Christopher Gill: Leverage is a powerful, important tool that must be used responsibly, but I think a lot of us you know, we're very attracted to the idea that we don't have to have 100% of the amount of money we have to buy a big piece of property, right? And then as syndicators, we bring a portion normally of, of the equity of the down payment required. And then we're bringing in other people and we're telling the story and we're managing the deal effectively. And, and on broad strokes, like if, if the deal works, we want to have more leverage rather than less leverage.
SPEAKER_02: This is your daily real estate syndication show. I'm your host, Whitney Sewell. Thank you for listening to the show. My goal is for you to become a savvy investor by learning from some of the best operators and investors in the business. I'd like to hear from you. If you have questions you would like us to ask on the show, or if you have someone you would like me to interview, please let us know by emailing info at lifebridgecapital.com. Would you please leave us a written rating and review? I would be grateful. Well, do not hesitate to let me know how we can best serve you at LifeBridge Capital. And now for an amazing interview with my friend, Ben Kogut.
Ben Kogut: Welcome to the Real Estate Syndication Show. I'm your host, Ben Kogut. Today we have Christopher Gill. Christopher is the founder of Phytera, which partners with single family home investors to help you reduce the amount of capital you need to buy your property. They will further optimize the deals by aligning the risk and reward, lowering the cost of debt and boosting investor returns. Christopher is a licensed real estate broker and entrepreneur in the state of Texas. Over the last 11 years, and only starting with $15,000, he has performed on well over 120 flips. He's built seven infill new construction neighborhoods. He's owned and built multifamily, mobile home parks. He's built to rent communities. He directly controls over $11 million with the real estate and $90 million through partnerships. Christopher, welcome to the show.
Christopher Gill: Thanks for having me. And you left out that I'm kind of your neighbor. We're like 15 minutes apart from each other.
Ben Kogut: So that's an extra bonus. Yes. Here in Austin, Texas. Well, let's take the next 90 seconds, maybe share a little bit more about whatever I missed in your background and what you're up to these days.
Christopher Gill: Yeah, I think that pretty, pretty good overview. It's always interesting when you take a second to like, look back over any time period and probably, I don't know if y'all are like me, but when you're in the middle of something, what has happened and what you've created kind of gets lost with the forest, the trees. So, yeah, it's exciting to think that I've actually accomplished a few things in real estate over the last 10 years, but yeah, I've been really active in housing. Pretty much everything I've done has been on some level connected to supplying housing to people. And latest ventures are all around housing finance optimization and just how to make this thing that we all need, right? I mean, food and shelter are like top needs and how can that become more accessible, more attainable for people and an even better thing to invest in.
Ben Kogut: Yeah, so I know that you have a new company and it's a novel approach to what you're talking about. Tell us about that and what's the latest there?
Christopher Gill: Totally. So the new company is something called Phyterra, and Phyterra combines finance and Terra, which is Earth. And at the end of the day, Phyterra is a company that optimizes and increases investor buying power. And when you think about that, it's obviously something we all want. We're all capital constrained on some levels, some people more than others. But we increase investor buying power through something that I've begun to call capital optimization. And capital optimization really comes from what the biggest investors in both real estate but then on Wall Street do and how they make their deals more and more profitable. And if you think about it, capital, of course, is a huge piece of any deal. There's the mechanics of actually doing a deal and finding the tenants and managing it and doing whatever value-add strategy you have. Then there's the capital piece. And a deal that's financed well, that has an optimized capital structure, there will be a dramatically different effect on the bottom line for the positive or the negative. Same exact deal, same exact area, same amount of appreciation, same tenant, and how you finance the deal can be a breaking point if the deal works or not. That concept really struck home to me as I want to wring all the value out of every deal I do. Real estate is a lot of work, there's a lot of moving parts, there's obviously risk. If there's things I can do, that don't require changing my strategy, but just how I'm getting into a deal, that was really attractive to me.
Ben Kogut: So if someone's listening and they're a syndicator and they are buying residential properties and typically they go and they get a loan from the bank and either rate is syndicate the rest of the equity. So how is what you're doing different from the traditional model?
Christopher Gill: Totally. So FITERRA, we've got three main areas that we benefit deals. So as I mentioned, it all comes back to increasing your buying power. And so the first is we're able to increase the leverage on a deal. Leverage is a powerful, important tool that must be used responsibly, but I think a lot of us We're very attracted to the idea that we don't have to have 100% of the amount of money. We have to buy a big piece of property. Then as syndicators, we bring a portion, normally, of the equity of the down payment required, and then we're bringing in other people, and we're telling the story, and we're managing the deal effectively. And on broad strokes, if the deal works, we want to have more leverage rather than less leverage. Again, there's a lot of caveats with that. But generally, leverage use responsibility is a really, really powerful thing. And we increase investor leverage. And then we boost returns. And we kind of boost the returns through increasing leverage but without increasing the cost of capital. And so if you think about it, If you put down 50% of the cost of a deal, right, and you get a loan for the other 50%, that's going to cost you less than if you get a loan for 90% of the purchase price, right? And you're only putting down 10. You have more capital to service. And the difference we're able to provide is not quite as dramatic as 50 to 90, but we're able to increase leverage, basically double an investor's potential buying power without having a dramatic increase in the capital cost, the holding cost that it costs to service that debt. And then the third area, and I'll stop and we could go into any of these more, but the third area is we want to, and we have developed a structure that's the most tax efficient ownership structure in real estate. Depreciation is this incredibly powerful part of owning property, right? I mean, the taxes are high and only going up. And so if there's a way that we can structure our deals that's tax advantage, that's really a good thing. And we accomplish that by allocating the non depreciable parts of a property, i.e. the land basis to this separate ownership vehicle. So the investor goes in and they bring their down payment. They're purchasing the property. Every dollar of the down payment of the equity investment goes toward components of the property that can be depreciated. And there's not capital that's being infused into the deal that doesn't go to depreciable dollars.
Ben Kogut: Got it. So a lot to unpack there. Let's definitely the depreciation and all that makes sense. It sounds like what's what's happening. Well, I want you to explain. But here's what I'm hearing is you're able to have the ability for investors to be able to take 100 percent of the depreciation on the improvements. and not necessarily need to invest in the land sort of it, which can't be depreciated. So let's take a step back, try to explain this as if I'm a fifth grader to simplify things.
Christopher Gill: Yeah, so, and I think it kind of goes back to the capital optimization question, right? We all understand when optimizing, making it more efficient to do whatever we're doing. And how capital is optimized is really risk and reward alignment. So if you think about every bucket of capital, every investor you have has a return that they're wanting to make, right? And they have a risk profile, a level of risk they're willing to accept for that return. And people that want a higher return, generally they understand there's going to be a higher level of risk. People that are OK with a lower return, they're also really wanting to mitigate that and have a lower risk level and more about capital preservation. And as we are able, so we basically say, hey, if there's a low risk piece of the deal, we will bring capital to that low risk piece at a very low cost. And this is done when you hear about tranches of capital right in Wall Street. They take a single deal, and they have a ton of risk-reward alignment, which the sum of those pieces decreases the total cost of capital. So by aligning the capital very precisely with the return they want at the risk level they're willing to have for that return, the entire capital stack is going to become a decreased cost. And most small banks, most banks where individual investors, me, when I go to borrow, they kind of hold all the cards, right? And Wall Street, the investors are big. They're very sophisticated people. And so they forced the money to get really sophisticated. And that hasn't trickled down for most small investors when they're buying a small rental home, a small multifamily community. And we're working to kind of change that power dynamic that's in place.
Ben Kogut: Love it. I love it. Okay. So for someone that's listening, that's maybe looking to go buy an investment property, maybe just give us some numbers on how this shakes out. Can you do that simply?
Christopher Gill: Totally. Yeah. So kind of a easy number, right? Let's just say a $250,000 rental home, right? So normally you go to a bank, you bring your, you go get qualified for the mortgage. And generally for an investment home, you're going to be bringing between 20 to 30% of the payment. Let's just say 25%. So you're going to be bringing about $50,000 and that is going to be your equity requirement. And again, if you're a syndicator, you could be syndicating a portion of that and then probably owning a smaller piece of the deal while you're sharing in the upside and the appreciation with your investors. What FITERRA does is we'll come along and we'll bring up to 50% of the total deal cost. So you've got the $250,000 home. We'll purchase a portion of that, up to $125,000, in this passive, non-controlling interest. And then the investor will go to the bank and now they're bringing that same 25% down payment, but now it's a smaller bite of the entire pie. So now you're bringing 25% on the 125 instead of on the 250. And so right there, as long as there's cash flow to support it, you think about what's happened. You're buying power that same. If you had the $50,000 to buy the $250,000 home, now you're buying two homes. So now you have $500,000 of real estate that you're controlling that you're able to depreciate. And as we all know, the dollars in number to the dollars out number, the cash on cash return, is one of the most important return metrics in real estate because we've all got a limited pile of cash, whether we're bringing in investors, whether it's our own cash. So we want to make those dollars go as far as possible. We want as many dollars out from that investment. And so if we're able to increase the buying power without increasing the holding costs, right, and making it so your 75% loan normally on the 250, the holding costs, the monthly servicing doesn't go up. Now you're putting less in, you're making about the same amount of cash flow, So there's a really, really dramatic effect on the cash on cash return.
Ben Kogut: Got it. And why would somebody want to do this versus just bringing their rich uncle or somebody as a partner to come in and participate and bring that equity with you?
Christopher Gill: Totally. Yeah. And that's a great, I mean, that's a great option, right? I mean, I think a lot of us, we start with our friends and our family to come along and begin investing with us. What I've learned over time as a syndicator, that normally the most expensive piece of my capital stack, of the costs to purchase a deal normally are going to be my limited partner investors, right? I mean, they're there. And, you know, naturally, so that makes sense, right? They're bringing capital. They don't really have control. They're wanting to be in a passive position. But they realize that without their capital, The deal is not getting done. And so they will have return metrics that they're wanting to hit. So if I'm able to lower the amount that I need to give of my deal to them, and I'm able to bring my entire capital costs down, from my debt costs to my equity costs, the whole deal is going to make more. The limited partners I do bring in, if I do still bring some in, are probably going to make more. And me, ultimately, as a sponsor, are probably able to make more on the deal as well.
Ben Kogut: Got it. Can we talk about costs? Like what does it cost to do something like this?
Christopher Gill: Totally. Yeah. So we, as I mentioned, we're a low cost, we're in a low risk position. And so we have gone and we've sourced the cheapest possible capital debt sources for our ownership position. We've done a ton of analysis around it and really explained to really big debt providers that are wanting to put tens of millions, hundreds of millions of dollars to work, and they want a safe, predictable cash flow stream, right? They're not looking for a lot of upside. This is not their aggressive and divesting bucket that we're sort of helping them deploy. So normally the cost, our fee, is normally between 50 to 100 basis points less than the prevailing interest rate that it costs to borrow debt. So really think about that. Like we're equity, we're coming and we're bringing 50% of the equity at a lower cost than when most people are able to get debt from a local bank.
Ben Kogut: Got it. Got it. And the OK, so let me let me try to recap here, because there's a lot to unpack. And this is such a novel approach, Christopher, to optimizing financing. And I really think that if syndicators are listening to this, they'll understand. that this is kind of reminds me of how the CNBS market came to be. The commercial mortgage-backed securities where they would take tranches, which you referred to earlier, A, B, C, and D. And so the less risky tranches could get sold off and they package these all in a way where they would bifurcate the different levels of risk. And so what I hear you doing with Fiterra is, taking the least risky portion of the capital stack, which is 50% LTV or below, and basically coming in as an equity partner on that piece by investing in the land, I presume. And then that allows for the top 50% to be able to benefit from not only the upside as rents and as the deal appreciates in value, but also with the depreciation, which are the tax losses that come that we currently have the benefit of using in our tax code here in the US. And then at some point in the future, maybe talk about how if somebody wants to sell this property, what happens to FITERRA at that point?
Christopher Gill: Yeah, so we really want to be a long-term capital partner, but we want to be a capital partner that is accretive, to use a little bit of industry jargon there, accretive to the business and to whatever investment strategy is there, right? So we designed our structure where it's able to be bought out at a set rate at any time during the deal. So we're putting these contracts in place, these lease agreements, for 99 years. It's a long, long time. But you don't have to have us in place for 99 years. And you're also able to transact your ownership portion on top of this. So you're able to go to market with a property that looks identical to all your competition's property, but holy moly, it's for sale for 50% less. And of course, there's an explanation there that this is a unique capital structure and here's how it works. But many times we're seeing that the new buyers coming in, they're saying they're still benefiting from that lower down payment, from that increased return. And they're seeing the benefits of of the tax optimization as well. But we're there for as long or a shorter period of time, really, as investors want us to be in the deal. And we wanted to make it very clear how we get into the deal and then also how we can be bought out of the deal. And you can go on and you can pay off the property if you're taking chips off the table and wanting to increase cash flows, or your buyer is saying, no, I don't want this FITERRA structure for whatever reason. We can be taken out and you can sell it just like any other piece of real estate.
Ben Kogut: Got it. You know, I've seen this happen in the commercial space, ground leases on big shopping centers or apartments or office buildings and things like that. Why do you think that this hasn't been done in? I haven't personally seen it in the residential space that like what you're talking about.
Christopher Gill: Yeah, we we weren't able to find it either. You know, there's a couple of isolated cases. Hawaii has a lot of ground leases because the land is all owned by it's all tribal land. So this the structure is a little bit more common there, but it hasn't been thought of in a way that says, hey, how do we really benefit all the players in the deal? Right. And are we able to pass on the capital savings that we're able to get by being in this low risk position? Are we passing a lot of that on to the sponsor, to the person who's doing the deal? And they're putting in all the work. I mean, capital is an important part of it. But if there were people out there doing deals, all the capital would be sitting on the sidelines undeployed. So I personally think there's been a little bit of a misallocation of the risk and reward for most people because lenders do know that they kind of hold all the cards. And most, especially smaller investors, You know, I remember when I learned about non-reforced debt. I mean, it blew my mind. And I mean, I was mid-20s before I knew that that was a thing. And people in my circles, right, they didn't know that that was a thing. I mean, we're just so used to the way things kind of have been done. So that's why I thought it was a really interesting opportunity to take something that's been done in the commercial space, that's been well fleshed out in the commercial space. Wall Street with tranches of capital has taken this even further toward capital optimization. But all of that hasn't been brought back to your smaller, your mom and pop investors who are saying, hey, either this is where I'm starting or this is the asset class I want to focus on. And so I think there hasn't been people saying, hey, we're going to take something from big Wall Street, from big money, and we're going to apply it to people that may not even know this is a thing that's possible. But I personally believe as Fiterra and other companies like us begin really looking at capital optimization and finding areas of the industry that really aren't benefiting from capital optimization, we're going to see more and more creative structures and more risk reward allocation with really all kinds of real estate. state.
Ben Kogut: So yeah, thanks for sharing that. I went to your website prior to this and was trying to figure out how I could benefit from FITERRA. And so I know on your website, you have a really nice, maybe you can describe it, but basically like you can toggle some assumptions on what a deal might look like if someone was to consider partnering with you. Maybe talk about that. How does that work on your website?
Christopher Gill: Yeah, totally. I think it's really cool. So you can, we've got a tool where basically you can almost do like live underwriting for your deal. And you put in all your deal level assumptions, your purchase price, your assumed rent rates, your holding costs, and then you can basically set and play with, okay, if I tear us not in the deal and here are my debt costs, here's what my returns look like. And then you get to pull our really great slider all the way up to 50% if you're interested in us participating to that level. And math is easy and really doesn't lie. And you can see exactly how the returns change and how really your equity, your cash on cash return, and the down payment, the amount of equity you need to invest in the deal, how those change. And as I started to be able to play with those and telling people about this and they're like, okay, but yeah, exactly. How does this, what would this look like for me? Right. And does this work for small deals? Does it work for big deals? And, and now people can kind of go in and play and, um, and see how it, how it might work for, for their specific use case and rental amounts and purchase price, that kind of thing.
Ben Kogut: Talk to me a little bit more about that. Like who would be the most ideal person to partner with Fiterra?
Christopher Gill: Yeah, so I really think we've developed, this is a big statement, but I haven't come across deals that aren't able to be benefited by a little bit of capital optimization. Especially we are playing in the single family, small multifamily, one to four rental space, right? And about 30 million rental units in the United States, about 69% of the small small single-family, multi-family inventories owned by independent investors. They're not owned by Wall Street. They're not owned by build for an SFR funds. They're owned by people that own, you know, two to 20 homes. And of that asset class and of that buyer pool, we really haven't seen deals that don't benefit from capital optimization. But I think very germane to our conversation is people that are syndicating, right? And just kind of going back to what I was mentioning. I mean, LP capital is very expensive, right? And being able to stretch your LP dollars as you're growing your portfolio is something we're always thinking about, right? You're thinking about your next deal. Man, can I raise and put together that much money by the closing date? And how much am I going to have to give up of this deal to execute on this transaction? And if you can cut that equity amount of your LPs down 30%, 40%, 50%, 60%, it has a pretty dramatic impact to not only the deal level returns, but then you really got to go a level deeper with the underwriting. Look at your sponsor returns. What are you walking away with at the end of the day after this 12-, 24-, 36-month-long project? And if you're able to get your LPs the returns they want more quickly, your sponsor level returns are going to be way better.
Ben Kogut: Yeah. And I'll add on top of that, you just have less people to have to raise money from. So less people to deal with is less, uh, less headaches, less conversations. And, uh, you're saving yourself, uh, not only money, but a lot of time and having to make all these conversations. So, uh, yeah, for anybody that's out there looking to continue to grow your portfolio and have, uh, to raise less money and deal with less people. Definitely reach out to Christopher at FITERRA to learn more. And so as we're rolling things down, is there anything else that you'd like to add about what you're working on?
Christopher Gill: No, I don't think so. I guess the one thing I might leave people with is this idea kind of came out of me looking at what's worked at different parts of my career and really seeing that evolve as asset classes go from unknown to more popular. And then there's kind of a maturity of the asset class. And then there's normally some contraction of it because a lot of money has gone into that. most of us small investors, right? We're not going head to head with BlackRock, right? I mean, we don't have, that's not how our companies are set up. That's not the capital that we have access to. And so finding a niche is, you know, it's said a lot, but like multifamily wasn't always the popular asset class, right? Mobile home parks weren't always this thing that everyone was looking at. There was a long time when it was owned by individual mom and pops that weren't sophisticated. And now look where we're at now. And so I've always made my most money looking for and then finding and then executing on more niche real estate investing strategies. And Fiterra is birthed out of looking at something, looking at this concept of capital optimization, and can I apply it from the commercial world and use it in a unique way in the residential space? And that framework, that thought process has really stood me in very good stead. And if you're a new investor or a newer syndicator wanting to start and trying to think through, man, where am I going to start? I would probably recommend against going and doing the hot thing. If you Google what to invest in real estate and whatever that top couple asset classes that pop up, Probably just discard those because you're going to be going head to head with people with a lot of experience and a lot of very inexpensive capital. And really the riches are made in the niches, as they say.
Ben Kogut: Amen. Amen. Well, thank you for sharing all that. This is such a novel approach to investing. And if somebody wanted to get ahold of you, what's the best way for them to do that?
Christopher Gill: Totally. So Fiterra, F-I-T-E-R-R-A.co.co. We're looking at deals. We're launching now. This has been in beta and stealth for the last about year and we're finally coming out. So that's really exciting for us. I'm pretty active on LinkedIn, Christopher Gill. You can find me under real estate or prop tech or infill investing. Those are probably the two best ways to get ahold of me.
Ben Kogut: Wonderful. Well, that's a wrap. Thanks again for coming on the Real Estate Syndication Show. I'm your host, Ben Kogut with Rooster Equity Partners. And until next time, thank you so much.
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