Controlling Real Estate Risk in a Turbulent Market

The third quarter of 2015 has been a wild ride for investors. The Dow lost 6.6% in August 2015, the largest percentage decline since May 2010. There are many lingering fears in the minds of investors: a slowdown in China, the Federal Reserve raising interest rates, the Greece crisis, the future of oil – just to name just a few. Many of the risks in equity markets are bleeding into the commercial real estate market. Real estate issuers and investors need to take every step possible to mitigate risk during this turbulent time. One way to control risk in a real estate investment is to use a broker dealer to ensure regulatory compliance of the offering.

Commercial real estate can be a risky business. Investors, issuers, developers, bankers, and everyone else involved in the industry face risk on a daily basis. Typical risks that all commercial real estate professionals need to manage include tenant relationships, development risks, project financing, and even general business issues. While these risks are more common, there are additional risks that need to be considered and addressed when raising private capital for commercial real estate. These include the ability to find investors, manage ongoing investor relationships and, most importantly, address all of the regulatory issues associated with raising private capital. Not everyone appreciates that any time you raise private capital, it is considered a securities transaction. All of the federal and state securities laws and regulations must be followed, regardless of the amount of money that you are raising.

As a result of the financial crisis, the JOBS Act was enacted to help make the process of raising capital a bit easier. But, along with the ease in restrictions on general solicitation came even more rules and regulations. The JOBS Act has opened up new opportunities to market and invest in real estate. These new ways to invest have been beneficial to the industry, but they also brought new compliance standards along with them. Issuing a security seems like a daunting and risky task since one must adhere to SEC and FINRA regulations. However, regulatory and compliance risk surrounding a real estate offering can be mitigated – and it might be one of the few risks in a real estate transaction that can be managed through outsourcing.

Anyone issuing or selling a security can work with a registered broker dealer, which can in turn act as the issuer of the security. Broker dealers can play many roles in the security transaction, but for the most part they can handle the back office processing and assume the regulatory responsibility for the offering. For example, there are companies such as WealthForge, who are registered broker dealers and solely focus on transaction management. WealthForge acts not only as the outsourced back office broker dealer, but also as the risk manager and regulatory partner to help reduce and manage potential liability.

Using a broker dealer to manage the transaction has many benefits other than just assuming the regulatory liability of the deal. First, there is an increased level of confidence that investors will have in the issuer knowing there is a trusted third-party intermediary handling the transaction.

Second, issuers can focus their time and effort interacting with investors to raise more capital and outsource the compliance and regulatory efforts to a trusted partner. This can greatly reduce the total amount of time to complete the transaction. For example, the average amount of time to complete a successful private capital transaction is under 30 days for real estate on the WealthForge platform.

Last, it’s typically cheaper to use an outsourced partner. You can take advantage of a turn key platform that’s available when you need it and doesn’t require you to hire more people, invest in more technology and build out new business processes. Through increased efficiencies, time savings, and a lower cost of capital, issuers can save money by outsourcing the back office involved with raising private capital.

Using a registered broker dealer to reduce regulatory risk in a real estate transaction is an easy way to mitigate overall risk from a real estate deal. You can also increase investor confidence in the offering while taking advantage of outsourcing to decrease the time and costs to complete the capital raise. The benefits of using a broker dealer far outweigh any downside. And, in turbulent markets, investors and issuers need to take every step possible to mitigate risk and increase returns.

Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice.