Contrary to the prevailing myth, Investment Real Estate Buyers can increase their return and reduce risk when they purchase "Fee Simple" (own it outright) rather than purchase a Partnership, Participation, Security or REIT. This article explains why.

1. Commercial Real Estate Investing -<br />Why Buy Fee Simple<br />Buying Cost – Accredited Investors know that 15% to 40% of the price paid for an investment registered with the SEC (Securities Exchange Commission) goes to the Promoter for his registering and selling cost. This Front-End Fee is a necessary component for any REIT (Real Estate Investment Trust), Security or Registered Participation and Partnership. In addition, most LLC (Limited Liability Company/Corporation) backed with Real Estate must be registered with State and Federal Securities Regulators. <br />Commercial Real Estate buyers who select Wall Street type offerings start off at a loss. Investment Banking cost can be saved if Real Estate is bought quot;
Fee Simplequot;
(own it outright). The buyer of a Commercial Real Estate Security is fortunate because unlike many “paper-backed” investments like credit card debt or accounts receivable, Real Estate has the ability to quickly “appreciate” within a few years, especially during a good economy.<br />Appreciation, along with increasing demand for Office Buildings, Shopping Centers, Medical Complexes, etc., have historically overcome the premium paid for quot;
Paper”, backed by Commercial Real Estate. However, when you buy Real Estate “Fee Simple” and actually own the brick, mortar and dirt, you know exactly how much the Real Estate Cost, and exactly what you pay for it; something generally unknown when you buy a Participation, Partnership or REIT.<br />Buying Fee Simple eliminates the “Smoke and Mirrorsquot;
concerning how much “Skin” the Promoter actually has in the game, as opposed to how much “Skin” he bought from a large Insurance Company like AIG for their pledge or guarantee. And we all saw how much the Pledge from companies like AIG was worth in September 2008!<br />Fee Simple ownership also allows the buyer to know the exact purchase and sale price. Promoters offering a REIT (Real Estate Investment Trust), Security or Partnership don't report exact purchase price or sale price because they sell yield, not real estate.<br />Promoters selling Commercial Real Estate to Investors pay their registering, operation and selling expense and still make healthy profit for themselves. Their clients manage to make good returns because of Appreciation. However, if the buyer were to purchase the exact same Real Estate “Fee Simple” they would pay much less for the Asset, due to the fact they have eliminated the underwriting, acquisition, operation and selling cost of the Promoter.<br />Incentive Fee - When you buy Real Estate “Fee Simple” you eliminate the Incentive Fee. The Incentive Fee is the fee paid from the investor's profit to the Promoter as quot;
Incentivequot;
to make sure the Promoter’s projected returns are met.<br />Incentive Fees generally range from 10% to 40% of the investor's profit. When you own Real Estate “Fee Simple” there is no Incentive Fee to pay; the investor keeps all his profit!<br />Management Fee - When you buy Real Estate “Fee Simple” you control or eliminate the Management Fee. The Management Fee is the fee paid to the Promoter who manages the Asset.<br />When you buy a Partnership, Security or REIT, the Promoter will make the decision on how much Management Fee is paid, and who receives it. The Promoter will generally pay it all to themselves, one of their subsidiaries, or another selling partner. Occasionally, they only receive a portion of the Management Fee in the form of a Referral Fee, through an arrangement with the Management Firm they select. This means the Management Fee may be higher than necessary because this is a “Profit Center” for the Promoter, and there is no competition for this service.<br />Owning Commercial Real Estate “Fee Simple” allows you to select and manage your Manager. There are many companies that offer Management Services on a short-term or long-term basis. When you own “Fee Simple”, you can select several competent Management Firms and allow them to compete for your business. This simple concept reduces the Management Fee by competition.<br />Control - When you own Commercial Real Estate “Fee Simple” you decide if and when you want to sell. The Real Estate Market varies just like the stock and bond market. The Promoter who sells a Partnership, Security or REIT has a responsibility to meet their projections. In addition, they have a responsibility to their stockholders or owners. Therefore, they may have pressure to generate cash flow for many different reasons, which are not always in the best interest of the “Paper” holder.<br />There are also times when a premium offer is made on the underlying asset of the Partnership, Security or REIT from a motivated buyer. This information seldom gets to the holder of the “Paper”, because the decision-maker is the Promoter, not the investor.<br />SUMMARY<br />This all boils down to the fact that a Commercial Real Estate Buyer cannot reduce or mitigate risk by purchasing a Partnership, Participation or REIT. There is always the Risk-Reward trade-off. A fractional interest in Commercial Real Estate may end up being worth less than the ink on the paper; just like the equity and debt owners of paper issued by Enron, WorldCom, Bear-Stearns, Lehman Brothers, WaMu, Wachovia, Freddie Mac, Fannie Mae, AIG and Mortgage Backed Securities in general.<br /> <br />However, when you buy Commercial Real Estate Fee Simple, you get to keep all the profit; and you never end up with less that the physical asset.<br />_____<br />About the Author: Jim Ed Brown is a Professional Commercial Real Estate Buyer’s Broker, located in The Woodlands, Texas. Mr. Brown is a Certified Buyer’s Agent by the Buyer Broker Institute, Graduate Forest Technician, former Forester and Registered Appraiser. In addition, Mr. Brown is Past President of the Century21 Arkansas Real Estate Investment Society, and an Investment Specialist who has worked as VP of Earnings Improvement and Branch Manager of Securities Firms in Memphis, TN. and New York City. He has worked for Lehman Brothers as VP Institutional Sales and lead teams which restructured the Commercial Real Estate and Residential Loan Portfolios of some of the largest Financial Institutions in the US. He now offers a Commercial Real Estate Buying Service from The Woodlands, Texas. For more information please go to http://www.brownlandandtimber.com<br />