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My Day at UC Berkeley's Real Estate & Economics Symposium (Part 1)

I was recently invited on behalf of RealtyShares to attend UC Berkeley's 36th Annual Real Estate & Economics Symposium in San Francisco.  With over 500 attendees from around the country, the symposium is one of the most prestigious one-day real estate conferences in the entire country.  It brings together a distinguished group of experts and entrepreneurs in real estate, finance, government and academia to discuss and evaluate real estate and the financial markets.  This year was no different.  From the keynote address by Ken Rosen to the luncheon speech by Lieutenant Governor Gavin Newsom, the day featured the who's who of the real estate and finance industry.  Btw, in case you missed it, you can catch Ken on CNBC's Street Signs discussing momentum in the housing market HERE. 

The panels were just as diverse as the speakers featuring some of the best business and real estate minds from around the country.  There was a general consensus among the panelists that finding good real estate deals was now tougher than raising capital.  The panelists also agreed that we still had some time to go before reaching a full recovery and that real estate values would continue to increase, albeit a bit more modestly than in 2009-2012, over the next 3-5 years.  

I wanted to share with our readers some of the highlights I gathered from the day and in interest of keeping this post relatively short, I've decided to break it into two separate parts.  In this part 1, I'll be highlighting the Capital Markets panel that brought together Kevin Shields, the Chairman and CEO of Griffin Capital Corporation, John Schissel, Executive Vice President and CFO of BRE Properties, and Dennis Williams - Senior Vice President of Northmarq Capital and an advisor to RealtyShares.  

Dennis kicked off the discussion for the panel by highlighting how the volume of originations for Commercial Mortgage Backed Securities has recovered since the economic recession.  In 2007, there were $228 Billion in CMBS originations and in 2008, the peak of the recession, that number had dropped to $12B.  As of 2013, that number is back up to 2003/2004 levels with a forecasted $80B in originations.  In his concluding thoughts, Dennis stated that CMBS is back, that underwriting has generally been sound and that we are in a healthier market for CMBS than we were in pre-recession times. 

Next up was Kevin of Griffin Capital.  Griffin operates the second largest non-traded REIT in the country and has closed more than 650 transactions representing over $16 billion in value.  According to Kevin, the capital markets are very robust and debt and equity capital for real estate is plentiful.  For example, non-traded REIT's issued over $20B of equity in 2013 which is almost double last years $10.2B issuance.  Accordingly, the difficulty isn't in raising capital but rather in finding the right deals in which to deploy that capital.  I found this statement to be interesting since we are seeing the same trend at RealtyShares and the very reason we are being extra conservative with the investments we list on our platform.

Last up was John Chisel of BRE, a multifamily equity REIT with a west-coast focus.  John made some interesting points regarding foreign influx of capital into the US real estate market.  In 2011, 70% of capital for Equity REIT's came from Japan.  Although this number has decreased to 30% in the last few years, Japan still accounts for 8.5% of total public REIT values.  With a total market cap as of 2012 for public Equity REIT's of almost $550 Million (and larger still for all REIT's), that number is staggering.  Kevin also alluded to the current low single digit yields for the REIT market which is a concern among investors (this is something we discussed in a previous blog post that compared REIT's to private real estate like that offered on RealtyShares - RealtyShares v. REIT's). 

Subsequent to Dennis, Kevin and John offering their thoughts on the outlook of the commercial real estate market for the next few years, the panel moderator - Kristin Gannon, a real estate law partner at Dean, Bradley and Osborne proceeded to a Q&A.  Here are the highlights:

Cap Rates for NNN properties saw a fair amount of compression over the last 18 months and depending on the lease duration and credit of the tenant, we are seeing NNN cap rates anywhere from the low 6's to the mid 8's.  

Cap Rates for core multifamily assets in high job growth, west coast markets (specifically LA, Seattle, Orange County, San Diego and San Francisco) range from the high 3's to the low 4's.  Even as interest rates have risen over the last year, cap rates have for the most part remained stable.  

It is important to remember that the correlation between interest rates and cap rates isn't 1. In fact, Multifamily cap rate spreads to the 10 year treasury have gone from about 200 bps in 2007 to 400 bps today so there is still a wide spread which offers a fair amount of protection in a rising interest rate environment. I think this is an important point because as fear of rising interest rates enter the minds of investors, cap rate compression becomes a concern but one that should not be overestimated.  

Debt pricing has inched up slightly over the last year and the current rate for a 10 year fixed commercial mortgage from a life insurance company is at 4.25 to 4.5 (4.75-5.25 for riskier asset types).  

The Private REIT market continues to be slow to provide liquidity to investors because there is no public market for Private REIT shares.  However, we've seen a lot of liquidity events in the last 6 months due to increased mergers and acquisitions among REIT's.  

Despite the very informative discussion from the panelists, for me the true highlight came towards the very end when an audience member asked Kevin, Dennis and John about their thoughts on crowdfunding as a means to raise capital for real estate now and in the future.  What was most exciting was that all three of the panelists had heard of crowdfunding and a few had even considered using it.  The panelists were generally bullish on crowdfunding but also made clear that the market is still in its infancy much like the REIT market was a few decades ago.  

Thanks for reading.  I'll be back with more next week!  In the mean time, please email your questions or comments to [email protected] or if easier, give me a call at 866-202-2023 ext. 701.  

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Part 2: What to look for in Multifamily Real Estate

Last week we covered multifamily real estate and why it has been the most attractive area of commercial real estate investing since the economic downturn of 2008.  Fortunately, crowdufunding platforms like RealtyShares are making it easy to get started and passively invest in this asset class without needing the time, capital and knowledge to purchase and manage an entire asset on your own!

  The next step, of course, is understanding what to look for when you’re ready to invest.  Naturally, investors tend to first look at the cash flow generated by a particular property, as well as the potential for the asset to appreciate during the hold period.  While this may “price in” the other factors such as property attractiveness and location, that’s only at a particular point in time and may change.  To make a good multi-year investment, you’ll also want to conduct adequate due diligence:

  Location, Location, Location:  This familiar real estate cliché applies to multifamily properties, too.  Location is critical to understanding things like: economic health, growth prospects, industries the community relies on for employment, earning potential, etc.  Is the unit in or near a major metropolis, and is it close to transportation options that make it a viable option for those commuting to work? 

Purchase Price and Comparables:  One way real estate is distinct from stocks is that there are real opportunities to purchase assets below market value.  A $10,000 purchase of Google stock, for example, almost certainly isn’t worth more than $10,000 at that moment.  It may move up or down over time, but unless you’re buying off the market, it’s almost impossible to find a below-market investment.  In the case of real estate, however, the market isn’t as liquid or efficient, so a limited buyer universe can create great opportunities.  A quick way to compare an investment against market precedent is comparing its cap rate and / or cost per square foot against similar deals that have occurred recently in the market.  According to a recent report released by Reis, the mean cap rate for apartment properties continues to creep ever lower, reflecting growing valuations for apartments, which are soaring to new heights.

  Competitive Supply:  Like other markets, multifamily housing tends to add supply in waves as demand spikes.  Bringing new assets to market from the planning stage can take years, so you’ll want to know not only the current market inventory but also how that is slated to change in the next year or two.

Vacancy Rates:  Vacancy rates mean something different in each market.  In some places, it may be a reflection of local industry leaving the area, and in other hot markets it may be a sign of an inferior property in need of rehabilitation.  Understand how your potential investment stacks up against the market in general, and if it has above-market vacancy, understand why.

    Opportunities for Value-Add: Continuing with our Google stock example above, such an investment doesn’t allow for you to help boost the company’s value and stock price.  In the case of real estate though, that certainly isn’t the case.  Some properties may have opportunities to increase value, including through cosmetic improvements, increases in rent to market rates, and subdividing larger spaces into smaller ones with higher per square foot rates.  With older properties in particular, you’ll want to understand the value-add opportunities for your potential investment.

Management Company:  Does the real estate company sponsoring the project have a strong track record, history of success, and size to make you feel comfortable that the company can effectively manage the property and create value?  Does the sponsor have a track record of finding below-market deals and has it purchased properties in that same market or submarket before?  You’ll want to understand the company that will steward your investment to what is a hopefully profitable outcome. 

  Are there other items you like to take into consideration when evaluating multifamily investment opportunities?  Please share them with me at [email protected]! 

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Part 1: Investing in Multifamily Real Estate

Since the economic downturn in 2008, multifamily housing has represented the most attractive area of commercial real estate investing.  The first signs of recovery coming out of the recession were in multifamily housing, initially in underlying fundamentals and then in investor dollars.  While office space and other commercial property experienced increased vacancy rates during the downturn, multifamily housing remained relatively stable.  It’s no surprise of course that this sector would lead the recovery, given that regardless of the health of the economy, people need somewhere to call home.  Particular attributes investors also like include:

Diversified Cash Flow: these properties produce monthly rents while also spreading the risk of default amongst multiple tenants

Economies of Scale: management and maintenance costs are more efficiently spread between multiple units in one location

Less Competition: multifamily properties can be less popular among investors than single-family homes, for myriad reasons including higher purchase price, making it easier to find high-quality assets

Given that the population growth has not slowed, vacancy rates have hit record lows and the strongest markets have experienced healthy increases in rental rates over that same period.  This might lead you to think that new development is booming, right?  While investor interest ramped in the sector, according to Freddie Mac, new construction remained a scarcity until 2012 in most areas of the country.  Even with the resurgence in multifamily development, new starts are still significantly below the average of 260,000 units / year over the last two decades. 

  The combination of these attractive characteristics has led to tremendous investor interest in the multifamily housing sector, with CoStar estimating total U.S. multifamily deal volume hit $88 billion in 2012, a level not seen since 2007. 

   As you might imagine, this increased demand for good product has led to a corresponding compression in cap rates, moving down from 7% to 5.3% YTD in 2013.

  Investing today naturally means thinking about tomorrow though.  With the natural lag between start and completion of new multifamily development projects, many of which are enormous and require years to take from entitlement to finished product, inventory will remain relatively stable in the next few years.  As a result, multifamily investments should continue to experience favorable vacancy rates.  Rental rates may have hit peak levels in top metro markets such as New York City, San Francisco and Boston, but according to REIS opportunities still exist in major cities around the country such as Dallas, Phoenix and Charlotte.

The challenge, as we at RealtyShares see it, is avoiding compressed cap rates and investing in areas with further potential for rental rate growth.  So how do you find a great multifamily investment opportunity?  What should you look for in a good multifamily housing investment?  We’ll be writing about that next week! 

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How to Invest like Harvard and Yale

U.S. University Endowment Funds, such as Harvard and Yale, have been leaders in diversified multi-asset class investing for decades.  Through large exposure to alternative asset classes outside of the traditional stock and bond markets, they have consistently achieved attractive annual returns with moderate risk and volatility.  For example, even in the face of the 2008 financial meltdown, for the 10 year period ending June 2013 the annualized returns for Harvard and Yale were 9.4% and 11% respectively, 60-75% greater than the returns of a traditional US equity/bond portfolio (i.e. consisting of 60% stocks and 40% bonds) and 32-55% greater than the S&P.  

The investment philosophy of these successful investors is simple-diversification.   The top 20 Endowment Funds, which include Harvard and Yale, hold only 40% of their portfolio in traditional assets (equities, bonds and cash), with the remainder in alternative assets such as real estate, timber and private equity.  Diversification, the principal tenant of Modern Portfolio theory employed vigorously by Harvard and Yale and their high priced Investment Advisors, demonstrates that the risk adjusted returns of an investment portfolio are improved through diversification across assets with varying correlations.  

Based on this theory, an investor constructing her own portfolio with a similar asset allocation to Harvard and Yale should achieve similar risk/return characteristics.  However, the fact still remains that most investors do not have access to the same resources and investment vehicles as Harvard and Yale.  In fact, David Swenson, the long time head of Yale’s Endowment, has argued that you have no chance of matching Yale’s market-beating returns.  Well that is changing.

New vehicles, such as ETFs and crowdfunding for real estate through platforms like RealtyShares, are emerging to bridge that gap and provide investors with greater access to nontraditional assets such as timber and private equity stocks as well as real estate.  By utilizing these resources and applying a similar level of diversification to that of Harvard and Yale, investors can achieve risk adjusted returns that are far superior to those of a traditional stock and bond portfolio.

In fact, by reallocating a traditional 60% stock and 40% bond portfolio to include real estate, investors can reduce volatility and increase returns.   That is because private real estate has low or negative correlations with stocks, bonds and even public REITs.  Furthermore, real estate also offers the potential to diversify a portfolio geographically and strategically.  Each investment in private real estate is unique in terms of location, size, purpose (residential vs. retail vs. industrial, etc.), value and myriad other factors.

Simply put, if you want to invest like Harvard and Yale, diversify beyond stocks and bonds and invest in non-traditional assets like real estate.

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Purchasing Real Estate Through Your IRA

Real Estate is a true way to diversify and provides investors a more tangible alternative to the volatile stock market and the low-yield bond market.  However, the fact remains that investors can’t access nontraditional assets like real estate through a traditional 401(k) or IRA.  Rather, these investors, in order to take advantage of tax deferred returns, must invest exclusively in publicly traded securities like stocks and bonds. 

Interestingly enough, real estate has been available to invest in using IRA’s, specifically Self-Directed IRA’s, under a little known IRS Code 4975. A Self-Directed IRA is an IRA like any other under IRS Publication 590 in terms of annual contributions, required minimum distributions, and types such as Traditional, ROTH, SEP, Simple 401K, Health Savings Account and Coverdell Education Accounts.  However, it differs from a traditional IRA or 401(k) under IRS Code 4975, in that it allows one to invest in almost anything with the exclusion of life insurance, collectibles and S-corps.

The types of real estate assets that an investor can invest in using their Self-Directed IRA is quite broad and includes:

Residential or commercial real estate

Unimproved land

Rental houses

Multiple-occupant dwellings

Office buildings

Foreclosed properties

Deeds and mortgages

Crowdfunded Real Estate 

The most important aspect of using Self-Directed IRA’s is understanding Prohibited Transactions. A Prohibited Transaction is the buying, selling, leasing, using, having any benefit or receiving compensation, directly or indirectly with a Prohibited Person, which is basically immediate family and lineal and a lineal descendants. In other words, one cannot invest in vacation property and vacation there, nor can they buy a condo for their parents to retire in, even if they rent it to them at market rates.

RealtyShares currently supports Self-Directed IRA investments for investment offerings offered through our platform, www.realtyshares.com.  Also, our investment offerings are structured to avoid any prohibited transactions so investors' can rest easy that their preferred tax treatment will be preserved with the IRS.

To learn more about how you can use tax-deferred investment dollars to invest in real estate through RealtyShares, please contact us at 866-202-2023 or shoot us an email at [email protected].  

This post was written with the assistance of James A. Jones of Kingdom Trust Co.  James is a national speaker and educator, and the most published author with 6 books in the Self-Directed IRA industry. He is also the Founder and CEO of the Self-Directed IRA Investment Institute and Vice President of Business Development for Kingdom Trust Co. He has pioneered the use of self-directed IRA’s in the Crowd funding space, and serves on the Board and Co-Chair of the Investor Committee for the Crowd funding Intermediary Regulatory Advocacy Group

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Crowdfunding: Individual Investor's Answer to Wall Street

This article originally appeared on June 26, 2013 in Crowd Chronicles and The Soho Loft under the title "Crowdfunding: Individual Investor's Answer to Wall Street."

In 2012, billionaire investor Warren Buffet was quoted on CNBC as saying: “If I had a way of buying a couple-hundred-thousand single-family homes, I would load up on them. It’s a very attractive asset class now. I could buy them at distressed prices and find renters.”

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Investing In Private Notes Secured by Real Estate

Trust Deed Investing or investing in debt secured by real estate has become very popular among investors that want to diversify into real estate and earn a stable return on invested funds (typically as high as 8-12% annually).

However, before diving into any investment, including a Trust Deed Investment, a prospective investor should understand the basics and what to look out for.

The Basics:

Unlike a direct real estate investment, with a trust deed investment the  investor is acting like a bank by extending money to a borrower.  Accordingly, the investor is able to earn fixed-income while securing those funds with the underlying real estate asset.  

Because the investor is acting like a bank by extending a loan to the borrower, the borrower signs a promissory note, which is essentially a promise to repay the the loan plus interest, usually paid monthly, to the Investor.  As with a real estate loan from a bank, the Note is secured by the underlying real estate property through a trust deed.  In order to secure the investor's interest in the property and the note and to provide public notice to any other lenders/lien holders that there is debt on the property, the trust deed is publicly recorded.  As a lender, you are most secure if you hold a first position loan meaning that your loan is senior to any other debt on the property and must be paid first.  

As an investor, you may become the owner of a note and the beneficiary under a Trust Deed either by making the loan (called an origination) or by purchasing or assuming an existing note and trust deed.  In either case, you are the lender and are entitled to fixed interest income (usually paid monthly) and are secured by the real estate.  

Although investing in a first position trust deed offers investors a great way to earn high yields and consistent cash flow with the security of tangible real estate, proper diligence should be conducted.  Here are the essentials:

Loan-to-Value (LTV):  The LTV is a key factor in any trust deed investment and represents the ratio of the loan amount relative to the value of the piece of real estate that the loan is secured against. The lower the LTV, the higher your level of security.  In today's market, first position trust deeds secured by single family homes typically have LTV's between 65 and 75 percent.  This means the property would have to lose approximately 1/3 its value for there to be risk to the Trust Deed Investor.  

The Underlying Real Estate:  Although loans secured by real estate are protected by the value of the underlying asset, depending on the method of foreclosure, the nature of the loan, and the value of the property, the investor may or may not be able to recover his entire investment in case of borrower default and lender foreclosure. Thus, it is important to analyze the underlying asset as well as the LTV. .

The Borrower:  The borrower's ability to repay the loan and the borrower's reputation, experience and background are all important considerations.  As an investor you should review this information and understand the risk.

Benefits:

Once you understand the basics and know what to look out for, Trust Deed Investing can be a very beneficial investment option.  These benefits include:

Security: When you invest in a loan secured by real estate, you are secured by the underlying real estate.  That means if the borrower defaults on the loan (i.e. by failing to pay interest on the loan or by failing to pay back the principal balance of the loan upon the maturity date) the Investor has recourse against the Borrower.  This recourse is to foreclose on the property and sell it to recoup the investment.  

Returns:  Many economists believe 2013 could be a very volatile year in the stock market due to higher taxes, health care costs, spending cuts and high unemployment rates.  And with money market accounts currently paying a paltry 0.5% and the 30-Year US Treasury Bond yielding only about 3.3% per year, investors are seeking out alternative Investment options that provide more healthy returns.  Trust Deed Investments, with yields ranging from 8-12% annually, are a great option for these investors.

Consistent Monthly Cash Flow:  Most Trust Deeds pay interest on a monthly basis.  This means that as a Trust Deed investor, you get monthly cash flow. 

Limit Exposure:  A trust deed investor gets exposure to real estate without directly owning and managing the underlying asset.  Thus trust deed investing offers investors a more secure way to diversify into real estate.

How It Works On RealtyShares At RealtyShares we are currently offering our investors an opportunity to invest in high yield (typically 9% or greater) first position trust deed investments.  You can purchase these trust deed investments individually or through a corporation, LLC and even an IRA.  

The process to invest is simple:

Once you have created a user account and verified that you are an accredited investors, you can browse real estate investments, including both equity investments and Trust Deed investments.

You can conduct all of your due diligence online including with respect to the LTV, reviewing information on the Borrower, reviewing information on the underlying real estate, etc.  

Once you feel comfortable with a specific investment, you can execute all legal documents and transfer all funds via RealtyShares' secure online investment dashboard. 

Benefits:

Passive & Streamlined: The process is streamlined and the investment is 100% passive to the investor.  RealtyShares handles all of the paperwork and manages all of the parties involved.  

Diversification:  By investing in a Trust Deed through RealtyShares, you can invest as little as $5,000 per investment.  Accordingly, you can diversify across a wider range of trust deed investments than you could if you purchased the Trust Deed directly.

First Position:  At RealtyShares, all of our Trust Deed Investments are in first position which minimizes the risk to our investors.  

Low LTV's:  The LTV's for our Trust Deed Investments are lower than average which ensures the Borrower was sufficient skin in the game and the investor has a large equity cushion and is thus protected.  

If you have any questions about specific Trust Deed Investments on RealtyShares, please reach out at [email protected].

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Is Oakland following the trend of other Bay Area cities in becoming more gentrified over the past few years?

We were recently asked if Oakland was following the trend of other Bay Area cities and becoming more gentrified over the past few years.  We did some research, and here's what we found: 

By the numbers, yes. If you look at the demographic and income data from 1980 through 2010, two trends emerge.  First incomes are up relative to the national average.  The chart below lays out the median household income in Oakland versus the US from 1980 through 2010:  Oakland's income was 85% of the national median in 1980, by 2010 it was 104% of the US national median.  That's a significant improvement in incomes.

Second, you see a shift in the demographic composition, which is also typically associated with gentrification.  It's tough to talk about gentrification given the racially charged nature of the discussion, and I hope I don't get attacked for a frank presentation here of the data.  Typically the data will show an area dominated by non-white minorities becoming more white over time.  What's interesting about Oakland's shift, however, is that gentrification appears to be coming from the Asian, Hispanic as well as Caucasian communities.  What's not borne by the data here, but what I suspect having lived in Oakland the past 5 years, is that there are greater numbers of higher earning black households today than previous, and that they are also a component of Oakland's gentrification.  The chart below shows the trend:  In 1980, 47% of the population was African American and 40% Caucasian - less than 10% was Asian or Hispanic.  Today Caucasian are the most populous race in Oakland at 35% of the total population.  African Americans account for 28% of the population, Asians for nearly 20%, and Hispanics for about 15%.  

So there you have it: yes.  That said, Ian's caveats and details about the diversity and array of neighborhoods in Oakland are very much on point. All the data employed here was provided by the US census.

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Real Estate, the SEC and Investor Protections

As a Founder of RealtyShares, prospective investors and investment managers often ask me how we qualify our offerings with the Securities and Exchange Commission (SEC).  The short answer is, because our investments currently are open only to accredited investors, most if not all of our offerings are qualified through the Regulation D, Rule 506 exemption which is perfectly suitable for most if not all Real Estate Investment Offerings.  I recently gave a lecture on real estate investing and securities laws to a group of UC Berkeley business and law students.  Prior to the lecture, I circulated a brief synopsis of the state of the securities laws (mostly as they pertain to real estate) now and in the future.  I wanted to share this synopsis with our readers since I think it gives a good overview of both Regulation D, Rule 506 as well as the highly praised (but yet to be effective) Crowdfunding Exemption set forth in the JOBS Act.  If you have any additional questions after reading the below synopsis, please don't hesitate to post questions and I'll respond as soon as I can.

SYNOPSIS:

It was settled a long time ago by the United States Supreme Court that an offering of an interest in real estate is an offering of a security.  Thus, real estate offerings fall within the purview of the Securities and Exchange Act of 1933 (“1933 Act”) and are regulated by the Securities and Exchange Commission (“SEC”).    

What is a Security?

A Security is defined rather broadly by the 1933 Act as including not only things like stocks and bonds, but also participation in any profit-sharing agreement and even investment contracts.  Although not obvious at first glance, this very broad definition of a security surely encompasses any offering of a real estate share or interest.

Whether you are investing in real estate as a tenant in common, joint tenant, limited partner of a Limited Partnership (LP) or a member of a Limited Liability Company (LLC), you are participating in a profit-sharing agreement.  Additionally, in most such cases you are also entering into an investment contract since your investment is memorialized by way of an Operating Agreement (in case of a LLC) or a Limited Partnership Agreement (in case of a LP). 

How Securities Offerings Are Regulated by the SEC?

Fortunately, there are exemptions from registration that are very suitable for most real estate investment offerings including (1) Regulation D, Rule 506 and (2) the recently enacted Crowdfunding Exemption.

Regulation D

Regulation D is the most widely used securities exemption and in 2010 alone, the aggregate amount of capital raised in the U.S. pursuant to Reg D was $905 billion.  Regulation D is very suitable for most real estate offerings and most private placements for real estate investments are qualified through this exemption. 

Regulation D contains three rules providing exemptions from the 1933 Act’s registration requirements with the most widely used being Rule 506.  There is no maximum annual fundraising limit under Rule 506; however, a majority of the investors participating in a Rule 506 offering must be “Accredited” with a maximum of 35 non-accredited investors permitted to participate.  To be “Accredited” an individual investor must have an annual income of $200,000 or more or $300,000 jointly with the investors spouse or conversely have an individual or joint net worth of $1 million or more (excluding the investors personal residence).  Additionally, because the purpose of Regulation D is to exempt “private” placements from the burdensome 1933 Act Registration Requirements, general solicitation and advertising is not permitted under this exemption.  This may all change with the passage of the JOBS Act (discussed below) since Title II of that act will lift this ban on general solicitation and advertising for Rule 506 offerings but only if all investors participating are “Accredited”. 

While issuers using a Reg D exemption do not have to register the offering with the SEC, they must file what is known as a Form D after they first sell their securities.  Form D is a brief notice that includes some basic information about the issuer and can be filed online.  If any non-accredited investors are involved in a Regulation D offering, then the issuer must also give each such non-accredited investor a disclosure document that outlines the risks involved with the investment.  

Crowdfunding Exemption

The JOBS Act was signed into law by President Obama on April 5, 2012; the Crowdfunding Exemption is set forth in Title III of that Act.  The Crowdfunding Exemption has received a lot of hype and publicity since even before it was passed mainly because this exemption, for the first time since the great depression, allows issuers to solicit and advertise their offerings to non-accredited investors without the need to register under the 1933 Act. 

However, this exemption is not without its limitations.  Pursuant to this exemption, issuers are limited to an annual raise of up to $1 million per year.  Additionally, there are limits on the amount that investors can invest into offerings qualified pursuant to this exemption.  These limitations are as follows:

Any investor, regardless of income, can invest at least $2,000/year

Investors making less than $100,000 or having less than a $100,000 net worth can invest 5% of their income per year. For example, if an investor makes $80,000/year, that investor can invest $4,000/year.

Investors making more than $100,000 but less than $200,000 or having less than a $200,000 net worth can invest 10% of their income per year. For example, if an investor makes $150,000/year, that investor can invest $15,000/year.

Investors making more than $200,000 (or >$300,000 jointly with their spouse) or having more than a $1 Million net worth are considered Accredited Investors, and can pretty much invest as much as they want.

Additionally, although an issuer utilizing this exemption does not have to comply with the 1933 Act’s registration requirements, the issuer must still file certain disclosure and financial documents with the SEC and must also provide all investors with a copy of such documents.  The SEC has yet to publish proposed rules to implement this exemption despite the Act mandating the SEC to act no later than January 1, 2013 and it is anyone’s guess on when final rules will be published and this new exemption will actually come into play.

About the Author:  Nav Athwal is a Founder of www.realtyshares.com, a commercial real estate investment platform and is also a Real Estate Attorney, broker and investor.  Nav graduated from UC Berkeley School of Law in 2010 as the class Valedictorian.  

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THE REALTECH REVOLUTION: ERADICATING INEFFICIENCIES IN REAL ESTATE

US real estate ranks among the world’s largest asset classes with a total market cap exceeding $27 Trillion (by comparison, the US Stock Market is almost half the size at $14 Trillion).  In 2012, close to $1 Trillion worth of US real estate traded hands and this number is expected to increase in 2013. 

However, despite being a massive market, real estate is stuck in the past and those in real estate don’t know or don’t care (business as usual is in their best interest) how disconnected real estate and technology truly are.  This has created lack of access, market inefficiencies and also tremendous market opportunity.  It isn’t surprising that those making the most progress towards eradicating these inefficiencies are innovators rather than core real estate people.  And their entrance into this market has in some cases been accidental and in others simply because they haven’t been tainted with how real estate works today and thus see an opportunity to disrupt this multi-trillion dollar market through technology. 

As a founder of RealtyShares (www.realtyshares.com), a real estate crowdfunding platform focused on eradicating the inefficiencies of investing in and raising capital for commercial real estate investments, I have had the pleasure of engaging with many of these innovators personally.  Although they come from a variety of backgrounds, they have one thing in common: they are all leveraging technology to disrupt real estate and make it more efficient.  And after careful consideration, below are my picks for the five that I believe are (or will soon be) the most disruptive.

DOTLOOP:  The US residential real estate market is over $16 trillion in size and purchases of existing homes in 2012 increased by 2.1 percent to a 4.79 million annual rate.  Yet, if you have ever bought or sold a home you know first-hand how inefficient and broken the process really is.  Dotloop, a company that assists agents, buyers and sellers through this process, is on the verge of changing that.  Dotloop’s value proposition is simple: make the residential real estate transaction process efficient and paperless.  Dotloop does this by utilizing a cloud based technology focused on inviting people to the transaction documents rather than passing around multiple versions.  As of 2012, Dotloop served more than 200,000 agents in 700 cities in the US and Canada and had raised over $7 million in funding. 

STOREFRONT:  In the US alone, there is more than 9.9 billion square feet of leasable retail space with an average rental rate of $15.15 sq. ft/year (a market cap in excess of $140B).  Although there are a growing number of startups giving brick-and-mortar retailers an avenue to build their own online ecommerce stores (i.e. Shopify), the process for retailers to find and lease space offline is inefficient and lacks transparency.  San Francisco based early-stage startup and Angelpad grad “Storefront” seeks to change that.   At its core, Storefronts product is an online marketplace for short term retail leases.  However, the coolest thing about this startup is that it propagates the pop-up shop phenomenon (i.e. giving online retailers a presence in the brick-and-mortar market).  You can find a video of one of their latest pop up shops here:  http://www.youtube.com/watch?v=P7ponQ6JeNs. 

 42FLOORS:  42Floors is for office space what Storefront is for retail space.  The demand for office space is on the rise and in 2011 was at its highest level since 2007 with 50.4 million square feet of net absorption.  42floors is a search engine for the office rentals market that is turning the inefficient office leasing process into a transparent online user friendly experience.  The founding team is a group of coders, developers and innovators (rather than brokers or real estate professionals) looking to capitalize on an inefficient yet huge market.  To date, this Y Combinator-Backed startup has connected over 1,000 businesses with over 2 million square feet of office space and has raised more than $17 million in funding and is now looking to expand internationally. 

 ZUMPER:  The US Apartment rental market has not only fully recovered since the start of the real estate recession, but is now expanding (with vacancies expected to fall from 5.5 to 5.2% in 2013 and 5.1% after that).  However, anyone that has ever looked for an apartment knows the apartment hunting process (especially in SF or NYC) is time consuming, unreliable, overly competitive and inefficient. For the last decade, craigslist has been the only real online solution (although lack of consistency, spam listings and its utilitarian design have left users wanting more).  SF based early stage startup Zumper vows to change that through a more efficient, user-friendly online apartment rental marketplace that will help apartment hunters find their next great apartment.  Zumper is currently operating in NYC, San Francisco and Chicago with expansion plans into additional markets in the very near future.

Real estate is ripe for disruption and each of the above listed companies are a testament to the fact that this disruption can come from anywhere.  Personally, I am excited for their prospects and they are worth keeping an eye on.  You can catch a few of them at RealTech SF 2013 at the end of April (www.reesio.com/realtech).  The event will be hosted by Reesio, a realtech startup that streamlines the real estate transaction process through an interactive online workflow.

[realtyshares]

Real Estate v. REITs

One question we get asked quite often is how RealtyShares differs from a REIT which stands for Real Estate Investment Trust (often referred to as "real estate stock"). At RealtyShares we give our investors direct access to real estate investments whereas the idea behind a REIT is that you have exposure to real estate without actually owning, directly, the property. 

What is a REIT?

A REIT is essentially a corporation that owns and manages a portfolio of income-producing real estate properties such as apartments, hotels, malls and office buildings (Equity REIT's or EREITs), mortgages secured by such real estate (Mortgage REITs or MREITs) or a combination of the two (Hybrid REITs).

REIT's can also be private or public.Private REIT's are not registered or traded with the Securities and Exchange Commission (SEC) and raise equity from accredited investors (i.e. individuals, trusts or other entities) whereas publicly traded REITs are registered with the SEC and traded in major stock exchanges such as the NYSE, NASDAQ and AMEX.There are approximately 800 private REITs and 200 publicly traded REITs in the United States with total assets of $400 billion.Accordingly, REITs make up only a fraction of the $11-12 Trillion Dollar US Commercial Real Estate Market.

How REITs Compare to What We are doing at RealtyShares

RealtyShares and REITs are similar in a lot of ways.Both options offer investors balance and diversification from the traditional stock and bond markets as well as value from both the current income produced from rents as well as long term appreciation of the underlying real estate asset.Both investment options also permit investors to pool their capital with other investors and thus offer a less capital intensive way to invest in a wider range of real estate.

Finally, as with a RealtyShares investment, when you invest in a REIT, you do so passively and thus you don't have to worry about the day-to-day operations and management of the asset which instead is handled by reputable management team.

Important Differences

The main difference between a RealtyShares Investment and a REIT investment is that with RealtyShares you are investing directly into tangible commercial real estate whereas with a REIT you are investing in a corporation that in turn invests your money into real estate.In fact up to 25% of a REIT's total investments can be in assets other than real estate. Accordingly, RealtyShares offers investors more control and transparency than a REIT since investors have the ability to personally select each pre-vetted investment opportunity.

Some additional notable benefits of RealtyShares v. REITs include:

Higher Leverage & Higher Returns: Direct property ownership benefits from the power of leverage (up to 80%) whereas REITs are generally leveraged at or less than 50%.  Higher leverage means higher potential returns (because you can buy more property with less equity).

Less Volatility:  Although touted as an effective way to diversify a stock portfolio, the performance of REIT shares have closely tracked overall equity market performance resulting in correlation coefficients as high as 0.86 (as early as 2011).  This means that publicly traded REIT's are moving in near lockstep with the market at large and are subject to the same volatility.  During the same period, the comparable equity market correlation for private real estate has been close to 0.14 (ranging from -0.03 and +0.25; a very low correlation). 

More Transparency and Control: When you invest directly into a real estate asset, you know exactly what you are getting and thus the process is transparent and you maintain a certain level of control.  On the other hand, when you invest in a REIT you are buying into a corporation that owns a pool of properties and you may not know exactly where your investment dollars are going. 

Until recently, and because of the typical minimum investment thresholds for most private real estate deals, REITs have been the only viable option for investors wanting to diversify their portfolio by investing in real estate.  RealtyShares is changing that by providing our investors with direct access to pre-vetted real estate investments with lower investment minimums (currently as low as $1,000+).  Thus RealtyShares for the first time gives investors the true ability to achieve a mixed-asset investment portfolio.  

[realtyshares]

What is RealtyShares?

RealtyShares is a marketplace for commercial real estate investing (Kickstarter meets Lending Club for Real Estate). The US Commercial Real Estate Market is approximately the same size as the US Stock Market (~$11 Trillion) yet access is a night and day difference.  There is no readily accessible marketplace for investing in real estate like there is for stocks, and that is what we are setting out to change with RealtyShares.  

Our Value Proposition:

Our core value is Access.  Access to Capital for Real Estate Investment Managers and Access to real estate investments for Investors.  Via RealtyShares, best-in-class Real Estate Investment Managers looking to raise capital for real estate opportunities can connect with and raise capital from Investors looking to invest in those opportunities.  All investing activity (i.e. document execution, fund transfers, etc.) will happen via our platform thus making the process paperless and efficient.

Investors:  For investors, we provide access to commercial real estate investments.  Although real estate is a great way to diversify a portfolio consisting of stocks, mutual funds bonds and the like, many investors don't have efficient access to real estate. With RealtyShares, investors can passively invest smaller amounts directly into pre-vetted real estate investments and achieve a truly diversified investment portfolio.

RE Investment Managers:  For Real Estate Investment Managers, we provide a platform for branding, marketing, connecting with investors and most importantly, raising capital.  Real Estate Managers doing $2 million to $20 million of deal volume annually are often too small for large institutional investors and have difficulty maintaining deal flow.  Many of these Investment Managers are scattered over 1,000's of websites and other online channels with no real visibility to grow their non-institutional investor network.  RealtyShares will change that by providing reputable Managers that have a proven ability to execute a defined strategy and geographic focus with a centralized platform to market themselves, their strategies and their investment offerings.  

RealtyShares is currently in private beta but will be live in the next few weeks.  We will update you as soon as we are ready to go.  

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[realtyshares]

The Real Estate Capital Stack

              One of the keys to understanding real estate investing is understanding what goes into the capital stack for a typical investment, and how variations in that stack can affect yields and returns.  Equally important is knowing the best sources for each layer of the stack.   

The real estate capital stack is the total capital invested in a property, including debt, hybrid debt and equity.  As you move up the stack, the risk increases and thus higher positions in the stack expect expect higher returns.  As you travel down the stack, the risk decreases and thus, so does the potential return.  For example, most real estate debt is secured by a deed of trust that is recorded against the property and serves as collateral in case the borrower is unable to make timely interest and principal payments to the lender.  Thus, interest rates on debt are typically lower than preferred returns on equity, which is an unsecured layer of the stack without the benefit of any such collateral.

Senior Debt:  The senior lender position is the safest in the capital stack because it is the lowest risk position and is secured by the actual real estate.  Depending on the geographic location of the property and the income it generates, a real estate investment is often financed with a loan of 70 to 75% of the purchase price or value of the property and thus is the largest layer in the stack.  The reason is simple: senior debt is cheap (compared to equity and hybrid debt) and the higher your loan to value ratio (LTV) the higher your potential cash on cash returns.  Also, with debt, an investor can spread his equity over a larger investment.   For example, suppose an investor has $1 million to invest in real estate and a conventional loan is available to finance 75% of the purchase price.  This means that an investor can purchase a property worth $4 million with the equity of $1 million.  

Equity:  At the top of the capital stack is equity financing.  Equity fills the gap between the purchase price of a property and the senior debt. The source is typically both the Sponsor as well as investors participating with the Sponsor. Equity differs from debt in that an equity investor participates in the success of the investment by receiving a higher return as the property performs better whereas a lender is entitled to an interest rate that does not depend on the investments success. Equity holds an unsecured position and thus there is no collateral to protect an equity investor like there is for a debt investor.  Because of this higher risk position, equity investors typically expect higher returns than lenders with 6-7% being a good cash on cash return for a stable real estate investment.

Mezzanine Financing:   In the middle of the capital stack is mezzanine financing. Mezzanine lenders are less secure than the senior lender but more secure than the property owners/equity investors.  Unlike with senior debt, the security for a mezzanine lender is an ownership interest in the borrower/property owner rather than the real estate itself.  Accordingly, this form of financing is a hybrid of debt and equity.  Mezzanine loans are typically short term loans (1-3 years) and given the higher risk involved, bear an interest rate that is approximately 2-3% above the interest rate for the senior debt (although returns vary widely based on the structure of the particular mezzanine investment).  Because of its high cost and the risk involved, Mezzanine debt is not a part of the capital stack for every real estate investment, and the demand for mezzanine real estate financing depends on the state of the market and whether a borrower is willing to pay 200 to 300 basis points more for a few years in order to increase their loan proceeds from 75% to 85% and even 90% of value.  

Appropriately structuring the capital stack for a particular investment is therefore an important decision and will directly impact returns to investors.  A healthy mix of the above sources of capital to minimize risk and maximize potential returns is the obvious goal.

[realtyshares]

Without rent control, would anyone outside of the top 1% be left in Manhattan?

Rent Control actually increases market rents by removing at-market rental stock from a given city/area. I live in San Francisco, where roughly 80% of the rental units are subject to rent control. Rents here have spiked approximately 15% in the last 18 months. Here's the dynamic: people with below market rents stay in those apartments, because they don't want to pay market rates. Thus those units tend to stay out off the market. When demand increases, as has happened here in the last 18 months due to increased start-up hiring, there is a reduced inventory of units to absorb that demand. Market rents spike. The same holds for Manhattan, though I'm not sure as large a share of the apartment stock is rent controlled/regulated. If rent control was removed, market rents would drop, though average rent paid would likely go up (no more renters paying below rents far below market).

[realtyshares]

Real Estate: What's a better market to invest in real estate: Baltimore or Oakland?

Oakland.  

Oakland was one of the top 3 markets in annual rent growth according to MFP research (Q3 2012): Top Ten Apartment Market Rent Growth Leaders for Third Quarter 2012.  Yes, MPF is well known and credible.  Do you see Baltimore on that list? No.  And you probably won't very often at all. Oakland benefits from proximity to SF, being next to UC Berkeley, having half of it's land area along the SF Bay hills (much of Oakland is very nice and scenic), and being part of the overall San Francisco Bay economy.  People have a desire to live here; SF is probably one of the top 4 idealized US cities.  People dream of moving here then get here and realize SF is too pricey.  They look elsewhere, including Oakland.  Oakland wins as a lower cost alternative.  No one dreams of moving to Baltimore (or far fewer at least).

My thoughts.  Btw - I really love Baltimore, and two of my close friends own there - sorry guys.  I grew up in DC.

[realtyshares]

RealtyShares Is Now "BETA"

Thanks to everyone that attended our BETA Launch Party in November at 5A5 Steak Lounge. We had an amazing time and it was very exciting to share RealtyShares with everyone, Congrats to those attendees that walked away with some swag! We received a lot of positive feedback and are working hard to make real estate crowdfunding possible via RealtyShares in Q1, 2013. That is when we expect to have our first real estate investment available on our platform for you to invest in.

RealtyShares is now in BETA and we are very excited to keep you updated on our progress in the weeks to come as the SEC gets ready to promulgate some game changing rules pursuant to the JOBS Act and as we get our first investment ready. Although our BETA version does not permit you to do any actual real estate investing, there are still plenty of things you can do to stay engaged and become an informed real estate investor. Here are just a few of the things you can do with RealtyShares BETA:

Sign Up

Signing up for realtyshares.com is the first step towards becoming a part of our investment community and investing in real estate investments through our platform. Also, by signing up you get immediate access to an investor profile and sample deals. Although you cannot invest in these sample deals, they will provide you with insight on the types of deals you will be able to invest in Q1, 2013.

Stay Engaged and Become Informed through RealtyU

While most people are familiar with real estate, understanding how to evaluate the suitability of a specific real estate investment is important to becoming a successful real estate investor. That is why we created RealtyU. Through RealtyU we will provide easily comprehensive educational tutorials and materials that will allow you to stay engaged and become an informed investor able to accurately assess the investment that most adequately meets your investment needs and your risk threshold. We will update RealtyU regularly and you should check back periodically for such updates.

Ask Questions, Provide Feedback

Finally, as one of our BETA users, you have another very important task: Providing us with regular feedback and asking us questions as they arise. We are constantly looking to improve our platform and our user experience. You are a very important part of that process. Accordingly, we hope that you will provide us regular feedback. We will make every effort to respond as quickly as possible. Email all feedback and questions to [email protected].

[realtyshares]

RealtyShares Official "Beta" Launch

RealtyShares is excited to announce its official Beta Launch party on November 14, 2012 from 5:30pm until 8:00pm at 5A5 Steak Lounge in the financial district, San Francisco.

The event "Hypin' Orange November" will be hosted by SFHyp and will feature RealtyShares and Habitat for Humanity East Bay/Silicon Valley as these two organizations team up to spread the word about real estate, crowdfunding, online investing and social good. The event will feature snacks, giveaways, brief and informal presentations from SFHyp, RealtyShares and Habitat for Humanity, followed by mingling, networking and drinking! It will be a great time, with great people and for a great cause, so please show your support for RealtyShares by attending!

For more on the event and to RSVP, please visit http://www.facebook.com/events/489381904426682

What is SFHYP?

HYP's mission is to bring together young professionals to celebrate the people, things, and causes that they believe in. HYP is a strong supporter of startups, businesses and nonprofits in their community. For more on SFHYP, please see http://www.sfhyp.com.

Habitat East Bay/Silicon Valley?

Formed in 1988, Habitat for Humanity East Bay/Silicon valley (HEBSV) was formed as an independent affiliate of Habitat for Humanity International serving Alameda and Contra Costa Counties. HEBSV builds homes that are not only affordable, but also environmentally sustainable. HEBSV's innovative programs provide first-time affordable homeownership opportunities for low- and very low-income families with children. These homes are built using a large amount of volunteer labor and donated funds and materials. For more on HEBSV, visithttp://www.habitatebsv.org.

Questions? Please email us at [email protected] or see our FAQ.