Forming Reit Or Other Entity.
I have many investors that want me to manage their money using real estate. I want to serve as a manager of a pool of money. Should I form a reit or other entity? If a reit, can anyone point me to a book or article on the formation of a reit?
Thanks! I plan on starting with about 1 million of investor and my own cash, if the amount matters. Also the goal is to invest the money in any real estate or paper, and generally property would be held for a period less than 2 years.
First off. Stop! Evaluate your statement as to the length of time you will hold properties. Make that decision after a period of time in ownership of the property.
While On The Run, I bought an apartment house in Paris France in 1941. I have held it ever since and recently gave it to my daughter who therein resides. It is in the 5 Arond just near the Etoile on Ave Hoche. I paid $15,000 for it all cash. 9 two bedrooms plus. The key money on each unit is over $45,000, that just buys the key. The rent Oh My God you have to be a Saudi Prince to afford them. Best investment of my entire life. But then you see if I survived the war I was going to hang out in the area. Learn to smoke Galouse cigarettes, Hail a waiter without looking. Insult everybody who tried to speak French and could not get that nasal snarl like a true Paresian. Besides I liked Paris, great place to spend two months during the summer vacation. All the French are gone. Northing but tall gorgeous Blonds from the far North whose limited exposure to Americans gives me a fighting chance to hold hands.
To start an REIT. You begin humbly with hat in hand. First Step: You set up a Limited Partnership. Select perhaps 10 of your best and most trusting investors.
You are the General Partner, take all the risks and well you should. You do well over a 12 month period of time. You stop and convert to a Corporation and you now take on say 20 more investors who trust you and are impressed by your investment record to date. You then decide to file an IPO. You arrange a total subscription through a brokerage house with whom you feel comfortable in getting into bed with. The Participle dangles for a reason use great care.
Shortly after these events, driving your new VW Beetle, no not the convertable, the TDI one. Shows you care. You then call upon your attorney the one that practices in your state but is admited to practice in NY and DC just as a little added flourish. He then does the conversion and as an already active corporation with assets and a listing on the exchange. You list once again with a great flourish your quarterly statement. Which should be so good that Sheeites and Sunnys will abandon their faith and call you Tribal Chief and offer to sponser you in DownTown Bagdad.
Now thats the path. Other then a catchy little name thats the way to go. Do I like REIT's yes indeed. You can do a lot of very fancy steps in the accumulation of properties.
You can for example buy big multiples at the top of the present day Spike. you can pay top dollar for them. Yet, thru virtue of your Reit Structure have an escape path that reduces your debt in accordance with the slide of the real estate market. Now that alone is worth the stuff you have to go thru to get the show on the road.
I could rave on and on but that would take all of the fun out of it. Go do it.
Cheers, before during and after Lucius
You are in a tricky area. After the stock market crash of 1929 Congress passed the Securities and Exchange Act of 1933. It regulates Reits, and corporations who sell stock to the "general public". Failure to follow the guidelines set forth there can land you a very long stay in the federal prison camp with a bunk right next to Ken Lay, assuming they eventually put him away.
This is assuming you are not female in which case you might get lucky and get teh bunk next to Martha.
If you do not solicit the general public then you may rely on the "private placement" exemption which the SEC act envisioned for people who raised money only among their friends. You may not have more than 35 unqualified investors and you may not find those persons by general advertising.
Now, then. the normal practice is to assume that a Reit is going tobe generally marketed and therefore has to comply with the full disclosure filings of Regulation D. Last time i checked (about 10 or 15 years ago) the legal fees for a Reg D were around $50,000. I'm sure that in our post-buble post Enron world the charge has gone up significantly.
This is the reason for Lucius' staged approach: first a small Limited partnership which qualifies as a private placement. Establishes track record so that you can solicit more generally. Switch to Corporaton, raise more money so that you can afford a REG D filing. Do an IPO so that you can trade on the NYSE or where-ever.
Now I hope you have figured out by now that this is not the game to play to raise only a million.
Do you intend for your new entitity to have debt in addition to the million or are these properties going to be all equity deals?
Either way get thyself to an attorney who is familiar with securities law. They are not a cheap group but they will keep your a** out of jail.
On Tuesday I am driving down to the Federal Prison Camp in Terre Haute Indiana to pick up a friend who is returning to the outside world after doing three to five because he was too stupid to spend $500 on legal advice before he decided that partial interests in mortgages were not a security and therefore not regulated under the SEC act. He was wrong.
Lufos...thanks as always. Commercial, that was more of the nuts and bolts I was looking for. 1 mil is initial cash, to be leveraged. I do not want stranger investors, as I do not need them. 2 year max holding is so that profits can be cashed and distributed, as investors sometimes change priorities. Should I want to hold them longer, I can buy them from the REIT and add to my personal portfolio. Otherwise, I agree that my blanket statement did not make sense. You both gave me some great info, and I could not agree more about the attorney. thanks. PS, going public is the last thing I am going to do. When I hit 5mil cash and a house paid off in Kauai, I am a ghost.
I say go for a REIT. The forms filled out though have to be "picuture perfect". They say it takes 2-3 years for them to actually get to your application. Do not call them over and over or they will mark it up and hand it back.
But they are definately very adventageous....how the rich work.
Given that thats your plan i wouldn't bother with a reit. Probably what you want is a Limited Partnership (though they are somewhat out of fashion these days). Don't be the GP personally, though (in spite of Lucius advice, this is the only thing I think I've ever disagreed with him on). Put together a corporation to be the GP, and hold the stock of that corp. closely.
By the way the idea of buying things yourself out of this entity also has its problems. You have a fudiciary responsibility to your partners/investors/shareholders and moving partnership assets to your private account even if you pay full market price is quite likely a conflict which would be viewed as a breach of your fudiciary responsibility.