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.
For commercial real estate and property owners, it’s a tale as old as time: A CRE owner/sponsor owns a stabilized property in its portfolio and needs to create liquidity in the asset.
There are several different reasons that an owner might need to create liquidity: They may want to monetize a gain in the value of the asset, they could be looking to create liquidity for a partner that wants to exit the investment or has reached the end term of the investment, they may want to pull out capital to invest in a new investment, or they may have any other need for capital or cash.
The challenge for the CRE owner is how to create this liquidity without having to sell the asset outright or borrow more money from a lender, all while maintaining full operational control of the asset.
Creating liquidity in an asset is something many real estate owners have to deal with and is very challenging in financially turbulent years like 2020. CRE owners looking to create liquidity may be faced with some difficult options on liquidation values that are well below the actual net asset value for the building.
A CRE owner may be faced with trying to sell a minority equity stake in an asset, which has very limited voting power and no liquidity option. Buyers of this minority equity stake will demand a significant discount to the net asset value to make up for these investment issues, which could be very unattractive to the owner/seller of the stake.
But now, there’s a better solution for owners looking to create liquidity.
“LEX has created the holy grail for many real estate owners,” said Jon Bren, managing director at LEX, a real estate investment platform. “We’ve given owners the ability to raise capital and create liquidity in their asset without having to sell their building. It’s something the CRE industry has been trying to figure out since the dawn of time, and now there is a solution.”
Through LEX, a CRE owner can sell a minority equity stake in their property to investors on the LEX platform using a product that offers fractional equity ownership interests in a specific real estate asset. These shares can sit in a normal brokerage account and can be bought and sold in the OTC market.
As Bren explained it, via the LEX platform, investors are buying a portion of a building from the owner/seller. LEX creates a security that is sold to investors by the CRE owner, generating cash for the CRE owner, and the investment vehicle is a permanent capital structure that never needs to be paid back by the owner. All the while, the owner maintains majority ownership of their property and management control of the asset while creating liquidity for themselves.
He said this is the first time that investors have had access to fractional equity ownership in specific properties that is tradable, in their brokerage account and can be sold at any time (liquidity is not guaranteed).
“The conventional way that most retail investors have invested into real estate is in a REIT, which typically has multiple buildings and can have exposure to stock market volatility, which has very little to do with the underlying value of the real estate,” Bren said. “Our product structure is based on a specific building, which the investor selects, which sits in the investor’s brokerage account and the investor can sell it anytime.” Publicly traded REITs may be more liquid than LEX securities.
To illustrate a typical LEX deal, Bren gave the example of a $100M building that has $40M in equity and $60M in debt and the owner would like to create some liquidity in the asset. The owner could try to sell $20M in equity to raise the cash, but the new investor will likely require a discount that could be 25% of the NAV, leading to the investor bidding $15M for that $20M in equity to compensate for the lack of liquidity and their lack of control in the stake that is being sold.
A new alternative option for CRE owners is to consider LEX, which can structure a security with a value of around $20M for the equity stake, which is much closer to the actual NAV of the asset. The LEX security structure reduces the liquidity discount from the original example because the LEX investors own a share in a tradable security that sits in their brokerage account, and they can buy and sell the shares as they see fit.
“The CRE owner still has 100% control of their asset,” Bren said. “The owner continues to manage the asset as it always has. All the while, we’re providing low governance money to the owner that the owner never has to pay back.”
LEX’s main focus is on equity recaps of stabilized real estate producing distributable cash flow. Bren said that is because LEX investors are searching for investment alternatives making fairly consistent cash distributions with potential upside for the value of the underlying asset. Bren said the building owners they work with are ones that have created value in their assets but may not get the initial attention from large financial institutions because the deal size may be too small for them to consider.
He gave another example of an owner that owns several Class-B apartment buildings around the Atlanta metro area who has created value in each building they own, each of which is valued at less than $100M. The owner would like to pull out some capital from one of the assets to invest in a new acquisition, but the amount of equity to recap is $15M, so it isn't getting much attention from large financial institutions and real estate finance funds.
“No one else is offering this kind of opportunity to property owners on this scale,” Bren said. “For the bigger firms, it’s not really worth their time. But we’re working to create smart liquidity solutions that benefit owners and investors of all sizes."
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
The Landing at One Chestnut is owned and operated by Manzo Freeman Development (MFD). The MFD team brings over 40 years of expertise in managing and developing industrial properties in the New England submarket.