Synopsis  This  document  describes  the  basic  principals  of  and  methods  used  to  build  a  Real  Estate  investment  portfolio.    It  uses  by  example  our  own  experience  in  the  downtown  Charleston  marketplace  and  as  such  reflects  our  experiences  and  learning  over  the  recent  past.      We  would  be  pleased  to  speak  with  anyone  considering  this  option  and  to  discuss  real  examples  of  how  investments  have  performed  and  strategy  has  been  modified  in  light  of  changing  economic  circumstances.    

L u x u r y   S i m p l i f i e d ,   9 5   B r o a d   S t ,   C h a r l e s t o n ,   S C ,   2 9 4 0 1

Real  Estate  Investment  Strategies  and  Structures  

Real  Estate  Investments  Strategies  and  Structures  

“A  qualified  group  of  contractors,  brokers  and  financial  analysts  based  at  95  Broad  St,  Charleston  SC.  Our  experience  in  infill  development  on  the  historic  Charleston  Peninsula  has  set  us  apart,  developed  strong  community  relationships  and  a  strong  investment  pipeline.  “  

Track  Record  An  effective  Real  Estate  investment  strategy  has  enabled  us  to  contribute  to  and  benefit  from  the  development  boom  that  that  has  engulfed  Charleston  over  the  past  three  years.    A  total  infrastructure  and  capital  investment  north  of  $1  Billion  on  the  Peninsula  alone.      

As  one  of  the  largest  historical  renovation  and  redevelopment  firms  in  Charleston,  we  have  amassed  a  land  bank  of  approximately  50  building  opportunities  within  the  rapidly  developing  Downtown  corridor  South  of  Highway  17.    

To  date  some  $30  million  has  been  invested  to  produce  a  market  beating  return.    Land  on  the  Peninsula  has  become  a  premium  asset  during  this  timeframe  and  is  a  valuable  commodity  now  that  the  construction  market  has  returned  in  full  force.    In  addition,  an  influx  of  job  creation,  primarily  in  the  technology  sector,  growing  student  populations  and  a  large  teaching  hospital  complex  have  driven  demand  for  housing.  Our  goal  is  to  help  meet  this  demand.    

Figure  1  -  Company  offices  at  recently  renovated  95  Broad  Street  Charleston  SC.  Built  circa  1770.

Our  investment  strategy  for  the  Charleston  marketplace  has  evolved  over  the  last  few  years  and  as  market  conditions  have  changed.      

From  buying  distressed  residential  property  for  the  rental  market  in  Mount  Pleasant  and  the  Barrier  Islands  to  buying  vacant  land  and  renovation  opportunities  in  developing  downtown  neighborhoods  then  to  developing  our  own  downtown  PUD  and  Event  Space  opportunities.    At  each  stage  we  have  examined  returns  on  a  bi-­‐annual  basis  and  reformatted  strategy  to  suit  market  conditions.  

The  map  above  shows  properties  we  have  “touched”  in  the  recent  past.  Either  to  renovate,  restore,  rent.  Buy/Sell  are  not  included  and,  as  such,  many  remain  within  our  current  portfolio.    

There  are  a  few  ways  for  an  investor  to  become  involved  in  the  Real  Estate  market  so  below  we  have  written  a  short  summary  of  the  target  investments  themselves  and  mechanisms  used  to  fund  their  ownership.  The  illustration  is  an  example  of  how,  by  following  a  mixture  of  the  strategies  outlined  below,  one  Group  of  investors  has  developed  their  portfolio  in  the  downtown  Charleston  marketplace.    It  shows  mainly  single-­‐family  house  rentals  though  a  few  duplex  and  triplex  opportunities  are  included.    Properties  are  mortgaged  with  rental  income  covering  the  mortgage  and  maintenance  costs  plus  an  additional  margin.    

The  second  illustration  shows  either  empty  land  or  renovation  projects  secured  by  the  same  investment  group.  This  represents  approximately  2  years  of  further  construction  work  with  properties  being  transferred  in  to  the  rental  pool  as  they  are  completed.      

The  illustration  shows  a  medium  sized  real  estate  investment  play  but  the  basic  principals  hold  true  right  down  to  one  off  investments  in  single  properties.    i.e.  purchase,  stabilize,  cash  flow  then  withdraw  equity  using  bank  funding  and  repeat  the  exercise  with  an  additional  property.    An  opportunity  or  two  per  year  will  soon  yield  a  very  valuable  portfolio  given  attention  to  purchase  and  operating  costs.    

Types  of  Real  Estate  Investment  Property  Residential  

Residential  real  estate  is  the  most  familiar  form  of  real  estate  because  everyone  has  purchased  a  house,  rented  an  apartment,  or  had  some  interaction  with  residential  real  estate.  Tenants  of  residential  properties  pay  rent  to  live  in  the  property  and  owners  collect  rents  as  part  of  the  lease  agreements.  Residential  properties  include  single-­‐family  homes,  multi-­‐  family  homes,  apartment  buildings,  condominiums,  luxury  properties,  and  other  variations.  

We  have  seen  strategies  of  purchasing  several  properties  and  packages  of  single  family  homes.  In  other  words,  instead  of  buying,  say,  an  apartment  complex,  an  investor  may  instead  buy  a  portfolio  of  single  family  homes  and  employ  a  property  manager  to  produce  desired  gains  from  the  rental  income  and  appreciation.  3  

Commercial  

While  individuals  and  families  are  the  typical  tenants  of  residential  real  estate  properties,  businesses  occupy  commercial  properties  though  sometimes  there  may  be  a  mixture  of  residential  and  business  in  the  same  building.  The  commercial  tenant  abides  by  leases  and  pay  for  use  of  the  property,  just  like  any  other  resident.  These  leases  are  more  complex  than  the  leases  one  might  have  on  a  condo  or  apartment  and  the  agreements  can  vary  to  include  obligations  for  the  tenant  to  pay  for  some  or  all  of  the  following:  property  taxes,  rent,  insurance,  required  maintenance  and  up-­‐keep,  or  other  expenses  that  would  otherwise  be  covered  by  the  property  owner.  

Industrial  

The  last  type  of  real  estate  to  cover  here  is  industrial  real  estate.  Industrial  properties  are  used  for  manufacturing,  production,  assembly,  storage,  and  related  activities.  Some  large  institutional  investors  own  industrial  properties  and  lease  the  property  (usually  under  long-­‐term  agreements)  to  businesses  that  will  use  it  for  manufacturing  and  production.  

The  goal  is  always  a  positive  return  on  investment.    Gain  can  be  achieved  two  ways:  

1. Equity  –  i.e.  increase  in  value  after  completion  of  renovation  or  by  opportunistic  purchaseor  inflation  etc.

2. Rental  or  other  operating  income,  most  commonly  used  to  cover  holding  and  operatingcosts  plus  a  small  positive  return.

For  a  real  estate  property,  this  is  most  commonly  achieved  when  the  property’s  value  appreciates.  Although  the  recent  bursting  of  the  real  estate  bubble  has  made  some  investors  question  the  idea  that  real  estate  investments  are  a  sound  long-­‐term  investment,  traditionally  real  estate  has  been  a  source  of  steady  gains  that  at  least  keep  pace  with  inflation  and  hold  tangible  value.  One  simple  explanation  for  why  many  investors  like  to  hold  real  estate  is  that  at  the  end  of  the  day,  even  if  inflation  jumps  up  or  the  stock  market  crashes,  your  property  still  has  some  value.  

If  the  real  estate  property  does  not  appreciate  or  even  loses  value,  there  is  still  an  opportunity  to  notch  a  return  on  investment  by  renting  out  the  property  to  businesses  or  residents.  In  the  wake  of  the  financial  crisis  and  real  estate  meltdown,  for  example,  many  investors  cushioned  the  blow  to  property  valuations  by  renting  out  properties.  This  is  especially  attractive  if  the  property  is  purchased  with  a  loan  and  thus  the  owner  will  have  to  make  the  monthly  payments  regardless  of  whether  the  housing  market  collapses  or  the  macroeconomic  picture  changes.  Renting  out  the  property  or  otherwise  monetizing  the  real  estate  can  help  the  investor  meet  loan  requirements  and,  ideally,  realize  returns  on  the  investment.  The  income  and  appreciation  qualities  make  real  estate  a  mandatory  allocation  in  many  family  office  portfolios.  

Real  Estate  Investment  Structures  

As  we  touched  on  above,  there  are  a  number  of  different  real  estate  property  types  and  there  are  also  many  different  structures  by  which  investors  allocate  to  real  estate.  We  will  briefly  explore  a  few  of  these  structures  here.  

Real  Estate  Investment  Trusts  (REITs)  

One  way  of  investing  at  arms  length  is  through  what  is  known  as  a  Real  Estate  Investment  Trust  or  a  REIT.  A  real  estate  investment  trust  (REIT)  is  an  investment  company  that  invests  in  properties  or  mortgages  and  typically  provides  an  income  component.  REITs  trade  on  exchanges  like  stocks  and  bonds,  making  these  securities  an  easily  accessible  and  liquid  avenue  for  investing  in  real  estate.  

REITs  must  pass  through  a  significant  portion  of  their  income  as  a  dividend  in  order  to  qualify  for  special  tax  treatment.  Publicly  traded  REITs  normally  invest  in  commercial  real  estate,  such  as  apartments,  hotels,  shopping  malls,  office  complexes,  and  storage  units.  REITs  are  a  way  to  invest  in  real  estate  without  directly  investing  in  private  real  estate  and  managing  property.  The  tax  benefits  of  this  structure  are  often  the  most  important  aspect  for  investors  considering  a  REIT  compared  to  other  real  estate  investment  structures.  

Real  Estate  Investment  Firms  

Similar  to  REITs,  a  real  estate  investment  group  allows  an  investor  to  invest  their  money  with  a  firm  that  will  then  use  that  capital  to  make  investments  in  real  estate,  manage  properties,  and  attempt  to  produce  gains  for  the  investor(s).  

Private  Real  Estate  Funds  

There  are  many  different  private  real  estate  funds  that  are  structured  as  a  limited  liability  corporation  or  limited  partnership  and  investors  in  the  fund  commit  capital  that  is  deployed  to  purchase  various  real  estate  properties  and  securities.  

Private  Equity  Real  Estate  Funds  

A  variation  of  the  real  estate  fund  is  the  private  equity  real  estate  fund,  which  typically  refers  to  a  fund  that  completes  leveraged  buyouts  of  real  estate  property  companies  or  large  

real  estate  portfolios.  The  funds  are  often  limited  partnerships  and  the  general  partner  charges  a  2%  management  fee  and  20%  performance  fee,  like  private  equity  funds,  and  invests  the  capital  pool  in  a  number  of  different  portfolio  companies  or  investments  with  a  finite  window  for  exiting  (five  to  seven  years  typically).  The  use  of  leverage  tends  to  “juice”  returns  and  allows  the  private  equity  real  estate  fund  to  make  larger,  debt-­‐fueled  acquisitions.      The  fund  may  also  be  incentivized  to  improve  returns  with  a  waterfall  calculation  where  they  receive  an  increased  split  as  targets  become  met.    7.5%  and  15%  IRR  would  be  typical.    

A  recent  development  in  this  area  has  been  Crowd  Source  or  Community  Source  funds  where  high  net  worth  individuals  pool  assets  under  a  General  Partner  structure  to  create  substantial  real  estate  portfolio’s.  This  is  similar  to  traditional  private  equity  though  with  a  degree  of  disintermediation  resulting  in  lower  operating  costs  and  an  increased  profit  pass  though  to  the  investors.  

Individual  Purchase  

Many  high-­‐net  worth  individuals  purchase  real  estate  from  outside  of  a  pooled  fund  structure  or  sophisticated  vehicle.  These  investments  are  usually  taxable,  compared  to  more  tax  efficient  vehicles  or  tax-­‐exempt  entities  like  government  and  corporate  pension  funds,  endowments,  charitable  foundations,  etc.  Of  course,  there  are  many  other  unique  features  and  characteristics  of  real  estate  investments.    

Acknowledgment  

Reproduced  in  extract  and  in  part  from:  ”Family  Offices  and  Real  Estate  |  The  Family  Office  Club”  

Disclaimer

This  presentation  has  been  prepared  by  LS  Group  (“LSG”)  for  the  exclusive  use  of  recipient  (together  with  its  subsidiaries  and  affiliates,  the  “Recipient”)  using  publicly  available  information.    LSG  has  not  independently  verified  the  information  contained  herein,  nor  does  LSG  make  any  representation  or  warranty,  either  express  or  implied,  as  to  the  accuracy,  completeness  or  reliability  of  the  information  contained  in  this  presentation.    Any  estimates  or  projections  as  to  events  that  may  occur  in  the  future  are  based  upon  the  best  judgment  of  LSG  from  publicly  available  information  as  of  the  date  of  this  presentation.    Nothing  contained  herein  is,  or  shall  be  relied  upon  as,  a  promise  or  representation  as  to  the  past  or  future.  LSG  expressly  disclaims  any  and  all  liability  relating  or  resulting  from  the  use  of  this  presentation.  

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