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Today,
I thought it would be fun to dissect the sundry sorts of investors we encounter
in the commercial real estate profession. So, in no particular order - here
goes.
Owner occupants. Let’s start here. Important to
understand is an investment is made in a location by the owner of the business
- simple! Not to confuse things - but generally, owners whose businesses
live in the buildings they own have an investment structure. Most typically,
the proprietor of the company creates a Limited Liability Company - an LLC.
Title to the real estate is then vested under the name of the LLC. Occupying
the parcel is the business. Frequently, the business has a different ownership
- IE a Sub Chapter S Corporation. Although the LLC and the Sub S have
synonymous underlying principals - they are two separate entities. Therefore
the Sub S pays rent to the LLC. The LLC is the investor and the Sub S is the
tenant.
Whew! As you can gather, a myriad of places to invest money exist for a small business. Machinery, equipment, customer acquisition, and new employees all compete for the investment dollar. Considered must be the return on investment for all of these opportunities to grow the business. Specifically - if I buy a new machine and spend X amount of money - will sales grow proportionately vs. how will a purchase of my premises affect the expansion of my enterprise?
Whew! As you can gather, a myriad of places to invest money exist for a small business. Machinery, equipment, customer acquisition, and new employees all compete for the investment dollar. Considered must be the return on investment for all of these opportunities to grow the business. Specifically - if I buy a new machine and spend X amount of money - will sales grow proportionately vs. how will a purchase of my premises affect the expansion of my enterprise?
Private capital investors. Generally defined as the use
of your own money - in this case dollars generated from the investor’s hip
pocket. Certainly a bank may have been used to finance the real estate purchase
but the down payment came from a non-public source. In the case above - an
owner occupant - consider what happens if the business that occupies the
building is sold but the commercial real estate is retained. Now, that owner
occupant becomes an investor owner. Before, he controlled the tenant - an
operation he owned. Now, he simply owns the real estate.
We have a client who parlayed this method into a fairly substantial commercial real estate portfolio. Acquired were the properties - in different locations - his company occupied. Amassed were a dozen or so buildings. He then sold the business, struck long term leases with the new company for all of his properties and voila! He is a private capital investor. Before, the operation he owned made money and paid him rent - a daily double. Now, the returns are only from the rental income.
We have a client who parlayed this method into a fairly substantial commercial real estate portfolio. Acquired were the properties - in different locations - his company occupied. Amassed were a dozen or so buildings. He then sold the business, struck long term leases with the new company for all of his properties and voila! He is a private capital investor. Before, the operation he owned made money and paid him rent - a daily double. Now, the returns are only from the rental income.
Institutional capital investors. Broadly
defined as the use of other people’s money - OPM - institutional capital can
vary widely from friends and family to the State of California’s Public
Employee Retirement System - CalPERS. An institutional investor uses these funds
to buy and manage commercial real estate. Clearly, different levels of
sophistication are needed. Regardless, a tenant must pay rent in order to
generate a return on the invested proceeds. Occasionally, these institutional
investors will package their holdings and create a publicly traded company -
known as a Real Estate Investment Trust - REIT. A stock is available to buy and
sell through a stock exchange - NYSE or NASDAQ. As every share of stock is
valued the same, easy transition in and out can transact. Your dividends are
generated from a small sliver of rent from the underlying buildings. Quite
creative!
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