Real Estate Investors - How Securities & Real Estate Property Interests Work

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:

• 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.

• 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).

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