Commercial Real Estate Investing: REITs, MICs, Funds and SPV investing

In this Article we will be discussing different types of pooled investments including Private Direct Investing via Asset Specific Pools, REITs, MICs and Investment Funds.

What is a Pooled Investment Vehicle in general?

As its name suggests, a pooled investment vehicle (PIV), sometimes called a pooled fund, is an investment fund raised by pooling small investments from a large number of individuals. The professional management team responsible for a pooled investment vehicle combines these individual investments into a single large fund that is then deployed for investment purposes. The group of individual investors are all stakeholders in every investment the fund makes, in proportion to the size of each individual’s investment in the fund. Pooled investment vehicles are sometimes organized as standalone companies, and in other cases they are arranged and managed as entities within a larger business, such as a brokerage house.

What are the Benefits of a Pooled Investment Vehicle?

The key benefits of aggregating capital into pools and investing are:

Negotiating Power

Typically small companies do not have the negotiating leverage to purchase assets they want at the price they want compared to bigger entities, due to broker favours and market network. While small companies rely on local market inefficiency to attract better deals, the Pools rely on “clout” similar to how Walmart deals with their suppliers.

Professional Management

As pools get bigger, they can have highly paid executives running the business and as a result investors now have access to professional management and administration of their real estate. This does come with a heavy platform cost though. For e.g. CEO of a medium to large sized pool alone might be pocketing $3MM to $5MM in total compensation. That eats into investor returns.

Economies of Scale

Because the pooled investment vehicle allows the entity to make larger-scale investments, the fixed costs of buying, managing and selling real estate goes down per dollar invested.

Diversification

Multiple asset investing pool does provide benefit of levelling out of volatility in cash flow distribution but often times this comes at the cost of lower returns as the costs of maintaining a large pool do eat into returns.

Common Types of Pooled Investment Vehicles

Private Real Estate Investment Trusts

  • 6% to 8% CoC monthly,
  • Total IRR +/-10%,
  • Liquid but with hair cuts &
  • With OM open to non Accreds

A REIT is a real estate company that operates by pooling money raised from investors (individuals as well as institutions) and using that capital to purchase real estate — often a large portfolio of properties. While many REITs are traded on public exchanges and anyone can purchase shares in them, certain REITs are closed or private. These REITs generally have $50,000 or more in min investments. If such a REIT has filed an Offering Memorandum with securities commission, they are able to offer their product to non Accredited Investors as well. In certain circumstances, such REITs are also eligible for RRSP investments.

Mortgage Investment Corporation (MIC)

  • 6% to 9% CoC monthly,
  • No upside beyond that,
  • Liquid typically after a 1 year lockout and then with hair cuts (4% going to 1%),
  • RRSP eligible,
  • Backed by residential/commercial
  • First and Second mortgages up to 80-85% LTV

These are mortgage pools created under the Income Tax Act and have strict criteria under which they must operate:

  1. A MIC can only invest or manage funds, and cannot manage or develop real property. A MIC cannot own debts secured on real property situated outside Canada, debts owing by non-residents unless such debts were secured on real property situated in Canada, shares of the capital stock of corporations not resident in Canada, or real property situated outside of Canada or any leasehold interest in such property.
  2. No shareholder (together with related persons, as defined in the ITA) may at any time own, directly or indirectly, more than 25% of our common shares.
  3. The cost for tax purposes of any interests in real property (including leaseholds but excluding real or immovable property acquired by foreclosure after default by the mortgagor) may not exceed 25% of the cost of property.
  4. There are certain restrictions as to maximum debt-to-equity ratio.
  5. Typically private MICs are offering 6% to 9% yield payable on monthly basis to investors.

One way to invest in a non-public real estate investment trust or a MIC is to log in to www.r2-re.com and select out of one of the many available options. You can also request to meet and or speak with our Investment Advisors.

www.r2-re.com

Publicly traded REITs on the other hand function just like other stock issues traded on the public markets, and they can therefore lose value if the market or a given market sector in which the REIT is invested drops. But private REITs also carry risks for e.g., a general downturn in the economy can have impact on property level leasing.

Investment Funds

  • 4% to 5% CoC monthly,
  • Total IRR of 8-10% p.a,
  • Open or Close ended (limited liquidity),
  • High min. investment amounts,
  • Large stabilized assets in core markets,
  • Big platform costs resulting in lower yields

Typically such funds are reserved either for ultra rich or Institutional money only. Most of the Funds offer a very low cash pay out (3-4%) and have very high minimums to invest in ($5MM and upwards) unless if they are made available as a special unit/share class through the IIROC channel. The funds will underwrite that it’s NAV (Net Asset Value) over time will add up to a total return of around 7% to 9%. Such funds are typically investing in “Core” properties i.e stabilized large income producing assets that have little or not value appreciation potential over time outside of rental growth (especially in todays’ CAP rate environment). These Funds like the investment to be closed (no liquidity) but if its open ended then there are certain liquidity options available albeit with “hair cuts”.

Property Level Direct Investing through a Special Purpose Vehicle (SPV)

  • Asset specific i.e Hard security. Proceeds of asset liquidation always go to beneficial owners after debt payout (if o/s),
  • No monthly. All returns at the exit,
  • 15% to 23% ROI,
  • Equity multiple target 2.0 i.e money doubles during investment horizon,
  • Time horizon of 3-4 years but some longer,
  • Development LPs or JVs,
  • Open for RRSP and Non-Accreds if an OM filed with Securities Commission,
  • Min investment usually 50k but selectively down to 10k

These structures are typically utilized on development projects. At R2 for example, we will team up with certain high quality developers on trophy projects. Our investors will come into the SPV pool which is in a JV/LP position with the developer. We take a hands on approach on the “capital management” aspect of the project while we leave day to day “operations management” to the developer. We underwrite these projects to yield 15% to 23% ROI per year for investors typically. Our SPV will be structured as an LP giving certain tax benefits to the holders of the LP units. Our SPV pool investments are then available to our investor base for a min of $10k and up. In certain cases, our units will also be RRSP eligible.

In many ways, this structure is best of both worlds: Investors get a unified voice representing their capital on the table and also rely on expertise of a well established property developer to see project through completion.

These are some very subtle differentiators of such investment vehicles in the market and investors are encouraged to compare and contrast them.

For more contact us at www.r2-re.com

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