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Are you potentially
buying securities or are you buying an interest in a real property
estate? What's the difference? Is there any hidden advantage
one way or another? Commercial real estate investors must make
these judgments on a sound basis in order to only deploy their stock in
those transactions that offer the highest returns for the lowest risks.
The biggest differences
between securities and interests in real property are in form:
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Real property
interests (leasehold estate or fee-simple estate) are represented by
title to the real property being vested in the name of the
investor. The investor is legally liable for the property
taxes, maintenance and insurance of the real property. The
investor acquires the real property interest via a sales contract
(similar to the one you signed when you bought your house or rented
an apartment). Real property interests are typically
considered to be non-liquid in the capital markets.
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Securities are
represented by stock certificates, loan pools, bonds and the
like. This makes up a big portion of the capital market
liquidity pool and these investments come under the regulatory
oversight of the Securities & Exchange Commission and the
corresponding state securities regulators. These do not
represent a real property interest per se, but a share (usually
pro-rata) of a given class of securities (e.g.: preferred stock,
common stock, bonds, commercial paper, etc.). If the
securities are issued by a publicly-traded company the securities
are said to be liquid. If the company is not publicly-traded
(as the vast majority are not publicly-traded) the securities are
said to be illiquid.
In both cases, you have a
responsibility to undertake your own due diligence and not rely upon the
broker or investment banker (as the case may be). You have to make
some comparisons. We suggested the example of SPDRs.
Ask yourself how these investment opportunities stack up against the
relatively riskless yield of the SPDR? Are the findings of the
various due diligence documents (market study, financial study, business
plan, capital funding plan, etc.) tracking through the entirety of the
development program in a building block fashion? Note the graphic
above that demonstrates the building-block approach to commercial real
estate investing. Everything builds on the previous step so the
risks increase at each level that a mistake in the analysis process can
lead the project far afield from the market. This is why a
thorough understanding of the due diligence documentation is going to be
so important to you. Information is your friend when it comes to
making investments in commercial real estate development finance.
The returns can be truly breath-taking, but you have to do your homework
(or have someone like Rainmaker Marketing Corporation analyze the
homework and give you a summary of the information).
Now back to where we were
so we can continue the discussion. Click here
to return to the topic page.
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