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Real Estate Investing 101: Private Equity

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This is the presentation deck from Real Estate Investing 101: Private Equity, PeerRealty's second in a series of on-demand educational videos. In this series, PeerRealty Head of Investments Jeff Rothbart takes viewers through the fundamentals of real estate investing, and discusses some of the key metrics that real estate investors should consider. This first course, Private Equity, discusses the fundamentals of real estate private equity transactions, and covers concepts like private placement memorandums, the "promote," and preferred returns.

You can view this webinar at http://resources.peerrealty.com/real-estate-investing-101-private-equity

Published in: Real Estate
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Real Estate Investing 101: Private Equity

  1. 1. REAL ESTATE FUNDAMENTALS & SYDICATIONS REAL ESTATE PRIVATE EQUITY PeerRealty
  2. 2. RISK PROFILE • There are four main types of investment funds which all target different returns. • There is no bright line rule that separates these different risk types and people in the industry might argue there are additional risk tolerances in between. • These transaction level returns are generally gross IRR, not net to the investors. Core Funds 7% - 10% Core Plus Funds 11% - 13% Value Add Funds 14% -17% Opportunity Funds 18% +
  3. 3. PRIVATE PLACEMENT MEMORANDUM • Also known as a “PPM” or Offering Memorandum, this is a document that outlines the terms of securities to be offered in a private placement. Resembles a business plan in content and structure. A formal description of an investment opportunity written to comply with various federal securities regulations. A properly prepared PPM is designed to provide specific information to the buyers in order to protect sellers from liabilities related to selling unregistered securities. • Typically PPMs contain: a complete description of the security offered for sale, the terms of the sales, and fees; capital structure and historical financial statements; a description of the business; summary biographies of the management team; and the numerous risk factors associated with the investment.
  4. 4. SPECIFIED VS. BLIND ASSET POOL • Specified Asset Pool – An equity fund established to acquire specific, identified assets. • Blind Pool – An equity fund established to acquire assets that meet certain criteria’s but that have yet to be identified.
  5. 5. PARI PASSU • Latin for “in equal proportion.” • If you have a 95% / 5% relationship between JV partners, all Venture Costs, Cash Flow, Tax Attributes (i.e. depreciation) will be pari passu, in equal proportion (95/5), until the hurdle rate is satisfied and the GP gets promoted.
  6. 6. Preferred Return / Hurdle Rate Hurdle Rate - The internal rate of return that a fund must achieve before its general partners or managers may receive an increased interest (the promote) in the proceeds of the fund. Often, if the expected rate of return on an investment is below the hurdle rate, the project is not undertaken. – This is also called the “Pref” or “Preferred Return.” – The higher the pref, the higher the cost of capital for the sponsor.
  7. 7. PROMOTE Once the pref/hurdle rate is fulfilled (and the catch up has been applied, if any), the LP is “promoted” to a higher percentage. – For example, if you have 95/5 partners and the deal calls for an 8% preferred return (IRR) (the hurdle rate), once the IRR exceeds 8%, the interests will switch to 80/20 and the LP has received a 15% promoted interest. • There is sometimes what is called a “Super Promote” that will create a second hurdle rate and higher promote (60/40 or 50/50) after this hurdle is reached. – The “Promote” is also sometimes called the “Carried Interest” which there has been a lot of discussion about changing the method of taxation.
  8. 8. PREF’S AND PROMOTE GP (Fund Sponsor) LP (Investors) Initial Equity Investment $50,000 $950,000 Sales Proceeds ($2,000,000) Preferred Return (8%) $4,000 $76,000 Return of Equity $50,000 $950,000 Balance of Sale Proceeds ($920,000) If Pari Passu $46,000 $874,000 Promote Split (20%/80%) $184,000 $736,000 Total Cash Received (ROE) $238,000 (476%) $1,762,000 (185%) Assumptions: 95/5 Split $1 Million Investment 8% Proffered Return Property Is Held for One Year 80/20 Promote $2 Million upon Disposition Cash Flow Ignored All Fees Ignored
  9. 9. Catch Up’s Once the returns exceed the pref and both the GP and LP have received their equity and pref, the LP sometimes receives a preferred payment to the hurdle rate. Once the hurdle rate has been achieved by the GP, the LP “catches up” to the GP at the hurdle rate.
  10. 10. CLAWBACK PROVISIONS • The clawback provision is sometimes called a "look- back," because it requires a partnership to undergo a final accounting of all of its capital distributions when the fund is wrapped. • This task is designed to ensure that the G.P. receives no more than its fair share of the profits.
  11. 11. SQUEEZE DOWN FORMULAS If any partner fails to make a required capital contribution, their interest in the investment vehicle is “squeezed down” to balance out for the additional capital funded by the contributing partner. – This would also most likely constitute a default under the organization documents.
  12. 12. ROUND TRIPPING THE ASSET(S) This is the process of acquiring and then disposing of the asset. Round Tripping is usually discussed in the context of track record. If you have not round tripped the asset, then your returns are all projected and hypothetical versus if you have disposed of the asset and have actual returns to report.
  13. 13. PeerRealty PeerRealty.com invest@PeerRealty.com premier equity crowdfunding platform and secondary market for crowdfunded assets

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