Fund Manager Spotlight – Billy Procida, 100 Mile Fund

I recently had the pleasure of speaking with one of our liveliest clients, Billy Procida, President and CEO of Procida Funding & Advisors, manager of 100 Mile Fund. The morning was well underway for Billy, who is based out of Englewood Cliffs, NJ and just getting started for me here in Portland, OR. We spoke about transitioning to a REIT, the state of the market, and what Billy is investing in now.

Billy has been in real estate since 1980, when he started as a construction worker, followed by a successful career as a real estate developer (he was named “Developer of the Year” by the Associated Builders and Owners of Greater NY, along with a slew of other accolades). He then made another successful move to the investment side.

From 1995-2000, Billy was CEO of William Procida Inc., which financed over $1 billion of developments as an investment banker and correspondent. The firm was also advisor to several financial institutions for due diligence, asset management, sales and marketing.

In 2011, he established 100 Mile Fund, an open-ended vehicle that invests in mortgages and investments in real estate and businesses within 100 miles of the New York City area.

Using the Tax Cuts and Jobs Act (TCJA) to Raise Capital

100 Mile Fund has been operating as an LLC since 2011 and is currently transitioning to a REIT structure to take advantage of one of the provisions in the TCJA which can save their investors’ money and open the door to raise capital from new investors. Within the TCJA, there is a 20% deduction for qualified business income.  Although investment income is excluded from this definition, REIT ordinary dividend income is not. This means that the Fund’s income will continue to be taxed as ordinary income, while investors could potentially go from paying a 37% tax rate to 29.6%.

This represents a savings, for those investors who look at returns on a net (of taxes) basis. According to Billy, this has been an easy transition, as the administrative work in making the change was minimal and the Fund has always operated like a REIT, in that it has over 100 investors and distributes all of the Fund’s income every year.

The party is coming to an end

Billy’s passion and expertise for real estate shone through when we delved into the current state of the market. He believes we are at the end of the longest boom in history and  that all existing and new deals should be carefully re-underwritten as you put your armor on to prepare for a possible pricing correction of 20% to 50%, especially in the high-end residential space of $5M and up.

When I asked Billy how he knows the party is ending, he referred to this as the 1% crash because the assets that may be impacted are high-end projects in major cities where developers have little skin in the game, as that is where he sees the majority of permits and a corresponding oversupply.

Billy published an article last summer, A Time for Pause and Urgency with a map showing housing start cycles and concentrations from the 1970s through to today. “Although the number of housing starts has dropped considerably in recent years, says Billy, 75% of all housing starts today are for high rises in major cities all around the country.” Therefore, he believes we are under-supplied in what Billy refers to as wholesome housing, $250k-$500k homes in urban and suburban markets.

Billy’s simple rule for how to figure out if there is an oversupply: “if you see too many cranes in the sky, beware!” Billy pointed out that this is especially evident in New York City, where condos for which people previously paid $20M+, can’t be sold. Cite the source Billy gave the example of the rapper 50 Cent, who just sold his 52-bedroom house in Connecticut after 12 years on the market for $2.9M, $15.8M less than his original asking price. [1]

Bill believes that those who are not prepared for the impending correction may be wiped out, and the pool of Fund Managers may shrink, as it did during the last recession.

I believe, Billy is one of those people who has that real estate gene, with immense knowledge that seems innate. In fact, he reported that he was the first person on CNBC to explain to Maria Bartiromo what a subprime loan was and why it was going to ruin America. During that same time, he wrote of the coming crash and literally got hate mail.

Undeterred, he followed it up with another article called Revenge of the Asset Manager where Billy said “that if you are the CEO of a bank, then you should fire your originators and find out who your asset managers are because you probably don’t know.”

Where is the 100 Mile Fund investing in now? 

So, what is 100 Mile Fund investing in now? Old, ugly and tired assets within 100 miles of NYC, but certainly not in NYC. The Fund made a recent loan to a family-owned catering hall that has been around since the 1950s, where Billy went for sports dinners when he was in grade school. For more, check out his article How the Real Estate Industry Can Save America.

Super sharp, knowledgeable, committed clients like Billy and his team are part of what makes the work that we do here at Redwood so rewarding. If you have a chance to see Billy speak (he recently gave the keynote speech at the Northeast Regional Mortgage Bankers conference) I encourage you to do so!

 

Lance Pederson

As the only third-party Fund Administrator specializing exclusively in real estate, Redwood can provide deep industry knowledge and expert insight to its clients. To learn more about the benefits of partnering with Redwood for your administration needs contact Lance at Lance.Pederson@redwoodrea.com.

 

 

As with any private investment, an investment in 100 Mile Fund is speculative and involves substantial risks. Consider the risks outlined in the fund’s formal offering documents before investing.  Risks include, but are not limited to illiquidity, lack of diversification, and complete loss of capital.

Neither Redwood nor any of its affiliated entities offer or provide any legal, accounting, or other advice that requires a professional license. None of the materials in this post or any related materials are intended to be or should be considered legal, accounting, or similar advice. No one receiving these materials may rely on them as a substitute for appropriate professional advice. Redwood strongly encourages and advises anyone receiving these materials to consult with their own independent attorneys, CPAs, and other professionals in order to ensure that any actions taken in connection with the materials complies fully with all applicable laws, rules, and regulations.

[1] https://www.cbsnews.com/news/rapper-50-cent-sells-massive-connecticut-mansion-at-84-percent-loss/

Key Considerations When Choosing a Fund Administrator

When starting a Fund, it is easy to underestimate the complexities of the operation: raising capital, originating deals, managing cash flow, investor relations, regular reporting requirements, tax returns, and so on. There are a lot of moving parts, which is why many Managers choose to outsource their Fund Administration to an independent third-party.

Whether you are starting a Fund, or contemplating a switch from your current Fund Administrator, finding the best fit can be challenging. There are many different Administrators in the market, big and small, and making the right choice can be a critical factor in the success of your Fund. There are several key considerations you should keep in mind when reviewing your options.

Knowledge of your Industry

The number one consideration when choosing a Fund Administrator should be their experience in your industry. You wouldn’t take your car to a mechanic who specializes in boats, so why trust your small balance real estate (SBRE) fund to a firm that specializes in multi-billion dollar Hedge Funds?

Engaging an Administrator with deep knowledge and experience in the real estate industry means working with accountants who are experienced and able to ask the right questions and provide the right guidance throughout your Fund’s lifecycle; from launch to wind down, through the ups and downs of the market. Quality Administrators also have connections to others with direct experience in the SBRE industry, including Loan Servicers, CPAs, attorneys, and other partners, who can help you grow your business.

Strategic Partnership vs. Outsourced Accounting

Some Fund Managers may be concerned about losing the insights and understanding of a Fund’s dynamics if they outsource administration and rely on a third-party firm to maintain financial and reporting requirements. This is where choosing the right Administrator is critical; you don’t need to lose the experience of having an individual who understands your Fund inside and out. This is the difference between engaging a Fund Administrator in a strategic partnership and simply outsourcing your accounting.

Finding a firm with low staff turnover, where you will have a single point of contact, will give you the benefit of the expertise and independence that comes with engaging a third-party, as well as maintaining the personal touch of having a dedicated individual working on your Fund, with whom you have a strong working relationship. Your Fund Administrator should be an extension of your own team; someone you trust and partner with to deliver accurate and timely reporting to you and your investors.

The Investor Experience

High up on the list of the complexities of managing a Fund is investor relations. Finding a Fund Administrator who can deliver a great experience to your investors through an investor portal is a worthwhile investment. This professionalizes the investor experience through the entire process: from onboarding to delivery of statements and ultimately through wind-down or redemption. Finding an Administrator who can provide a seamless, technology-driven investor onboarding process, including taking care of all the accreditation and compliance requirements, including AML, can play a key role in helping you raise capital from new and existing investors.

Technology can also deliver the transparency many investors now require. Investor portals can save you time responding to investor inquiries by enabling investors to make changes to their contact information and distribution preferences, providing up-to-date information on how their investment is performing, and providing access to Fund and tax documents in a secure environment.

Keeping these three considerations – industry knowledge, finding a strategic partner and managing the investor experience – in mind when exploring your options for Fund Administrators will help you select the right partner from the beginning.

 

Lance Pederson

As the only third-party Fund Administrator specializing exclusively in real estate, Redwood can provide deep industry knowledge and expert insight to its clients. To learn more about the benefits of partnering with Redwood for your administration needs contact Lance Pederson at Lance.Pederson@redwoodrea.com.

 

 

Neither Redwood nor any of its affiliated entities offer or provide any legal, accounting, or other advice that requires a professional license. None of the materials in this post or any related materials are intended to be or should be considered legal, accounting, or similar advice. No one receiving these materials may rely on them as a substitute for appropriate professional advice. Redwood strongly encourages and advises anyone receiving these materials to consult with their own independent attorneys, CPAs, and other professionals in order to ensure that any actions taken in connection with the materials complies fully with all applicable laws, rules, and regulations.

Making the Transition to a Fund

Transitioning from a single deal structure to a Fund can be an appealing proposition; chasing investors for one-off deals can become incredibly frustrating and inefficient. However, it is common for experienced real estate entrepreneurs to underestimate the challenges of making the transition.

Is now the right time to transition?

Before converting to a Fund structure, first consider the following:

  1. Do you have a consistent monthly deal volume?
  2. Are your deal sizes smaller, with shorter hold times?
  3. Do you have experience and success raising capital?
  4. Do you have clear goals and objectives for your potential Fund?
  5. Are you ready to commit long-term to the industry?

Transitioning to a Fund might not be for you if your entire focus is on a handful of bigger deals with longer hold times, or if you are not ready to be patient and really put the time in – most Funds take at least three to five years to reach maturity. Managing a Fund is its own business above and beyond the real estate business.

Get the right advice – early

It goes without saying, but do your due diligence before making the transition to a Fund. You should do some financial modelling to compare the economics of what you are doing today versus a Fund, to understand what makes sense and what doesn’t. Good financial modelling will give you insight into key variables you’ll need for success, such as how much capital you need to raise, anticipated costs at the Fund level, profit splits and your target returns for investors. Many entrepreneurs don’t know enough about Fund structures to effectively produce a financial model, so engaging outside consulting to assist in both the financial modelling and overall Fund structure is a smart move, ensuring that you are moving in the right direction from the outset.

Fund administration is a function you won’t have in your current operation and it is a key factor I recommend considering before drafting your Offering documents. Understanding how you will administer the Fund and incorporating this into your Operating Agreement and PPM will make it easier to launch. Keeping the admin in-house or outsourcing is another consideration. If you do commit to doing the admin internally, ensure you are strong on systems, processes and details; if these aren’t your core competencies (and this is often the case for entrepreneurs), consider outsourcing to a third-party such as Redwood.

Good administration provides confidence to your investors, with transparent operations and consistent and accurate communication. It sets the tone with investors about how you’re going to operate and can help you raise more capital from new and existing investors.

Capital Raising in a Fund isn’t easy

Before launching your Fund, have a comprehensive written-strategy in place, which you are prepared to evolve over time. Just because you have good access to capital now, does not mean you will in a Fund structure; a good Fund investor is not necessarily the same as a good individual investor.

Working with your existing investors to prepare them for the transition by sharing your plan and your goals is important; change is hard. As a rule of thumb, you can expect 20% to 40% of your single asset investors to come over to the Fund, but generally they won’t invest as much as they had before, and it will take time to convert these investors to the Fund format.

Consider a dual strategy

Making an all-or-nothing transition to a Fund is generally unwise and you can expect to run a dual strategy for some time. You will likely continue to do one-off deals to generate income while the Fund is getting off the ground. By following a dual strategy, you are still able to leverage your existing investors to Fund one-off deals, maintaining your existing relationship.

Making the transition to a Fund is a long process and one where it pays to get the right advice early to make sure your economic model is financially conducive to a Fund. There are layers of complexity to converting to a Fund structure you won’t understand until you are in the middle of it. Remember that success takes a significant amount of time, dedication, and pairing with the right advisory partners.

 

Lance Pederson

If you are considering transitioning to a Fund and have questions on how to get started, contact Redwood’s Manager Partner, Lance at Lance.Pederson@redwoodrea.com. As the only third-party administrator specializing exclusively in real estate, Redwood can provide the right advice as you launch and beyond, to help you succeed.

 

 

Neither Redwood nor any of its affiliated entities offer or provide any legal, accounting, or other advice that requires a professional license. None of the materials in this post or any related materials are intended to be or should be considered legal, accounting, or similar advice. No one receiving these materials may rely on them as a substitute for appropriate professional advice. Redwood strongly encourages and advises anyone receiving these materials to consult with their own independent attorneys, CPAs, and other professionals in order to ensure that any actions taken in connection with the materials complies fully with all applicable laws, rules, and regulations.

[WEBINAR] How to Launch Your Own Fund

<<DOWNLOAD SLIDES>>

Are you a real estate entrepreneur who has considered launching your own fund? You know other people have done it, but the prospects seem daunting. Maybe you have even spoken to legal counsel but have more questions than answers about what it is really like to launch and manage a pooled investment fund.

If so, then look no further. The experts at Redwood will tell you the real deal, the street level truth, about launching and running a fund. It certainly isn’t for everyone, but for some, it represents the freedom to make decisions they have worked their whole real estate career to achieve.

We have consulted with more than 100 SBRE entrepreneurs around the country on the formation of their own pooled investment funds. Additionally, Redwood administers over 120 fund and real estate entities across every asset structure. From those experiences, we have distilled the secrets to success in launching a fund into a handful of the most important factors which we shared in this hour-long interactive webinar.

You will Learn:

  • The 3 musts to having a great fund
  • How to raise capital in a pooled fund format
  • Why structure matters and how to know which one makes sense for your asset model
  • Why some funds grow rapidly and other fizzle
  • Do’s and don’ts to a successful launch

Fund Manager Chronicles: Lessons Learned

One of the coolest parts of working at Redwood (yes, I have a cool job that revolves around accounting) is working with clients who possess a variety of interesting backgrounds and success stories. I recently spoke with four successful Fund Managers to get an understanding of what got them to where they are and what has enabled them to continue to be successful. Over the next few weeks I will share what I learned, including insights into raising capital, investor relations and today’s installment: what they wish they knew when they started.

For this series I’d like to thank the following Fund Managers, who generously shared their time and insights with me:

 

Drew Buccino, CMB

Principal and COO

CALCAP

www.calcapadvisors.com

 

Matthew W. Burk

CEO

Fairway America, LLC

www.fairwayamerica.com

 

Blake Hansen

Managing Partner

Alturas Capital

www.alturas.com

 

Max Sharkansky

Managing Partner

Trion Properties

www.trion-properties.com

 

A focus on continuous learning

One common trait shared among the Fund Managers I spoke with is that they are constantly learning, so when I asked what they wished they knew when they started out, they had a lot to offer. The universal answer to this question was that none of them realized how hard it would be, with the sheer breadth and magnitude of so many moving parts and issues, from capital raising to investor relations to accounting/administration to tax questions. One Fund Manager compared it to having kids – no matter what anyone tells you and how many books you read you have no idea what you are in for until you have a child, or in this case, a Fund of your own. Having a continuous learning mindset helped these Fund Managers work through these challenges.

Getting the right advice

Forming a Fund can be an ordeal in and of itself – often you don’t know what you don’t know! One Fund Manager expressed that he was grateful that he had an awareness about what he didn’t know. It prompted him to pay for the right guidance in forming the Fund and have the right advisory partners in place from the beginning. Getting the right guidance in forming your Fund can help avoid costly mistakes down the line.

Raising capital is hard

Raising Capital is the number one struggle for Managers in the early phases of their Funds, especially in a fund format. Prior to the formation of these Funds, many existing investors had grown accustomed to the syndication model that allowed them to review each deal, ask questions, and potentially earn a higher yield than in a Fund (although not nearly as diversified as a Fund).  One Fund Manager forced the issue by putting as many deals as possible into the Fund and not giving investors the option to invest any other way. Investors who moved to this particular Fund ultimately appreciated the diversity that they didn’t get in the lone deal format, albeit a potentially lower yield than in any given syndicated deal.

Running a Fund business

The Managers also commented on the difference between being in the Fund business versus being in the Real Estate business. In some cases, the challenge of managing idle cash which negatively impacted fund-level returns caused Managers to waive all or a portion of their fees to ensure that investors received their target yields. Similarly, the balance of not calling capital too early while still being able to fund fast-moving acquisitions was another learning experience previously not encountered by new Fund Managers.

Although these Fund Managers employ differing business models and live and invest in different parts of the country, they all share a passion for personal and professional growth that has driven them to be successful individuals that I feel personally lucky to know. Working with and for these entrepreneurs to deliver institutional quality financial reporting, it is a treat to step back and learn about the people and strategies that are allow Redwood to provide this service.

Click here for the second installment of Fund Manager Chronicles, focusing on effective strategies for raising capital.

 

Erica England, C.P.A

Redwood’s Chief Accounting Officer Erica England C.P.A. has 10+ years of experience working in the private equity industry and is always happy to discuss how Redwood could help you with your fund administration needs. Reach out to Erica at erica.england@redwoodrea.com to learn more.

 

 

Neither Redwood nor any of its affiliated entities offer or provide any legal, accounting, or other advice that requires a professional license. None of the materials in this post or any related materials are intended to be or should be considered legal, accounting, or similar advice. No one receiving these materials may rely on them as a substitute for appropriate professional advice. Redwood strongly encourages and advises anyone receiving these materials to consult with their own independent attorneys, CPAs, and other professionals in order to ensure that any actions taken in connection with the materials complies fully with all applicable laws, rules, and regulations.