Friday, 6 November 2015

Sam Zell & Andrew Litt on Real Estate: Invest For Kids Chicago ... | Real Estate Investing

Sam Zell & Andrew Litt on <b>Real Estate</b>: <b>Invest</b> For Kids Chicago <b>...</b> | Real Estate Investing

Sam Zell & Andrew Litt on <b>Real Estate</b>: <b>Invest</b> For Kids Chicago <b>...</b>

Posted: 06 Nov 2015 09:59 AM PST

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Sam Zell (Equity Group) and Andrew Litt (Land & Buildings) who talked about real estate.

Sam Zell & Andrew Litt at Invest For Kids Chicago 2015

•    Andrew met Sam 22 years ago while on the road show for Manufactured Home Communities. He was employed on the sell-side at that time.
•    Equity Residential recently sold $5B of real estate/apartments to Barry Sternlicht of Starwood.
•    Is Sam calling a top of the RE market?
•    Always been very disciplined and sold Equity Office before the last downturn as he thought someone offered him more than what they were worth. In case of apartments – different story.
•    Went public in 1993 - $800MM EV garden apartments.
•    Garden apartment – expressway visibility – "selling them shit"
•    Sam thinks the future was in high rise versus low rise, changing the company and upgrading portfolio. Suburbs sold, focus on 7 core markets. Envisioned selling it over 3 years, but had an opportunity to do it all at once at an attractive price and so he did it.
•    "Barry bought well maintained well occupied good assets which should be 75% leveraged versus 30%".
•    Thinks it's a win win for both.
•    Zell's perspective concentrates them on where they want to be and return capital on a pro-rata basis.
•    On Equity Commonwealth – didn't want to join activist campaign but said if they win, would take it over and finish it the last mile and got an option to purchase third of the activist's position.
•    Didn't buy/identify those assets and did analysis of opportunity – unusual situation as they could liquidate huge amounts of the portfolio without generating gains.
•    EQR had to distribute the proceeds, in Commonwealth's case, liquidate assets pile up cash and keep control.
•    Purchased 10/15 years ago sold with no profits so that's an indictment of the externally managed process (i.e. RMR's management were terrible). Every day not buying their selling.
•    Didn't have a hard time concluding that they should liquidate some of the assets.
•    Baseball adage – in the 8th inning on commercial real estate.
•    Once you get to the 9th inning – value dramatically dictated by quality of assets. High quality assets minor alterations but the marginal items in historical pricing is where you will see an impact in value.
•    US doing great today but the rest of the world isn't. Starting to see the impact.
•    The disparity between B/A asset will increase.
•    Thoughts of activism? Thinks activism in most cases is another word for ownership. Biggest fallacy in capital markets is that companies are not "owned".
•    Companies will be better out of activism. There are some good guys and some bad guys.
•    Not many viable opportunities as there is cash piling up.
•    Sending back $5.4B at EQR as they don't think the cash can be invested at attractive returns. That is an ownership decision.
•    Where are you seeing opportunities? Difficult to broadly identify where there is significant demand.
•    Always steals/opportunities but don't remember a signal period in his career where broad generalizations where irrelevant.
•    Investing in western Mexico – manufacturing is going there, other parts is weak.
•    Enormous amounts of liquidity and financing at attractive rates = lots of competition which is destructive.
•    Any place to use his grave dancer status? Energy sector. Haven't seen all of the ramifications. Banks are just starting to redo their lines, and twill see the security they had wasn't their anymore.
•    Most attractive at the moment.
•    You have to assume oil prices aren't going to zero but you don't need to bet that they go $70, don't need that to win.
•    Looking for forced sellers – keep drilling or jettison midstream assets? Might find the midstream assets attractive (PARR)
•    Brazil? Went into Brazil early created a couple significant companies sold all buy one at higher prices. Brazil 180MM people, still growing although slowing.
•    PBR/scandals and political situation is the elephant in the room.
•    Less competition there now.
•    Institutions there are prepared to take discounts to clear the market.
•    Single bank hasn't taken a single voluntary write off.
•    Thinks rates too low for too long.

Check out the rest of the presentations from Invest For Kids Chicago 2015.

<b>Real Estate</b> Crowdfunding: A Viable <b>Investment</b> Option or Risky <b>...</b>

Posted: 06 Nov 2015 06:29 AM PST

Many investors are looking at real estate crowdfunding. At the same time, they don't always understand the risks of this kind of venture. Is it a viable option for you, or just another foolish get-rich-quick scheme? Here's what you need to know about this new way to invest.

What Is It?

Crowdfunding differs from traditional investing and lending in many respects. The first of which is that, for investors, it represents a direct channel into an investment, bypassing Wall Street. Equity crowdfunding, which wasn't allowed until 2012, gives investors unprecedented control and access to companies without the need for lawyers and specialized contracts.

It gives real estate investors the ability to fund the building of new properties - all without having to spend ungodly sums of money negotiating with property builders.

For the financial industry, it represents a major threat to "business as usual." Banks no longer have a monopoly on lending. When companies can go directly to investors for funds, it cuts out the middleman.

Real estate companies, like abbotts.co.uk can sell properties to clients, while those clients raise money through investors. Everyone wins, except lending institutions.

For crowdfunding to work, there needs to be a platform where investors can go to invest in good ideas. The platform facilitates the collection and investment of money. Investors are assured that money will be handled appropriately. But, as with all investments, there is risk. And, with crowdfunding, there can be considerable risk.

Challenges You Face

One of the biggest risks in crowdfunding is underwriting. Specifically, the underwriting of risks. Usually, risk-analysis is done by professionals. But, with crowdfunding, you are left to do that yourself. Traditionally, an underwriter or analyst does the due diligence for an investor, verifying the investment, how the company intends to make money, its prospects for growth, and so on.

Everyone wants money for their project, but not everyone deserves it. An underwriter is the gatekeeper that stands between investors and people or companies who want investment capital.

Best Practices That Are Missed By Amateurs

Many amateurs aren't good at understanding risks. They miss best practices like a LexisNexis background check or a "Bad Boy" guarantee. And, they may forego professional legal counsel, title insurance, and crowdfunding platforms may not have a system in place to share underwriting discoveries.

A LexisNexis check means that you're checking as to whether anyone you're investing with has a criminal background. As an investor, you might automatically assume that anyone asking for money is clean. Criminals are never bold enough to ask for millions of dollars, right? Wrong.

A surprising number of sponsors do indeed have criminal records. Just because someone has developed a few buildings, or even a dozen or more, doesn't means that there's no trouble in their background.

A "Bad Boy" guarantee means that there's a personal guarantee, but it's only triggered by bad acts on the part of management.

Usually, this means fraud, or gross negligence, malfeasance, or some kind of other criminal activity. If a developer embezzled money, for example, they will be personally liable.

You should always seek legal counsel for an investment you're undertaking yourself, especially when it's not part of established financial markets. No one likes paying a lawyer's fee, but at the same time not doing so can be very expensive.

Finally, if you do uncover something, share it with the community, and encourage other investors on the platform to do the same. This is one of the major benefits of crowdfunding. Think of it as "open source underwriting." But, it only works when the community is transparent and willing to share anything they uncover.

The Potential Rewards

It's not all dark clouds though. In an industry where many startups are valued by the money that's originated through venture capital, entrepreneurs have become addicted to growth. In fact, it's a "growth at any cost" mentality that often takes over in many industries.

The problems is that, for many business, there's only one sure-fire way to guarantee unchecked growth: reduce quality.

Equity and real estate crowdfunding isn't unlike a lot of other industries in that respect. Due diligence often means turning down most potential investment ideas because most ideas are bad. A great investment crowdfunding platform helps investors sort through all of those bad ideas and culls the good ones to the top.

Poor underwriting standards is the main threat in this model. But, for those who do succeed, real estate crowdfunding will take on the financial industry like Amazon took on retail bookstores, Twitter took on newspapers, Kayak took on the entrenched travel industry, and Uber took on the taxis.

Adam Taylor has plenty of property-developing experience and is a committed financial investor. He likes to share his views on new investment initiatives like crowdfunding and writes frequently for a number of relevant websites.
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