Gurtej: and I was sitting at this little circular table in your office

Josh: Uh huh.

Gurtej: and We were going through it and I said something like I’m so new here I don’t know everything that you guys are talking about and the thing that sticks out to me And I don’t know if this is like I mean, I think this is a backhanded compliment.

Cause Chris just looked at you and was just like, look at Josh. He doesn’t know everything, but he gets by and like the comfort between

That you guys, cause we all kind of chuckled.

And but I could tell that there was like a bond between you guys and that you guys were going to be successful.

Josh: Thanks, man.

I tell people like one of my gifts is that I don’t remember many things, I think about that with this work, right? Coming at it with a new. Perspective on a regular basis, , I think helps a lot, because, we can all get stuck in our ways.

That business I think was definitely successful because we [00:01:00] were naive and we, and ambitious, right? We didn’t know how to scale a business and we didn’t know the the right ways to do that. In those kind of cases, I think of the importance of not knowing everything and embracing that as embark on something.

Gurtej: the that’s the nail on the head. Right. It’s a. It’s so important to understand that you don’t know everything,

but the things that are going to get you by are working hard and a willingness to learn,

, on our website, I think one of the things we talk about is that We want to learn.

Because we recognize that, we don’t know everything. I think we know a lot

We don’t know everything.

And people are going to know things that, or have done things that we haven’t done. And so,

especially with some of the new things that we’ve gone through and in terms of our strategy shifted over the last,

Four years, but really last 12 months. I mean, we know we don’t know everything, but I think we’re willing to learn and we’re putting in the time and effort to learn and make the best decisions we can.

Josh: Yeah. If you ever think that you do know, then you lose the curiosity and the ability to, I think, evolve and innovate and grow.

 I don’t even know how you got started , at Hilton and in revenue management or how you got into this business in the first place.

Gurtej: Yeah, I was working at a nonprofit actually at the time

Josh: Uh

Gurtej: an educational nonprofit and just you know, it wasn’t it had evolved into something that I hadn’t really anticipated Wasn’t something I spent happy spending my time on anymore And so, uh, yes, I was just like, give me your resume.

I’ll throw it in. And I was also interviewing at a couple other places and had had final rounds with Hilton and another company. I knew a couple of people at this other company and they were all analysts and they didn’t seem to really enjoy what they were doing where I was like, yeah, this is great down here.

It’s chill. So it’s like, all right, one person’s happy. A couple of people are unhappy. Let me pursue this option. I think I landed in a really good situation. If you look at like my leadership team to what I [00:03:00] came in at

Hilton is Patrick Boucher and my ESA John Pelican. And so the, that was, uh, a really great support structure that I had.

And so, so I fell in, in, into a pretty good situation. And I mean, honestly, like those years in the early 2010s, I think I was

We’re a lot of fun. I mean, I grew up in the Midwest, I grew up in Michigan. I went to school 25 miles from, from where I grew up and I had never really left

I just moved to Texas

Josh: Yeah.

Gurtej: was a big, it was a big jump but it was pretty cool the way that Hilton was structured.

I mean, like we had 20, 22 analysts that started around the same time. You kind of bond with those individuals. And the department is really, I mean, you have to do, you have to do

work, right. But there was so much support around it, it felt

Just a good place to grow. And I [00:04:00] never really thought about hotels before.

I mean, I got the business side of it. I mean, but I never thought about hotels. It’s like an industry before

Josh: Yeah.

Gurtej: thought it was super fascinating. And. Eventually some of the stuff I was doing at Hilton over the next couple of years were pretty, pretty cool. And I got to travel a little bit and got some cool opportunities to meet with different folks from different cities, different regions.

And yeah, it was, I mean, it was a really good place to start your learning career.

Josh: Yeah. And how did you and Sager know each other? For him to, refer you there and

 Working with him now. ,

Gurtej:, now we’re business partners.

So him and I have like always kind of been, my mom tells me I owe Saga a lot of money, Saga and I met in undergrad.

So we met at the University of Michigan, and just have always been really close friends. His sister’s one of my best friends and we met through her actually.

 [00:05:00] He’s always been somebody who I thought, is one of the more reliable people throughout my life.

Josh: Yeah. Wow. , I love that. I love that you guys are back together too. Working together like that. You said that you find the hotel industry so fascinating what about this business is so interesting to you?

Gurtej: Do you remember that we used to do lunch and learn?

Josh: Yeah.

Gurtej: So I think my fascination really kicked off at a lunch and learn. I actually went to those things, which were really cool

Not a lot of people went. And so we would bring in. Sometimes there’s people within our department specifically,

but we would also get people from other departments or other roles, And there was one where. We had a bunch of regional developers come in for Hilton, and they were talking about site selection and how they work with different ownership groups to figure out new locations

And there was a huge push for the home to brand at that point that had launched around 2013 or [00:06:00] 14., that whole like lunch and learn on the development side was what was fascinating to me. And it’s eventually what led me to make the move that I made away from helping. Because of that. So I think

I’ve always

Josh: wanted to get into the development space?

Gurtej: Yeah.

, I’m really interested in history.

 And a lot of that is tied to architecture. And

 I think maybe controversial, but Boston’s one of my favorite cities because of some of the stuff that still exists from revolutionary America over there, you

have the, uh, the courthouse where some of those early documents were signed and declaration of independence was signed there.

I’ve got to travel a little bit internationally and you see, I don’t know, the, uh, the architectural styles of Spain or even going to like the middle East and seeing some of the stuff there. It’s I have always just been fascinated by architecture.

And

so when this development conversation happened, I was like, Oh, like [00:07:00] I never thought about contributing to. All of the various things that go into actually building something.

That I think was a really interesting, interesting luncheon.

Josh: Yeah. Have you done any sort of deals with uh, adaptive reuse or like buildings with historical significance?

Gurtej: We have and we’re working on one right now in downtown Cleveland. We have, that’s our first actually we did want We’ve done 1 in Dayton, Ohio, we’re working 1 in downtown

Josh: What was the, tell me about one of them.

Gurtej: So, they, and I think is fully publicized at this point, but it’s the old arcade building in downtown Dayton. And we’re 1 of many groups that have contributed to this, and so I’ve really been the lead on it from our side, but essentially, it’s an active reuse of this arcade building. Where there’s going to be, uh, multiple uses that go in from, there’ll be different retail users.

And then our contribution is we’re working on uh, on a hotel portion there,

Josh: [00:08:00] nice. Wow. Okay. It sounds like that part is touching on a passion for you. What was that like to get to be a part of, restoring something with historical significance.

Gurtej: Yeah. I mean, I think that those kinds of projects are. Are just fascinating. Even if you look at some of this stuff that we’ve done, where we’ve taken a piece of dirt and we’ve put, a five story building on it. Like it’s, even if it’s not historical, I mean, that building is going to be around like 60 years at least.

And

It’s going to go through probably different ownership hands and whatnot. And and just. Building things like things that are so tangible I

think is just,

It’s fascinating to be able to contribute. There’s so much that goes in into that,

right?

Like you have to get the land under contact. You have to work with the local municipality. If there is zoning restrictions or variances that you need to get adjusted you have to go through, uh, a process with the local municipality. For that, [00:09:00] you have to get architectural and design. Engaged civil engineering and just coordinating all of these things.

I mean, there’s a decent amount of work that goes

into it, but then you end up with a place where you’re creating employment and you’re servicing guests.

Josh: Okay. Can we unpack this? Cause I’m curious about order of operations, right? , do you find a piece of land first and then think, Oh, I want to buy this. Do I buy the land and then go get the zoning? Or do I need to like, Get something locked up about the land so that I can find out if I’ll be able to get what I need to build what I need. When do I engage the brand , all of that kind of stuff.

Gurtej: The easiest answer is yes.

Like you do all of that. And so. What we’ve typically done, by no means would I say

it’s like the only way to do

things, but we’ll try to put something under control. Right? So we’ll

Purchase and sale agreement and simultaneously to negotiating that we are looking at [00:10:00] the current zoning that’s in the area.

If it’s already zoned for the use that we want. Great. That’s a

Josh: Right. Right.

Gurtej: not, even before we put something under contract, we’re having preliminary conversations with the right people to figure out if the municipalities open to adjusting that zone, because.

May have something that’s zone for residential, commercial residential.

So, uh, an apartment building,

And you may want to put a hotel there. It might be a non starter for the municipality then, so you wouldn’t necessarily try to fight a battle that you’ve already been told, Hey, we’re not making this adjustment.

Josh: What zoning would a hotel typically fall under?

Gurtej: There’s a hospitality zoning For most every

Josh: municipalities, it’s like a

hotel zoning kind of thing. Okay.

Gurtej: so A, you want it to be commercial versus residential, and then within commercial, there’s a subset of different uses.

And could some be zoned a hotel but not sale of [00:11:00] alcohol or something like that? So you’ve kind of got to figure out a few things, right. With zoning, depending what you’re trying to build there, I guess.

yeah, one of our locations it’s a brand standard to have beer and wine, but we don’t have the ability to get a license at that location.

You’ve kind of got

to go through the candidates and then we have to request a waiver from the brand. So, yeah,

there’s. Pretty much anything you can think of

Josh: Yeah.

Have you handled aware, , you’ve personally picked, this is where to, I want to build something and taken it kind of all the way through the process.

Gurtej: Our team has,

and so we have. We’ve done, since I started in 2014, we’ve probably opened like. At least 12 properties

that were all ground up construction.

Josh: Oh

wow. Uhhuh,

Gurtej: so, yeah, we’ve done a lot and I’ve been plugged in various points of

Josh: That’s awesome. Yeah. Yeah, right. And there’s so many variables. I would assume, right, that you’ve got [00:12:00] So many things that are fluctuating and evolving from construction cost to like you’re saying zoning. I would assume sometimes the community may say they don’t like what’s happening or

there’s something else going on.

Gurtej: yeah, you have all that. You also have site conditions where, we had 1 project where we had to do. A lot more remediation than we thought to make the ground stable enough for the size of building that we were looking

Josh: Oh,

Gurtej: It’s really stability. It’s about making the ground stable. So

it was on a pretty large, pretty severe slope. And so you have to really even the grade and to, it’s really about the soil. And when

Josh: Uh

huh.

Gurtej: to do something like that

Josh: Yeah.

Gurtej: I’m not aware of the technical

Josh: Sure.

Gurtej: I’m working on the financial modeling and the debt and the

Josh: Right. You’re like, oh, we’ve got to spend another,

Gurtej: Yeah. And so it, it was just, we had previously, we had our own construction company before the pandemic and

Josh: What do you mean you had your [00:13:00] own construction company?

Gurtej: Witness construction,

Josh: uh, wow. Okay.

I didn’t

Gurtej: We built most of our own projects,

Up until around 2021, and such in our partner who who runs construction, he’s just trying to wind down a little bit. And so he’s still involved, but we’ll

outsource like. The

Josh: Like the GC

Gurtej: Yeah, and so he serves as the owner’s rep

Him and his team are still involved, we’re not the G. C. anymore.

Josh: Yeah, wow.

Gurtej: Yeah, there’s just, there’s been a lot of things that you encounter and even, now, today my role is predominantly on the acquisition side.

, which

does take out a lot of headaches,

Josh: Yeah.

Gurtej: even through a transaction, you have multiple things at all. That’ll come up that

Able to navigate.

And so.

We kind of say something’s going to. Be a hiccup and it’s never really the same thing every time.

And our role is navigating through whatever challenges that we’re experiencing.

Josh: Yeah. Okay. So, I have so many [00:14:00] questions about this.

Gurtej: One,

Josh: I, when I was talking to Sager, he said that , he mentions a capital stack a lot of times when I’m when I’m talking to him. And I, I’m just curious. What, can you explain to me, because I’m embarrassed to ask him, what talk to me about what is the capital stack, what goes into that, why does it matter,

Gurtej: most basic that you’ll be able to

think of is a senior position of debt and equity.

Those two components will The your total cost

on a development or an acquisition. I think you can get a lot more nuanced in the capital stack

and your goal is going to be to either, probably reduce equities is your major goal, but you might also have a constraint from your senior.

, lender from your primary debt position. Uh, where maybe you’re trying to get to 80 [00:15:00] percent leverage and they can only get to 60 and you can only put in 20 and so you need to solve for a 20 percent gap. And so you have to get creative on what other solutions you

can bring into the cap stack.

Josh: Okay.

Gurtej: So we just closed on an acquisition last week. Right.

And

it was a very basic capital stack. We had a senior lender come in, they had no participants. It was just the lender. They funded 70%. Of the total cost,

Josh: when you say lender, is this like a traditional bank or is this okay.

Gurtej: somebody who lends

in the commercial space,

No, no different than you going to get a loan

Home that you’re looking at

buying the constraint is like, when you go buy a home with a traditional mortgage, you’re.

Putting down 20 percent equity and a

80%. We, in today’s environment. Are for hospitality, probably. Maximum proceeds we’re getting from the lenders probably 70%.

And then we’ll 30 percent of the [00:16:00] equity.

So that was the capital stack for this deal that we closed last week.

Very, basic.

For something like that date and project . The deal has an equity position. There’s a lender. There’s public funding that’s coming in through different grants.

There is a tax incentive. There’s, uh, potentially I don’t quote me, but there’s something called pace financing as well.

We’ve actually used pace in a couple of our loans where it’s an energy efficiency. Uh, assessment,

Josh: Mm hmm.

Gurtej: That can generate proceeds and so it’s really good for shrinking the lenders position. Thank you. So you may have your senior lender at maybe 60 percent and you have 20 percent worth of PACE financing and a 20 percent equity position.

So the capital stack is essentially what you’re trying to solve for is the total cost. It’s going to require your some sort of equity position. It’s going to require some sort of debt position. And if you can bring in other dollars to help facilitate you can do so if you reduce your equity position, or if you can reduce your.

Blenders [00:17:00] position. With something that has a cheaper cost associated with it, then

you’re in a pretty good position.

 Could you explain in simple terms like the cost of financing? I would assume one is I have this much money cash. And I have this ability to borrow this much and there’s a question of like efficient use of those dollars so how are you measuring that?

Josh: What are some kind of like metrics or measurements that you’re taking a look at of how much we would want to put in and how much we would want to borrow here?

Gurtej: the constraint is really going to be from the lender. Right. To, to a certain extent. And then the biggest variable you’re trying to consider is the cost of. The capital stack. So

for your equity, you’re probably trying to deliver some sort of return to your investors, right? You

want them to make money so that they’re happy with you.

Generally, they’re probably looking for a [00:18:00] return that is greater than the cost of the loan. So

if you have loan proceeds, you’ll want to bring that in. So it’s a cheaper cost of capital than your equity. So we also, like I mentioned, we layered in PACE financing on a handful of our deals that generally is a cheaper cost than your senior lender.

And so you’re trying to maximize your PACE proceeds so you can minimize

the

Josh: PACE is like also a loan as well. It’s not

A grant.

Gurtej: it’s treated, it’s classified as an assessment, but it functions like a loan.

Yeah. And you need a lender to be okay with PACE sitting in a second position.

And more lenders over the last five, seven years have gotten comfortable with the

Josh: Meaning if the building were to like foreclose, PACE gets paid back before the

Gurtej: so lender gets paid back then PACE. Yeah,

Josh: PACE is second, and then investors are third. [00:19:00] Okay. Okay. So, even in this environment right now with interest rates, the way they are, like, you would still want to like take out 70 percent debt on a property.

Gurtej: probably. Yeah. Yeah. I mean, it is really tough to get a transaction completed today. But,

Josh: What makes it tough? What do you mean?

Gurtej:Lending, cost of lending is

the constraint right now. So,

Josh: Uh huh.

Gurtej: to.

Josh: So what you’re saying is , like the math, a lot of times it just doesn’t work then, right? Here’s what we can get from, , the deal. Here’s how much money we need to bring in terms of equity.

Here’s what we would finance. But if we put all that together, what we’re going to get as a return, just the math doesn’t work because of the

interest rates.

Gurtej: yeah, so let me ask you a question.

 If you want to invest in a hotel

If I told you, Hey, Jeff, you write me a check, I will get you a 4 percent return.

You’re not [00:20:00] going to be happy.

Uh, you can put your money into a high yield interest

account and you can make four and a half percent

today, probably with no risk commercial. Investments are all, they’re at risk investments, right? And

Josh: yeah,

Gurtej: You’re going to want to make sure that the return you’re getting compensates you for the risk that you’re

taking.

So if I’m giving you a net return, that’s like very similar to what you can get into in a high yield savings

You’re probably. I would advise you

To that person.

Josh: yeah,

Gurtej: So borrowing costs impacts your net cashflow. That’s the money that

you get after your operating expenses, after your debt payment, after any reserves that you have to keep, that is what you’re left to distribute to investors.

And if that return is. annualized four to 6%, you’re probably not getting a lot of investors.

 So that’s what the constraint is right now. So

borrowing costs have had, I’m not going to use 2021 [00:21:00] or 2020 because

that was a very unique debt environment.

But if you compare it to 2019, a pretty stable 2018, 2019, pretty stable times

You’re a couple of hundred basis points higher from a borrowing And then there’s also other requirements that a lender is typically imposing such as like a deposit account. So a lot of community banks, a lot of regional banks want you to keep money with them on the side for them to facilitate you with loan proceeds, which you’ve got to fund that

Yeah, you’re going to get 4 percent on it, but it’s still added cash that you’ve got to come up with that ends up diluting your investment more or less. And so

that’s what’s. That’s what’s making it tricky to get a deal done today.

Or, you’re going with, some of these bridge solutions or life companies,

people that’ll give you non recourse debt.

I mean, there’s no personal liability,

but they’re going to charge you 10, 10 and a half percent

You can get interest only on that, but you’re still paying

Josh: yeah

Gurtej:[00:22:00] very hefty interest

payment. And all of that is impacted the proceeds that you can get out for your investors.

So it’s hard to make deals quote unquote pencil right now.

Josh: yeah. So how are you making deals, Pencil? It seems like you’re still figuring some out.

Gurtej: Yeah, so we are I think we spent a lot of years building out relationships with different owners, different brokers who work in this space and We’ve just been, , also just fortunate with some of the stuff that’s popped up where we’ve just pursued it aggressively. And so

this deal that we closed last week, we got it for a very attractive cost. And we did that because we offered a lot of non refundable money up front, which is something I definitely do not recommend or want to do very often.

But it gave the seller certainty of execution from our standpoint,

We had a hefty sum that we. We would lose if we walked away from the deal from the minute we signed the deal.

And so they were in a [00:23:00] position where they were looking for an exit as opposed to a dollar value. And we were able to kind of take advantage of that

Josh: Right.

Gurtej: non refundable day one.

Josh: Where they could have gotten maybe a higher offer up front, but with , a lot of variables of maybe this will or won’t get done depending on how things go through due diligence and whatever else. But there was more, , belief and trust that it would happen from you and

I think also you and witness have like really built a reputation of trust.

And you’ve been in the Midwest market specifically, it’s clear, what your swim lane is and what you’re good at. And I would assume that also helps people be, more comfortable to do a deal with you because they know that. You know what you’re doing?

Gurtej: we also had 6 assets within a 15 mile radius of

that particular acquisition. So we have presence in

that specific market.

Josh: Yeah.

Gurtej: And this is where I think we’re probably different than a lot of different groups. [00:24:00] We’ve taken our entire portfolio is recourse that with community banks pretty much our entire portfolio.

And so we have a lot of lending relationships. That are local, but some of these banks, they won’t go beyond the state or the region that they’re in. And so we do have a lot of community banks in that region. And

We’re pretty confident we can get. Financing for that type of asset,

Josh: And what, what do others like, how do others approach that sort of thing? They’re not using regional banks because they’re trying to go everywhere. That’s like part of maybe being, your Midwest strategy then.

Gurtej: That’s part of it

where, you know, but the other part is we offer full recourse on all of our deals, so. We have personal liability

Josh: Got it.

Gurtej: where, and this is, I guess, one of the main differences from a residential loan you have a commercial loan option, which is non recourse or multiple

commercial loan [00:25:00] options that are non recourse, meaning your assets at risk, but there’s no personal liability beyond the asset.

So that, that type of loan tends to be more expensive for the, again, generally speaking.

But there have been vehicles in that non recourse space that can be competitive from price standpoint. C. N. B. S. is the most common. That was utilized

previously,

And they were able to get really competitive from a rate standpoint.

But you had absolutely no flexibility to the loan agreement that you signed. So. We have, we tend to have relationships with all of our banks with our bank. We know them, we get invited to family picnics with some of

Josh: Yeah. Yeah.

Gurtej: There’s definitely more of a personal touch and.

We also, I think are pretty proactive during the pandemic. 1 of the things that I did every single week. Which is a scary time for everybody, right? Is no different for us, and we assume there would be no different for our lenders. And so one of the

things that [00:26:00] I did every week is I compiled a spreadsheet , for every single lender that we had and their portfolio with us.

And I would send them our operating stats for that week. And I would compare it to the prior week and I would show the adjustment and then I would compare it for the prior month. And we got to a point by June, July, August of 2020, we were seeing pretty large month over month increases, even though the year over year,

when they looked at their P and L’s that they were getting, they were down significantly.

We were saying, Hey we’re seeing some progress, right?

This pandemic is lasting longer than any of us thought. This is more real than any of us thought when we were talking in January and February of that year. But here’s the progress that we’ve made from like the bottom.

Josh: Yeah.

Gurtej: think when I looked at our portfolio and April of 2020, we ran 5 percent occupancy or something.

so, hopefully at that point, the only place you can go is up. But it was important to show that to our lenders. And I think we got a lot of feedback as to how appreciated that was from

Josh: Yeah.

Gurtej: And so, we have [00:27:00] those types of relationships with some of these folks. And I’ve met some of our lenders families and and we’ve spent time doing that.

And. we do have to offer that personal recourse, but we’ve kind of found it worthwhile because we’ve gotten more competitive rates. And then, when we do go through something like a pandemic, when. And realistically, I think we started chipping our loan covenants for a handful of those banks, because we had a 1.

25 debt service coverage ratio, which is pretty standard and most loan agreements. They were very flexible with us and they just waved them and I’m assuming a lot of banks probably did that throughout the pandemic, but. I think we made it easy.

 Josh: I love that, man. You’re thinking about how they feel and you’re also thinking about the relationship and the fact that it’s in the community. All of this trust , builds and stacks,

Gurtej: They, I think, we’re in the hospitality business, relationships are everything.

Josh: that’s right. Yeah.

Gurtej: I think that extends to vendors, to lenders, to all the trades that we use

I mean, do we make mistakes? Yeah, absolutely. But that’s not our intention, and

we work to remedy any. Anything that we’ve done incorrectly on our part.

But the first thing you see when you go to our website is relationships first, outcomes follow. And I genuinely believe that.

Josh: Yeah. That’s so good, man. Yeah. So, you guys have shifted strategy a little bit you raised a fund recently. I was talking to Sagar about this a couple of weeks ago. And he said, yeah, we set out to raise 15 million and then, we accidentally got 20 and it wasn’t, it just made it sound like it’s so easy to raise a fund. And. I, I think that part of that is his, humble nature.

Gurtej: Or that’s also because he didn’t work on it day to day either. So, nah, I say that jokingly. He, I mean, Sager is a very, and you know him, he’s just a very helpful guy and he when push [00:29:00] comes to shove, he’s just going to roll up his sleeves and get to work. And so. Uh, I joke, this was something that he definitely helped with and we definitely did overshoot our target, which is a good problem.

Josh: How do you raise a fund? Why and how

Gurtej: So why was essentially because, like I mentioned, most of our historic portfolio was funded by three families.

Josh: Uh huh.

Gurtej: the pandemic hit, uh, these guys are looking at their. Net worth concentration, and 90 percent of it was in hospitality, real estate. And that’s probably not good.

You go to any financial advisor, they’ll probably tell you that’s not good diversification.

And so some of this was reallocating those families capital. And so that’s, Sagar’s family and two of our other partners. And so they needed to kind of. readjust their family’s strategy to better protect their family which I think is a very fair consideration, probably something that they should have done prior to the pandemic.

But that reduces our ability to get the volume of deals that we’re doing in 2020, March of 2020, we had five deals either in an acquisition or under construction. And I know that’s not necessarily a lot, but it is not a little.

Josh: Yeah, right.

Gurtej:and like I said, everybody went through things

That was really

Josh: like at the worst point in time you were on you were currently under exposed.

Josh: With five different deals.

Gurtej: And so, we definitely had to readjust our strategy. Now, having said that, I would say all of us believe in hospitality as a long term asset. All right.

We don’t want to just, we didn’t want to just shut down our operations,

like, all right,

well, now we don’t exist as a hospitality investment company

anymore.

We still believe in it. And over the years, we’ve had a lot of folks ask us about investing with us. And we’ve, we’ve never really been like, we’ve taken people at 5 percent here and there. And uh, but we never really engaged fully in [00:31:00] that type of sphere. And so what we ended up doing is. Over a lot of conversations and research, we decided to create a fund which, uh, we brought in expert legal help at ice Miller to help us facilitate, which,

And, they’ve been great for us.

But effectively we have 49 unique investors in this fund. It’s a 20 million commitment.

So, call capital fund. So as we have deal flow,

we call the committed amounts. And it’s not these guys just sent us a

check and we’re just sitting here and, trying to buy a private jet with their money or something.

We have to show them the

Josh: Right. Uh

Gurtej: then they’ll write the check. And so that was last week was the first deal that we closed with that fund. We have

Josh: Oh, nice.

Gurtej: Uh, that we just signed. Thank you.

Josh: So, typically You would , put together a proposal and then reach out to , all of those 49 and say, Hey, here’s the deal we’re working on. Here’s what we would expect to see. But in this scenario, having a fund is [00:32:00] now easier to then manage these deals in and out, what are some of the other things I’m not understanding there.

Gurtej: So, what we did in the past, probably one of the families took the majority position and then maybe and that was our entire equity. We didn’t really go and try to raise

Josh: Yeah. Yep.

Gurtej: And so, now costs have also gone up, equity checks are a lot larger, and so all this kind of plays in, and diversification for the family.

So all this kind of plays into it. Thank you.

How do we responsibly stretch not only like our own dollars,

but also take in some of these folks that have asked to invest with us over the years.

The fund solution is good because, and I’ll just give you a quick example, like some of my friends are now asking to invest, guys that,

 Guys and gals that have spent years building up some free cashflow.

So if we were working on that deal, we closed last week, I would

not take their cash and put it into one deal,

Josh: Okay.

Right.

Gurtej: cash for the fund because now that fund is going to go into four or five, six different [00:33:00] deals. And

their dollars into every deal is much smaller,

Their overall investment is so diversified.

That their risk is it’s a little bit de risked from that standpoint

versus putting that whole check size into one deal.

And so we’ve got probably like of the 49, probably there’s 10 or 15 are folks like that, that I would have recommended to them to not put into one deal,

I would recommend to do something like this, where their investment will be allocated throughout a handful of different deals.

Josh: Going out to get these 49 people to commit what was that like for you? What was the pitch?

Gurtej: We have a marketing deck that we put together with some external help and,

It highlights what we’ve done, why we want to do what we’re saying.

It highlights why we believe in the Midwest. It highlights the type of markets that we want to pursue and the types of assets we want to pursue. And then it obviously goes to a term sheet of what we’re willing to offer.

And so when [00:34:00] you raise a fund, what you’ll often find is some sort of structure where the sponsor, which would be us in this case, we’ll put in, a 10 or 20 percent position and raise the rest of that fund. And there’s something called a promote where after a specific hurdle, the sponsor, let’s say it’s a 10, 90 structure.

After some sort of promote, the sponsor will take maybe 30 percent of the return instead of 10 percent of the return. And that’s the, they have a 20 percent promote there and that’s how they get incentivized. So we didn’t put that in there. So everything in our fund is pair of pursue, uh, which I think inherently makes it rather attractive to what else you’ll find out there from an investor standpoint, but our goal here is to build credibility externally, because.

We’ve only worked with our own capital. And so we wanted, so I think that’s also part of why we raised the money so quickly is because it is an investor friendly term sheet. It gives us enough money from a fee [00:35:00] generation standpoint to, keep our overhead and our payroll and operating

expenses and a little bit of profit, but we’re not, we’re not charging a promote, so we’re not really getting too aggressive with the offering.

Josh: Got it. So is there some sort of management fee? \

Gurtej: Yeah.

Josh: Yeah. Cause I’m assuming that like , you have to make some income to just support the infrastructure. Okay.

Gurtej: exactly.

Josh: , but a promote happens a lot of times in these deals. And you’re saying that the sponsor would actually jump 20% in total, equity,

Gurtej: Hypothetically in your return

Josh: like in the return, but not act not in equity.

Gurtej: yeah. So if there’s like an 8% pref, that first 8%, maybe it gets paid persu, so the sponsor would get 10%. The L, the LP capital limited partner capital would get. 90%, but once an 8 percent return is generated, that may shift to a 70, 30 structure. So after you achieve more than an 8 percent return, the [00:36:00] sponsor starts getting 30%, even though they’re only a 10 percent

Josh: Yep. Right.

Gurtej: it can be structured in many different ways, the actual promote. But most real estate funds do have some sort of promote.

Josh: . Okay. And some of that’s probably incentive, right, to

Gurtej: it is cause you as an investor want me to be focused on finding

Josh: performance. Yeah.

Gurtej: and you do that on back end performance, which is what the promote gives you.

Josh: Yep.

Gurtej: I would always, even to my friends, I tell them like, don’t go on something that’s fee heavy up front, but if incentivized on the back end and you’re comfortable

Then that’s something that’s like worthwhile.

A lot of my friends have asked me over the years about different offerings that they’re looking at. But,

Yeah, we ended up rolling out a pretty attractive option. I did take a handful of my friends into it as well.

 I feel, comfortable with that, whereas I wouldn’t take them into 1 singular deal with, so.

Josh: And in that, in, in a fund like this would you get the value of being the [00:37:00] owner of the real estate?

Gurtej: Keep major decision rights. In terms of like refinancing and disposition that sits with us as a sponsor still.

Josh: then like depreciation and all of those types of things will carry through to everybody?

Gurtej: Para pursue, yeah, as long as they qualify for their personal tax returns as active real estate investors, which we don’t certify, that’s an IRS regulation,

uh, then, but we offer depreciation accordingly to their investment

Josh: Got it.

Gurtej: I actually have to jump.

Josh: Yeah,

great. No, this is great, man. Yeah, thank you for being here