Series A Units - High Yield Equity Investment Can Offer Significant Benefits To Your Real Estate Portfoilio

Thank you for watching Ivan Barratt’s interview with Curtis Edwards, VP of Investor Relations. 

If you are interested in working with Ivan and the BAM Capital team on Multifamily syndication,  please see the options for booking a call to learn more – or if you are ready to invest click the invest now link at the bottom of this page. BAM Capital works with accredited investors to invest in B++, A-, and A multifamily assets with in-place cash flow and proven upside potential. This mitigates risk and allows the fund to target consistent monthly cash flow.

Ivan Barratt is the CEO of BAM Capital and is pleased to bring value to potential investors who are looking for high yield equity investments  to increase your portfolio’s value. 

Ivan Barratt is a 20 year veteran of the real estate space and currently serves as founder and CEO of The BAM Companies. Ivan is a multifamily owner, fund manager, and syndicator who specializes in large apartment communities in the Midwest. Since 2015, he has raised nearly $100M in equity and acquired well over 4,000 units. He has also grown the BAM Companies to a three-time Inc 5000 Best in Series private equity and management firm. Today, Ivan focuses his time on equity finance, acquisitions, and company strategy.

Currently, his firm manages $593M in assets.

Ivan is an active member of the Young Presidents Organization, Entrepreneurs Organization, and the National Multi-Housing Council. Ivan serves on the Executive Board of the Indiana Apartment Association and is a member of The Penrod Society, a not-for-profit arts organization.

He enjoys public speaking and has been on countless podcasts discussing real estate, entrepreneurship, and personal growth. Ivan lives in Carmel, IN with his wife and three children.

Transcription

Real Estate Investment- Series A Real Estate Units Webinar

Ivan:

Curt, it’s good to see you. How are things at the office?

 Curt:

Things are good man, like two ships passing in the night here, but, uh, good to find time to get on the webinar with you here.

Ivan:

Yeah. So likewise, thanks for carving this out. I know you’ve done some really extensive work with our national accounting firm. And it’s been fun to watch these shares get gobbled up by some of our larger investors. What I wanted to do today for those of you that are listening is bring Curt in to explain why there’s been increasing demand for the shares a little bit more of the details in the benefits of those shares. So that some of our, our investors that maybe aren’t up to speed on it can better understand the cash flow the returns the tax benefits on the ace. So Curt, all I’ll let you take it from here. But let’s, let’s pause a minute on our disclosure slide. So, folks, anybody wants to read this, I encourage you to do so you get to pause the video and read through the whole thing at your leisure can take it away, man

 Curt:

You got it. 

So as most of our current limited partners know, we have a series A in a Series B offering inside fun too. And you know, just to note on the series A, the preferred return is 10% annualized paid out monthly. So a truly passive high yield option for those investors that choose the series A offering. Now, where it gets interesting is understanding how the preferred return is categorized by our accounting firms. Somerset. So you have investment income, rental income, and distribution income. So when those preferred return payments are paid, doesn’t matter whether it’s series A or Series B, those are categorized as distributions, not rental income, and net investment income. And the reason that that’s important, Ivan, is that when they’re labeled or categorized as distributions, you are not taxed on that income during the holding period of the asset. Does that make sense?

Ivan:

Yeah, it’s well said. It’s not just the 10% that you’re receiving folks, there’s more to it than this. And some of you be surprised to hear that some of our largest investors are writing million dollar checks for all A-shares. Of course, we’re getting a lot of investors that do a blend 5050 6040. so on, but I really wanted to drive home the why we’re seeing some of our largest more sophisticated investors taking large checks today. So I think this is a really great start. That 10% is tax-free. During the whole period. I’ll let you keep going from there.

 Curt:

Yeah, perfect. And you kind of lead in to where we’re going to go to next, that 10% preferred return for the share packs a bigger punch than what the offering memorandum states. And you have to dive deeper and understand why and that’s what we’re going to get into here. So let’s first start with, you know, a $100,000 example. And on the left side, we have a $100,000 investment into BAM capital series A units, we have already started on the last slide, you’re going to receive $10,000 annually and a preferred return. So at the end of those five years, that’s about $50,000. Right, so that’s where you get your 10% IRR. Now, let’s start looking at different asset classes, different investments, and kind of see how they are equal. So let’s take stocks, but not only stocks, let’s categorize this column as long-term capital gains or qualified dividends that are paid to that investor via those long-term capital gains stocks. 

So, if somebody were to make $100,000 investment inequities, and they hold those for longer than a year, they would have to generate a 13.2% return annually on that $100,000 investment to equal the same 10% in this series A and the reason that is is that if I sell my equity position after a year, and they’re categorized as long-term capital gains Either taxed at 15, or 20%. That’s going to be dependent on the limited partner. In this example, we’re using 20% as the long-term capital gains tax, as well as you have to add the 3.8%. net tax. So when you add the 20 in the 3.8, which is the net investment, income tax, that’s what nit stands for. That 23.8%. tax is the reason why are 10% and series a pack a bigger punch. So I’ll kind of pause there for a second Ivan, you know, questions or anything you want to drive home?

Ivan:

Well, I think the punchline is for everybody listening is that you would have to have an equivalent investment, earning somewhere around a 13% annualized return, in order to achieve the same after-tax benefits that we’re delivering. via the shares. Let’s tee up a softball question here. There’s a couple of assumptions that you’re using to come up with these numbers, correct? Correct?

 Curt:

Correct. So the assumption is in this category here, and we’ll, we’ll reveal a couple more categories. But in this column, we’re assuming 20%, long-term capital gains, it could be 15%. For some people, we found that most of our limited partners that invest in bam, tend to be in the 20%, long-term capital gains bracket. So that’s why we’ve aired on using the 20%. And 3.8%. That’s a tax a lot of people forget about, but their CPA and their accountants are doing that on the backside, that net investment income tax is brought into any type of you know, long-term or short-term capital gains in equities.

Ivan:

Yep. And we’re not here to be investment advisors, folks, or CPAs. But the last time I checked, stocks are a lot more volatile than real estate. And I don’t think there are any safe or blue-chip or choice companies out there in the equities markets that are paying anything close to a 13% dividend. Now, I know you’re you’ve got a few more stocks than I do curve, but I’m pretty confident in that answer.

 Curt:

Yeah, yeah, you know, you’re right. I mean, historical averages, as we know, are somewhere between six and seven and a half percent net of fees. And obviously, that’s over the history of the stock market. But we we’re not here to dive too deep on equities in returns. But it’s a great point. So before we go on to the next slide, just to kind of summarize, if you invested 100,000 in equities, and you returned 13.12% each year, and when you went to sell that you’d have to pay that 23.8 tax, you would end up with the same 50,000 proceeds as you would investing in the Series A units with inside the BAM growth and income fund to

Ivan:

and I’m probably stealing your thunder here a little bit. But I believe you’ve got a slide coming up maybe next on how we can continue to defer those taxes? Of course, you do. What’s this?

 Curt:

Well, so we have that coming up how you can defer those taxes even further, but just to kind of cash. The other examples. So the first column, I really wanted to explain to everybody without having too much on the screen, you know the difference in series A and just long-term capital gains. Now we’re looking at, let’s say you were trading crypto or equities, and you were a day trader and you were producing short-term capital gains. So short-term capital gains have a different Tax Scenario, we’re using a blended income tax of 27%. Once again, in talking to our national accounting firm, and the LPS that we have at bam, this tends to be a nice, conservative approach. But everybody else is gonna have a different scenario on their personal income tax. But when you’re dealing with short-term capital gains, the tax that you pay is tied to your personal income tax bracket. And you also have to add in the 3.8%. So as you can see in this example, 27 plus 3.8 is 30.8. And you would have to return 14.45 in this scenario to equal those series A units

Ivan:

well, Yep, I think this is a great illustration, folks, this is what we really want to drive home and why our sophisticated. In most cases ultra-high net worth families are gobbling up shares is because of what Curt showing you right here, from a before-tax and after-tax perspective.

 Curt:

Yeah. And the final example, which we wanted to keep separate was, if you were on a salary of 100,000, and you were to get a salary increase of 13.7%, it’s the same scenario, that increase in your salary of 13,699, that’s going to get taxed at your blended income tax rate, we’re using 27% here, and you’re still going to end up with the same 50,000. So we wanted to give you examples of long-term capital gains and short-term, as well as what that would mean in an income or a wage increase. To show you, all of those different examples are equal to the IRR of 10%, or the preferred return of 10% in the series, a unit that are not taxed at all during the whole period. And Ivan, as you know, our target hold period is five to seven years. So you can start to see how it packs a bigger punch, and how that cash flow is important in that series. That unit.

Ivan

Yep, yep, absolutely. In this case, this asset is securitized by the real estate in the portfolio, versus some of these other asset classes.

 Curt:

Exactly right. In the BAM growth and Income Fund, we have institutional-grade cash flow producing assets that are, you know, backed by those tangible assets as well, where, you know, investment, you know, whether it’s stocked, you know, what other avenues you want to look at, you know, do you have that same, you know, confidence, you know, and we can leave that up, you know, to the audience to kind of just, you know, question and determine for themselves.

Ivan:

Absolutely consult your advisors, consult your CPA is they’ll back up a lot of what Curt is saying here, we just happen to think we’ve got a very, very solid offering versus what you can find out there and some other areas of your portfolio.

 Curt:

Yeah, as you alluded to earlier, the softball question. So this is great, right, we can not pay taxes on the preferred return in series A during the holding period. But what happens when we sell the portfolio of assets, and we do have a capital event? You know that that’s the next question we get. And I want to kind of walk everybody through this first. So when you make that initial 100,000 investment in bam, you are generating a $55,000 passive loss, that’s referred to on your K one. And that’s due to the accelerated depreciation benefits that we get in commercial real estate, which will save for another topic. So you have your negative 55,000, average there as a passive loss, then you can see the distributions in your one through five, and then we return the capital if our target hold period is five years. 

So at that point, the capital gain from the sale is 105,000. And where we get that number, is you’re adding up the sum of the distributions. So 10,000 times the five years is 50,000. And you also have to add in that passive loss benefit. So the 55 plus the 100, or the 50, is how you get the 105,000 capital gain from the sale. But your accountant would tell you that your net taxable income, though, is still only $50,000. So $50,000. The reason that is is that you get to use that negative 55,000. In the passive loss. Follow me there.

Ivan:

Yeah, yep, makes perfect sense, you’re able to cover over most of the most out of the gate at the end with that loss.

 Curt:

Correct. And at that point, if the limited partner decides to take that money back and not reinvest that into another series A and potentially you know, the BAM fund three or four, you know, whenever that time happens, they would have to pay taxes on that $50,000. However, if they reinvest that money, this is the scenario that happens you have your capital gain from the sale of 105,000 like we just talked about on the last slide. Your net taxable income, though is on 50,000. But if you reinvest that 100,000 of return capital, you are generating another $55,000 loss, that $55,000 loss, offsets that net tax, that net taxable income of 50 and therefore, you’re left with taxes owed of zero, and you actually have a negative 5,000k one, carry over for Future taxes. 

So before I, you know, to summarize that your preferred return of 10% is, is labeled as a distribution. distributions are not taxed during the holding period. So from years one through five, you get $10,000 each year, and it’s not taxed. If you reinvest the money, when we have a capital event, you can offset any taxes owed, therefore generating a mechanism that is producing 10% tax-free, which we’ve given you those examples that it’s anywhere between 13 and 14.5%. Pre-tax. So I know I went through a lot there, Ivan, but you have any comments or you know, want to sum that up?

Ivan:

Well, I think you did a great job driving it home. And I hope our audience now sees why so many wealthy families are taking advantage of this share class because you can get an equivalent before-tax return somewhere in the range of 13%. indefinitely if you continue to reinvest the proceeds for the long-term.

Curt:

Yeah, and that, you know, being on the investor relations side, we have seen a lot of questions around that. And people, for the most part, didn’t really understand that these preferred returns are labeled and qualified as distributions. Yeah, they were thinking it was more rental income or investment income. So this is, you know, the reason we produce this quick segment is because of the confusion around that, and how are those preferred returns tax-free? And then how can I create a vehicle that is tax-free over the long run through reinvestment?

Ivan:

Yep, I don’t think I could have said it better. And I’m glad we’ve done these folks out there might have thought that this was treated as some of the debt funds we’ve seen or hard money lending funds we’ve seen which are 1099 interest, income, and tax in that year. And so, guys, Curt and I did this just so we could hopefully, educate our client base, get them to ask more questions to their CPAs Feel free to get us to get your CPAs involved. They’ll back up what Curt’s saying here. Somerset is a national accounting firm that Curt used to dot the i’s cross the T’s and cross-check all the math, we don’t want to take up any more of anyone’s time here. We just wanted to make sure that people had the entire picture of the advantages of the share class not to get too salesy here but I think we’re just about out of them for the 2021 deployment but we will have more availability the share class in 2022 Curt I don’t know what we’re down to maybe a million million and a half of a left for deployment for this year.

Curt

Yeah, just under 2 million at this point. So hopefully you know we’re going to send this quick webinar out and if anybody’s interested please reach out to myself or Andrew.

Ivan:

you know we’re whoa whoa. Now you said 2 million but you’re not counting for the folks that that are selling with us in a couple of months that wants some of those shares are you

Curt

No, correct? Yeah. Yeah.

Ivan:

You guys were closer to about a million left.

Curt:

Yeah, because of the capital event you have on another asset and the redeployment demand from that correct?

Ivan:

Yes, investors selling with bam, get first rights to reinvest with BAM for our new investors out there. I hope you are happy to hear that but that’s just the way we roll.

Curt:

Awesome, Ivan until we do this again, man. I’ll see you around.

Ivan:

Yeah, yeah. See you soon.