real estate chapter 17
who does most of the private equity?
"non-institutional" investors
how big is the commercial real estate market?
$6.5 trillion
Forms of Ownership for Pooled Equity Investments in Real Estate
- C corporation • S corporation • General partnership • Limited partnership • Limited liability company • Tenancy-in-common (TIC)
sources of commercial real estate debt
74% of outstanding commercial debt ($2.4 trillion) is privately held by institutional and individual investors - Commercial banks ------40% of private commercial debt - Life insurance companies (10%) - Savings associations (5%) - Foreign investors - Pension funds, government credit agencies, others
Private Equity Markets Non-Institutional Investors
Individuals and families RE syndications that form: - Limited partnerships (LPs) - Limited liability companies (LLCs) - S corporations - Other types Syndication is a pooling of private equity capital - There are advantages and disadvantages
REITs (Real Estate Investment Trusts)
Joint ventures, usually in the form of a limited partnership, through which real estate is purchased. A person must have a securities license to sell REITS. REITs avoid double taxation as they are taxed to the beneficiary. at least 100 people must own a REIT's shares and no five investors can have more than 50% at least 75% of REITs assets must consist of real estate assets, cash, and government securities
Mortgage Originators vs. Long-Term Holders
Many long-term holders purchase their mortgages in the secondary mortgage market Who originates the mortgages purchased by life insurers, foreign investors, pension funds, and CMBS issuers? - Other long-term holders -------•primarily banks (responsible for about3⁄4 of all ong-term commercial originations) - Mortgage banking companies
Mortgage REITs
Purchase mortgage obligations (both home and commercial loans) and thus become, effectively, real estate lenders
who does the most public equity?
REITs
Equity REITs
Real estate investment trusts that invest in and operate income-producing properties (commercial)
syndicate
a group of persons or legal entities who come together to carry out a particular investment activity advantages and disadvantages? takes place among both institutional and non institutional investors
CBL
a real estate investment trust (REIT) listed on the New York Stock Exchange under the symbol, "CBL". CBL is one of the largest mall REITs in the United States and owns, holds interests in or manages 160 properties including 85 market dominant enclosed malls and open-air centers from coast to coast. CBL is an active developer of new regional malls, open-air centers, lifestyle and community centers.
Private Equity Markets Institutional Investors
pension funds - direct investment - Commingled real estate funds Life insurance companies - Northwestern Mutual (Milwaukee) Others: - Foreign investors -------AFIRE (Association of Foreign Investors in Real Estate) - Banks - Savings associations
advantages of REITs for investors
portfolio diversification and liquidity
how are most commercial real estate deals funded?
private equity (44%) and private debt (37%)
trends for sources of commercial real estate debt
• By 2006, 75% of all commercial debt was securitized (CMBS) $206+ Billion • By 2009, little to none - $3 Billion • Now, coming back (2011, $30 Billion) 21% of total outstanding mortgage debt is CMBS - GSE backed commercial mortgage-backed securities (CMBSs) - Non-government backed CMBS - Investment grade unsecured debt of large REITs --------Had been fastest growing source of long-term commercial mortgage funds are investors in publicly traded CMBS.
Types of REITs
• Equity REITs, Mortgage REITs, Hybrid REITs • Retail, office, apartment, etc • REITs are not taxed if they satisfy a set of restrictive conditions on an ongoing basis - 90% of REIT taxable income must be paid out in dividends each year
What Drives the Choice of Ownership Form?
• Federal income tax rules • Desire of investors for limited liability • Management control issues • Ability to access debt and additional equity capital • Ability of investors to dispose of their interests in the organization
