For Registered Investment Advisors

Long term ownership of real estate or open-end fund (REIT) investment is focused on cash flow and market appreciation – it is often considered an inflation hedging bond replacement or bond alternative. There is very little “active management” or value creation through executing an active strategy with the property or portfolio. Real estate private equity, much like private equity, is focused on finding properties that are under-valued, mismanaged, and have some ability to create value through executing an active business plan. These investments are certainly affected by the broader market, but not as much as passively owned real estate or investment in a REIT, since those investments have no ability to offset market declines through active value creation.

Real estate private equity investments are focused on maximizing overall returns. We target net returns of high teens IRR, +2.0x equity multiple. Like private equity as a whole, real estate private equity returns come primarily from value creation and sale of the asset versus cash flow. Cash flow is a component of return (through quarterly distributions), but the majority of the return comes as assets are optimized and sold. Early in the portfolio, capital is being called as investments are identified. Limited cash flow is generated during the investment period. Once the investment period is complete, assets are sold and proceeds distributed.

While real estate private equity is focused on high return generation versus tax saving, we do endeavor to be as tax efficient as possible. Cost segregation studies are completed on all properties to accelerate depreciation (tax loss) in the early years of the investment – often resulting in a taxable loss early in the investment life. Properties are held long enough to result in long term capital gain versus short term.