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.

Vacancy rates in the U.S. office, industrial and retail property markets continued to rise in Q2 2009.

Commercial property markets are reflective of the economy, and the results from the mid point of the year highlight the continuing impact of the recession on property markets throughout the country.

Office vacancy rates increased by 80 bps during Q2 2009 to 15.5%. With both downtown and suburban markets feeling the ongoing effects of the the recessionary environment. The downtown vacancy rate increased by 70 bps to 11.7%, while the suburban rate rose by 90 bps to 17.6%.

The largest vacancy increases occurred in markets where the housing crash has been particularly concentrated, for example in the Southwest and Florida. In saying that, the increases were noticeable across the board, with 44 out of 57 markets seeing higher vacancy levels during the quarter.

The national office vacancy rate still remains well below the high of 19.1% set in 1991,however it is forecasted to reach 17% by year-end, with negative absorption for the year at 68 million sq. ft.

The national industrial availability rate increased 80 bps during Q2 2009 to 13.0%. Industrial availability is now at the highest level since 2003 and is forecast to go higher. The industrial market continues to suffer from declining economic activity both at home and abroad, as trade flows have slowed, and its negative absorption for the year is going to set a record.

The retail (neighborhood and community centers) availability rate moved upwards to 11.7% and is forecast to continue in that direction.

However, the rate of increase is noticeably slowing which may signal that the negative effect from the current economic crisis on neighborhood and community centers is moderating. It is expected that once the recovery in consumer spending begins, some tenants of neighborhood and community centers will be the first to benefit.