UNDERSTANDING THE BENEFITS OF A REG D RULE 506(C) PRIVATE OFFERING FOR REAL ESTATE DEVELOPMENT FIRMS [SECTION 2 of a 3 Part Series on Accredited Investor Crowdfunding]

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UNDERSTANDING THE BENEFITS OF A REG D RULE 506(C) PRIVATE OFFERING FOR REAL ESTATE DEVELOPMENT FIRMS [SECTION 2]

 

Editor’s Note: The following was written by Laurie Thomas Vass, a registered investment advisor, and regional economist. Vass manages The Private Capital Market, a crowdfunding platform. Guest contributors’ opinions are their own and do not necessarily represent the views of Crowdsourcing.org

Seeing The Reg D Offering From Your Company’s Perspective as an Issuer of Private Securities

The reason that terms like “cap rate” and IRR are used in many investment documents related to real estate is that these terms have much more significance to real estate professionals than they do to investors.

Real estate professionals usually begin their analysis by trying to figure out:

  1. How to put as little of their own capital into the deal as possible,
  2. How to receive the same preferred return as investors on the firm’s own invested capital in the deal,
  3. How to structure the deal to receive a “promote” (carry) share of the remaining cash flow and profits,
  4. How to receive a commission related to property acquisition, plus fees related to loan financing and property management,
  5. How to receive some share of the tax benefits related to the real estate deal.

Understanding The Benefits of A Reg D Rule 506(c) Private Offering For Real Estate Development Firms [Section 1]

Editor’s Note: The following was written by Laurie Thomas Vass, a registered investment advisor, and regional economist. Vass manages The Private Capital Market, a crowdfunding platform. Guest contributors’ opinions are their own and do not necessarily represent the views of Crowdsourcing.org.

 

Understanding The Benefits of A Reg D Rule 506(c) Private Offering For Real Estate Development Firms [Section 1]

Introduction: Seeing The Real Estate Reg D Offering From The Perspective of Potential Investors

One way to view the topic of real estate crowdfunding is to begin the analysis by seeing the investment from the perspective of a potential investor. Imagining how the investor views real estate investments, compared to all other investment alternatives, is useful because it provides an insight into how investors may select either a real estate crowdfunding website or a direct corporate private offering to complete their investment decision.

Imagining the investment from the perspective of the investor is also an essential mental exercise for all commercial real estate brokers and CEOs who are contemplating a Reg D Rule 506(c) offering. The new SEC rules authorize the CEO to issue securities, on behalf of the company, and part of the successful raise requires that CEOs become the best securities salesperson the company has ever seen.

Creating the Real Estate Special Purpose Entity: The Best Deal Structure For Crowdfunding Real Estate Deals

Editor’s Note: The following was written by Laurie Thomas Vass, a registered investment advisor, regional economist and licensed real estate broker in the State of North Carolina. Vass manages The Private Capital Market, a crowdfunding marketplace. Guest contributors’ opinions are their own and do not necessarily represent the views of Crowdsourcing.org.

In either a Reg D or Reg A offering, a real estate development company can offer to investors any form of securities that suits its goals. The strategy for the company is to structure the terms and conditions of the offering that are attractive to potential investors, and competitive with the offerings of other real estate development companies.

The recommended strategy of The Private Capital Market is to create a subsidiary legal entity called a “Special Purpose Entity,” (SPE), that raises capital, and afterwards, pays out dividends and interest to investors, for each capital project undertaken by the real estate company.

1. The Value and Benefits of the SPE To Both Investors and the Real Estate Company

Special Purpose Entities (SPE) are legal business entities formed to insulate investors from the threat and risk of bankruptcy, if the parent real estate development company fails. The stream of benefits from the investment securities issued by the SPE are secure, even in the event of the bankruptcy of the parent real estate development company.

Investors can reduce risk, and gain more security in the future payments from the SPE, because the future payments are guaranteed and insured by the parent real estate development company. The real estate assets of the capital project are segregated from other assets of the company, and generally, the payments are secured by the investor’s direct financial interests in the real estate assets that are transferred to the SPE.

Creating the Real Estate Special Purpose Entity: The Best Deal Structure For Crowdfunding Real Estate Deals