The United States commercial real estate investment market is pushing record levels in 2015. Commercial property investment sales in the United States was up 45% YOY in Q1 of 2015 with a volume of $129 billion dollars, and up 23% YOY in Q2 with a volume of $118 billion dollars. Close to $50 billion of the investments in Q1 came from private capital according to research published by Colliers International1. The recovering economy, uncertainty overseas, and other macroeconomic trends have made U.S. commercial real estate an attractive asset class. The popularity of commercial real estate investing has created a large influx of capital chasing investment deals.
The creation of exemption 506(c) will have a large impact on the way the commercial real estate industry raises private capital. There are three features of the 506(c) exemption that will benefit commercial real estate investors. For commercial real estate investors to be successful through the rest of the real estate cycle, investors should utilize the benefits of the 506(c) exemptions to raise capital in the most successful and compliant fashion.
- Under the 506(b) exemption, issuers are not allowed to advertise the offering. Under the new 506(c) exemption, issuers can advertise their offering in any way they want as long as the investor is verified as accredited. Commercial real estate investors have traditionally had a hard time reaching a broader investor base because they were not allowed to advertise a specific deal. The ability to actively advertise an investment allows for issuers to reach a broader investor pool, which can provide a larger amount of capital.
2) No Document Disclosure Requirements
Under the new 506(c) offerings, the requirement to provide disclosure document has been removed. Under this rule, there is nothing preventing issuers from preparing disclosure documents, rather it is up to market demand whether they are produced. The removal of the requirement can allow firms raising capital to act faster, save money, and be more flexible to respond to opportunities and demands in the market.
3) No 30-day Waiting Period
Under a 506(b) offering, the issuer must be able to prove a relationship of a minimum of 30 days before potential investors are allowed to know about a prospective deal. This waiting or cooling off period is designed to allow both the issuer and the investor to vet each other.
The problem with a 30-day cooling off period in commercial real estate investing is that it
removes flexibility. In a perfect world, investors would have all the time they need to source, perform due diligence, find investors, and close a potential deal. However, we do not live in a perfect world and investors often have to be able to move quickly. The absence of the 30-day cooling off period allows commercial real investors to perform faster capital raises which has numerous benefits such as the ability to close faster, respond faster to market opportunities, and lowers the cost to carry capital.
The new 506(c) exemption offers many benefits that commercial real estate investors cannot ignore when raising private capital. Although traditionally slow to adopt change, commercial real estate investors need to utilize the benefits of 506(c) to create the most value possible and raise more capital, faster.
Securities offered through WealthForge, LLC. Member FINRA/SIPC. This post is an industry update from WealthForge. The message does not constitute a research report or recommendation and does not take into account the specific investment objectives, financial situation or particular needs of the recipient. This message is not an offer to sell or the solicitation of an offer to buy any security or interest in any fund, which only can be made through a private placement memorandum that contains important information about the risks, fees and expenses of a fund.