Several real estate co-investment platforms are emerging today that provide large investment opportunities to real estate investors. As these real estate or investment platforms pool funds from investors to invest in real estate, each co-investor earns a fraction of the asset based on their capital contribution and the asset’s overall price. Like any other investment strategies, there are many benefits of co-investment in commercial real estate as well.
Read Lilypads’ article on what is co-investment in commercial real estate here.
Some of the advantages to this investing approach are:
1. Affordable investment amounts are one of the main benefits of co-investment in commercial real estate
Traditional commercial real estate Investments have high barriers of entry. It is a capital-intensive investment accessible to only well-funded firms and accredited investors.
As a result, there is a higher risk for significant losses. Moreover, the deployment of significant resources in assets limits the investor’s ability to diversify their portfolio.
However, co-investing in commercial real estate allows an investor to invest a fraction of their equity.
So, co-investing democratizes commercial real estate by allowing even small and average-sized investors to enter the world of property investment.
In addition to this, co-investing in real estate involves moderate fees. It is much lower compared to the blind pools and private equity fund investments and private real estate.
Therefore co-investors in commercial real estate can secure higher returns on investment. Hence, one of the foremost benefits of co-investment in commercial real estate is the affordable investment rates.
2. Diversification and access to wider opportunities
Accredited investors and firms often have access to sophisticated deals and opportunities in real estate growth areas. As a result, individual investors cannot access these transactions.
But, co-investment in commercial real estate allows average investors to partner with these institutional investors.
So they can partner with them on such profitable transactions on a deal-by-deal basis.
Co-investment platforms utilize in-house local managers and resources to locate, analyze, and underwrite deals.
Hence the individual investor can delegate the burden of due diligence to the real estate managers and experts.
This is because such professionals specialize in real estate investment and have the competence to unlock the full potential of each investment.
Furthermore, co-investing allows smaller investors to access lucrative opportunities across different geographical markets, asset classes, and investment strategies.
Therefore, the investors can strategically allocate capital in the most desirable and dynamic market conditions.
Besides, the investors can individually review and select those deals that suit their risk tolerance and investment and return criteria.
3. Preferential debt
Sophisticated accredited investors enjoy preferential low-cost debt from banks, retirement and pension funds, and life insurance companies.
However, these tax savings are not available to individual investors.
Therefore co-investing allows average investors to enjoy the benefits of preferential high-quality debt.
Co-investors can restructure their finances to gain more returns and make their investment more feasible.
4. Favorable terms of investment
The co-investors participate in commercial real estate transactions alongside institutional investors.
Hence, they gain insights into the overall pipeline of the transaction including how their capital is invested, and the degree of certainty of the outcome.
Moreover, a direct exchange of information with the fund managers enhances a greater degree of transparency.
It also allows the co-investors to gain more control over the size of their ownership and their rights in the negotiation of the transaction.
5. Management flexibility
In commercial real estate co-investment ventures, the primary investor and the co-investors share the day-to-day responsibilities.
Institutional investors are seasoned professionals.
Hence, they have a successful track record of property management.
Since commercial real estate transactions are complex and time-sensitive, co-investors can pass on the property management tasks to institutional investors. Hence, management flexibility is one of the most important benefits of co-investment in commercial real estate.
5. Sponsor benefits
The Sponsor or General Partner of a real estate co-investment deal is responsible for the following tasks:
- Source and identify assets
- Underwrite deals
- Negotiate and settle deals
- Create business plans
- Develop purchase and sale agreements
- Conduct extensive due diligence
- Obtain financing
- Close deals
- Manage properties
- Sell assets
- Deliver estimated investment returns
The co-investors or Limited Partners rely on the sponsor for these activities. Hence, it is logical that Sponsors receive a greater share of the profits.
And, it is only fair to the co-investors to agree with a disproportionate sharing of profits.
The sponsor of a co-investment real estate platform can now invest in assets that they could not access previously due to fund limitations.
Therefore, the sponsors of real estate crowdfunding platforms could spread their portfolios and investments across several asset classes.
Moreover, co-investment frees up illiquid sponsor equity.
So, sponsors can use this capital to invest across various profitable deals.
In addition to this, co-investment increases IRR and equity multiple on the actual sponsor capital on the deal.
What are the risks of a co-investment in commercial real estate?
There are some risks associated with co-investments in commercial real estate.
Investors must conduct thorough and timely due diligence on the individual properties or portfolios before investing in them.
In addition to this, it is important that investors analyze a fund sponsor’s or team’s track record in real estate investments and asset management. This is particularly helpful given the passive nature of their investment.
So, investors must carefully assess potential risk factors in key markets and strategies such as lease structures, tax, local laws, etc.
Therefore, a real estate co-investment platform must have real estate experts. And, they must have a strong ability to manage portfolios across multiple commercial real estate cycles.
Furthermore diversifying investments across more vehicles increases the administrative burden of a sponsor.
Besides co-investors should have a clear idea of the project terms, ownership structure, and their rights in the investment. Hence, co-investors must have prior knowledge of their lack of total control of the investment.
The Lilypads Bottomline
Investors must analyze the risks to earn the benefits of co-investment in commercial real estate
Although there are multiple benefits of co-investment in commercial real estate, just like any venture, it is not without its risks. Hence, both co-investors and Sponsors must analyze the pros and cons of such agreements before entering into a partnership.
So, it’s always wise to get the help of a seasoned business attorney and conduct thorough due diligence. This way, each party can uncover potential drawbacks beforehand.