Andrew Carnegie famously said that 90% of millionaires become so through owning real estate. Many of today’s wealthiest investors have proven him right. But the rules of real estate investing favor the rich; high investment minimums, accreditation requirements, long minimum hold times, and private offering structures all make it difficult or impossible for average investors to participate. The result is that only investors who are already at least moderately wealthy are allowed behind the velvet rope of opportunities to build more wealth through real estate investing.
LEX’s mission is to change that.
So few have benefited from commercial real estate investments for a handful of reasons.
High cost of entry: large amounts of capital are traditionally required to build or purchase buildings outright, or to join a deal as a limited partner.
Exclusivity: Real estate is still largely a relationship game - even if an individual investor did have the economic means to participate in a large transaction, these deals are often “country club deals” and take place through private offerings behind closed doors or within a close-knit community of high-net-worth industry players. There is no centralized market for non-insiders to find single-property real estate investment opportunities and to participate side-by-side with the institutional insiders.
Accreditation requirements: A legal designation called accreditation allows only certain wealthy individuals to invest in the majority of direct commercial real estate transactions. The accreditation requirement serves an important purpose in preventing less affluent investors from taking losses in private investments that lack the disclosure and registration requirements of public securities. In practice, however, the requirement also serves as a legal barrier that limits individuals seeking to capitalize on the economic benefits of commercial real estate ownership.
LEX’s approach to the access problem allows all US investors the ability to purchase equity shares of individual CRE assets for the low entry-point of $250/share.
Traditionally, investing directly in real estate locks up your capital for 5+ years (a “hold period”) with no guarantee it won’t turn into 10+ years. If you’re a minority partner in a real estate investment, you generally don’t have a say in when you can sell your stake. Understandably, this doesn’t make sense for most investors; both individuals and institutions.
A lack of liquidity makes an investment more daunting, because your capital is “locked up” and can’t be accessed if conditions shift or an unplanned need to exit the investment arises.
With this constraint and additional risk of illiquidity comes an impact on pricing, known as an “illiquidity discount” or “liquidity premium”, meaning that an investor is willing to pay some % less for an asset because of the lack of liquidity if they need to exit the investment.
The liquidity problem exists both on the supply side and the demand side of the marketplace: many current CRE investors are tied up in limited partnership positions and are unable to find liquidity for their stake (giving LEX an avenue to unlock “supply”), and many potential buyers of that real estate are less motivated or unable to purchase because of the lack of liquidity (giving LEX an avenue to unlock “demand”).
LEX’s approach to the liquidity problem is to “take buildings public” as a capital source for current investors stuck without liquidity, and to allow the new public investors to buy and sell these real estate shares whenever they wish on the LEX Trading System (“LEX ATS”).
The LEX ATS automatically executes matching buy orders and sell orders from 9:30am to 4:00pm on weekdays, and is an open system that welcomes all market participants to the table: institutional investors, market makers, other brokerages, and LEX users in the LEX app.
LEX’s ATS can’t guarantee liquidity, but we are doing more to enable it than any other direct real estate investment platform.
As we overcome the liquidity issue, LEX is adding value to the CRE landscape by removing a market inefficiency and allowing these CRE assets to trade nearer to their true asset value.
Real estate has created enormous wealth for countless generations of America’s richest families. In the earliest days of LEX, we knew that our goal was for a single share purchased through LEX to bring as many of the same benefits as possible that owning a building outright provides.
This goal guided our structuring of a LEX investment.
Investors buying shares of a building on LEX are buying equity in a partnership vehicle that owns a minority stake of equity in a building.
This structure is enables wealth creation in several ways:
Cash flow: As the tenants pay rent, the shareholders receive distributions. The distributions for each asset are expected to be paid quarterly. And while the distributions are not guaranteed, the owner of the building must pay distributions to shareholders if they pay distributions to themself.
Tax benefits: Being structured as a partnership allows many of the benefits of CRE ownership to pass through to the shareholder as K-1 investments (not 1099 investments).
Alignment & Protection: Because the owner retains a majority of the equity, they still have “skin in the game” and are motivated to operate the asset efficiently and attempt to produce healthy returns for shareholders. While the asset owner retains control of the building, there are several investor protections built into the LEX offering structure, including protections against insider sales, outsized management fees, etc.
Real estate deserves liquidity, and all investors deserve access. Solving these two problems in the real estate market will enable a new generation of more widespread wealth creation.
The Internal Revenue Code contains several provisions allowing owners of real estate to both defer when their taxes are due and to classify a portion of what might otherwise be treated as income as capital gains, which are taxed at a lower rate. These benefits make real estate investing more tax efficient than investing in other income-generating products such as corporate bonds.
LEX offers a new way to invest in individual commercial real estate buildings. While we’ve designed our platform to be simple and intuitive, it’s important that our investors understand how the LEX investment process works, and how deals arrive on LEX. Here’s a brief overview of the lifecycle of a LEX deal, and what the various “stages” of assets shown on the LEX platform mean.
The following feature was originally published on Bisnow.com and written by Julia Troy, in collaboration with the LEX team. We are republishing a version of it on the official LEX Blog with permission below.
Real estate investment trusts (REITs) have generally been the best available option for individual investors eyeing commercial real estate. Is that changing?
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