The acronym REIT stands for Real Estate Investment Trust.

This is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.

REITs receive special tax considerations and offer investors high yields, as well as a highly liquid method of investing in real estate. Essentially, it is a liquid, dividend-paying means of participating in the real estate market.

We can distinguish between a few differing types of REIT.

Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties’ rents.

Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. They loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. The revenue is generated mainly through interest earned on the mortgage loans.

Hybrid REITs: Hybrid REITs combine both investment strategies of equity REITs and mortgage REITs by investing in properties and mortgages.

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Still reeling from the large losses in Real Estate investments over the last few years it may seem futile to search for any ray of light to ease the pain.

But, wearing an optimistic hat, it is possible to see some benefits for the investor moving forward. The main positive is in the area of fee’s and how they are structured into the deal.

At the height of the boom, the general partner was soaking up a large chunk of the deal through exorbitant management fees. Everyone was happy, deals were going well, and people were taking the eye off the ball when it came to what was going to the sponsor. Figures got so out of hand that the sponsor was finding themselves with as big a piece of the pie as the investor, without having to stump up much cash, if any.

It was not uncommon to see 6%+ placement fees greeting investors at the door with an annual charge of 1%+ on Gross Asset Value thrown in for good measure. Not to mention the piece of the action at the back end which in many cases left the developer/sponsor with up to 50% of the profits.

When one looks at it logically, it simple did not make sense that those who are providing the equity were being left with a decidedly meager offering of the riches on offer.

This is no longer acceptable and developers need to start taking a long hard look at their investment model and ensuring that the fees are at an acceptable level. Investors are wiser as a result of their recent hard knocks and simply won’t accept a sponsor trying to take all the good out of a deal with unreasonable fees.

The institutional investment world is no different and managers here are also in for a serious wake up call.

Until recently, fund managers structured their funds with “2/20” fees. This meant charging investors a 2% fee on their contributions during the fund raising period, and then another fee of up to 20% based on a percentage of the fund’s total profits once it closed.

London-based private equity researcher Preqin, say that today’s fees vary widely and have come down from the old 2/20 standard. For example, most real estate funds now charge from 1.5% to 1.74% during their fund raising program.

Even more recently, managers have come under increasing pressure to trim their fees even further and to better align their fee structures to the actual performance of the funds.

Developers, and fund managers alike, are becoming incrasingly aware that they are now dealing with a whole different species of investor. One that has felt that wrenching feeling of a deal gone South and will not take that leap of faith so easily next time. Once bitten……

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

During the last number of golden years in the Real Estate market, the only word that investors wanted to hear was ‘returns’. Now, according to Ernst & Young, this is being replaced by another ‘R’ word: risk.

Ernst and Young are witnessing a marked change in the priorities of large Real Estate investment firms. When once, at the height of the real estate boom, they were focused on generating the highest possible returns for their investors now that attention is primarily targeted at managing risk.

In material documented from market research on over 40,000 client meetings globally, Ernst and Young said that firms should be developing a “plan of action” if they are to benefit from the downturn. That plan needs to focus on capital availability, reevaluating the business model and risk management.

With almost 75% of real estate executives anticipating a “permanent change” in the risk management of their organizations, Ernst & Young said everyone had to learn lessons as they tried to prepare for “success”.

In the ‘Lessons From Change’ report, the firm added that real estate companies need to be adept at controlling the expectations of investors who were used to seeing exorbitant returns in times past. They now need to “accept lower returns as some companies focus on lower yielding but lower risk investment”.

The issue of increased regulation is also something that the report identifies. Global Real Estate leader Howard Roth said this would be one issue facing all investors, particularly private equity and real estate funds. Here there is a growing demand and expectation for greater disclosure of investment plans and asset verification.

Dean Hodcroft, Ernst & Young’s Real Estate leader for Europe, the Middle East, India and Africa, continued by stating that: “Two years ago, real estate executives spent most of their time on new deals. Now they spend most of their time firefighting: protecting assets, controlling costs and, most importantly, managing cash flow.”

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Lending conditions for the commercial real estate industry continued to worsen in the third quarter, according to an index by San Francisco based Banc Investment Group. The index is supported by data from the US Bureau of Labor Statistics, CB Richard Ellis, Grubb & Ellis and Reis.

The index dropped 10.6% to 63.67 in the third quarter from 71.24 in the second quarter, which was an 11.6% decline from the first quarter.

The BIG CRE Index is essentially a forward-looking measure of strength of Commercial Real Estate market conditions for community banks. Values are derived from third-party providers and data collected by Banc Investment Group’s consulting services group, which provides a loan pricing model for community banks nationwide.

In summary, conditions in the industrial sector fell 21.2% representing the largest fall, according to Banc Investment Group. Retail sector lending conditions dropped 7.7% while the the office sector dropped 7.1%. Multifamily fell 9%.

This data foretells a testing lending environment for the fourth quarter of 2009 and into 2010.

Retail

•    The retail sector of the index fell to 60.89 in the third quarter from 65.99 in the prior quarter, down 7.73%. Half as much as compared to the second quarter.
•    For neighborhood and community shopping malls, rents fell an average 0.7% during the quarter. Vacancy rates at neighborhood and community shopping malls exceeded 10%, while rates rose nearly 2.5% at regional malls. In both subsectors, the rate of deterioration is only about half that of the second quarter.
•    More than six in ten markets experienced a rise in vacancy rates, and more than 95% recorded negative rent growth.
•    Lending conditions benefitted from a modest improvement in retail sales (less gas and autos). Sales rose 0.6% in August and 0.4% in September.

Industrial

•    The industrial sector of the index fell to 43.97 in the third quarter from 55.84 in the prior quarter, which is a decrease of 21.27%. This was slightly tempered in comparison to the decline between the first and second quarter.
•    Vacancies rose again, up an average of 3.4% in the quarter.
•    With inventory levels sinking, industrial production has turned positive for every month in the third quarter.

Multifamily

•    The Multifamily sector of the index fell at an increased pace of 9.06% to 76.74 in the third quarter from 84.39 in the previous quarter.
•    Unemployment rose 30 basis points from June through September. The average vacancy rate increased 1.3% over the quarter to a 23-year high. The vacancy rate is expected to climb further, although at a slower pace. In tandem, rent growth dropped 30bps.
•    Across the U.S., about 65% of metropolitan locations reported a rise in vacancies, while more than five out of ten saw rent decline.

Office

•    The office sector of the index fell to 73.07 in the third quarter, down 7.19 % from 78.73 in the prior quarter.
•    The sector posted negative net absorption levels with vacancies rising nearly 4% over the third quarter, despite only half the amount of space coming online as the second quarter. Nearly 85% of Metropolitan areas experienced a rise in vacancies.
•    Year-to-date, average rents dropped 7%, with nine in 10 areas suffering rent declines.

Real Estate has long been labeled as a finite commodity. After all, as we have heard so many times before, there is only so much land available. As true as it may seem, us humans seem to be doing everything in our power to push these boundaries and prove that this may not be the case!

The rapid pace at which technology is being developed and introduced to the market can be thanked for this. As these advances continue, more and more real estate opportunities raise their heads.

Who would have thought that church steeples would be the big real estate earner in the late 90’s! People would have laughed you out of the room if you had made such a claim. However, one invention suddenly made the steeple a viable business opportunity. As many will remember, telecommunications companies such as Sprint PCS and Pacific Bell Mobile Service raced to build antenna networks to transmit their new digital cellular phone service and church steeples seemed to be the ideal spot to transmit from.

More than ten years after the church steeple phenomenon a new technological advance has spurred a fresh demand for real estate. It now seems that flat roofs are set to take off as we move from worshipping the skies, to worshipping the sun. Solar power is becoming more and more viable as an alternative source of energy and where best to harness this power than a flat roof, possibly even on your private residence.

The trend first began with deals between energy companies and various large manufacturing and warehouse operations to install solar panels on their premises in return for a fee.

The energy companies have now started to tap the residential sector. The inherent logic of this development is obvious; once they’ve got local authority approval energy companies can extend their ’solar parks’ quickly and with relatively little hassle by fixing normal residents up with solar power. Homeowners are interested because they get a fee for renting out their roofs to professionally managed solar panel operators.

Duke Energy in North Carolina is one such company following this route. It recently became the latest company to announce it would start renting the roofs of ordinary houses for solar power generation. The energy giant will rent 425 roofs across the state as early as next year.  You could argue that Duke, which aside from the Carolinas is also present in parts of the Midwest, found a vital niche because not everybody can afford decent solar panels and this offers people the chance to participate in the solar revolution.

Indeed, throughout the United States, homeowners are being compensated by their energy utility to have solar panels installed. This is arising from the power companies’ urgent need for roof space. They are in a race against the clock to replace ever increasing portions of the regular energy supply by power sourced from renewables.

Independent companies are also getting in on the act of offering people the option of renting out their roofs. Outside renewable energy providers will pay for, install, own and operate the solar systems. The homeowners simply agree to pay a rental fee for the solar electricity generated – based on their usage at the previous year’s rate. Cost reductions of around 20% are feasible.

A good example of this in operation is the Delaware renewable energy company Citizenre which offers customers living in states that have a net metering law the option of renting panels for one, five or twenty-five years. These customers pay a per-kilowatt flat fee instead of the utility bill. Citizenre then sell the excess power generated back to the local utility.

Looking towards the future, it is worth considering how advances in technology can result in the further inception or birth of fresh real estate. Social networking, instant messaging, VoIP, and countless other advancements are leading us down the path to distance communication whereby there will feasibly be no benefit from having company staff in situ. It is not a wild leap to suggest that in the not too distant future, these developments will have led to colleagues connecting with each other from the sanctity of their own homes.

Where does this leave the vacant office blocks? Real Estate is a finite commodity – we beg to differ!

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Analysts are predicting positive figures for property sales and house starts next year in the US but they are also quick to warn that the recovery will be up and down.

The vast majority agree that the real estate market has reached bottom and indeed one can see prices increasing in a lot of states. However, there is still considerable confusion with indices reporting varying figures and experts disagreeing over whether or not a glut of foreclosures will come onto the market, and thus send prices into freefall.

Fitch Ratings increased its projections for housing starts and home sales for the first time in more than three years. At the same time, they were cautious in warning that recovery will be turbulent.
 
‘During the first 12 to 15 months off the bottom, the housing recovery may appear jaw-toothed as substantial foreclosures now in the pipeline surface as distressed sales,’ said managing director and analyst Bob Curran.

The foreclosure topic has caused much debate.

Latest figures from ForeclosureRadar show California foreclosure filings in September flattened from the previous month, while still well above the levels from a year earlier.

Conversely, other states saw a sharp increase, with Florida up 29.6%, Texas up 24.3% and Michigan up 18.22%.

According to Royal Bank of Scotland (RBS) the delinquency pipeline threatens to put as many as 2.7 million distressed sales on the market, ‘A housing market that is just beginning to climb from the ashes would be unable to handle an influx of nearly three million additional homes for sale all at once,’ they said.

Radar Logic’s president Michael Feder is less worried. ‘The threat of pending foreclosures to the housing market is, in our view, overstated and we believe there is strong evidence that housing supply and demand are returning to more normal levels,’ Feder explained.

Their latest residential property index shows that home prices and home sales in 25 metropolitan statistical areas increased 1% and 1.9%, respectively, from July to August.
 
The National Association of Realtors is reporting that existing home sales increased nearly 10% from August to September, and sales activity is at peak level since July 2007.

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

For the first time in more than a year, economy growth was in positive figures, said the Commerce Department on Thursday. The figures unofficially ended the worst US recession in 70 years.

GDP expanded at an annual rate of 3.5 percent in the three months ending in September, which is a significant jump from its depleted base. The economy had contracted at annual rates of 0.7 percent and 6.4 percent in the second and first quarters of this year, respectively.

Consumer spending, which accounts for over two-thirds of US economic activity, surged at a 3.4% rate in the third quarter, the fastest pace since the first quarter of 2007. Residential investment, which was the main force behind the downturn, jumped at a 23.4% annual rate in the third quarter, contributing to GDP for the first time since 2005, after declining 23.3% in the April-June period.

This surge in consumer spending and residential investment was likely to have been driven by government stimulus programmes.

The economic recovery in the third quarter was supported by a sharp moderation in the pace of inventory liquidation by business. Inventories fell $130.8 billion, slowing from a record $160.2 billion plunge in the second quarter

Analysts are hoping that the slowdown in the inventory decline by businesses will continue to support the economy in the fourth quarter.

Unemployment remains a major area of concern however with job seekers not likely to feel the benefits for months to come.

Stagnant consumer demand and withering consumer confidence have left companies wary of hiring more employees or taking any expensive risks at all. The jobless rate reached 9.8 percent in September, its highest rate in 26 years.

Such forces may pressure government to look for targeted interventions into the labor market, in addition to last winter’s broader $787 billion stimulus package which continues to work its way through the economy. Proposals on the table include another extension in unemployment benefits and various job creation programs.

On 16th September we hosted an exclusive event at the Trump Tower to present a uniquely NYC  investment proposal.

Invited guests were introduced to the highly experienced Split Rock Development team who specialize in luxury residential renovations in Manhattan.

The event took place at Split Rock’s latest project – a 3,300 sf duplex renovation Central Park views and fantastic finishes. Click Here for details.

The evening began with a casual discussion on the NYC luxury market over wine and cheese before the team presented their investment strategy.

An equity contribution of approximately $15 million is sought to partner in the acquisition of financially and physically distressed units in the best Manhattan locations with the intention of refurbishing and selling within a 30 month window.

Split Rock have successfully completed a number of similar projects in the last few years and on average have shown very strong investor returns. They are keen to take advantage of the discounts that are currently available in the luxury market and have identified a number of target properties.

The evening was a huge success and we have been following up with the attendees who have told us how impressed they were with the opportunity and the Split Rock team.  As we discuss details with a couple of the investors we are confident that Equity Interface will once again succeed in connecting a sponsor with a like minded investor.  Stay tuned and we will provide you with an update over the next few weeks.

To view details on the opportunity please click here

We may be hosting another event in the near future and would ask investors to express their interest by emailing NYC@equityinterface.com to ensure they are included on the guest list next time.

Real Estate Syndication involves bringing a group of individual investors together to pool capital for investment in real estate.

It has become increasingly popular over the last number of years as a means of investing in commercial real estate The main appeal is that it typically offers individual investors the opportunity to gain access to large-scale property transactions/opportunities that they would not ordinarily have the resources to participate in individually.

Conversely, on the developer’s/deal originator/syndicators/ side it can provide an alternative source of capital for which to take advantage of an opportunity.

Real estate syndicates typically own income-generating residential or commercial real estate, with investors having an interest in tangible “bricks and mortar” assets. This characteristic is untrue of many other investments and provides added security for the investment.

One of the key benefits of this structure for the investor is the professional management which might not otherwise be economically feasible for the small investor.

Parties Involved

There are three central participants, or sets of participants, as follows:

- The syndicator or promoter who creates the syndicate in the first place;

- The syndicate manager who typically sources the equity and manages the syndication. In certain instances, this can be the promoter as well;

- The investors who purchase the investment units.

Legal Structure

The structure of a real estate syndicate is invariably based upon one of the following six legal relationships: co-ownership, divided ownership, corporation, trust, general partnership and limited partnership.
Selecting the form of organization involves practical as well as legal and tax considerations. The responsibility rests with the syndicate manager to ensure that the appropriate structure is used. Each of the available entities has advantages and disadvantages.

The corporate form insures centralized management as well as limited liability for the investors but is seldom utilized in modern syndicates because of its negative tax implications.

The general partnership (joint venture) avoids the double taxation normally involved in a corporate entity but the unlimited liability provision and lack of centralized management inhibit its use.

The limited partnership combines nearly all of the advantages of the corporate and partnership forms. It has the corporate advantages of limited liability and centralized management and the tax advantages of the partnership. As a result, the limited partnership form of organization is the one most frequently selected for real estate syndicates.

Another form of business, the limited liability company, was added in 1994 and includes liability limitation similar to that afforded shareholders of a corporation.

There are various laws and regulations that govern the actual formation, and day to day operations of real estate syndications. These laws will vary by state, and it is important to speak with a qualified Real Estate Lawyer in your particular area to see what suits/works best.

Earnings/Fees

- Investors typically receive:

A preferred annual return on their invested capital. They receive a percentage figure which is stated from the outset on invested capital prior to the developer / owner receiving payment. Depending on the risk attached to the deal, this typically rests somewhere between 5% and 10%. In some rare cases, this may be a guaranteed minimum return, which is guaranteed by the developer / owner; (note: It is important to clarify whether this return is simple or compound. It can vastly affect figures.)

A priority of repayment of capital in the event of a sale or re-financing of the property;

A percentage share of the profits at exit. This is typically based on a waterfall model whereby the sponsors’ cut of the profitincreases as the profits rise. Differing ‘hurdle rates’ are set which dictate the profit split.

Example:

- The sponsor typically receives:

Fees for services provided to the partnership / venture, which may include any or all of structuring the syndication, identifying the property, managing the development of the property, providing property management for the finished property, managing the partnership / venture, managing the disposal of the property;
(probably put in market averages here).

A share of the profits after payment of a preferred return on the investors capital and the return of their capital; (as illustrated above)

A return on the equity it has contributed to the venture.

Potential Pitfalls

Investors must remember that the underlying investment is real estate, and as such, normal real estate risk factors apply. There are also other risks that relate to the structure of the investment. Typical risks for an investor to bear in mind when reviewing syndication include:

- Possible unforeseen costs or liability associated with the properties. Very important to ensure that the debt secured by the sponsor is non-recourse and thus in a worst case scenario the investor can only lose their original equity.
- Uncertainty in general market conditions related to the future sale of properties
- Uncertainty regarding future taxes.
- Real estate is “illiquid” and so it could take a long time to sell.
- Issues with Sponsors that own affiliated companies that service the properties.
- Possible conflicts between Sponsor and Investor. Investor needs to have full faith in competency of sponsor as management and decisions moving forward rests with them. conversely, Sponsors need to ensure they have complete control and can operate without any impediment from an awkward investor.

Getting Started as a Syndicator/Sponsor

If I want to put together a syndicate of investors, what do I need to do?

Historically, sponsors would approach equity raising houses, or syndicate managers who would raise the required equity and manage the monies on behalf of their clients. These firms will also put together the appropriate structure to incorporate these clients. Typically, the company would charge the sponsor a fee of anything from 2% to 5% of equity raised. This covers the professional fee’s involved in structuring the investment vehicle (legal, tax), the marketing material used to sell the deal to its clients, and for the provision of equity to the sponsor.

The other option is using Equity Interface (www.equityinterface.com), which offers you direct access to their pool of accredited investors and allows you commence dialogue with those that are interested. This could potentially save you hundreds of thousands in equity raising firm fees.

Do I need an attorney?

An attorney is imperative. All measures need to be taken to ensure that liability doesn’t rest solely with the sponsor in the event of the deal not succeeding as planned.

What other advisors do I need?

Tax – It is the sponsor, or syndicate manager’s, responsibility to ensure that the investor has minimal tax exposure. With that in mind, a tax consultant is one of the most important cogs in the syndication wheel. They will instruct you, or your firm, on the best entity to use for each possible scenario. As every real estate deal is different, there will often be subtle nuances that require a specialist to review and advise.

Marketing – Elements of the syndication process can be seen as a sales excise as ultimately you are trying to sell your product to a willing audience. The publication of a complete offering memorandum is central to this, and it is important not to understate its importance. Many large syndication firms have departments solely dedicated to the production of offering memorandum’s and other supplementary marketing materials like summary sheets, web pages etc.

How do I vet potential investors?

If you are using an equity raising house then this should come under their remit. However, the basic rule is to ensure they are accredited investors. In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least one million dollars or have made at least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and expect to make the same amount this year.

Getting Started as an Investor

What are the key things to look out for in an investment?

When assessing possible opportunities, there are a number of key elements, which should be focused on, the main one’s being;

Sponsors Track record: The sponsors experience in the field is one of the most important things to look out for when assessing a real estate investment. Look for past successes/failures and how they are viewed in the market place. While the real estate asset is the investment, it is really the team who plan on turning this opportunity into returns that you are truly investing in.

Returns: Be sure to note if returns are stated as a simple percentage rate, or compound. The method which is often used to state returns is Internal Rate of Return(IRR). Technically, this is the discount rate that makes the net present value of all cash flows equal to zero. More simply, it’s the year on year return of the project. Below is compared the return on a five year project with an equity stake of $100,000. As can be seen, the difference is great.

Fees: Ensure that fee’s are both comparable to market rates and highly transparent. Often fee’s can seem to be wrapped up in the deal but are really just going into the sponsor’s back pocket. Ideally, the main sponsor’s slice should be incentivised to help ensure that they will endeavor to push returns as high as possible, thus benefiting the investor in the long run.

Asset:The offering memorandum should provide detailed information on market comparables and where the market is thought to be moving. Alarm bells should be ringing if this information is not provided in a high degree of detail. When sponsors are anticipating returns, be sure that these returns are based on a realistic, or even pessimistic, valuation of sales price.

Other things to look out for regarding the asset are;

- quality and stability of tenant
- possible added value potential
- planning issues
- rent roll and status of leases
- Sponsor supplying equity: While not imperative, it is a good sign in an investment if the sponsors are contributing a percentage of the equity themselves. This shows a confidence in the deal and also means that the sponsor is working for their own money too and not jst the investors.

Real Estate investing can take many different guises. From traditional bricks and mortar, to more modern financial instruments, there are numerous ways in which investors can expose themselves to the real estate market.

These varying classes increase and decrease in popularity as a result of varying market and perceptional changes. But for investors seeking to enter the market, it is prudent to have an idea first of what you are looking for. This will aid both yourself, and also those doing the looking on your behalf.

With all this in mind, we have examined some of the various real estate investment types and how they currently sit in the market in an effort to help you, the investor, get a better idea for what you are really looking for.

Taking advantage of the Financial Crisis:

One persons demise, can be anothers gain and currently in the world of commercial real estate, the “flavor” of the year is the opportunity to pursue a real estate mortgage note that is in default. Refered to commonly as non-performing mortgage notes, they are simply loans that are currently in default or in the foreclosure processes. Institutions have been holding many non-performing notes, nearly all of which are in danger of entering foreclosure if no other solution presents itself.

The result of this is that people who never considered commercial real estate are now seeking the opportunity to purchase debt without understanding the technicalities and consequences of the underlying transaction.

In addition to the financial requirement to purchase the note, the buyer must be willing to assume that it will take between six months to three years before they can take ownership of the asset. So even though the purchaser may have bought the note at a discount, the legal fees, associated fees of foreclosure and the loss of the use of capital may cost the purchaser of the note a higher cost than the value of the asset.

There are really two distinct strategies one can employ when dealing with loan notes. Firstly, one can purchase the real estate notes directly from the originator of the loan, especially if the loan was originally a seller financed mortgage, and by doing so at a deep discount. Private sellers are less likely to know the true value of the note, and more likely to be highly motivated to sell their note quickly. If you can get them to accept a lesser amount for the note, then you can you can make a great return quickly by turning around and selling the note to another investor.

If you would rather have a regular income from your real estate note investments than buy and sell real estate notes frequently, you can buy a discounted note and hold onto it in order to collect on the monthly payments being made against the note. By doing this, you are creating what is known as real estate cash flow, which is another great way to build up your income if you can afford to sit on your investment for an extended period of time.

Bricks and Mortar

While discounted loan notes was indeed the ‘in’ asset class of 2009, one would be foolish to completely ignore the cornerstone of real estate investment, traditional bricks and mortar ownership opportunities.

Recent times have seen the steepest decline in commercial property values nationally in over 15 years. This decrease incorporated all four major property types; office, retail, multifamily and industrial. The gravitational pull of a falling economy was always bound to have a significant rippling affect on a commercial real estate market that remained robust while homes in most major markets plummeted in value.

The net result of this data is that commercial property values overall have declined nearly 30% since the peak. The number of transactions has fallen steadily as well with last April setting a record by having had the least number of transactions nationally than in any month in the last 19 years.

The news of this decline in the commercial market may seem ominous to many, but to a certain band of investors, it is a highly anticipated moment in the market cycle. This data is the signal that marks the start of the buyers market. The mantra used by many of the most successful real estate investors “buy low and sell high” is, once again back in play.

The option to “buy low” has arrived. People who remember the recession of the early nineties know that there can sometimes be a ‘sale’ on commercial property and it can sell for heavily discounted prices. Investors with the ability to purchase these properties, withstand the pressures of higher than average vacancies and a soft economy, can seek to emerge in a far stronger position when the recession ends.

In times past, investors multiplied their money 20 or 30 times after purchasing heavily discounted distressed properties, taking advantage of leverage offered by banks that were anxious to unload and in many cases, willing to finance. These investors fought to maintain occupancy levels and monitored expenses closely. Those who successfully waited out the storm watched property values soar in the decade after the recession and for nearly 15 years reaped rich rewards.

The cycle has finally come full circle and those who are prepared to recognize this will take full advantage of the small window of opportunity which is currently upon us.

Securities

Instead of owning real estate directly, investors can also purchase shares of a real estate investment trust (REIT) or shares of a mutual fund that invests in these securities.

Real Estate Investment Trusts are companies that own, manage and operate income producing real estate. They are organized so that the income produced is only taxed once at the investor level. REITs, by law, are obliged to pay at least 90% of their net income as dividends to their shareholders. Hence REITs are high yield vehicles that also offer a chance for capital appreciation.

There are currently about 150 publicly traded REITs whose shares are listed on the NYSE, ASE or NASDAQ. REITS specialize by property type (apartments, office buildings, malls, warehouses, hotels, etc.) and by region. Investors can expect dividend yields in the 5-8 % range, ownership in high quality real property, professional management, and a decent chance for long term capital appreciation.

There are over 100 Real Estate Mutual Funds. Most invest in a select portfolio of REITs. Others invest in both REITs and other publicly traded companies involved in real estate ownership and real estate development. Real estate mutual funds offer diversification, professional management and high dividend yields. Unfortunately, the investor ends up paying two levels of management fees and expenses; one set of fees to the REIT management and an additional management fee of 1-2% to the manager of the mutual fund.