Ways to Invest in CRE

Six things to factor into your decision to invest in commercial real estate as a family enterprise.

The last decade has proven to be a golden age for Commercial Real Estate (“CRE”).  If you have not yet invested in CRE, I’d certainly venture to guess that you have been approached about it.  CRE is at the heart of many a dinner party conversation—from vacant land being developed into income producing property or property that already provides income yields to its investors. It captures a wide variety of assets including industrial warehouses, retail shopping centers, multi-family housing (for the purpose of this article at least), office buildings and everything in between. With this much variety, you’re likely wondering how to pursue a CRE investment, and which investment is best for you and your family.

“Buy land, they’re not making it anymore.” - Mark Twain

As a firm, i3 has underwritten billions of dollars in CRE assets across every spectrum for the families we work with, whether traditional income producing CRE or land developments in the making. We have seen many interesting CRE deals but are still often surprised by the next deal.  For the families we work with, and so many others, CRE represents an opportunity for capital appreciation (because of rising rents and declining interest rates) and income yield, as CRE still outpaces yields on most government (local, state, federal) and corporate bonds.  But like every golden age that came before, prices can’t go up forever.  Our goal is to share with you, at least in this article, some of the vehicles available for investing. And in a second article, we’ll discuss the protection of your assets if and when the bubble bursts.

Diversifying an existing CRE portfolio or making a first-time investment into CRE starts with ‘making the decision’ to do so, which typically requires bringing all family members on board and writing an investment policy. With everyone’s blessing and a fully-formed investment policy, you will decide which investment vehicles you’ll use for CRE asset ownership. One or more of the following paths are how most families choose to participate in the ownership of CRE.

Invest In a Project

Invest in a project generally refers to a project that someone else, usually a developer (a.k.a. manager, general partner, promoter), has originated and is promoting.  A project is defined as any number of things: ground up construction, existing building or re-development for any CRE asset class.  In any case a developer/ promoter, with a scoped-out project, establishes a partnership business plan and is off to the races in search of capital (or equity), from a financial partner (or a  “LP”, limited partner).  In this scenario, your family will underwrite the people (developer/ promoter) first, with the project (a close) second.  Investing in a project generally means you’ll pay fees to the developer based on two (2) variables: management and performance.  Historically, this is the most common entrance into the CRE market; it offers families limited exposure to risk (equal to equity invested) and relies on the developer to manage daily operations. For more visibility and control, please see Buy It, Own It.

Be the Leader

Being the leader means that the project is entirely yours. You source, underwrite, execute, manage and report to shareholders on the asset at hand.  And beyond that - you’re leading the charge on establishing the business plan and managing, promoting and developing the project. Often referred to as the General Partner (“GP”), your role as leader entails lots of work. But guess what, there’s good news. You will be compensated accordingly. This path makes the most sense for families whose relatives already work in the CRE space or perhaps just wish they did.  In either scenario, to be an effective leader, or GP, it would behoove your family to gain as much visibility and control as possible on any given project.  A good strategic move? invest first as a limited partner.