Real Estate

LEX vs. REITs & Direct Ownership

Traditionally, there have been two ways for investors to access the returns of commercial real estate: real estate investment trusts (REITs) and direct property ownership. 

REITs come in a variety of flavors: private REITs for accredited investors, publicly-traded REITS that are listed on major exchanges, single-asset REITs for specific properties, and multi-asset REITs that include every class of real estate imaginable. No matter their individual nuances, all REITs pool the capital of many investors to purchase debt or equity in different real estate assets. REITs have several strengths as an investment. They are hands-off, meaning that any investor can access the returns of property ownership without needing to manage tenants and maintain a building. They are often publicly traded on stock exchanges, enabling liquidity when investors need to exit their positions. And they offer enticing total returns: under U.S. law, REITs are required to pay out at least 90% of the taxable income they receive to shareholders in the form of dividends.

However, REITs do come with drawbacks, primarily when it comes to taxes. Most REIT dividends are taxed as ordinary income, meaning that investors pay taxes on this income at their highest marginal tax rate. This is compounded by the fact that unlike direct property owners, REIT investors are unable to take advantage of amortization and depreciation to offset their tax burden. 

Direct real estate ownership is similar to REIT investing in that returns are generated from rental income and property appreciation. However, direct ownership comes with additional advantages, including the ability to write off some of the costs associated with building maintenance and depreciation at tax time. The downside of direct real estate ownership is the time, energy and capital required to actively manage a property. As an owner, you’re directly responsible for tenant issues, building maintenance, and financing. You also need to navigate the challenge of liquidity: purchasing a commercial asset can require millions in liquid capital, and your investment in a commercial building is often locked up for years, if not decades. If you need to exit your investment early, the lack of liquidity means you’ll often need to sell the asset below market value (what’s known in the industry as the ‘liquidity discount’).

LEX was designed as a way to bridge the gap between the benefits of direct ownership and the accessibility and liquidity of the REIT structure. Investors on LEX sit pari passu (side by side) with the building owner, and receive distributions at the same rate. This allows them to reap the benefits of working with an experienced management team, while avoiding the day-to-day work of running a commercial asset. These advantages flow from the unique publicly traded partnership (PTP) structure of LEX securities, which allows for the full tax benefits of direct real estate ownership to pass through to investors. LEX investors can expect to receive a K-1 at the end of the year, and can use amortization and depreciation to offset some of their tax burden. Potential investors are encouraged to consult with professional tax, legal, and financial advisors before making any investment into a securities offering.

The LEX platform empowers investors to conduct their own due diligence on individual properties, reviewing financial statements, return calculators, business plans and other information to make an informed decision. This allows investors to find investments that match their specific risk profile and investment objectives. If these objectives and risk profile change, investors can access liquidity through LEX’s secondary marketplace, where they can buy and sell equity in an asset with no lockups or hold periods. While LEX can’t guarantee liquidity, the features of the platform encourage it and are not available in direct real estate investments.

LEX Markets does not provide tax, legal or accounting advice. Potential investors are encouraged to consult with professional tax, legal, and financial advisors before making any investment into a securities offering. This investment may not be suitable for all investors. Distributions and liquidity not guaranteed. Property performance and performance of property tenants not guaranteed. Diversification does not eliminate the risk of experiencing investment loss.

November 15, 2022

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