As fund managers, it’s important to have a historical perspective when it comes to investment strategies and where we allocate our money. Real estate investing has been a popular way to build wealth for centuries, with people using a variety of methods such as direct ownership, partnerships, and land trusts.
As David McCullough said, “history is who we are and why we are the way we are,” and by understanding the evolution of real estate investment vehicles, we can make informed decisions on our future investments.
REITs vs. REIFs
Before the introduction of Real Estate Investment Trusts (REITs) and Real Estate Investment Funds (REIFs) like Terra Capital, people invested in real estate using a variety of methods. One of America’s oldest legal agreements to invest in real estate was through land trusts, which date back to the 1800s. A century later, two of the most common methods were either direct ownership of property or through partnerships, which pooled investor resources to purchase a property.
These partnerships eventually paved the way for the first official limited partnerships, or LPs, which appeared in the 1950s as a way to combine funds from multiple investors to put into real estate assets. The LP structure allowed for limited liability for investors, as well as a tax advantage in the form of pass-through taxation. As LPs gained popularity, the first REITs appeared in the 1960s, and REIFs followed closely in the 1970s, and both remain popular investment vehicles to this day.
While REITs are publicly traded companies that own and operate income-producing real estate, REIFs are privately held investment funds that pool money from a group of investors to invest in real estate assets. Some of the most well-known and longstanding REIFs include Brookfield Asset Management, Blackstone Group, PGIM Real Estate, and Invesco Real Estate.
Examples of REITs:
- Simon Property Group: A retail-focused REIT that owns and operates shopping malls, outlet centers, and other retail properties.
- Prologis: A leading industrial REIT that focuses on logistics and distribution facilities.
- Equity Residential: A large residential REIT that owns and manages apartment buildings in major US cities.
Rule 506(b) vs Rule 506(c)
To give investors more access to private real estate investment vehicles, in 1982 the SEC adopted Regulation D, which provided two exemption options for private offerings of securities in the US: Rule 506(b) and Rule 506(c). Investors could now choose between 506(b), which allows issuers to raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited investors; and 506(c) offerings, which allows issuers to raise capital from accredited sponsors only, but there is no limit on the number of sponsors who can participate in the offering.
Prior to its introduction, private securities offerings were subject to various state and federal securities laws, including registration requirements and restrictions on how securities could be sold. The introduction of Rule 506 under Regulation D provided more clarity and certainty for issuers and allowed for a more streamlined process for raising capital through private offerings.
Examples of Rule 506(b) and Rule 506(c) Offerings:
- 506(b) offering: A small real estate developer raises capital from both accredited and non-accredited investors to fund a new apartment complex.
- 506(c) offering: A private real estate fund seeks investments from accredited investors only to acquire and manage a portfolio of commercial properties.
TIC vs DST vs Crowdfunding
In the past two decades, new investment vehicles have emerged that allow investors to pool their resources to invest in real estate. Tenants in Common (TIC) agreements, introduced in the early 2000s, enable two or more people to own an undivided interest in a property, commonly used to purchase larger, more expensive properties and offering various tax benefits. The Delaware Statutory Trust (DST), created in 2004 by the IRS Revenue Ruling 2004-86, allows for fractional ownership of real estate assets. Crowdfunding, in particular Reg CF, is another method that has emerged as a popular real estate investment tool following the passing of the 2012 JOBS Act. Reg CF allows companies to raise funds from investors online, giving both accredited and non-accredited sponsors more access to investors in a more streamlined process.
Examples of TIC, DST, and Crowdfunding:
- TIC Agreement: A group of investors pool their resources to purchase an office building, each owning an undivided interest in the property and sharing in the rental income and tax benefits.
- DST Investment: Investors purchase fractional ownership in a portfolio of properties held in a Delaware Statutory Trust, providing diversification and access to larger-scale investments.
- Crowdfunding: An online platform allows accredited and non-accredited investors to invest in real estate projects, such as the development of a new residential community or the renovation of a historic building.
Which Investment Vehicle Is Right For You?
Choosing the right investment vehicle is crucial for both fund managers and sponsors today, just as it has been throughout history. Even for passive investors, selecting the right investment vehicle is essential. The options mentioned above come with their own pros and cons, such as the liquidity offered by REITs or the specific strategy of REIFs. Terra Capital is offering a Reg D exemption 506c to allow for a unique high-return strategy to grow our base of accredited investors.
In addition to the investment vehicles already discussed, there are other options available for real estate investors. Some of these include:
- Real Estate Mutual Funds: These funds pool investors’ money to invest in a diversified portfolio of real estate assets or real estate-related securities, such as REITs or real estate operating companies (REOCs). Examples of real estate mutual funds include the T. Rowe Price Real Estate Fund and the Fidelity Real Estate Investment Portfolio.
- Real Estate Exchange-Traded Funds (ETFs): Similar to real estate mutual funds, these funds track an index of real estate-related securities, providing diversified exposure to the real estate sector. Examples of real estate ETFs include the Vanguard Real Estate ETF and the iShares U.S. Real Estate ETF.
- Private Real Estate Syndications: These are groups of investors who pool their capital to invest in specific real estate projects, such as the development of a new apartment complex or the acquisition and renovation of an existing property. Syndications can be structured in various ways, such as through LLCs, LPs, or other legal entities.
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