Open Door Capital Funds

[Paul Gutierrez]

I am new to syndication investing and have read many comments on other threads regarding the ODC funds.  Can anyone that is a part of Open Door Capital fund 1 or 2 comment on their experience?  Any information is appreciated.

[Account Closed]

I'm an owner/operator who actively syndicates MHC deals. First off, the fees for this fund would dissuade me. 8.5% of EGI (6% for property & 2.5% for asset) for management? We charge 4% for property management and 2% for asset management. At least it's not 1% of the (Sponsor determined!) value of the properties each year like I've seen some other funds charge, which is akin to taking an acquisition fee every year. This is just not an alignment of interests. It's a "Heads I Win, Tails You Lose" proposition. 

I also saw that the pref was non-cumulative? I've never seen that before. Couple this with the "Cash Distributions from Capital Transactions" clause and you begin to see the real problem. The fund could essentially pay no preferred return/dividends to the LPs (Class A Members) during the holding period and then upon a Capital Transaction the GP (Class B Members) would still be entitled to receive 30% of the distributions, simply after returning the LPs initial capital contributions. It doesn't even take into account the pref!

In general, I’m of the opinion that if given the choice it’s always better to invest in a syndication than a blind pool fund. Once you invest in a fund, you've relinquished the single most important control valve you have: determining what investments your hard-earned capital goes towards acquiring. While it may not offer as much diversification, at least with a syndication, you can review the specific merits of that particular deal.

Also, the fund operator typically has different motivations than the syndicator. Once the fund receives a capital commitment, the clock starts ticking on the preferred return (or at least it should), so they’re motivated to deploy that capital ASAP. I find that they’re often a lot less judicious in their acquisition criteria as a result. With a syndication, there’s nowhere to hide. The deal has to stand on its own merit. Poor performing deals in a fund are able to hide behind the better performers. It’s only when they’re trying to wind down a fund do you see which properties are the duds.

I’m of the opinion that funds tend to be a more sensible platform when there’s a pre-identified number of opportunities that a sponsor's looking to capitalize on immediately. It doesn’t make sense to go through the fundraising process each time since the focus should be on trying to swallow up these deals in short order. The MHC space on the other hand is saturated with lots of well capitalized buyers all pursuing patient, well-informed sellers looking to obtain the highest price possible. 

The cat is out of the bag in the MHC sector and this has caused prices to reach historic levels. Even marginal deals are trading at ridiculously low cap rates (lower than MF I might add). During this last cycle it’s been a game of musical chairs, sponsors have been able to raise rents and flip deals quickly to the next buyer because of an insatiable demand and an abundance of capital. I've been saying it for years, but this tide will eventually turn. I'm not sure I would want to be in a blind pool fund at seemingly a late inning stage at this point in the cycle

Finally, if you're an average Joe wanting exposure to this sector I would strongly suggest taking a look at the public REITs as an alternative. Yes, this is an unsexy option and it doesn't offer the same tax benefits, but you would benefit from reduced volatility (so long as you don't obsess over fluctuating stock prices), greater liquidity, stronger management teams and superior assets. In addition, studies have shown that public REITs outperform private real estate:  https://www.reit.com/news/blog... And this is coming from someone who sponsors private deals for a living!

And, please, don't buy into "you make your money on the exit" argument. You make your money on the buy. And, the dividend yields are a key, if not the most important, factor for driving CAGR alpha. Year 1 cash-on-cash returns are a vital part of the equation. The MHC space is much more difficult for value-add then say for apartments where you have greater density and economies of scale.

Hope this helps.