Open Door Capital Funds

16 Replies

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.

@Paul Gutierrez

I don’t have any experience with that particular fund. There are typically two types of syndication. One is the fund type and the other is project type.

I’m in favor of the project type as it allows for money to be put to work immediately and it’s a set amount.

The fund allows for money to come in and sometimes go out as needed. It allows the sponsor to buy and sell real estate within the fund as well, maybe doing multiple smaller deals. You would have to learn a lot about the sponsor to see/or know exactly what they are doing.

The project type is usually 1-2 properties and set at that. No adding or subtracting. Then when it’s sold everyone gets out. (Super difficult to do a 1031, but not impossible). When everyone gets out, usually looking for a another deal to offset the taxable gains.

Hope this helps!

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With the caveat that I'm much more familiar with traditional private equity funds than real estate investment funds, I would caution that the returns waterfall is extremely favorable for the GP. Typical private equity funds have 80 / 20 splits above the hurdle rather than the 70 / 30 the fund is employing. The 50 / 50 split above a 15% LP IRR is also extremely favorable to the GP, and relatively unheard of (at least in the institutional private equity world).

This waterfall would materially limit your upside as an LP if the fund ends up being highly successful. If you're an accredited investor able to meet the minimum commitment amount required by the fund, I have to imagine you have access to opportunities that are more favorable to you as an LP. The off-market carry regime, plus the fact that there is no requirement for the GP to put any of their own money in, means that the GP is much less aligned with its LPs. 

I have no idea what performance of the first two funds has been like, and maybe they're blowing it out of the water, in which case they might partially justify a more expensive carry regime. But this is a portion of what I would consider as an investor in the fund, in addition to: past performance, ability to source good deals, asset manage well, and successfully exit. 

I am invested in the Open Door Capital Fund 2 where I transferred funds in early Feb 2020. I believe they started funding activities in April or May. So far, I've gotten 3 distributions of Class A dividends. If I compute these payouts as a simple ratio of the capital invested, it would be about 3.1%. There might be a better way of computing returns which I would welcome learning about, but with these numbers, it's rather underwhelming. It would be helpful to learn how other mobile park funds have fared over this period. 

I can understand the underwhelming feeling; however, it takes time to get their team in place and to make changes. That was my understanding after reading the documents. So far, I’ve just received holding interest from Q4 2020, but the fund is still open. I’m hoping that the team will pull through for previous funds as well as ODC 3. Lastly, it was also my understanding that the greatest returns come towards the end of the holding period and after selling the assets. 

I'm certainly holding out for them to pull through. Their executive summary also had annual projections on cash flows, hence my expectations of better returns. That said, the 'annual' year isn't over yet so things might pick up.

Let's reinvigorate this thread. Open Door is now soliciting funds actively on Fund IV and I'm interested to hear feedback. I think some good ideas have cropped up back 6-7 months ago when this was first discussed, I guess on Fund III. There must be huge numbers of folks in Funds I, II and III, so speak up! 

After looking into Fund IV closely and even getting money ready to move over to ODC for IV, I decided against it. Lots of factors, but deciding factor was what what Torren described (waterfall highly favorable to GP). I like the idea of trailer parks and the target IRR is impressive, but ODC will have to absolutely crush it to justify the 70/30 and 50/50. Too rich for me, especially when there are so many similar opportunities with proven firms and a much more favorable return waterfall. That being said, I hope ODC crushes it and current investors are richly rewarded.

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.

Originally posted by @David Waite :

After looking into Fund IV closely and even getting money ready to move over to ODC for IV, I decided against it. Lots of factors, but deciding factor was what what Torren described (waterfall highly favorable to GP). I like the idea of trailer parks and the target IRR is impressive, but ODC will have to absolutely crush it to justify the 70/30 and 50/50. Too rich for me, especially when there are so many similar opportunities with proven firms and a much more favorable return waterfall. That being said, I hope ODC crushes it and current investors are richly rewarded.

It should not really matter what the GP makes in the deal. 
You should compare the investment with other investment opportunities you have at the moment.

If you can make 13% from the ODC deal, then who cares if ODC made 30%. They are the ones who are putting the time and effort into finding and managing the deal.
If you can make better than 13% elsewhere, then don't invest in ODC.
If you can't make better than 13% elsewhere, then invest in ODC.

I just made up the 13% figure, I don't know what rate of return their fund would make.

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It absolutely matters what the GP is making on the deal, because it impacts the risk-return for LPs.


If the GP is taking a crazy high amount, that amount is coming out of LP returns, which means that the LP might not be adequately compensated for the amount of risk they are taking by investing. 

Originally posted by @Basit Siddiqi:
Originally posted by @David Waite:

After looking into Fund IV closely and even getting money ready to move over to ODC for IV, I decided against it. Lots of factors, but deciding factor was what what Torren described (waterfall highly favorable to GP). I like the idea of trailer parks and the target IRR is impressive, but ODC will have to absolutely crush it to justify the 70/30 and 50/50. Too rich for me, especially when there are so many similar opportunities with proven firms and a much more favorable return waterfall. That being said, I hope ODC crushes it and current investors are richly rewarded.

It should not really matter what the GP makes in the deal. 
You should compare the investment with other investment opportunities you have at the moment.

If you can make 13% from the ODC deal, then who cares if ODC made 30%. They are the ones who are putting the time and effort into finding and managing the deal.
If you can make better than 13% elsewhere, then don't invest in ODC.
If you can't make better than 13% elsewhere, then invest in ODC.

I just made up the 13% figure, I don't know what rate of return their fund would make.

Basit,

I generally agree with you. It is a matter of evaluating the risk/return on this opportunity vs others out there. Of course, track record and conservative vs. aggressive underwriting/promotion play a role in the reality of what you're hearing from any syndicator. 

If I am an LP investor and making fabulous returns, I want the syndicator to do very well. Hopefully, they will then be motivated to do more deals and provide more opportunities. And higher profits can mean more downside protection if a deal goes south. Hopefully, the syndicator can be trusted to protect investors first in a case like that (this is part of the track record/history). A fund (vs single deal) can provide additional protection in cases where one deal goes bad. 

According to Brandon's Instagram feed, Open Door Capital just sold Fund 1 with a 35% IRR for the limited partners. I believe Fund 1 started in 2019 and closed on its last park in May of 2020. So that might be a total return of around 60-70% over 1.5 or 1.75 years (don't know for sure since I am not an investor in Fund 1).

Fund 2 (the last of the two non-cumulative preferred MHP funds) hit 7% annualized IRR this past quarter. Annualized quarterly preferred dividends Q3 2020 through Q3 2021 have been 4.7%, 5.2%, 8%, 8%, and 8%. Cumulative return to date is 8.5%. The ODC MHP funds seem to take about six months to fully invest, during which they now pay 2% holding interest before the full preferred return begins.

Past performance is no guarantee of future returns, of course.  They sold Fund 1 into a huge bull market for MHPs.

I think a lot of new LPs look at fees a bit too much where at the end of the day its LP returns in your pocket. We all don't care how much Apple profits on our iPhone... what really matters is the product or value we get or in this terms the ROI on our principal.

The fees can be broken down in the three main fees (so you might have to combine some of the above fees under one of the categories below):

  1. Acquisition fee (paid % of the asset price) - normally 1-3%
  2. Asset management (paid % of the income the asset produces) - normally 1-3%
  3. Distribution or exit fee (paid % of the sold asset price) - normally 1-3%
  4. Development fees (this is present in development deals) - example

NOTE: Just because these fees are high or the split structure has too much going to the GP does not disqualify it. This is what unsophisticated investors think who have a surface level of understanding of these deals. Again its all in how much meat there is on a deal. For example, our process on setting fees and splits is to underwrite conservatively for LPs to get 80-100% ROI on their money in 5 years. If the deal is very fat due to our deal finding ability...we will bump up our fees. Hopefully you are starting to see these investments as products and they have a set market price. Your job is to determine if under the hood of these packages is it is underwrote properly and with a good sponsor.

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