Unlike in most other business sectors, the vast majority of real estate enterprises are capitalized either building-by-building or portfolio-by-portfolio, with each newly acquired or developed asset going into a separate special purpose entity set up for the acquisition. Imagine a bank or an auto manufacturer setting up and capitalizing a separate company every time it expanded with a new branch or factory.
In our experience this model is inefficient, uneconomical, opaque and lacking in scalability, and often misaligns the interests of real estate operators and providers of capital. Consolidating assets and growing a real estate business within a single company overcomes many of these drawbacks and makes the asset class more attractive to investors—but it remains the exception rather than the rule.
In this paper, we outline the history of real estate company investing and how it works. We also explain why we believe that there are a number of reasons, both structural and related to current conditions, why real estate company investing is well positioned to become a favored way to structure real estate investments.
Executive Summary
- The Origins of Modern Integrated Real Estate Operating Companies
- How tax reform, recession and regulatory change created a new environment in the late 1980s and 1990s
- Why Create a Company? Alignment of Interest, Transparency and Efficiency
- The governance and alignment advantages of the corporate structure
- The scale and efficiency advantages of a corporate balance sheet
- The value-add that a strategic partner can bring to a real estate business, providing capital and corporate experience
- How to Invest? Public or Private; Equity, Debt or Preferred Stock
- The variety of ways a capital partner can participate in a new operating company
- Why we are flexible—but favor an investment of meaningful size, through debt or preferred stock, with split board control: investor seniority, investor-manager alignment and mutual trust
- Which Operating Partners? Seasoned Teams, in Specialist Niches, With Skin in the Game
- The characteristics we look for in a real estate operating partner
- What Is Our Outlook? Company Investing Is Built For Today’s Uncertain Environment
- Why we believe the current crisis has accelerated the already growing interest in integrated companies: new appreciation of the efficiencies of the corporate balance sheet meets an inter-generational transfer of real estate assets
The Advantages of the Integrated Operating Company Structure
Company-level investing requires a broad-based approach including expertise in evaluating real estate management teams and company business plans, focus on underwriting corporate structures and securities, experience serving on boards and providing corporate governance.
