these factors to verify that we have an element of safety, that there's nothing that's going to pop up in the background that is going to cause us a future problem.

Adam Gower: And what about due diligence? Not just - so we've got kind of the, you know, you're crossing t's and dotting i's when you look. Are these guys crooks? So we know they're not crooks, alright? So, it's kind of a minimum standard. But what, as far as determining the validity of their underwriting, their assumptions, you know, the deals that they're in. Just tell me about your processes for figuring that out.

Alan Donenfeld: Yeah. So, just comparing us with maybe a real estate crowdfunding, which might be a single asset where you might have access to the proforma. I don't think that every site provides that level of detail, but it's one asset. And when you go on another site, they will not usually provide any sort of track record to you. So, we're focused on making sure that the track record is as sound as can be, which is that higher than, greater than 20% average IRR on prior transactions. Our current fund has had no principal losses on their acquisitions. And so, there is an element of safety in their  past performance. However, going forward, our current transaction, it's a $50 million private equity fund. They've raised $30 million to date. They've invested $12 million of the $30 million that they've raised so far, and they bought seven properties. We have the pro formas on those seven properties and have already gone through those seven properties that are in the fund. So, we have a good sense on about 30% of the fund, what is going to be in that fund and what the performance is likely to be. It happens that there's around a, 31% targeted IRR on the properties that are in the fund. So we have a very good sense of what rent increases they are expecting to get, what amount of renovations they're looking to put into the properties. So we've reviewed those proforma models. They are reasonable. The rental increases are about 10% to get from the as-is rents to the stabilized rents. And so we've done, in addition to the "trust but verify" using Buttonwood. We've looked at the actual properties that are going to be in the portfolio.

Adam Gower: Right. So you've segued nicely into KeyCity Capital. So, let's go ahead and talk about them a little bit.

Alan Donenfeld: Yes.

Adam Gower: So, first of all - now last time we spoke, I didn't quite get it, but now I do. So now you have an access fund called KCAP. Fund II, I think you've called it. KCAP anyway.  That's your access fund. So anybody investing is going to invest in that, which is the fund that you manage. And then that entity will invest with KeyCity Capital and KeyCity Capital are the guys that are out there finding the deals, putting them out, doing the day-to-day work. Why did you like KeyCity Capital? Let's start right there. We know we trust them already. Buttonwood would have, you know, buttoned that down for us, if you'll excuse the pun. But what was it you liked about what they do and, you know - tell me more about who they are and why you like them.

Alan Donenfeld: So, within the themes of real estate investing, I mentioned that industrial went through their period where everybody was focused on industrial. What we've seen in the past year is that workforce housing or Class B, B-minus, C housing provides a significant advantage over buying core or core-plus where it's very difficult to get rent increases from a newer property where tenants have more recently moved in, say, the last five years, and it's a stabilized property. In a Class B, B-minus, or C property, which are older properties. So KeyCity, KCAP, has a portfolio in Memphis of six properties. Total acquisition was about $82 million. They're planning on putting $15 million into that group of properties. It's about 1,200 individual units in these properties and the average rent is around $840 - around Southeast Memphis. Memphis is a great market with FedEx. UPS has a distribution facility there, St. Jude Hospital, AutoZone. There's like 700 different bank branches. It's a very vibrant economy. There's a population moving to Memphis because Tennessee has no state income tax, much like Texas. And so, the base of the employment of Memphis is very strong.

Alan Donenfeld: And as I discussed earlier, as those minimum wages increase, many are factory employees. As those wages start to increase, their ability to pay rent improves and that $830-$840 average rent in this portfolio is expected to go up to something over $1,000 in average. They're expecting about $150-$250 increase in rents. And part of that is because that $15 million in a renovation budget will improve these properties through simple things like re-blacktopping the driveway, putting in stainless steel appliances, new countertops, two-tone paint, landscaping, new model units. All of that happens from this $15 million budget. The properties are improved. They hopefully will end up to be B and B-plus properties, and the tenants will, I believe, be able to afford that new $1,000-$1,100 average rent. On average, it's going to be about a 10%  improvement in rent. So that new stabilized net operating income will be higher and the projected sale date in year five will be at a level that will produce this 31%  average IRR for our investors.

Adam Gower: So I was very - you must have thought, what is Adam doing playing with his phone while we are talking? What an incredibly rude thing to do. I was not sending a text or anything ghastly like that. Actually, I was actually just looking - should be able to do it. Gosh, I tell you something. If the people that brought me up knew that I couldn't do this in my head, they would never talk to me again. But most of them are gone anyway, so it wouldn't matter. I had to calculate $15 million, divided by 12,000 units, $12,500 per unit. That's a lot of money for an $800 a month unit. What are you doing there? What are the upgrades?

Alan Donenfeld: Yeah so usually it's about $5,000 for each unit itself. The rest of the money is for overall property improvement, and there's a lot of new technologies that have gone into multifamily. Little things like having a new standalone package building. We know what Amazon has done with delivery of packages. You can't just leave packages at a doorstep in a multifamily property. And so, new buildings are being created, which each tenant will have a key to their package compartment so their packages are safe. Many of these facilities are putting in dog runs, swimming pools, new model units. So, it's not the full $15 million per unit. It's more like $5 million for the new appliances, new kitchen, countertop, painting, carpeting, laundry facilities and then that overall development of the property. There might be excess land where a new building can be built and that's a great benefit to the owner where you can put a new building in. Increase the size of the property.

Adam Gower: Now KeyCity Capital. Why do you like KeyCity Capital? Why do you like them? What's their track record? You told me 20% something. But, how long have they been in business? How long have they been doing multifamily? Tell me about KeyCity.

Alan Donenfeld: Yeah. So, the principals came out of the accounting industry, which is always a good place to start so that you can trust the numbers and their accounting for their properties, I think, is as sound as could be. KPMG is actually their auditor going forward. And so, that was about 20 years ago. They started buying and managing properties about 15 years ago. And, about five years ago, they started buying properties - properties that they've realized they have over a 20% IRR in those realized round-trip properties. They've had four different real estate private equity funds to date. Two where they've realized the properties and two, more recently that they have not yet sold those properties. They're vertically integrated, having spent some time in brokerage construction and property management. So you can imagine, with these 1,200 units in Memphis, there is a significant amount of property management, of ongoing construction, you know, improving all of these units. And so, those various skills, wrapped up together of, the accounting function, property management, being able to renovate these at the lowest cost possible. All of those go into the making of an investment fund manager that we believe will do the best by our investors and hopefully help us achieve the highest possible IRR.

Adam Gower: Right now. They're raising $50 million, not $15 million that's going into Memphis, Tennessee. You said with an American accent, as best as he could. So, what are they going to be doing with the other $35 million. What's the business plan over here?

Alan Donenfeld: So, their target markets are Texas, Tennessee, Florida, some other places. But those three, have one thing in common, which is, no state income taxes. The company is actually based in Texas. They found a lot of their opportunities in those three states, specifically in Florida. It's the West Coast, from Naples up to, through Fort Myers, up to Tampa. All are markets where population is growing. Incomes are growing and the cost of a home has increased significantly, while rents have not gone up as much as the cost of the homes. So that will portend that rents are likely to push up also. They haven't yet gone up to the extent that housing prices have. And so, if you're a millennial and thinking, OK, now's the time to buy a house but the housing prices have gone up 15 or 20%, in the past year. You're likely to say, well, maybe I need to rent for another couple of years because I can't afford that house. And then you find out, while rents have gone up, maybe 5% in the past year, they will be pushing ever higher to match the same percentage increases of housing prices. So those are, you know, Texas, Tennessee, Georgia. It's the southeast dynamic where population is growing and average wages are growing.

Adam Gower: Right and they're looking for multifamily. So, they're out there with the hordes of other sponsors trying to find multifamily in those three states. What makes them different that they can find deals that they can compete effectively on?

Alan Donenfeld: Right. So, one thing that makes them a little bit unique is - because, as they've grown up in the industry, from accounting to real estate brokerage into construction and now the investment fund management. Their ability to source real estate multifamily developments is a little bit better because they've come up through the brokerage community. They know how to talk that language and they're looking for properties that actually have problems. That may sound strange. The reason they want to find problems is usually with problems, they're going to find that there is a lower occupancy, that the properties are run down. Not many buyers want to buy rundown properties, but KCAP or KeyCity Capital wants to buy those. They want to find an 8 Cap that's been run down, where if they improve it, they can get the rents up and that creates a large increase in net operating income so that when they sell those properties, they get the highest return.

Adam Gower: Right. So these are value-add properties. Distribution frequency. So, what's the minimum? How much is - actually let me ask you this first. What are the fees for the sponsor? What are their fees?

Alan Donenfeld: So, sponsors are usually in a tight band of a 2% management fee. I believe it's a 5% property management fee. And so, they're usually pretty consistent from sponsor to sponsor. They're not charging anything that's unusual. The great thing about a private equity fund, which charges a 2% management fee and a percentage of profits is, their goal is to earn that percentage of profits. They want to earn higher than that preferred return. In the case of a direct investment, it's 8%. In our case, it's 12%. But, their biggest windfall is going to come from generating the targeted 25% IRR. That's where they really make their money. And so, we want to keep them focused on this win-win where, they will get a windfall from the percentage of profits but we will also get 80% of that return. And, if they hit something around the 25% plus IRR that they're targeting, that's a great return for our investors.

Adam Gower: And do they have acquisition or disposition fees, as well, these guys, when they buy something?

Alan Donenfeld: I'm sorry, acquisition?

Adam Gower: Yeah. So when they buy a building, they buy an asset for $25-$30 million. Are they getting a fee for that?

Alan Donenfeld: There is a - I believe it's. They do have a brokerage arm. So I think it's a 1 or 2%  brokerage fee going into the properties.

Adam Gower: Got it. Okay. So we'll leave the fees alone. Distribution frequency. How much is the minimum that anyone can invest in your access fund?

Alan Donenfeld: Yeah, so because this is a $50 million fund, a direct investor would have to invest a couple hundred thousand to get into the fund. We want to make these real estate private equity funds accessible, and our minimum is $25,000. However, we've seen that our investors are investing in multiple funds of ours, and usually the first fund is -they start out at $25,000. They see what our investment dashboard is about and our ability to distribute the capital, and then they move up to $50,000. Many of our investors now are at a $100,000 and $150,000 after they've made 3 or 4 investments through our platform.

Adam Gower: So into KCAP, the current fund that we're talking about.

Alan Donenfeld: Yes.

Adam Gower: It's a $25,000 minimum. Are there any different classes of investor, Al, or is it  just one class of investor?

Alan Donenfeld: Yeah. The only distinction and class of investor is, if you invest $100,000-$200,000, we reduce that first year fee in half. And over $200,000, we eliminate the first year - 1.75% fee that we charge. So, I think in the future, because a lot of our investors are starting to creep in at amounts that are $250,000 and $300,000, we're going to have to have another class of investor where we give this 2nd year of fees, free for investors that are at those much larger amounts.

Adam Gower: Now is there any early exit possible from the funds that you put together or are they really locked into the full lifecycle of the fund itself?

Alan Donenfeld: Right. So KeyCity management is planning on selling these properties around year 4 and 5, although they reserve the right to extend the fund if there are some properties that haven't yet been sold. And so, it could go out as long as 8 years. It is technically illiquid, during that entire period of time, although you will start to get back 5, 10, 25% of your invested capital, in years three, four or five. So there will be some larger distributions that come back to investors during some of those mid years - three, four or five, with all of the capital being returned in years six, seven and eight. We don't currently have a liquidity provision in our documents, although we are looking to put in place a fund that will buy in your interest. If in year four, you need all of your capital back because kids are going to college or you're buying a bigger home or medical expenses, whatever that might be. We're putting in place a fund that can buy back your investment and give you complete liquidity earlier than waiting for the seventh or eighth year.

Adam Gower: Oh, that's interesting. All right. So in the KCAP Fund II access fund.

Alan Donenfeld: Right.

Adam Gower: Which is the fund that you put together to invest for KeyCity Capital. What are the projected returns to the investors? Equity multiple, cash flow, IRR.

Alan Donenfeld: Right. So, specifically, that 6 property acquisition in Memphis. They call it M6. They're targeting a 31% IRR on that entire portfolio. KeyCity Capital, on the fund, is targeting a 25% plus IRR. They don't know if it's going to be at 25 or 28, but they're fairly confident that it's going to be over 25% which would basically be that 31% less  some of the management fees and percentage of profits, bringing down that average net IRR in the fund overall, to around that 25% level. I think that is going to work out to, something around a 2X equity multiple, which is a solid return, twice your money back from your investment.

Adam Gower: And do you happen to know what the difference is between the project level IRR - projected IRR and investor-level projected IRR, off the top of your head?

Alan Donenfeld: I don't. I know that on each of the individual properties, the projected IRR is something north of 25%. I don't know what each one of those targeted IRRs are.

Adam Gower: No problem. I know it's, kind of, getting into the weeds a little bit. Otherwise, sounds like a very, very interesting project. What are the downsides, do you think? What are the threats to their successfully executing on their business plan?

Alan Donenfeld: Sure. So it's entirely possible that this inflation story doesn't happen. That the population growth in Memphis doesn't happen. If they're not able to get $150 extra in rent after spending money on - a significant amount of money on the renovations. So, it is possible that the stabilized net operating income, of that group of properties, is not as high as expected and at that point, I don't think the downside is a loss of money. I think the downside is a lower return. Maybe that ends up to be a 10% IRR, but, from what we've seen - being able to achieve $150 increase in rent given what's happened to rents since when the fund started. So this property, they were looking at buying this property back in the second quarter of this year. They've already started to achieve increases in rents, already. So I think that story is playing out as they expected. They do have another $38 million or so properties that they're looking to acquire. And it's always possible, as a downside, that they don't pick properties right. The one thing that - the reason I have focused on real estate is overall, it's a lower risk than venture capital or hedge funds. At this point in the stock market, I think we can all safely say that given cycles, there will be a correction to the extraordinarily high level of PE ratios that we're now seeing in the market. Who knows when that's going to happen, but I feel safe in real estate and the story of inflation and higher rents.

Adam Gower: And how does it work then? So somebody commits $25,000 or you commit $6 million or whatever it is.

Alan Donenfeld: Right.

Adam Gower: How does it work with KeyCity Capital, if they aren't closing on deals today? So are you making a commitment and then they call on it? Is there a hard deposit that you've got to make? How does it - you've got to put your money up now. How does it work?

Alan Donenfeld: We really didn't want to deal with call provisions, which are just problematic for us, dealing with so many investors. So, we required KeyCity Capital to accept all of our money on the subscription date. That's the date that our 12% pref will begin to accrue. So we're not under a significant disadvantage by investing all of the money basically at the end of this month, December, because our pref is accruing. Now, it may happen that they don't have that next acquisition, with our $4, $5, $6 million. If they don't have that acquisition in early January, maybe it happens that it ends up in February. But that's on them to manage that capital. So we'll have our 99 investors investing in KCAP Access Fund LLC. We aggregate that capital over this next month period. We'll subscribe to their fund. Invest that full amount into their fund. They have professional accountants, KPMG, overseeing their numbers, and so I expect that they will deploy it. I've seen a glimpse of their pipeline. They are looking at a significant number of acquisitions following their theme of the Southeast. There's a couple of other things of the southeast investor-friendly states, which we know are Tennessee, Florida and Texas, as well as solid hospitals and employment growth. So, we are optimistic that given their strong pipeline of acquisitions, that they're currently looking at, that they will deploy our capital fairly quickly.

Adam Gower: What's the co-invest that they're putting in? It's a $50 million fund. How much are they contributing?

Alan Donenfeld: They're investing $2.5 million into their own fund.

Adam Gower: Those are all the questions that I have. I suppose the last one is - frequency of distribution. So somebody invests. How often - when are they going to see their first 12% check.

Alan Donenfeld: Sure. So the plan is to distribute quarterly distributions. The problem that always happens, and it always leads to some consternation. If we close on December 27th with $5 million. Not all of that money is going to be invested in a property, throwing off, you know, an 8% distribution. That's just not going to happen because these are value- add properties where you have to spend the money, get the rents up, which means a tenant doesn't roll over the lease, they leave. That's not going to be more than 1% of tenants in, across the board in the property. So, you're not going to be able to get all of the rents up. It's going to be a very small percentage. Month after month after month, over a period of five years, tenants move out, they improve the property. They re-rent the property at a higher rent and then the cash flows start to go up. So, in March 30th of next year, we will not have a 4% distribution or a 16% annualized distribution amount. It may end up being, you know, a 2% distribution, which might be - may be as high as an 8% annualized amount but probably even less. Maybe by the end of the first year, certainly by the end of this second year, we hope to start seeing that cash-on-cash return, start to get up to 8% and that will continue to rise as they get higher rents. They are saying that it should get up to 12, 13, 14% over the life of the properties as rents continue to be increased.

Adam Gower: So, it's accural. You're accruing the -

Alan Donenfeld: The 12% pref will accrue, if it's, obviously if it's not paid. The cash-on-cash projections are quite strong. But I just am reluctant to promise that investors are going to get anything near that 12% preferred return. It's more likely to be at 6 or 7% in the first year.

Adam Gower: Alan, it's always such a pleasure to see you. It really is an enormous pleasure. Is there anything else you want to leave listeners with before we sign off about KCAP Fund or about your company, CityVest?

Alan Donenfeld: Yeah. Thanks for spending the time to ask the questions. And, the one thing I might say is, if you are interested in KCAP, we will be running daily group conference calls where investors pop on a conference call. Some people don't like to ask any questions because they don't understand cash-on-cash or IRR. Some think they know. In the last questions, and that educates everybody on the call and much of the discussion will be, what's in the videos that are at our website at CityVest.com. But, these daily group conference calls are a great way to learn what we're doing, what the fund is about, their strategy. And a lot of it will be repetitive from videos that we have on our site, as I said, but I'm happy to talk to anybody. If you want to call me directly and discuss KCAP or what we're doing. My phone number 917-747-3091 or just log into CityVest.com. You'll find an Investments button and KCAP has a significant amount of information on our website.

Adam Gower: Alan. It's just such an enormous pleasure seeing you again. Thank you so much for joining me on the podcast today.

Alan Donenfeld: Thank you, Adam. I appreciate your time. Have a great day.