Scaling Success: CTC Capital's Innovations in Co-GP Real Estate Investments
Feb 22, 2024
David McIlwaine
Unlock the secrets to scaling your real estate endeavors as we sit down with the masterminds from CTC Capital Management—Joe Harriman, Mark Pertell, and Preston Hartzell. In our latest episode, these industry pioneers reveal their co-GP investment model, a game-changer for operators eager to expand beyond traditional financial constraints. Delving into the strengths of the mid-market, they lay out how their approach not only bolsters operators with essential capital and balance sheet support but also maximizes investor returns. You'll gain an insider's perspective on navigating the challenges and seizing the opportunities in affordable multifamily properties, all while ensuring sustainable living conditions and lucrative investor outcomes.
Our conversation transitions to the art of sponsor selection, as rising interest rates reshape the real estate playbook. We discuss the necessity of aligning debt strategies with project timelines and the critical role of historical performance in the vetting process. The CTC trio stresses the importance of the human element in forging long-lasting partnerships. Beyond the numbers and contracts, get to know the personalities behind the portfolios. From mountaintop hikes to family life and sports, our guests share slices of their lives, offering a glimpse of the individuals behind the investment strategies. Tune in for a genuine, insightful look at the future of real estate investment.
Unlock the secrets to scaling your real estate endeavors as we sit down with the masterminds from CTC Capital Management—Joe Harriman, Mark Pertell, and Preston Hartzell. In our latest episode, these industry pioneers reveal their co-GP investment model, a game-changer for operators eager to expand beyond traditional financial constraints. Delving into the strengths of the mid-market, they lay out how their approach not only bolsters operators with essential capital and balance sheet support but also maximizes investor returns. You'll gain an insider's perspective on navigating the challenges and seizing the opportunities in affordable multifamily properties, all while ensuring sustainable living conditions and lucrative investor outcomes.
Our conversation transitions to the art of sponsor selection, as rising interest rates reshape the real estate playbook. We discuss the necessity of aligning debt strategies with project timelines and the critical role of historical performance in the vetting process. The CTC trio stresses the importance of the human element in forging long-lasting partnerships. Beyond the numbers and contracts, get to know the personalities behind the portfolios. From mountaintop hikes to family life and sports, our guests share slices of their lives, offering a glimpse of the individuals behind the investment strategies. Tune in for a genuine, insightful look at the future of real estate investment.
Hey everybody, welcome to another episode of Break your Golden Handcuffs podcast Today. I'm super excited to have with me not one, not two, three guests today, and it's going to be an interesting conversation for us because we talk about breaking your golden handcuffs. But today I've got three guys from CTC Capital Management, based out of Chicago. I've got Joe Harriman, the CFA and Chief Ops Officer, mark Pertell, head of Real Estate Acquisitions, and Preston Hartzell, the Analyst. And so, gentlemen, give us a quick 30 second who you are and why we want to hear your expertise.
Speaker 2:
Sure, yeah, I'll start real quick with just some my name's Joe Harriman, I'm the COO of CTC Capital Management. The parent company of CTC Capital Management is Chicago Trading Company, which is a global trading firm based in Chicago, formed in 1995. Now it started off as options market making, actually and now they trade pretty much every asset class globally, primarily in making markets. Ctc Capital Management, which is the SEC Registered Investment Advisor, was formed to provide an alternative investment platform and exposure to different alternative asset classes and this focus is on, that is, multifamily, affordable real estate. So we have nine funds. Four of those are focused on multifamily. Those four funds have about $100 million in commitments. The total investment advisor has about $200 million in commitments. We've just launched our fourth fund late last year with $40 million in commitments, and we really focus on partnering with GPs and operators in the space to get access to multifamily value add deals.
Speaker 1:
That sounds sexy to me as a multifamily value add syndicator. You know, right at my ballpark right, that's right.
Speaker 3:
Yes, mark, yeah, real quick. We have to get this out of the way. Is all views expressed by myself, joe and Preston are ours personally and not those of CTC, and at this time we are not taking on new investors and tour any of our offerings.
Speaker 1:
Thanks for getting the legal out of the way. So tell me, Jits, have any of you ever had golden handcuffs?
Speaker 3:
We kind of look at ourselves as someone who helps people realize where they want to go with their business. By operating as a code GP, we're providing equity and balance sheet help to operators who are looking to grow and expand their business and essentially release them from, you know, the limitations of not having enough capital or net worth to sign on a note, so that then you know we'll spin on your question there. But basically saying that we look to help people and have value across all aspects of the real estate process by helping operators grow, by improving tenant living conditions and then, at the same time, to producing returns for our own investment vehicles.
Speaker 1:
Love that because I was actually going there next but you jumped one question ahead of me. So you know I often think about golden handcuffs. Are this ability to not make a take a risk because of the risk of losing what you feel like you've already earned. You guys are allowing people that have golden handcuffs to do a code GP model, which is very unique for institutional registered investment advisors. So I'd love to learn why did you guys come to this thesis as RIAs? It's kind of atypical of most RIAs and I'm really curious why this thesis.
Speaker 3:
A lot of our deals are in that middle market space where there's an inefficiency. They're kind of above the small single retail type owner but you're also below institutional grade. What we found is there's a lot of inefficiencies in this space. As a result, we realized by having a balance sheet and an equity to deploy into an inefficient space, we can definitely find a lot more opportunities. And then by combining with the code GP aspect, we layer on a new offering to operators that make us more attractive and our capital more attractive, which grabs more opportunities than just being straight LP equity in a deal.
Speaker 1:
Yeah, very much so.
Speaker 2:
Yeah, and I'll say that as well, that from an investor's perspective into our funds, we, with the way we structure our deals, we do that for the benefit of our investors because we started off as kind of a small close partnership capital base and so we negotiate fee income. That's a little bit different than maybe other funds that our investors benefit from.
Speaker 1:
All right. So let's say that I'm a burgeoning syndicator and I hear this and I'm curious. Walk me through a little bit about how you guys work with the operators, what kind of markets you look for. Why should an operator pay attention to CTC capital?
Speaker 3:
So with CTC capital, what we're offering is a check size that fits in that GP slice. So we'll provide up to 95% of the GP equity in a deal, allowing an operator then to bring their deal, collect fee income or some part of fee income and then get majority of the promote out of the deal. So their IRR goes through the rough. Compared to if they're funding that deal on a typical 90-10 structure and 80-20 structure they're able to capture a larger deal in a sense, try more order flow from brokers because now they're doing larger deals. So from as far as the actual markets, I'll let Preston speak to kind of our underwriting process and what we look for in multifamily deals.
Speaker 4:
Yeah. So for markets, what we've really found out of late during the pandemic, obviously interest rates went to the ground and there was a lot of migration and developers took note. So a lot of the markets where there's a ton of construction maybe big Texas, msa, atlanta a lot of the coastal forwarded markets they were flooded with supply. One thing we found, at least recently, is supply overweight demand. So a lot of these developments from COVID are still are 10, 20% vacant and that's really moving the market. As well as having big concessions and as us investing in these C-grade properties where we want to be the affordable property in the market, those rent concessions are really narrowing that delta between all the rents which are affordable and the class A. So what we found is a lot of these tenants who would normally rent with us are going to these class A properties getting a one-year concessions. No, no concessions the year of high vacancy that we don't really want to target.
Speaker 4:
So these with a lot of construction. We're trying to wait for these. Really, in the northeast and the midway, which is a lot of people migrated to over COVID, there's not a lot of new construction and this is a big demand because of a lack of supply. And those are the right rates of spending. You can see well we have problems there sometimes with building structurally expensive.
Speaker 3:
I'll even take your order.
Speaker 1:
So as a syndicator looking at some of these B&C stuff and I operate in the Midwest a fair amount and so I'm just kind of curious is there an age cap, since you mentioned that you're having some structural challenges with older properties? That stands to reason, because the northeast has obviously been around a whole lot longer than, say, the Pacific Northwest from a density point of view. So is there an age cap?
Speaker 4:
I would say it's deal by deal. One big thing is just the outer facade. We invested in an old deal. They renovated the whole thing and the year later bricks were falling off. That's a big one for us as well, as one thing that is attractive is the property. That may have 500 units and split up into 15 different buildings. That'll kind of be a hedge against one whole roof falling in, whereas one roof will need to be fixed every six months on the 15-input building.
Speaker 1:
Yeah, so really it sounds like One big building for 15-input. Yeah, it sounds like you really want to have some variable in your portfolio. Is that a fair assessment? Absolutely yes. Tell me, guys, this is kind of an interesting business model. You found this inefficient niche and I completely respect that, because you're right, institutions won't talk to some of this product size. Is there a population requirement in a tertiary market? I'm thinking about a 50,000-person population versus a 300,000 population basis. Do you guys have a guiding thumb on that?
Speaker 4:
I would say a lot of that has to do with supply versus population. If there's 10,000 units in a 50,000 population area, that's obviously not going to work. We try to have those parallel. If it's a smaller market, there should be less units, and vice versa that there are ones. So not necessarily a black and white number. This is the equivalent of a unit population.
Speaker 3:
One other thing to add, too, is when we're looking at a market, a lot of our properties are in secondary and tertiary markets. With that in mind, we're looking for varied economic drivers. You're not going to have a robust economy such as New York City and a population of 200,000, but you'll have different industries and different employment options for those tenants. To create the metro. That's dependent on various economic factors. So if the hypothetical single company leaves town, the whole town doesn't go broke. That's what we're looking for is just a very balanced economy with good supply-demand indicators for us.
Speaker 1:
I'm curious. When I first came into this business I had a thesis that I wanted to buy 50 unit buildings in college towns and really go after that permanent rotating college student. That thesis has been tested and I hear people give me different points of view all the time. What do you guys think about student housing?
Speaker 3:
We do own a couple student housing deals in our previous fund and we like it. One thing to note about student housing is that it's hyper-local. College students want to be able to walk out of class and walk down the street and be at their campus. They don't want to be two miles away and have to take a bus. So location is truly, truly important with student housing, relative to a more traditional multifamily where a couple miles in market rate is the equivalent of 50 feet in student housing. So you want to be as close to campus as possible.
Speaker 1:
Right, so it's really that. Really, is that one of the drivers, while you're going more into affordable workforce housing because the location is a little less premium?
Speaker 3:
It's actually the thesis for the workforce housing is that you can't make a $100,000 unit from ground up, but you can buy one, and just the way the market's set up right now is there's huge demand for workforce housing, good quality housing, and they're not making any more. 1978 built product or career. So that's definitely a play of unit cost and replacement costs relative to what's available on the market.
Speaker 1:
Yeah, I think the replacement cost is really an important part of this assessment right Now replacement costs, as you said, they're not making any more, so what do you look for? We've got a lot of talk going on right now in this day and age about syndicators going through challenges with the Fed raising the rates so much in the last 18 months. And I actually was looking at the SOFR curve this morning and it looks like the chatham, for example, is forecasting the SOFR curve to start to slow down and decrease down into the right, which is kind of a good thing for the 10-year. What's your point of view on the forecast for the future 18 months' outside?
Speaker 3:
We really don't have one, and we do that because we go on the idea that you can't predict the market. But what we can control is if we have a property and a contract and a business plan in place, we want to make sure that the debt term matches up with the project life. For example, if we have a 10-year hold, we don't want to put three-year bridge debt on it with the intention of refinancing later into PERM. That's too much risk from our perspective. However, if we have a three-year project which is kind of get in, renovate and sell, then we're more likely to take on something like a three-year, five-year loan product.
Speaker 1:
It makes a lot of sense to me. So how are you guys vetting the sponsors that you work with now? Because obviously it seems like in some of these real estate clubs you go to you can swing a dead cat and hit 15 brand new sponsors. So I'm just curious, what's the process? And Joe's kind of crackling over there a little bit, the dead cat comment. I mean let's call a spade a spade. I'm also on a real estate brokerage, so you can swing a dead cat and hit 30 realtors.
Speaker 1:
It's true, how do you do this kind of vetting of the sponsors?
Speaker 2:
Yeah, we have a pretty robust due diligence process we go through when we encounter a new operator. Not too much detail, but broadly speaking, we want to see a track record of some sort in the industry. We obviously do your typical background checks, everything that's due with criminal and all of that stuff, to make sure that we're. The most important part is we want to work with good people and we want to do that systematically, ideally, so we find a good operator who really knows their stuff is a good person. We want to rinse and repeat that in other investments. If we can show that they have a good background and can execute on the business plan, we want to keep doing business with them.
Speaker 1:
So it sounds like you're betting on the jockey more than the horse.
Speaker 2:
Yeah, jockey, more than the horse, yeah.
Speaker 4:
People have had real intelligence and we weren't really adding any analysis or analysis that came in. So there was interaction and I was punished for that. Yeah.
Speaker 1:
So if you guys didn't hear that, he pressed him, was having a little bit of a challenge with some audio in there and what he was basically saying was they had an operator that had some challenges, but he was boots on the ground, he brought in a really good team and they were able to turn around what could have been otherwise a untoward situation. Is that a good way to put it? Correct? Yeah, yeah. So, guys, what's the way that I start to get into your ecosystem and start to learn what I need to do? If I'm looking at scale, for someone like myself who's got a GP in multiple deals and he's got a little bit of knowledge, but he knows there's a cap because I can't do X, y and Z, what's the process for someone like myself?
Speaker 3:
It really starts with the deal. Find a good deal, send it our way, let us take a look at it. I know you mentioned vetting operators and diving into them. The first thing we say when we talk with someone is hey, we want to hear your story and where you come from. But the second point is do you have any opportunities in hand? And we have no problem waiting. If you don't have a deal today, that's great. We can resume this conversation at 3-6-9-12 months later. But find a deal, send it to us and let us take a look at it. From that point we can continue the conversation. And if that deal doesn't work out, that's fine. Keep us in mind for the next one.
Speaker 1:
Awesome. So really, it really does. The dialogue starts with so many different things from. Here's a transaction, let's have a dialogue around that. So tell me, you guys are Joe's based out of Boulder and Marks in Chicago and Prestons in Chicago. So tell me, what do you guys do for fun? Just out of curiosity.
Speaker 2:
I'll start by that I'm actually I'm based in Chicago. I spend a lot of time in Boulder, primarily because the mountain scene is so fantastic and I just I love hiking. So get out in the mountains and get some fresh air.
Speaker 1:
Fun fact, I used to be a backpacking guide many years ago, so I can. You're in Colorado, yeah Well, in New Mexico, okay yeah, nice, yeah, mark. What about yourself, sir?
Speaker 3:
I got three kids, so I'm hands-on right now.
Speaker 1:
So there's no fun in fatherhood.
Speaker 3:
Well, there is, but you know, I'm not by backpacking through the Andes or anything like that.
Speaker 1:
Yeah, that's unfortunate man. Preston did I hear that you played baseball in college.
Speaker 4:
Yeah, so I'm a former D1 college baseball player at USC and also new to Chicago, so I found a game called 16 and softball that I really enjoyed playing.
Speaker 1:
That's outstanding.
Speaker 4:
It's one big song off of the big squishy ball. But you don't wear it the last time, can I?
Speaker 1:
Let's get some juice, please. I used to live in Chicago when I was fresh out of college and I discovered a game in Chicago called Gosh I forgot it. It was at Sluggers, which I think is still there next to the Cubby Bear, and I think it was called Netball and there was a trampoline with four quadrants in it and four basketball hoops and a dodgeball and you never got in that thing sober, and it was quite the experience.
Speaker 3:
Sluggers, sluggers, still there, yep.
Speaker 1:
Yeah, I used to live right behind that alley and boy. I'm glad I don't live there anymore because my liver could not take it. So guys tell me as you think back on your careers, and we've got people that are in all different stages of careers, and so I always like to ask this question what do you know now that you wish you had known a decade ago?
Speaker 3:
One thing that we say on the office slide here is staying still is going backwards. In other words, you got to keep looking for the next opportunity and keep moving forward, because as soon as you stop, everybody else will pass you.
Speaker 1:
Yeah, that's so very true, right? If there's no forward momentum, then you're going backward. Couldn't agree with that more. Anybody have anything they want to add to that one.
Speaker 2:
I'll comment that I wish I had more law experience under the belt, because it would have saved a lot of money, a lot of what I'm doing here in the real estate world.
Speaker 1:
Yeah, you know, a good lawyer is invaluable, right? I actually was on a conference call yesterday with an attorney and I was thinking I need to find a different one. That's got this guy's gumption and there's so much to be learned from that one. Just curious, is there a piece of advice that you did follow for our listeners that you wish you had not followed, or something that you said? Looking back on it now, that was a bad move. Don't waste your energy experimenting with that one.
Speaker 3:
I guess one thing that we've learned is that you can't make an assumption based on someone or something based on someone else's knowledge. So, in other words, go out and talk to as many people as you can, because one thing that we found is that that next opportunity might be not the first person you talk to, but the person they introduce you to. So you're, by talking with someone else, you're not only accessing their network, you're also accessing the network of everyone outside of their circle. So just keep an open mind and keep the conversation flowing.
Speaker 1:
Man, mark, that's such a powerful comment. That goes back to this, kevin Bacon, in the seven degrees of separation, right, you never quite know who you're going to run into. Here's a little funny aside. I am two degrees of separation from the King of England. Right now. My son goes to school in Scotland with his niece, so that's pretty neat. You guys are now three degrees from the King of England.
Speaker 2:
I'm going to use that.
Speaker 1:
I want $10, please in royalty. But anyway, what you're saying there is that you don't make the assumption yourself from somebody else's knowledge. Does that mean that you then go out and also re-verify and keep asking questions? Is that part of the process? Is that what I take away from that?
Speaker 3:
Yeah, just keep digging in questions, keep over turning rocks until you find what the answer you're looking for.
Speaker 1:
I love that. So is there any other piece of advice that you followed that you wish you had never followed, or something else that moves you guys that says, oh, I don't want to ever do that again? If you're Steve Bartman, you're going to say you never want to go sit in the front of a PubScame again, right, so?
Speaker 2:
I tend to just. This is sort of a cop-on answer, but I tend not to dwell on. You. Learn from the mistakes you make. But you can't dwell on them. You have to move forward, learn from them and keep going. It applies pretty much to everything, so I don't know if I could say there's a piece of advice Everyone's made mistakes and you just have to learn from them and move on.
Speaker 1:
It makes me think about. You don't get anywhere in your car looking at the rearview mirror. So, speaking of this, we're running down. Now Is there a axiom or quote or something that you'd like to share with our listeners that really does solidify what CTC is about or what keeps you guys moving forward?
Speaker 2:
I kind of mentioned it. I'll just throw mine out there. It's not really a quote, but it's really surround yourself with good people and that's it. Ctc culture is very important in general, and I think that that's something that we follow for sure.
Speaker 1:
It's great advice, and so if the listeners want to get a hold of you guys, what's the best way to track everybody down at CTC Sure?
Speaker 3:
So you can call us 312-863-8079. You can also email us at capitalmanagement at chicagotradingcom, or you can go to our website, ctccapitalmanagementcom. Any of those will respond within a day or two, and then we look forward to hearing from you.
Speaker 1:
Great, and we'll have that in the show notes as well. Thank you, preston, thank you Mark, thank you, joe, for joining us today. You've been listening to another episode of Brecker-Golden Handcuffs.
