CityVest: 2018 Comprehensive Review and Ranking
#18 (out of 100+) Last year ranking: none
Up-and-coming (4 out of 10 stars)
What is CityVest?
CityVest specializes in commercial real-estate (CRE) investments. If offers multi-property funds in both equity and debt deals.
City Vest has a unique model that offers access to top-tier sponsors that aren't often seen on crowdfunding sites, and could end up changing the industry. At the same time, they're new and challenged by chicken-or-the-egg issues that may make it hard for some early investors to pull the trigger on them. Additionally, volume is very low. (More on these in the "pros and cons" section).
How does CityVest work?
CityVest does not originate any of its deals itself. Instead it gets them from third-party fund-managers that it makes available on its site. The type of sponsor they offer is different than what's typically found on even the top-rated crowdfunding platforms (like CrowdStreet and RealCrowd).
CityVest claims their research has found that the best historical real estate returns have come from what they call the "middle-market" sponsors. These are $50 million-$200 million institutional real estate funds who have considerable experience, audited track records and are taking modest risks (rather than aggressive ones). CityVest claims these have outperformed the billion-dollar behemoths (like Blackstone, Apollo, colony and others). And they claim they have also outperformed the smaller, less experienced 2nd and 3rd tier sponsors who make up the majority (if not all) of many crowdfunding platforms.
The problem is that even if an investor can find such a sponsor, the minimums are usually too high for them to invest ($500,000-$1 million). So CityVest lets investors access the sponsors at just $25,000-$50,000 minimums, by creating a feeder fund. This fund aggregates the investors together to meet the minimum, in exchange for 3 fees. If they are unsuccessful raising the aggregate minimum, then investors get their money back.
What are CityVest Pros and Cons?
Advantages: Access to larger, more experienced sponsors than are typically available on other crowdfunding sites.
Disadvantages: Fees may be exorbitant percentages to early investors. Money can sit for a long time idle and fail to fund. Very low volume. Minimums are above what investors are used to expecting ($25,000-$50,000 vs. $10,000 average).
As mentioned above, the biggest advantage of CityVest is that it offers access to larger and more experienced sponsors than are typically found on crowdfunding sites. Why is the industry currently like this?
One of the criticisms of crowdfunding sites is that there are too many smaller, less experienced second and third tier sponsors and too few larger, very experienced first tier sponsors. Many of the most experienced sponsors have told me they have no need for the crowdfunding platforms. Their continued success over many years has naturally developed an enthusiastic and loyal investor base that's eager to fund their deals. As an example, MG Properties will often fully fund a new deal in a couple of days. In comparison, I've seen more than a few deals that never fully subscribed, after languishing on a platform for months. This even occurs on some of the top-ranked sites, and even though the sponsor is actually trying to raise 5x-10x less money than MG. So I can understand why some of these top-tier sponsors feel it doesn't make sense to pay for that.
If an investor can discover such a sponsor on their own, they can always invest directly. But unless you know someone who happens to know the sponsor (or belong to a private investor club like the one on the site) they can be difficult to find. Once you do, some of them have minimums that are too high for most individual investors ($500,000-$1 million). As mentioned above, CityVest solves this problem by creating a feeder fund that has just a $25,000-$50,000 minimum.
At the same time, CityVest has what I feel are some significant drawbacks that will make it difficult for many investors to invest in them today.
The biggest is the unpredictable fees. In my opinion, these range from reasonable to wildly exorbitant percentages, and the most difficult thing to swallow is that the investor doesn't know exactly what they'll get when they put down their money.
Here are the 3 fees that are charged:
Investment Management Fee of 75 basis points or 0.75% per year.
An annual Administrative Fee of $50,000/year. (which would be 5%/year on $1m). On their latest fund this is amended to $500/investor/year and capped at $50,000/year.
A one time organizational expense reimbursement of $50,000 - $75,000. (which would be 5% - 7.5% on $1m)
So the percent charged can depend on how successful they are at raising money. The more they raise the cheaper it gets, and vice versa.
If they raise $10 million, the fees look like this:
One time: 0.75% total: 0.75% organizational expense reimbursement.
Annually: 1.25% total: 0.75% investment management fee. 0.5% administrative fee.
In my opinion, this is a little high but not bad. Like many investor clubs, our site's private investor club also creates feeder funds (for many of the same reasons that CityVest does). Creating these is a huge hassle and pain, and it would be great if we didn't have to and could rely on a crowdfunding platform to do it. (And in fact I had approached a couple of other platforms about doing this in the past, but was shot down). I don't know what other investor clubs typically charge, but our club charges about an annual 1% total fee, and with no one-time fee. So I think it would be difficult for many investors to choose CityVest at $10 million over other options
But, if CityVest were to raise a lot more money, then the costs would go down. While the one-time fee would never be lower then no fee, the annual fee could eventually drop below other options and over time that might be more desirable. So I think that could be a potentially much more interesting situation for many.
On the other hand, CityVest appears to be new, and some new sites suffer from lack of volume. So an investor might be concerned about a different scenario where CityVest might have difficulty raising money and raise only $1 million:
One time: 7.5% total: 7.5% organizational expense reimbursement.
Annually: 5.75% total: 0.75% investment management fee. 5% administrative fee.
Ouch. It's hard for me to picture investors choosing this, compared to other options.
The other complication here is that when the investor puts down their money, they don't know how much the ultimate fees will be. It depends on how many other investors ultimately the same thing. In my opinion, this is a chicken-or-the-egg problem for both investors and the platform, which I'll discuss further below.
I give kudos here to CityVest for improving this a bit, because until recently the site did not show the amount that have been raised by CityVest to date. But to their credit, I pointed this out to them and they changed this. You can now find this information on the "terms" tab/page under "Amount Raised by CityVest".
(Important,: do not confuse this with the much more prominent "Amount Closed" on the upper right-hand corner of the first page. "Amount Closed" is just the amount that the underlying fund has closed and has nothing to do with the investor fee. For example, on a sample deal the underlying fund had closed $45 million and CityVest had closed $0. The fee is based on the latter, not the former.)
Unfortunately, I believe the current CityVest fee structure puts them and investors in a bit of a chicken-or-the-egg situation. Early investors are unlikely to jump in at the beginning, when current participation would doom them to exorbitant fees. And thus, not enough critical mass is generated to drive the fees down to a level where everyone is happy and more investors want to participate. I feel this isn't good for investors or the platform.
In my opinion, the platform needs to rethink how it's fee structure works. The existing structure is safe for them but risky for early investors. I think they need to think about taking more risk themselves at the beginning, if they are serious about scaling. I hope they will think about this further.
Another potential issue on a young platform is "What happens if the fund does not successfully raise the target amount?".
In this case the investor gets their money back, which is good. And while waiting for that to happen, CityVest says, an investor can cancel anytime.
However, an investor in that situation would not be getting any interest on their money, which isn't ideal, and they might wait for months. The earlier the investor is considering the investment, the more risk there is of this. So again, early investors have a disincentive to act. In my opinion this is not a good way to generate investor interest and critical mass. I hope they will think about this as well.
As a new site, one of the other downsides of CityVest is that it currently has low volume. There are currently two open investments and a third that seems to be opening up in a few days. So it's not currently a one-stop shop to fully fund a real estate portfolio.
Finally, the minimums are much cheaper than typical for this class, but might be considered high to crowdfunding investors used to a $10,000 minimum average.
For more raw data on the site (including investor and sponsor fees, legal structure etc.), or to easily compare it with the data of competitors, see the feature by feature comparison matrix.
Is Investing In CityVest Legal?
CityVest markets to investors under 506B and 506C, meaning that it's only available to accredited investors. For 506c, it also requires investors to prove their accredited status (and update it periodically). 506b offerings allow accredited investors to self-accredit.
What does a CityVest deal look like?
Here is my step-by-step due-diligence on a random CityVest investment. So it may or may not be a typical investment. Also I'm a very conservative investor, so something that's way too risky for me might be the perfect fit for someone else who is more aggressive. Finally, I'm not a financial advisor, attorney or accountant. So this is just my personal opinion and always consult your own financial professionals before making any financial decisions.
The investment is...
The first step is to make sure that the asset class and strategy even make sense for my portfolio. (If you don't know how to do this, please see The Conservative Investor's Guide to Due Diligence).
Let's assume that it does make sense for me, and dive in.
"T2 Access Funds LLC" is an investment in a multi-property fund that intends to invest in multifamily and other commercial real estate mostly in the Midwest (specifically Missouri, Michigan, Illinois, Ohio, Georgia, Minnesota and Tennessee). It says it makes equity investments in properties that have a value-added component and also buys senior and junior loans on commercial real estate. Financing is structured as senior debt, debt, preferred equity or hybrid. It is a five-year fund, with an 8% preferred return and a minimum investment of $25,000. City Vest must aggregate $500,000 to successfully invest.
The first thing I noticed is that this fund says that investors can invest in them directly (without CityVest) with just $250,000.
One of the marquee pitch points of City Vest is that it allows access to institutional class funds that investors normally can't get into because of high minimums (i.e. $1 million and above). The crowdfunding sites are full of sponsors that typically have $250k minimums, so this was interesting to see.
So, someone looking to invest only $25k would probably prefer to consider using the CityVest feeder. And someone that can swing the $250k will probably want to bypass the CityVest fees and invest directly.
Sponsor experience: I believe we are late in the cycle. So if we have a severe downturn I don't want a newbie manager learning expensive mistakes with my money. In a mainstream asset class like this, I require full real-estate cycle experience in the exact strategy as the current fund, with no money lost.
In this case, the sponsor claims 150+ years of combined industry experience. This sounds impressive and like they must have decades of experience. But this type of statistic can be misleading because they just add up all the years of experience of everyone in the company together.
Digging further into their track record shows that their first fund was established only 7 years ago in 2011. So they don't even have a single real estate cycle on their track record, and for me this is a red flag. For someone that's more aggressive or is not concerned about an upcoming downturn, this might not be an issue.
Skin in the game: as a conservative investor, I require the sponsor to put 5 to 10% skin in the game, to mitigate the fact that their performance-based compensation incentivizes them to push the risk envelope. (I am okay with less if they are a new sponsor without deep pockets. It just needs to be a significant amount of money to them.)
Strangely, the pitch deck does not mention any skin in the game at all. I also took a look at the PPM summary and it says that the sponsor has the option to put in skin the game but does not make a commitment to. The combination of these two makes me suspect that skin in the game is either nonexistent or extremely low.
If so, then this is a red flag for me and a dealbreaker. On the other hand, a more aggressive investor might consider the lack of skin in the game as a plus, because they want the sponsor to push the risk envelope as aggressively as possible, to try to maximize returns.
Leverage: as a conservative investor, I want to see no more than 65% loan to value at this stage of the cycle (on both borrowing and lending). The pitch deck does not mention how much leverage they intend to take on the equity portion of the fund, nor what LTV at which they intend to make loans. If I were interested in this fund, I would follow up with the sponsor and get some direct answers to this.
The fact that they are making junior loans strongly suggests to me that they would probably be going over 65% LTV. If so, that is a dealbreaker for me. Someone who is more aggressive, or doesn't think there will be a recession and believes in the business model, may not have an issue with it.
The other issue here is that, at this stage of the cycle, I only invest in senior debt. Other types of debt project a higher return, because the investor has to take additional risk of not getting paid back if things go badly. For me personally this is another red flag. A more aggressive investor might be fine with this.
Structure: the says that the financing will be structured not only with senior debt but also with preferred equity in hybrid debt. If I were interested in this fund, I would find out from the principals exactly what they intend to do in this regard. Sometimes more exotic forms of equity and debt are required on deals that do not have solid fundamentals. If that's what's going on here than that to me would be another red flag. Again, a different investor, coming from a different place on risk tolerance, would probably feel differently.
Split: this is an 8% preferred return. That's on the higher side of average (6-8%) and to me is good to see. The split is 80% investor/20% sponsor which is right in the middle of average (usually 75 to 85% to the investor) and also fine to me.
Fees: the fees of the underlying fund seem ok to me. The PPM seems to contradict what CityVest posted, so I presume the PPM is what prevails. There is a 1.25% management fee which is on the high side of average (usually 1%) but not ridiculously bad in my opinion.
On top of this, though, are the additional fees charged by City Vest. As discussed earlier, these depend on how much other investors decide to put into the deal. They can range from minimal to as high as a 7.5% upfront fee and an additional 5.75% per year. If that happens to the investor, it's almost extortional (in my opinion).
If the investment passed all my initial checks, I would have dived in further to check out the sponsor, the property itself, the projections, etc. To learn how I do those things, check out The Conservative Investors Guide to Due Diligence.
Where can I discuss other CityVest deals?
You can do this with thousands of other investors in the private investor club. While the club is free, membership is restricted to investors who have no business connections to sponsors or platforms. Also, all members must agree to keep all club info confidential by signing a nondisclosure agreement. Click here to join or get more info.
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This site has been ranked and reviewed as part of our in-depth, 100+ site industry review. All data is believed to be correct, but may have mistakes. Please contact us if you notice one. All non-data (including rankings, investor comment summaries, etc.) are my opinion only. I'm just an investor and not an attorney, accountant, or certified financial advisor. To maintain neutrality: I do not own a portion of any of the companies reviewed.