LUR 79 | Passive Investor

Many passive investors don’t have the desire or time to own real estate and fully operate it. Lisa Hylton’s guest today is John Fortes, also known as The Passive Investor Consultant and the founder of The Fortes Company, which partners with working professionals seeking to invest in diversified commercial real estate funds. In this episode, John talks with Lisa about how he is revolutionizing the passive investor experience through real estate funds. One of the many perks of investing passively is still having tax benefits despite not actively participating in constructing properties. You’ll also learn the difference between investing in a real estate fund versus investing in a single asset syndicator. Join in the conversation to learn more!

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Revolutionizing The Passive Investor Experience With John Fortes

In this episode, we have John Fortes. John along with his wife, Jen, their two beautiful children, a boxer, and two cats reside South of Boston on the South Shore of Massachusetts. John is also known as The Passive Investor Consultant. He founded The Fortes Company, which partners with working professionals seeking to invest in diversified commercial real estate funds because they don’t have the desire or time to own real estate and fully operate it. John raises funds and acquires commercial real estate that allows investors to diversify their investment and create a stream of cashflow truly.

He consults with real estate investment firms and helps them start their funds through the Fund Rollout Program. He’s also the host of The Passive Investor Show. He showcases the value of real estate investment firms and the true hands-off investment audio experience. His show has become one of the hottest real estate podcasts on iTunes for working professionals looking for a hands-off approach to investing in real estate syndications and funds through real estate investment firms. I am delighted to have you on the show, John. Thank you for coming on.

LUR 79 | Passive Investor

Passive Investor: A syndication is a group of people coming together to purchase an asset.

 

It’s a wonderful experience and I’m grateful to be here with you and for anybody reading, please do me a favor, go rate and review The Level Up REI Podcast. It’s a great show.

I appreciate it. Thank you. As we were saying before we got started that I remember when I listened to your podcast for the first time. I heard your accent and I was like, “This guy must be from New York.” Maybe the New Yorkers are going to hate me because maybe people aren’t going to agree that your accent is from New York. Maybe they will agree that it’s from Boston.

I was born and raised in Massachusetts. A lot of hip-hop from New York growing up, so it might have something to do with that.

To kick the show off, I like to start my show with a little bit of background and we’re going to jump into the meat of the episode and close things down. We know where you live. You live in Boston. Tell the audience what you love to do for fun.

Making memories with my family, that’s the most important thing that I like to do but also my personal hobbies. For me, I like basketball refereeing, meditating and working out. If I don’t work out, I get anxious, stressed easily and agitated but if I work out and I’m meditating, I’m relaxed and even keeled. That’s what I do. Basketball refereeing is my biggest passion.

Who would have known? I love this aspect because there’s so much humanity and all of the people that we meet and I like to be able to showcase and show the human aspects of these amazing people that come onto my show. The other question I like to ask in this section is, was there a challenge in your past that you’ve experienced that, as a result of that challenge, has enabled you to achieve something in life? Maybe see life from a different perspective or vantage point that has been good for you that was at first, a struggle.

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I grew up not having everything I wanted when I wanted it. I had to make a lot of choices. Meaning if I needed to get something my dad always said, “Save your money and buy once.” That basically means buy the best quality, not the most expensive. When I was growing up and even to this day if I buy a TV, I do a lot of homework and my wife won’t come with me. She’s like, “You’ve drilled them on questions that you know they know or they should know, so why do you do it?” I was like, “I’m trying to get the best quality TV and I’m trying to get it out of them.”

That’s an example but I do that in my daily life where at times, I’m a little naive about things on how big achievements or certain things can be or to get something done. What I try to do is I try to focus on the first step on what I’m doing and the next thing I know, I’m a couple of years into something and so far down the line. I look up and I’m like, “I never thought it was going to be this long or whatever,” and I achieve something.

When I look back, it’s not being exposed to a lot growing up. I never had mentors. If there’s anything I needed to do, I needed to go and figure it out on my own. Not that my parents weren’t around, my parents worked every day and I didn’t want to do that. I wanted to build a life where life was working for me. My parents are still together. They love each other and they gave me a great childhood because it was filled with love but they weren’t around, so my wife always says, “How did you stay on the basketball team when you were growing up?”

I had to keep my grades up to stay on the team, so that motivated me. I always had something that was motivating me. I was self-motivated because I had challenges, obstacles and things I wanted to do to remain there. There are always barriers to certain things, “If you don’t do this, you’re gone. Keep good grades and stay on the team.” My wife is always surprised at how I went in that direction when a lot of kids probably would go in another direction because their parents weren’t focused on their report cards. They only knew that we were doing well in passing but they didn’t know how well we were doing. Not to say that they were bad parents for that but my parents were on me for certain things and they built it into me so they didn’t have to worry about me for some reason. It’s crazy when I think about it now because I’m like, “I grew up free,” but that’s helped me in my business and everything that I do now.

I can’t imagine because as a business owner and an entrepreneur it takes a lot of discipline. You have a lot of freedom and with that freedom to achieve things in life comes a lot of discipline. You’re humble here on the show, but you’ve achieved a lot to this point, so it comes from a lot of discipline to get there. Going to the next section, there’s something you said, which is, “I want to build a life that is working for me.” That’s perfect to get into the topic of this show. We’re going to be talking about the passive investor experience through real estate funds. Why a passive investor, what that experience is like, why should investors consider that experience and what are some of the benefits of choosing to go down that path?

With investors, what I typically come across are high net worth individuals that love their jobs, they love doing what they’re doing and they don’t want to go and be active on real estate. Some of them still acquire small multifamily apartments, meaning 6 to 10 units and they know that there are challenges in that. There are challenges in managing, operating, working to build and making sure construction is done right, clean, and efficiently. You’ve got to keep all those in line. It’s almost like you’re a project manager.

When you’re dealing with an alternative investment as far as real estate, there are benefits to that because you’re still getting the tax benefits from investing passively. You’re investing with a sponsor team. You’re picking a jockey and riding the horse or picking the jockey instead of betting on the horse. You’re picking the sponsors and the opportunity is based on what their experience has done in the past. You want to look at a few things and you want to vet the sponsor but also, when you’re doing that, you’re leveraging the operator’s excess previous experience to provide the returns that you’re going into on each opportunity or even each fund.

To back up a little bit on it, as I think about investing passively, they can do so through investing in single syndications where you, as the passive investor, have the opportunity to be fully aware of that deal or they have the option of investing in real estate funds. I’ve touched on it a little bit, but could you talk a little bit about the difference between investing and real estate funds versus investing in single asset syndication?

Syndication is done deal by deal and also a fund is also syndication as well. Let’s get to the bottom line of what syndication is. Syndication is a group of people coming together to purchase an asset a business. There are two people general partnerships and limited partners. The general partnerships operate, run and manage the asset. The limited partnerships provide the capital and that’s it. They don’t have to manage or operate. They don’t have to do anything.

The operators, the general partnership, provides communication, show financial reporting and provides the distribution based on how they’re operating the asset. We do that also in a fund but here’s the difference. The traditional syndication, I call them deal by deal. It’s like, “Lisa, here’s apartment 42. It has X amount of units. Here’s the scope of the work and the project.” You see everything that we’re going to do with this business plan. You see the projected returns, the projected is the keyword there, and you know and you can see the asset. They’ll show you exactly what the buildings look like and everything. You get to see it all.

With a fund, you’re investing in pretty much a fund or a blind pool, that some people call. Ours, for instance, is strictly multifamily. There are different types of funds that go and invest in other assets but let’s stick with multifamily for the sake of argument. Our fund will go and raise capital, then we will go and purchase the multifamily assets and there’s a minimum limit. For us, it’s three. If an investor is seeking to make a $100,000 investment, here’s what the typical passive investor does, either the investor is going to invest $100,000 in one deal or they’re going to invest $100,000 into a syndicated deal by deals.

LUR 79 | Passive Investor

Passive Investor: A passive investor that likes cash flow and wealth preservation won’t have the patience for ground-up development because that’s a year of no cash flow.

 

The difference between doing the two and doing the one with a fund is this, when they’re going to invest in those deal-by-deal opportunities, they might have four different sponsors that they’re reviewing. Let’s say four different deals in four different markets, so you have to sit down and decide if you are going to invest in that. Some investors even go as far as, “Let me underwrite the deal myself to see if it shakes out.” You’re spending all that time after work or away from your family to do that. If you love it, great.

Here’s the other way. The other alternative. The fund shows you the type of assets we are looking to target and there we go but we don’t have them now. You can make your $100,000 investment into that fund and from there, you will be diversified into three assets once they purchase them, so that’s the difference. Here’s the other difference, the last point I want to make. When it comes tax time and you know this well, you have to go get each deal by deal syndication K-1 from each deal that you participate in. Those three investments come through the fund and that and the investor gets one K-1. It’s less chasing, less hassle, more time for you and you’re still investing.

Another key point to note here, too, is if your fund is doing three deals, most deals want a $50,000 minimum. That means that $100,000 would probably only get them two deals, at best. A lot of sponsors now want more deals, etc. They want even higher minimums as well. They’re a couple of other things to think about. As a passive investor thinks about that and they’re like, “Wow.” What about the time? Can you talk about what happens between the time when an investor says, “I want to submit my money to this fund and the fund acquiring assets with that money?” Can you talk about that time gap and what you’re seeing that to look like?

As investors commit to the deal, usually sponsors say, “Wire your funds three days after you sign.” An investor goes ahead. This is on a deal-by-deal investment. That’s the typical traditional way. With a fund, what happens is you commit and you keep that capital until the sponsor calls it down. The sponsor is going to call it down once they’ve identified the asset. The fact that you already committed, you are there you sign the paperwork, it’s a legal agreement at that point.

From there that you get to see the opportunity coming down the pipe, “We’ve identified an asset in Philadelphia. We’re going to do this.” That’s not even one of my target markets but I said Philadelphia. Let’s just say, in Philadelphia, we’ve identified 150 units and this is what we’re going to purchase. We need the capital called down a month from now. We start gathering and pulling the capital from other investors that have already committed and from there, we make that investment and close at the table. That’s the difference. It’s called a Call Down Practice. It continues to be the thing with funds but also, there’s another practice where the sponsors could take all of the capital one state once the investors commit and go ahead and invest it.

Your funds are typically similar to some syndications but not all of them but are they structured with preferred returns?

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We typically like to do preferred returns. The only reason why is because investors are already used to it. Maybe future deals, we might not do a preferred return but the expectation is there but we’re going to keep it for now because that’s the demand of the investor. We know we can get them through our deals, especially with the partnerships that we’re forming and the type of opportunities that we’re investing in. We’re going to keep the preferred return.

Another thing that we don’t do, as of yet and I don’t think we’re going to plan on doing it. In a lot of deal-by-deal investments, once the preferred return meets, it’s called a Waterfall Structure. It’s a preferred return. Once that hits, anything above the preferred return is now split 70/30. Meaning, equity 70 to the LPs and 30 to the GPs. Once the IRR is hit, typically on the exit, usually there’s another waterfall where it slides the equity to a 50/50. That’s what you see in some of these traditional deal-by-deal investments. For our funds, we keep it at 70/30 the whole time.

Connected to that, what are some other things that investors should be asking fund managers as they assess fund managers to deploy capital with?

One of them is what type of opportunities are you looking to do because if I’m a passive investor that likes cashflow and wealth preservation, I don’t know if I have the patience for ground-up development because that’s 1 to 2 years with no cashflow and the big exit or whatever they do after stabilization. What are these funds typically going to do? What’ the fund’s investment criteria? What type of assets are you purchasing? Are you in self-storage? Are you mobile home park? Are you strictly multifamily or are you a blend?

Be upfront with investors and let them know exactly what you’re investing in. Ask questions like, do we get cost segregation? Are you doing studies on all these assets? That is a tax question. You want to know if they are going to pass. Also ask, are going to pass depreciation on to the investors. That’s the biggest factor there because why invest in a real estate fund if they’re not going to pass the depreciation down to their investors? You might as well go and invest in a REIT, so that’s the difference. Those are a few questions that I would ask.

Connected to that as I think about more on the passive investor experience, when passive investors are deciding to invest with an operator, can you talk a little bit about the monthly or quarterly communications they can anticipate receiving? If they’re not getting that stuff, what should they be getting?

Communications key for us. We have a problem with over-communicating so what we do is, we like to communicate on a monthly basis on the status of what’s going on with your investments. The reason why is I think like a passive investor. If I have my capital in a deal, I want to know what’s going on at least once a month if this is a long-term play. It’s beneficial for me and you as an investor, to receive something from us once a month. The reason why is it lets you know the status and the position of what’s going on.

Also, if you have any questions, you can easily reply and we’ll be happy to answer. Over- communicating is key. If your sponsor is not doing that already, you need to reach out and ask them, “Can you give me an update a little bit more frequently on the asset?” It depends if they’re too big. If they’re a big firm and they’re not already doing that, shame on them. If they are a small firm, any small boutique firm, the advantage with them is building closer relationships with their investors. I was thinking about this. How do you build your marketing campaign or your CRM? When do you need to get a CRM?

You need to get a CRM when you have an investor database that you need auto-replies to because you’ve outgrown it. My pastor said that he could remember 120 names after that, it starts getting crazy. When you can’t remember people’s names, you need to start implementing systems to either build an auto-reply saying, “Thank you. We’ll get back to you. Give us some time to review,” or you need to make sure that you’re getting back to those investors because that’s key. Over communicating in smaller firms have a leg up over the bigger firms on the communication side. The bigger firms have the leg up on how frequently they can provide investments to those smaller firms.

Two questions have come up for me based on those answers. One, I want to go in the direction of the track record of a fund manager or even the operators. What’s the best way for the investors to understand and get an understanding of the fund managers, the operators that they’re working with, and their experience with the different asset classes?

Go to their website, which is going to show you their highlight reel. I don’t recommend people to say, “Sponsor, refer me to an investor that it has invested with you,” because they’re going to handpick the best investor and they’re going to gloat about their experience. What I like to do is, Google is your friend, Google everybody, figure out what it is and go to sites that offer verification processes. For instance, we’re in the process of going through Verivest. They vet sponsor on behalf of investors. If you’re Verivest verified, it’s like the Yelp of sponsor firms and real estate investment firms. They put you through the wringer. They do the background check on you and they will even audit your assets for you. For instance, they’ll audit our funds as a service as well. What they’re doing is they’re putting us through the background check. I’m talking about criminal background checks, as well. They’re asking us for the actual documents for the investments that we have. Are they true LPs in every one of these deals saying that they are investment firms looking for investors? Are they sponsors and deals?

That’s what they’re doing and that’s how they’re verifying investors. As another form, too, I had a guest come on the show, they came and they say that they do background checks on everybody that they invest in. Not everybody has this luxury but they try to go and meet the sponsor team because they want to trust their gut if they’re uncertain. One time he got on a plane, he went down and visited the sponsor and something told him not to invest and he didn’t. It was a good decision on his behalf. Trust your gut and do your homework.

Another thing is you can also request the LLC documents, too. I have investors that request that. They’re like, “Do you have your LLC documents to see if this is a real business?” That’s another thing that Verivest does and the reason why they’re doing it and the reason why we want to do it and be a part of that is it cuts off that timeline between, “I’m an investor,” and I’m vetting the sponsor. It cuts that in half or cuts it completely because now we’re on verified and they can go and prove it. We’re using a third-party service to vouch for us our credibility.

I never heard of this. You’re the first guests that have spoken about this company, so it’s good to know.

They’re fairly new to the market. They’re growing and picking up steam but it’s a way for these small firms to differentiate and legitimize themselves.

That brings me now to the second question that I had. In your bio I said, “The Passive Investor Consultant and you’re the host of The Passive Investor Show podcast.” You’ve been running your show now for a good little while. Can you share with my audience, what you have learned from running your show, maybe from the perspective of a podcast in general but also from the perspective of a passive investor like things that would be beneficial for passive investors?

LUR 79 | Passive Investor

Passive Investor: If you’re not going to pass the depreciation down to the investors, you might as well go and invest in a REIT.

 

As a passive investor, I learned what to expect when I’m working with a firm. If you listen to all the shows, we highly touch on real estate. We talk about the passive investor experience. My goal is to give the best experience to passive investors while investing in real estate. How do I achieve that? I need to figure out how these firms are working and transitioning from when they started working with limited partners to how they work with limited partners. What does that experience look like? Is it video updates instead of a newsletter behind the investor portal wall? Is it providing a gift after investors commit to a fund or commit to an investment? Is it having a checking party? All these investors are located here. Let’s meet and I’ll hand you the check when we exit from a deal.

It’s all these little things that I learned that helped build my businesses. Which CRMs? What days to reach out to people for the highest open rate? It’s all about trying to learn not only the marketing aspect of the business but how to scale your business. As an investor, what to expect at each stage when I’m investing? What does a PPM look like? I’ve had attorneys come on and talk to me about the process that sponsors go through to create these documents and why it serves investors. It’s a lot of different things and a lot of different conversations.

I’ve even had LPs come on and talk about how they vet sponsors and deals. What are they betting on? What are they focused on these deals? How do they get started? Were they scared when they first started? Because it’s $50,000 or $100,000 one investor invested with his friend and he was comfortable because he already knew the friend’s business. I had to vet, I had to do this and I had to do that but it was shaking hands when I was handing that check or sending that wire over. Those type of conversations are real, genuine and authentic but they helped me understand how an investor thinks, hence, The Passive Investor Consultant.

When you started off your journey, were you focused on funds or was that also perhaps a part of the process of having your podcast and speaking to firms when you learn about the fund structure?

The first episode I ever had with someone about a fund was with Dave Thompson and he has his own fund. I knew about it before. I had already started researching it prior and I ended up meeting my mentor about funds. Shortly after that, I had him on the show, Eric Silverman as well. He’s been awesome and phenomenal. He’s nothing but a wealth of resources and a great friend in general as well. He’s not from Boston but he lived here for a long time.

With that said, my focus was, I didn’t want to create another real estate podcast that people come on and talk about the great real estate purchases, acquisitions, or exits that they’ve already been through. I didn’t want to start a podcast that talked about the bad deals that they did. I feel like there’s a platform for that already but that’s fine because I wanted to focus on something that no one had done and I didn’t find a lot of shows that focused on the passive investor experience.

I was out running one day and this is before all my frontline industry colleagues were like, “Start a podcast.” I didn’t want to do it to sound like everybody else or blend in. How do I differentiate myself? How do I stand out? I’ve used that word twice because that’s what I focus on. How do I appear differently? How do I become different? How do I evolve differently? I was out running. I go 3 miles out. I’m on my 3 miles, I turned around, I’m going home and it hits me, “What about if we talk about passive investors?” At first, the bright idea was like, “Let’s talk to all LPs and see where they are.”

As LPs, they like to remain private unless they’re speaking to other people about their investments and stuff like that. I don’t know how many people want to come on but now here’s some people that come on and genuinely talk about what they’ve invested in. I felt that would have been hard so I started in that I started talking to operators about their experience. The question came about and I had to formulate the questions and I landed on a set of questions that I liked because it helped me learn more. I’m curious and I’m nosy because I want to know how you grew your business and I want to grow my business. That’s the gist of it but the real reason why I even started the podcast was, it’s a good excuse for if something was to ever happen to me, my kids could go and listen to my voice. That’s the real reason.

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It’s a perfect way to get into the level up questions, which are the final questions of my episode. The first one is what are you grateful for in your life right now?

My family and my health.

The second question up, what do you now know that you wish you knew at the beginning of your journey?

As I was growing my investor list, I wish I knew to communicate and have more phone calls and interactions with them, instead of focusing on growing an email list.

What experience brought that home for you? What makes you feel that way?

I was part of a deal and I was raising capital. I wasn’t on the deal solely to raise capital but I was raising capital and I couldn’t raise a single dollar. It occurred to me that, why couldn’t I raise capital for my investors at this time? I went back, I was thinking about it and looking at all the history of my communications. I was focused on one group instead of my committed group. I started saying, “This is a little bit backward.” That’s what brought me to the realization of that. It’s rezero.

All of us in our journey, maybe some people don’t experience that but I’ve definitely experienced that. I feel that when you experience that, a couple of things can happen. One, you can choose that, “Maybe this business isn’t for me,” and you back out or you could take a look at yourself and say, “Maybe there’s something I need to do differently.” For you, you saw that as there’s something that you needed to do differently. For me, I saw that as something I needed to do differently in order to move forward. This brings me to my last question. What has attributed to your success and continuous growth?

My curiosity. I mentioned I’m a basketball referee. The reason why I got into real estate is that I wanted to create some cashflow. Had I known or focused more on the LP, I would be an LP, a limited partner, and keep basically moving my money into bigger deals, playing the LP game, and focus on refereeing. My curiosity has gotten me to this point of building a business. There are other ways to do this. What happened was I was part of these communities. I was asking a lot of questions. I was answering a lot of questions based on podcasts, books and conversations I had.

It was going like, “This is what I heard, learned and have read to this is what we’ve done. How did that happen?” People were asking me, “Do you want to partner on this? Do you want to JV on this? Do you want to JV on that?” I was like, “Let’s do it.” Eventually, this business was built, because I was providing a lot more value in conversation and not even realizing it and people were asking me to be a part of that. I was grateful for that, so my curiosity got the best of me and now I have a business.

What I’ll say is, when you said conversation right there, it reminded me of listening to the podcasts that you had in the beginning. When I heard what you said, I was like, “That’s good.”

Is that the intro where I say, “I’m a connector?” In high school growing up, I wasn’t a good matchmaker for boys and girls but my boys come by and they’re like, “John, I need someone that knows how to weld.” I’m like, “Call Jimmy.” Jimmy and Ryan become best friends or something like that. I’ve been good because I put people together that could help each other and they ended up building lifestyles together and friendships.

Christmas is one of my favorite times and it was It’s a Wonderful Life. When he opens the book at the end or like something that it’s from the angel, it’s something about friends. “As long as you have friends, you have everything.” I end it with that with Clarence from It’s a Wonderful Life. How can I help you through a conversation and if it makes sense, I can make an intro? I love utilizing my network like that, so I don’t have to benefit from anything. I never did in high school. They never gave me anything. I continue to do it. They gave me their love and friendship, that’s all that matters.

The real estate business is largely a relationship business through and through. You definitely meet so many people through having conversations with people. For me, at least, the show has brought a lot of that to me having these amazing conversations with people or doing awesome things, inspiring people to pursue businesses and invest in real estate, and helping other people in amazing ways. Thank you, John, for coming to the show. I appreciate it. If my readers want to learn more about you, what’s the best place where they can go to learn more?

Thank you for having me. I’m grateful. I appreciate it. Please go rate and review the Level Up REI Show, please. You can find me at PassiveInvestorShow.com or you can go to JohnFortes.com if you want my free calculator because you already invested in a few syndications or even real estate and you want to see how your returns are comparing from the actual returns that you’re receiving and comparing sponsors and markets, go to ProjectedReturns.com and download the free calculators. Go get it.

I pull that down. I was on your website and I saw it. I was like, “This is perfect for all the controllers and finance people.” It’s totally up our alley, 100%.

I try to reverse engineer the passive investor experience because that’s something that I wanted and I couldn’t find, so I created it myself and I gave it away.

Thank you, John. I appreciate you coming on the show.

I appreciate you. Thank you.

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About John Fortes

LUR 79 | Passive Investor John along with his wife Jenn & their two beautiful children (boy and a girl), a boxer and two cats, reside just south of Boston in the South Shore of Massachusetts. John Fortes also known as The Passive Investor Consultant, founded The Fortes Company which partners with working professionals seeking to invest in a diversified commercial multifamily fund because they don’t have the desire or time to own real estate and fully operate it.

By leveraging John’s experience and real estate investment firm, he has helped families invest in real estate investments that’s allowed them to secure financial security, preserve and grow their wealth as well as compound their investments as they achieve their financial independence.

Today John raises funds and acquires commercial real estate that allows investors to truly diversify their investment and create a stream of cash flow. He also consults with real estate investment firms and helps them start funds of their own through the Fund Rollout Program.

John is also the host of The Passive Investor Show podcast and showcases the value of real estate investment firms and is a true hands-off investing audio experience. The show has become one of the hottest real estate podcasts on iTunes for working professionals looking for a hands-off approach to investing in real estate syndications and funds through real estate investment firms.

Although John loves spending time with his family, another fun fact about John is that he also is an NCAA men’s basketball official.

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