Real Estate Investing 101: Private Equity

December 15, 2015

This excerpt from our webinar series discusses larger institutional real estate transactions.

 

 

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Note: The following is a brief excerpt from Episode 2 of Real Estate Investing 101, PeerRealty's on-demand webinar series. In this episode, PeerRealty Head of Investment Jeff Rothbart discusses concepts like private placement memorandums, preferred returns, and the "promote." You can sign up for the series and watch the entire episode here.

Real estate private equity is no different than any sort of other investment. There are all sorts of risk tolerances that certain investors may have and certain risks that are presented by deals. So generally, let’s talk first about the four kinds of larger buckets of risks.

The first kind is core assets. Core assets are what you would expect to be owned by a public REIT, and have the lowest IRR thresholds.

Core plus investments are core investments that maybe have a little bit of value add. Maybe they need some leasing or some maintenance, some updating, whatever it might be, but they are generally core assets that can be bought at slight discount to a core property. You will see that there is a slight uptick in the IRR presented by those deals.

The next level is value add transactions, which have a real value add component to them. They are certainly more risky than a core deal, but they are not totally opportunistic either. Value add transactions tend to have IRR in the mid to high teens.

real estate investingThen the final bucket is opportunistic, and it’s exactly what you would expect. It is high risk, high reward opportunities. We believe here at PeerRealty that we will look at all deals across all of these risk spectrums, so long as those deals are priced appropriately for what the asset, the risk opportunity, and profile of the transaction may be.

The second concept that I want to talk about is called private placement memorandum. When you invest in real estate, you will get a private placement memorandum. The private placement memorandum generally has two components. The first is a legal component and the second is a marketing component.

The legal component will go through all of the things that you expect it to go through. Who are the key principals? What is the summary of primary terms? What is the experience and track record of those principals? What are the economics of this transaction or this investment? And then, traditionally a copy of the LLC Operating Agreement is attached there too.

In the marketing component of a private placement memorandum, you generally find case studies on previous transactions. Some is duplicative of what is in the legal component, but generally, this is much more of a marketing presentation. PeerRealty suggests that investors read both the legal and the marketing components of a private placement memorandum prior to investment.

The next concept that I want to talk about is blind pools versus specified assets. Most of the deals that you have seen to date on PeerRealty have been specified assets. You know as an investor that you are going to buy property X or property Y. You can study in dilligence the merits and detriments of property X or Y, and then make a determination as to whether you want to invest.

PeerRealty is about to launch shortly a blind pool or partial blind pool investment [the Ameritus Real Estate Fund, currently active on the site]. What this means is, generally, that you do not know what you are going to invest in. We can talk to you about what the sponsors have done in the past and some other deals that may be in the same specific pool, but you will be blindly investing with the sponsor and with PeerRealty, understanding that they will be looking for acquisitions that fit a certain type of criteria. The underwriting for the examination and diligence conducted by an investor for blind pool is different than it is for a specified asset fund.

 

Jeff Rothbart

Jeff Rothbart

Jeff Rothbart is the Head of Investments at PeerRealty.

 

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