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June 22, 2020
This paid piece is sponsored by Ernst Capital Group.
For his first year in business, everything looked promising.
Then, Todd Ernst was forced to navigate the Great Recession, with a business that revolved around real estate investing.
“There was a lot of activity, and then everything came to a grinding halt,” said Ernst, who formed Ernst Capital Group in 2007.
“I certainly questioned whether I picked the right time to start the company.”
Fast-forward to the latest economic uncertainty, though, and it’s clear Ernst Capital is here to stay and positioned to weather the inevitable rise and fall of markets.
“You’ll have ups and downs in anything. Real estate goes up and down,” said developer Craig Lloyd, who was Ernst’s first client. “The stock market goes up and down. But if the market goes down and you can still make the payments, you’ll still have real estate. It’s not always easy, but real estate is a solid investment that can provide a good return.”
Lloyd Cos. and Ernst Capital were entwined from the beginning, as family ties drew Ernst from the East Coast to Sioux Falls.
Engaged to Christie Lloyd at the time, he saw a need for real estate venture capital, and Craig Lloyd was hoping his daughter would move back to work for the family business.
“What we really do is private equity real estate investing, and Craig recognized that need in this region and suggested I come back and do that for Lloyd,” Ernst said.
“Being new to the family, I wanted to set up a separate company and partner on deals, and that’s what we did for many years and still are. But I wanted the flexibility to work with other partners and propose changes or turn down a deal structure.”
At first, Ernst was a one-man operation. He put together a syndication investor group for several office buildings, including the Midco and Meta Financial headquarters, as Lloyd made introductions around town. He had been used to raising capital for projects in-house, and Ernst provided welcome outside expertise to manage investors and free Lloyd up for other elements of development.
“The first couple deals I worked very closely with Craig trying to learn all that I could; that’s how it was for at least a good year,” Ernst said.
And that was a good year. Then came the Great Recession. The approach to structuring deals changed, and Ernst broadened his base of business.
“When Ernst Capital started in 2007, we set up an organized capital flow structure to real estate investing in this region,” said Chris Daugaard, who joined the firm in 2014.
“Before then, there were deals here or there for people looking to invest in local projects. But now, there is a much more organized option for people that want to do this kind of investing and realize there’s an alternative to investing in Wall Street. It’s investing in their local community.”
As the Great Recession ramped up, Ernst met Sioux Falls developer Clint Ackerman, owner of Signature Cos., who was doing his first apartment project, West Briar Commons in west Sioux Falls. Lloyd came in as a general partner on the project.
“Clint was looking to break into apartments because it was a tough time for homebuilders, and we hit it off right away,” Ernst said.
“He needed capital, and really what Ernst Capital has done is institutionalize real estate investment in Sioux Falls. That allows the developer to focus on their primary business of developing and not necessarily managing investors.”
Ernst and Ackerman have subsequently partnered on multiple projects, including multifamily, office and retail buildings.
“The experience has been great,” Ackerman said. “I feel that as a developer and homebuilding company at our core, we’re good at designing and keeping projects affordable and getting them built in a timely manner. They handle raising the capital and working with investors, and we have a great working relationship.”
Another key milestone for the firm was the addition of Rick Martin, who joined Ernst in 2009 after a decade as Sioux Falls market president for Great Western Bank.
“Craig Lloyd had been my largest customer, and I knew how he was raising capital,” Martin said. “So he told me how he thought we would be a good match because Todd is a very analytical, detailed individual and I’m drawn to people and came from the business development side. And being a bank president in the Midwest, I knew a lot of people, and that worked out very well.”
It wasn’t an automatic success, though. Raising the firm’s first $4.1 million fund took a year.
“Today, we can open an offering, and we can raise it in less than a month,” Martin said. “We can get commitments in less than a week.”
The tipping points in business for Ernst Capital weren’t so much projects as they were people.
Nick Gates joined the team in 2012 after receiving his MBA at USD. He leads the firm’s due diligence review process and assists with regulatory compliance, deal structuring and management of investment partnerships.
“It’s just a really unique opportunity,” he said. “My favorite piece is putting deals together, and in the last eight years, I’ve served in a lot of different roles. As we’ve grown, we’ve specialized a bit more, but it’s given me a good opportunity to learn a little bit of everything.”
Daugaard came on board two years later with an interest in development but without a background in real estate financing.
“They were gracious enough to let me be an asset management analyst for my first two years, so I could learn about the business and grow into the background on the real estate investment side,” he said. “I think what I’m able to do in my role now is to take the investing side, the numbers and analysis, and help our investors understand and get excited about it.”
He now focuses on marketing and investor relations.
“I help translate some of the underlying benefits of their investment and explain why it’s meaningful from a long-term standpoint,” Daugaard said. “Instead of sending their dollars across the country, they’re able to invest back into their own communities and region, and see the projects develop around them.”
The firm now has four partners and three associates, who work out of an office in the Lumber Exchange building in downtown Sioux Falls. They help investors balance their portfolios with local real estate by providing services that include private real estate funds, asset management services, property acquisitions and dispositions, and assistance with 1031 exchanges.
Ernst Capital has an affiliated firm, Ernst Capital Securities, which is registered with the U.S. Securities & Exchange Commission and has expanded in recent years to invest in projects in Des Moines and Lincoln, Neb.
“We came in as a co-investor in a deal with Hubbell Realty Co. in 2014 and got more exposure to that market and have continued to work with them,” Ernst said.
“We’ve invested a lot into Sioux Falls, and we continue to invest in Sioux Falls. By expanding into other regional markets as well, we’re able to continue investing in the stable growth of the upper Midwest, while providing investors with a bit of geographic diversification.”
Ernst Capital Securities is a registered broker-dealer – one of only two such firms based in South Dakota – and is subject to examinations by the state, the SEC and FINRA, the Financial Industry Regulatory Authority.
“We’ve probably had seven or eight routine exams by regulatory bodies that are here to protect investors and make sure we’re following the rules,” Ernst said. “That’s crucial to us. We want to make sure we’re doing things right.”
The median investment in an Ernst fund is $100,000, the average is $75,000, and investments are typically accepted in $25,000 increments. Investors must be accredited, which requires individuals or couples generally to have $1 million in net worth, excluding their primary residence, or an annual income of $200,000 for an individual or $300,000 for a household for the past two years with the same expectation for the current year.
“When it started, it was very much close associates, friends and family that were involved, and over time it’s grown by worth of mouth,” Daugaard said. “As the network grows, referrals grow, so now it’s many small-business owners, farmers and ranchers who have been successful in agriculture and people that want to invest in the upper Midwest.
Distributions generally are paid monthly by check or direct deposit along with updates on all of a client’s investments with Ernst Capital.
“We’d love to be able to share our returns, but we need to maintain the confidentiality of each investment fund,” Daugaard said.
Among the best endorsements, though, is how much business has grown through referrals.
“We want people to tell their friends about us,” Ernst said. “And if we’re able to meet or exceed investor expectations, we’ve been fortunate that many of our investors will share our story with others. Right now, we’re out looking for future investments that meet our criteria.”
A recent fund, Signature Fund II, illustrates how far the firm has come. At nearly $18 million in capital and over $75 million in real estate value, it closed to new investors 18 months ago and included multiple large apartment complexes in Sioux Falls and Des Moines, a medical office and retail centers.
“Investors just love this firm,” Lloyd said. “In most of the deals, you get a check every month, which is not normal in the investment world. Because of how they’ve been able to perform and work on deals and how they underwrite, they have a great reputation. I couldn’t be prouder of a group of people who really took on a need for that type of industry and have done very well.”
Recent months also have shown the need for careful diversification in investment strategy – something Ernst provides its clients.
“There’s more volatility in the market, but the communities we’re in haven’t experienced as much as some other places,” Gates said. “We have some tenants that are going through challenging times, and we’re working hand in hand with them, but otherwise we have seen minimal impact so far.”
It’s still busy on the development side too.
“We’re busy. We have not stopped any of our projects,” Ackerman said, adding he continues to partner with Ernst on asset management and investments as each company is able to bring its strengths to the developments.
“They’re really just good people,” he said. “They like what they’re doing, and that reflects in how they conduct business. It’s not about just making money for them. It’s about making sure the investors are happy, the developer is happy, and the project works well. They really enjoy the services they provide and the product they put out, and that makes it better for everybody.”
From a one-man operation to a regional leader in real estate investment, enjoy this look at the growth of Ernst Capital.