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Real Estate Managers to HNW: ‘What We Do Is Not Liquid’

Real Estate Managers to HNW: ‘What We Do Is Not Liquid’

High-net-worth investors have to be patient if they want to invest directly in commercial real estate, admitted real estate managers during National Real Estate Investor’s annual conference today. The managers also provided other ways to talk to clients about this illiquid, opaque asset class.

Advisors are fielding questions from clients on the possibilities and perils of investing in real estate; while many economic metrics point to a solid recovery for the sector overall, advisors have reason to be cautious, given the flurry of recent bad news from broker/dealers selling problematic non-traded real estate investment trusts. 

But at a recent conference that brought together commercial real estate developers and high net worth advisors, managers stressed that any investment in commercial real estate, be it through a non-traded REIT, private equity fund or any other illiquid investment pool, should never be considered a short-term play. The conference was sponsored by National Real Estate Investor, sister publication of,

“It's buildings,” said Jonathan Schultz, managing principal of real estate fund manager Onyx Equities, during the Commercial Real Estate/High Net Worth Investment Conference held in New York today. “You have to actually have a business plan, fix them, lease them, operate them, make them better than what they were when you took them over.”

“Real estate is a long-term asset,” agreed Robert Knakal, chairman and founding partner of Massey Knakal. “If you look at the Manhattan market for instance, the average turnover of the stock of buildings every year is only 2.6 percent over the long term, which means on average, when somebody buys a building in Manhattan, they own it for 40 years before they sell it.”

Don MacKinnon, chief operating officer of ARC Realty Finance Trust, a non-traded REIT sponsor, said their funds typically have a five to seven-year time horizon and a 6 to 8 percent distribution rate. His firm’s wholesalers are selling the funds as a bond alternative; they’re for investors looking for durable income and capital preservation, with some capital appreciation.

American Realty Capital has selling agreements with 300 broker/dealers, MacKinnon said. The firm expects to raise about $8 to $9 billion this year from individual investors; the average ticket charge is about $30,000, he added.

When choosing a real estate manager, MacKinnon and the other speakers said the manager must have an exit strategy, or a plan for a liquidity event. But Schultz said advisors evaluating real estate managers should look beyond the simple mechanics of the investment.

“You’re betting on people,” he said. “Investors are way more concerned with your track record, your integrity and who you’ve done business with, then whether you’re a liquidity event fund or not.”

The panelists had a lively debate over the whether high-net-worth investors should look at IRR, or the internal rate of return. IRR facilitates the economic comparison of projects with different funding, holding and distribution patterns. Schultz and the other panelists agreed that most HNW investors don’t consider IRR, but rather they focus more on the qualitative aspects of the manager.

“For the smartest investors in our fund, IRR is the last thing on their mind,” Schultz said. “Most of them ask me, ‘What is your worst deal, and how’d you get through it?’”

David Lichtenstein, chairman and CEO of Lightstone Group, admitted that out of the 1,000 real estate transactions he’s made since 1988, there were some mistakes. But investors should want a manager who has had some failures because, presumably, they've learned from them.

HNW investors also want managers with skin in the game. Schultz said he and his team have a lot of money invested in their fund, although he wouldn’t say how much. “We’re aligned with our investors.”

Robert Kline, principal and CEO of RW Kline Capital, said he’ll put 5 to 10 percent of their own capital into each fund they manage.

At the end of the day, investing in a commercial real estate is as much of a bet on the manager as it is on the building. “Who are you betting on, and what have they done in their careers to show you that you want to hitch your wagon to them?” Schultz said.

TAGS: Real Estate
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