Niche Multifamily Investing, With Crossbeam Capital

Crossbeam Capital was a presenting partner at Alts Expo May 2023, a one-day virtual event hosted by WealthChannel. In this webinar, Brad Blash presents a niche investment strategy.

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Click here to visit the Crossbeam Capital website.

Webinar Presenters

Webinar Highlights

  • Overview of Crossbeam’s history.
  • Summary of the niche investment strategy implemented by Crossbeam.
  • The benefits of co-investor status through the Crossbeam structure.
  • Review of historical performance data and key terms for Crossbeam’s current fund.
  • Live Q&A with webinar attendees.

Connect With Crossbeam Capital

Webinar Transcript

Brad: Welcome everyone. I’m happy to be on the call. Crossbeam is a institutional manager, born as a management spinout by New York Life Investment Management before The Great Recession. But we were lucky enough to have raised some significant capital from large institutional LPs over that timeframe.

And since that time, we’ve done roughly $2.3 billion worth of transaction volume and delivered great returns. I thought what I would do is start off with a quick video that’ll describe our current fund, and also give a little background, and then I can open it up to the presentation and Q&A.

Ted: Crossbeam Capital manages multi-family investments of all types, including purchasing existing properties, and developing new properties. Crossbeam primarily invests in underserved high-demand, low-supply markets in the Midwest, particularly in the Rocky Mountain region where institutional investors typically don’t invest.

Matthew: Crossbeam has a unique approach because we’re able to find niche opportunities that may be overlooked by other investment firms. We feel like we’re able to act on those opportunities more quickly than others. In turn, we’re able to produce returns that are extraordinary.

Ted: Crossbeam is small and nimble and highly experienced, and we have the ability to take advantage of opportunities on behalf of individual investors that larger institutions don’t or can’t take advantage of. Investing in these smaller markets can be more lucrative than investing in major metropolitan areas, primarily because they’re high-demand and low-supply markets.

Brad: Crossbeam is always looking at risk. That’s why we haven’t lost a nickel for our investors.

Ted: Crossbeam’s track record since 2010 is comprised of total transaction volume of more than $2.3 billion. Of that amount, the properties that have been in investments that have been purchased and sold have produced an approximate 35% compound rate of return per annum.

Brad: We are very focused on having a high-quality, accessible, and transparent reporting package to the investors. That includes a dashboard with every one of the positions that they have, both by geography and product type. It has all of their original investment documentation in one place, and it has all the quarterly reports, which come out four times a year. Our goal is to focus on the private investor, provide them phenomenal investment opportunities on a regular basis to meet their portfolio needs while also providing best-in-class reporting.

Ted: If I were a private investor starting to invest in real estate, I would choose Crossbeam because I think the most important thing an investor can do is pick the right sponsor to make the right decision, to have the fiduciary integrity and the accessibility and transparency that you need to protect your investment.

Brad: As I mentioned, Crossbeam is a very experienced multi-family manager that is really focused on a niche strategy in the marketplace. That strategy was chosen after five-plus recessions of the principles and managing significant amounts of capital for third parties and ourselves. So, we’ve run over 100,000 units of multi-family. We did over $2.3 billion worth of transaction volume since 2010 and delivered a growth property level IRR average across those 45 exits of 34.75%. This has been our, you know, representation of our institutional investor base.

So, we’re migrating from institutional to private, and we’ll get through the why on that in a bit. But our current fund, so we’ve done 34.5% in the last 10 years. So, what have you done for me lately? Our last fund was, and this helps explain the uniqueness of the Crossbeam opportunity for those looking at it. It’s a little bit differentiated than a standard fund or a co-investment opportunity on a deal. What we’ve attempted to do with our hybrid fund is to combine the selectability and duration and choice and allocation of a syndication, and the ability to get access to deals that you wouldn’t perhaps have access to previously with the fund.

So, for those who are looking at the opportunity here with Crossbeam, if you invest in our fund, which I’ll get to in a minute, this was our last fund, as an investor in the fund, you get co-investment rights. What does that mean? That means that prior to any other investors getting a subscription agreement accepted by Crossbeam, there will be a period of time in which fund investors will get exclusive access to co-invest in individual deals. Why have we set it up this way? Well, we’ve set it up this way because we believe that the investor group is a combination of those that don’t have time to invest in individual deals perhaps or those that only wanna invest in individual deals. And so, we’re attempting to meet the market at the middle and provide this excellent opportunity.

Within context, if we were in the institutional world, minimum investments for the fund would be 5 million to 10 million bucks. And if you wanted co-investment rights in the fund, you’d have to be the staking investor at roughly a 25% stake in the fund. So, you know, and this is a significant opportunity for folks to gain this co-investment opportunity. The fund itself is focused on really dynamic markets. So, we’ve covered, you know, 40 markets in our institutional pass.

My partner, Ted, who runs the business with me, started off at Bank of America, ended up working for a large operator as the chief investment officer, merged that company into a publicly traded REIT and managed the portfolio of 45,000 units, and then took that private. My background is as a institutional asset manager of Fannie Mae in the largest workforce housing fund in America, the American Community Fund. I was a director at that fund and ran originations of equity across the country with that. In which we learned, you know, did 270 transactions. And between myself and Ted’s experience, we’ve learned a lot about timing in this marketplace as well as fundamental valuing.

If you were to reverse engineer, how did you get to those returns? It’s the recognition of fundamental value and making of that choice prior to the market recognizing it for themselves. So, one example that I will throw out to you guys is our current fund here, the current fund, we’re raising $25 million target with a maximum of 50, that will be the head of the spear part of the fund. What does that mean? That means that the fund will acquire, control an asset, get the loan, you know, peel the skin, and serve up the stake to the investor. And this is another important feature of the fund in the sense that we’re not guys who are out there doing a syndication, pulling our hair out, trying to get a deal closed in 60 days.

With the fund, we have the discretion to control the deal, to maximize the debt and the equity positions within the deal. And to push as hard as we can to drive individual returns to those investments. So, how do we recognize fundamental value? Well, there are two strategies to our fund, and multiple markets to execute that activity. And so, let’s start with the primary focus of the fund, which is alleviating a mountain housing crisis. What does that mean? That means that generally speaking, there’s a housing crisis of roughly before The Great Recession, but now there has been a lack of housing due to tight financial markets and a poor economy that has led to the lack of development of 5 million housing units that would be required to satisfy the households that have been created over that timeframe.

So, in addition to the fact that multi-family being a most favored nation status asset class for [SP] institutional investors, you also are getting a significant benefit by virtue of there not being enough supply. Add to that, markets where supply-demand dynamic has gotten almost to the level of insanity. And that would be worse than New York, worse than San Francisco, worse than the Bay Area in total. And any other high barrier market that you can imagine, the mountain markets have, you know, roughly 2% of the population has a rental unit, and in major cities that’s anywhere from 10% to 15% of the total population.

So, you can see that it’s a factor of three to five times less housing being produced. And these markets offer a significant opportunity because if you can build, which is the difficult part, you can shoot fish in a barrel because there are literally 1,000 plus people looking for a market rate apartment that isn’t a short-term rental unit at $5,000 a month. For a hotel unit, there is no other housing. All of the 1970s condominiums that were being rented to the local workers are now transitioned to Airbnb where they make more money between Christmas and August than they do renting to a long-term renter. So, we’re in a really dynamic market.

We figured out how to access one of the most difficult markets, which are those mountain markets, and then we’ve added something very important to the mix, and that is building technology. So, we have the ability to bring modular units, which we did just outside of Vale in a project called Six West, a housing-starved Vale Valley, very difficult NIMBY issues in terms of getting anything entitled. We were able to build 120 units. Indeed restricted those units for better zoning to county residents. What does that mean? That means that these counties who are having a massive housing crisis are interested in housing that at least is available on a first-option basis to local workers, which makes sense.

The unfortunate part of the housing situation in the mountains right now is visa workers, i.e. J1 visa workers who are coming from outside of the country, are required to have housing before they’re offered the job. And for U.S. residents, that is not the case. And it’s really an unfortunate situation for U.S. residents trying to make these mountain towns work by providing their labor. And there is literally no housing. And if you look, you know, if you just Google, you know, resort town housing crisis, you’ll get a steady flow of issues of people in the summertime living out of their cars, and very desperate situations.

The primary housing for these folks right now, which I think is a shame, is our trailer units that are between 15 and 50 miles outside of town. So, a primary strategy of the fund is to provide housing. We now have a 104-unit deal approved in Golden Colorado, which is very high barrier with a 1% growth boundary. We have a 55-unit deal that was just approved last week in Steamboat. And to give you an example of how the strategy works, it’s a countercyclical strategy in the sense that, you know, there is a fundamental structural housing crisis in the mountains in which we can build units, whether the economy is good or bad because there is a 10 times demand for each one of those units.

And when we play on the front ranges, so instead of in Steamboat, let’s say we wanted to play in the front range between Fort Collins and Colorado Springs, or the front range of Utah, there are opportunities to work through the issue coming through the pipe right now, which is people needing liquidity for multi-family. We do value-add and new construction. Our new construction is focused on those high-barrier markets. The value-add is focused on situational opportunities in which fundamental value can be acquired at the property from the get-go, and we can move through that asset over time.

What we’re finding fundamentally at this point, older vintage value-add deals don’t make sense. Why? There is a lot of capital that has to go into those deals, and right now the market will not allow you to raise the rent in those deals. So, what’s happening is if you buy an older value-add asset, you’re losing ground based on CapEx that is not revenue-generating at those older properties. Our strategy is we need significantly more price capitulation in that sector for us to find value. So, we’re moving up the food chain on the non-build side, on the acquisition side, the newer deals with not well-capitalized sponsors.

And what do you mean by that? I mean, if you built a deal two years ago, and your construction loan is coming up, the value of your property is less than you thought it would be, and there is not an opportunity for you to refinance out with the current equity partners, what is going to be required is a significant additional capital that needs to go into that deal. And with smaller balance sheet builders who are building mid-size projects as opposed to large institutional projects. We’ve underwritten 15 opportunities that would fit into that bucket.

And, you know, we bought 10,000 units between late 2009 and 2011. So, we understand the timeframe in which to acquire what I’ll call the stressed assets, but we also understand more fundamentally, the institutional side of this. And right now, you know, we talked to our friends in New York Life and they said, we’re pencils down. And all their friends are pencils down because they don’t know what’s gonna happen in the multi-family market or the economy at this point. And so, there is no liquidity from an investor perspective there. The great news for us is that we’re in a multi-family business.

So, if we were an office, retail, commercial, other types of commercial, and we had a loan maturity, and we owned an asset, there is no one to give you a loan today unless it’s rescue capital, and that’s gonna hurt a lot. In multi-family, we can take advantage of someone wanting to sell, even at a significant discount, and get 60% to 65% debt in the mid-five range, which isn’t crazy. You know, historically, that is not a abnormal interest rate. So, summing up in total, we have a compelling kind of two-fork strategy. Take advantage of some distress that’s coming in the multi-family market where we can buy fundamental value at a discount replacement cost on the front ranges between Idaho and Mexico, and some of the most dynamic markets that are taking advantage of the coastal migration because of lifestyle, property pricing, you know, and employment growth.

So, we love the Rocky Mountain region for that purpose, and we can take advantage of distress on the front range as a partner to a seller that… You know, if you have discretionary capital in a time like this, you are the winner of the bid if you’re overpricing because surety of execution is what matters to sellers right now. And a company like ours with billions of dollars of transaction volume, institutional pedigree, and background, a strong reputation in the marketplace as someone who does what they say they’re gonna do, we have a very unique opportunity over the lifestyle of this event. Meaning, we were to be deploying the funds. If you invest in a discretionary closing…

Jimmy: Sorry to interrupt and cut you off, but we do need to move on to our next presentation. We’ve run over time here. Before I cut you loose, can you tell people how they can get in touch with you, and learn more about your opportunity here?

Brad: Yeah, absolutely. So, in yellow at the bottom of the screen is an email, which you can send an email to saying, I would like access to the current deal room. That will put you on the list in the future. And we will immediately get you access to the deal room. And then lastly, Jimmy, for those that are interested in the more practical nature of who we are and what we do, we have a very strong back office anchored by Juniper Square, which provides a hundred percent of all of your executed documents, all your tax information and your ability to subscribe to any one of our deals is open 24/7, you can look at all of your possessions at any time.

And most importantly, for those on the phone that are interested in taxes. We got all of our K1s out in March this year, and I don’t know how many other private equity funds actually do that. So, and we also, for folks on the phone, and Jimmy, thank you for letting me run over a little bit. You have access to me, you have access to our CFO, you have access to Ted. So, we don’t have a huge… Part of how we’re lean is that we don’t have a huge investor relations group. The principals and our key staff run through that. So, you know, this is also about access to really strong institutionally-vetted folks.

Jimmy Atkinson
Jimmy Atkinson

Jimmy is co-founder and co-CEO at WealthChannel.