A Business Model to “Launch” U.S. Real Estate Equity STOs in 2020

REI Capital Growth (REICG) has devised a new business model for a U.S. Commercial Real Estate Fund which addresses and optimizes for the issues discussed in the previous blog posts “U.S. Commercial Real Estate and Understanding the STO’s “Failure to Launch” in 2019.”

This new model is the combination of an “Interval Fund” structure wrapped in a “Permanent Capital Vehicle (PCV)” with beneficial ownership recorded as a “Security Token Offering (STO).”

What is an Interval Fund?

The SEC defines an Interval Fund as a type of Investment Company that periodically offers to repurchase its shares from shareholders. The fund periodically offers to buy back a stated portion of its shares from shareholders. Shareholders are not required to accept these offers and sell their shares back to the fund. Legally, interval funds are classified as closed-end funds, but they are very different from traditional closed-end funds in that:

1. Their shares typically do not trade on the secondary market.

2. Instead, their shares are subject to periodic repurchase offers by the fund at a price based on Net Asset Value (NAV).
3. They are permitted to offer their shares continuously at a price based on the fund’s Net Asset Value (NAV), which many interval funds do.

Interval Funds are investment vehicles that provide individual investors with access to strategies that are typically limited to institutions such as hedge funds and pension plans. These strategies may allocate funds for investment to asset classes that are less liquid, such as commercial real estate, than those typically found in mutual funds, but which strategies offer the potential to generate higher long-term returns.

What is a Permanent Capital Vehicle (PCV)?

Permanent capital is an investment for an indefinite period of time in an underlying vehicle. The vehicle can be any form – a corporation, trust or partnership. The investment entity could be publicly traded or privately held.

The most recognized, and perhaps most successful, example of permanent capital may be Berkshire Hathaway. In simple terms, Warren Buffett created a pool of investments where new capital could be added, capital could be withdrawn, management is incentivized and the investments within the pool could change. Family offices have been doing this for years. This is why REICG quotes Warren Buffett in our video, “My favorite holding period is forever.” For 50 years, Warren Buffett has been able to reinvest profits from his businesses and the premiums from his insurance operations without investors pressuring him to return cash to them. The result is that Berkshire Hathaway is one of the largest companies on the U.S. stock market.

For private-equity investors, permanent capital is an open ended investment in a company, akin to buying shares of a company on the NY stock exchange without determining in advance when you are going to sell. This is very different from the way private-equity currently invests in U.S. commercial real estate. Typically, private-equity invests in a private real estate fund for a specific period, usually five to seven years, with annual profit distributions, and then the real estate is sold and the cash proceeds are delivered back to the investors. The fund sponsor then has to start all over again for the next deal.

PCVs are also known as “Evergreen” structures, sometimes called “Evergreen Funds” where evergreen is defined as “always reliable”. There was an article written in 2015 that referred to Permanent Capital Vehicles as “Perpetual Cash Machines”.

The Synergies of Combining the Interval Fund and PCV Structures with Securitized Token Offerings (STO)

The Benefits:

STOs using and managed with Blockchain Technology provides investors with transparency and the security that their beneficial ownership position is immutable.

By synchronizing beneficial ownership with an SEC approved Transfer Agent, confidence and transparency can be further enhanced.

An STO provides confidence to global investors that it is an SEC compliant Reg S and Reg D 506(c) offering.
As a Permanent Capital Vehicle, with no dividends, global investors with no U.S. tax ID may participate, without concern over the 30% dividend withholding rules.

Provides global investors unprecedented access to U.S. commercial real estate investments.

Provides clarity and stability in the valuation of each share of stock (or token) based upon the Net Asset Value (NAV) of the real estate acquired.

Reinvesting cash flow to acquire additional assets provides Equity share investors long term, year-over-year, compounded growth in NAV.

With a commitment to issuing US GAAP audited financial statements and quarterly reports to its shareholders consistent with an SEC reporting entity, provides unprecedented financial transparency and investor confidence for a private real estate investment fund.

NAV and hence Share (Token) value will grow regardless of the interest rate environment.

NAV and hence Share (Token) value will grow in either a rising, level or falling real estate price environment.

New STO exchanges in the U.S. and all over the world, for the first time, provide global liquidity for investors in U.S. private real estate funds.

Liquidity is enhanced and NAV managed with a share repurchase program.

At REICG we like to refer to the combined business structure as a “Perpetual Growth Machine” and that is exactly what REICG is preparing to launch within the next few months.