Last year, I wrote about an interview I did with real estate entrepreneur Jay Morrison, detailing how he and his wife Ernestine raised nearly $10 million for their fund (the Tulsa Real Estate Fund aka TREF) from over 9,600 investors through a Regulation A crowdfunding campaign in just one week.
A popular method of raising money, Reg. A allows companies, real estate operators, and sponsors to raise up to $50 million from everyone—not just accredited investors.
Shortly after launching, TREF made their first acquisition, picking up East Point’s 3015 North Martin Street in Atlanta.
Since then, the Morrisons recently opened their cornerstone asset, a 30,000-square-foot office property named the Legacy Center that will be used as a co-working/creative incubator.
“This asset and the businesses it fosters will help stimulate the local East Point economy with dozens of job opportunities,” Morrison told Curbed. “It will serve as a socioeconomic training center and an incubator-accelerator for small businesses.”
Related: 5 Ways Easily Invest In Real Estate Without Buying Property [Video]
In a shrewd move, the Morrisons then signed their Inc. 5000 company, the Jay Morrison Academy, as an anchor tenant, offsetting the risk of a co-working play and guaranteeing rental income for the asset.
Before the historic reveal Jan. 8, the Legacy Center was merely a dream conceived by the couple and brought to reality, using a vehicle all investors—including you—can tap into: the crowd.
Obviously, there are traditional, even creative ways, to raise capital. Since the Title III of the JOBS Act was signed into effect in 2015, it’s opened the floodgates for investors to tap into community to create wealth.
Here’s what Jay had to say about the plans for his fund before it all came to be—and some experiences raising money through this method.
Q & A With Entrepreneur Jay Morrison
What is the fund’s mission?
The mission is to be an economic vehicle and an economic base for the revitalization of urban communities, to stop gentrification of urban communities and to build black Wall Street-like districts and African-American communities.
It also serves the purpose of an investment vehicle, outside of social good, but to provide investors—non-accredited and accredited, family, offices, institutions—the option to invest in social good projects or to receive passive income for a 8 percent preferred return in a 50 percent profit-share model.
Which is the model most funds use? A preferred return and a profit share?
Correct. But the true mission is to be able to control our dollars to deploy capital in areas and projects that have a positive impact and are also economically sound. It’s also properly harnessing our $1.2 trillion of spending power that we have to do something that the black community has never had—the funds.
So we, as a fund manager, want to create this fund to have the best interest and the good of our community in mind, leveraging capital from everyone to impact their communities.
I know this is normal in the disclosure of risk in any new investment vehicle. Nevertheless, you’ve received criticism on social media on the absence of assets (at the time of the raise) and the high risks associated with it. What do you say to that?
Criticisms come from the lack of knowledge. The majority of people never have to file an SEC application to launch a new fund or a company.
So when they talk about our balance sheet not having any assets, there wouldn’t be any assets in the company until the company is launched. It raises capital and deploys capital and acquires assets.
Right.
The management company, which manages Tulsa Real Estate Fund, takes on the responsibility of managing their operational costs, its compliance, legal, marketing, accounting costs.
So you don’t see as much activity on the Tulsa Real Estate Fund LLC because the Tulsa Founders LLC took on those costs on behalf of the Tulsa Real Estate Fund LLC. So there was no debt to investors on the capital that helped build the infrastructure.
Now, the fund has raised $9.6 million. People can see that we have assets and will have more assets and leverage capital to raise more assets.
We’ve talked about the fund itself. Why you did it and the mission. Let’s talk a little bit about the business model. How’s TREF set up?
We charge a 5 percent management fee and 50 percent of profits. Our fund investors receive an 8 percent preferred return and have only a one-year lock-up period. After that, dividends are paid out quarterly.
You’ll see many funds have a two to three year lock-up. They may charge less management fees, but if you read the fine print, it could come with developer fees, refinance fees, and other origination costs that could pass on to the investor from the developer, based on the shares they own.
Related: What Are Typical Real Estate Developer Fees?
Everyone has their model based on their assumed cost of doing business and their assumed risks.
Summary
And this is only some of what Jay had to say. I will share the rest of the interview in another post. Jay goes on to break down the nuts-and-bolts of raising money through Reg. A, pricing shares, how to create an offering, and more.
What do you think about Morrison’s fund idea?
Comment below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
