Introducing The Tempo Growth Fund: Part Two

This is part two of our overview of the newly established Tempo Growth Fund LLC. As you’ll recall, last month we introduced you to TGF team members (link), our business philosophy (link), and provided a broad picture of the fund.

In this month’s installment we’re going to look more specifically at the fund’s structure, how it will be funded, the value of diversification, and discuss the on boarding process.

Structure of the Fund: Growth Oriented and Closed-Ended

Overall, the fund is investing in two key structures: 1) Equity and 2) Private Debt. It’s a growth-oriented fund and close-ended in nature. Let’s talk a little bit about a closed-ended fund.

The Anatomy of a Closed-ended Fund

A close-ended fund has a finite timeline and a dollar amount it’s raising. In our fund, the amount is $25 million and the timeline is 12 months (it’s worth noting that we’re allowed two 6-month extensions). Thus, effectively, within 24 months at the very latest, we will close our fund and not accept any more capital. We’ll be making investments when we have deals.

A closed-ended structure works a bit differently from open-ended structure investments for those of you who have experience with the latter. Here, people will be making commitments or pledges of capital. We start paying preferred returns from the day we make a capital call.

Example

Let’s look at an example of an investor who makes a $1,000,000 pledge. If the deal flow is strong, we may be able to pull all of the funds in from a committed investor. However, the fund may not have enough deals at the outset to be able to take all of that pledged money. Therefore, we’ll take the pledge, but we may only need $500,000 of it at the time of that subscription.

If the deal flow is strong, we’ll be able to pull in all of the committed funds. If, on the other hand, the deal flow is paced over time, then we may have $500,000 called in immediately, and then $250,000 the next month, and so on.

So, you have to be prepared as an investor that you’re making a pledge of capital, but it requires a bit of patience to allow us to find great deals and to make the investments when these deals are ready to close. In this way we don’t have a bunch of idle capital sitting around burning a hole in our pockets. This is why the fund takes pledges rather than the capital.

The Connection Between Deal Flow and Capital Calls

We start paying preferred returns from the day we make a capital call; when the money comes in and we invest it, that’s when we start paying preferred return.

This is a critical piece of our business model here as we’re trying to make prudent business decisions not to rush into any deals. Commitments help us plan how much capital we have. As mentioned, at the same time, we don’t plan on having capital sitting around doing absolutely nothing.

As it stands, we have good deal flow, and we’re very confident that we can deploy most of the projected capital rather quickly on great projects. However, we want to set the right expectations. So, to reiterate, if you make a pledge it’s possible that not all of your capital will be pulled in immediately. This enables everyone to be on alert for capital calls.

By and large, we’re investing in projects with forced appreciation without having to wait for any normal appreciation. We feel very confident about the long-term prospects of these projects, but in the short-term, there will be limited liquidity. Some investments may cycle through faster and some capital may come back faster.

So in a 5-7 year horizon, it’s possible you may get some money back in year 3; however, the life cycle of the fund is projected to be 5-7 years, but it may take longer if it’s a great asset and it’s not the right time to sell it may go beyond that.

Management Fees Explained

We feel like we’re very reasonable with our fees. Our compensation is a 2% annual fee which helps us to keep the lights on, allows us to operate, to have professional services, good communication, and constant interaction with our third-party fund administrator.

The only other fee we get paid is when we underwrite deals, and we spend time preparing for them; in this case we charge a 1% asset acquisition fee. This fee, in comparison to other one-off projects which tend to be anywhere from 2-3%, is very low. The only other way to get compensated is a performance carry fee.

To do so, we basically have to generate investors 8% preferred return (cumulative not compounded). Every dollar above 8%, gets split in the following way:

• Class A units (80/20: 80% = investors & 20% = mgt. as a performance fee)
• Class B units (70/30: 70% = investors & 20% = mgt. as a performance fee)

In closing, these are our only fees. Please note that this is separate from expenses which include third party fund administration; these guarantee confidence in the fund in that the books are done properly, and so, in the end, the accounts are administered so that we get professional statements.

Waterfall Explained

• • Fund Type = GROWTH
  • Target Return = NET 12-18% to investors
  • Preferred Return = 8% cumulative preferred return (not compounded) for investors
  • Management Fees = 2% annually

Performance split (above the 8% Pref.) =

• • A Units: 80/20 ($1,000,000+ invested)
  • B Units: 70/30 ($250,000 – $999,999 invested)

We are giving certain membership groups with whom we have a strong affiliation the ability to invest in Class A units with a Class B dollar amount.

Distributions:

There are no distributions initially. Distributions would normally occur quarterly, but there are no distributions planned. Statements will be issued quarterly but, again, no distributions until we have reached the lifecycle on each project. A lifecycle means that value add has to be executed and the asset is sold or refinanced. It’s at this point when the capital comes back and distributions occur.

Funding the Tempo Growth Fund LLC

The fund is designed to accept funds from U.S. qualified clients, and as such, this fund has slightly higher requirements than some of the other funds with which both Ryan Parson and I have been involved.

To invest in the Tempo Growth Fund LLC, the requirement is $2.3 million dollars net worth outside of an investor’s primary residence. The fund has a $250,000 minimum requirement, so if any potential investor has less than $2.3 million of net worth, it wouldn’t be a good fit because it’s more than 10% of their net worth.

We can continue to accept capital into this fund as well from non-U.S. investors. There are no accreditation requirements. Investors can be individuals or entities, ranging from IRAs, 401(K)s, self-directed LLCs, corporations, and so on. It could be taxable money or qualified money.

Furthermore, we’re certainly raising capital from various affiliated networks of investors. We have investors from other funds participating as well.

Diversification: Our Number One Priority

We’ve all heard the saying about something looking really good “on paper” but not necessarily once it’s put into practice.This old adage also holds true with investment deals: something may look great on paper, but given the fact that we simply can never know what the future holds and there’s no such thing as a sure thing, it’s important to diversify to offset the risk factor of becoming too invested into one thing. In this sense, diversification serves as a firewall.

To diversify means you’re making a conscious choice to spread the risk around rather than locate that risk in one place alone. As a result, the number one job of our fund managers is to pursue diversification in our deals. We simply will not put all of our eggs into one basket due to the potential risk.

In this same respect, there’s a double advantage to working with our fund. We have a professional waterfall for our managers which means that they’re not getting large fees for managing the investments. In this sense, our investors get diversification two times over.

Lastly, we have better access points to deals on the street compared to what someone might do on an individual basis. So, by putting money with us, you’re diversifying, plain and simple. You’re not only taking risk off the table… you’re also likely to get more predictable returns as compared to putting your money into a single asset that theoretically may generate a slightly higher return than the fund projected range, but also creates much more risk in general.

We certainly want to take some level of concentrated investments that allow us to take advantage of great opportunities, but in general we do need to maintain diversification. That’s the wind that promotes smooth sailing versus the frightening twists and turns that accompany a roller coaster ride. We love to see very smooth returns. For example, when you look at a long-term fund, it’s not all linear with returns coming in the form of backend capital gains on the project’s life cycle. So, the objective here is to create a diversified portfolio.

We also pay significant attention to the downside protection on each investment (another key question we always ask is about the downside protection). But, when it’s all said and done, the goal is to generate return of capital, and then to generate significant performance upside above that.

Those are our key objectives. We are always looking to do it in a smooth manner, but setting expectations–because it’s a long-term investment, quarter to quarter–you may not see immediate results. For example, you may pledge $1,000,000 and five years down the road walk away with $1,750,000.

Fund Accountability and Transparency

We have taken great steps to ensure that we have a highly reputable securities council (Stoel Rives LLP), a trusted third party fund administration (Redwood Real Estate Administration), and a leading investor on boarding platform (Marko) so that we continue to be in compliance with all of the applicable capital raising laws.

Part of the subscription and on boarding process that all capital will go through and that all investors will go through are familiar to many of you given the changes in the law in the last 4-5 years. We utilize the services of Marko to make sure we’re in compliance with OFAC, the anti-money laundering program, as well as helping you complete the subscription documents which are primarily all e-signed these days.

We do also have a full investor document vault including subscription booklets and the PPM, and as K1s come out over the year, these documents will all be placed in one easy point of access and available through secure login.

Subscription Processing & Maintenance Fee

There is a $150 subscription processing fee for all new accounts coming into the fund (this is waived for Mile Marker Club, Diamond members, and Diamond plus members). For those of you investing through any tax qualified account (Roth IRA, HSA, traditional IRA) there will be a $100 annual maintenance fee assessed.

With the use of Redwood, the fund will continue to have quarterly statements; these will arrive two months after quarters 1-3 typically and four months (late March – April) after the close of the 4th quarter. Please note that Q4 takes a little longer with tax return processing.

You’re also encouraged to take advantage of our quarterly webinars in which we’ll provide updates on fund activity; we will also have an annual meeting as we do with all of our funds.

Tax considerations

K1s are generally issued sometime in June-July. In the early years of the fund, it’s likely that we will show paper losses associated with value-add projects, non-capitalizable expenses, and operating losses upon completion of construction and during lease up period, but before the break even point. In addition, the depreciation will come through on many projects.

Furthermore, Fund Administration and Management Expenses will also show as losses in the initial years. Most of the income will come on the back-end of the projects in the form of capital gains upon sale. The returns should look like a “J” curve. There might be accelerated depreciation all of which will flow through to our investors on the K1.

For those of you investing with us through your IRAs, we don’t anticipate any UBIT unless there is some kind of unanticipated triggering event.

Here is an interesting idea/benefit that you might want to consider utilizing.

Note: We are not offering any CPA, nor accounting, nor legal advice. No advice at all. We are just sharing this educational concept that is very powerful in nature.

Here is the IDEA:
Let’s say you are considering converting traditional IRA to Roth IRA. You could invest traditional IRA money into the Tempo Growth Fund LLC (or another growth deal or fund with similar life-cycle). In the initial years, it is likely that the fund will show losses on statements. You may then consider converting traditional IRA to Roth IRA around the bottom of the “J” curve, e.g. year 2 or 3, when the paper value of the investment is below cash invested into the fund.

For example, you invest $250,000, and the estimated book value goes down to say $225,000. The investment is illiquid, and there might be enough documentation to justify lowering conversion value to $225,000 or possibly event lower (due to illiquidity). This conversion of the Units in the fund, rather than cash, at the bottom of the “J” curve could save you on the tax bill (due on the conversion amount).

*Please consult your CPA before making any decisions.

Note: The investment in this fund has risks and results are not guaranteed. Please consider this very carefully. Conversion from Traditional to Roth IRA would trigger tax liabilities, and the projected returns may or may not come through.

Contact Us if You’re Interested

We’re very excited about this new opportunity for our investors. If you’re interested in investing or want more information, you can contact Mike Zlotnik at Mike@TempoFunding.com or by phone at 917-806-5029. You can also schedule a time to chat via bigmikecall.com.

Also don’t miss the latest Episodes on Big Mike Fund Podcast:

054: The Power of Cashflow in Turnkey Real Estate Investing
053: Rental Properties Cash Flow: Multi-Family vs Single Family with CEO of Pioneer Homes Al Beahn

Thanks for reading,

Mike Zlotnik
CEO, TF Management Group LLC

This newsletter and its contents are not an attempt to sell securities, nor to sell anything at all, nor provide legal, nor tax accounting, nor any other advice. The presenter is a private lending and real estate fund management business, and the information represented herein are purely for educational purposes and represents the opinions of the presented. Prior to making any investment or legal decision you should seek professional opinions from a licensed attorney, and a financial advisor.

TF Management Group LLC (TFMG) is an investment fund management company that specializes in both short-term debt financing for real estate “fix and flip” projects, and long-term “value-add” equity deals.