Realty Mogul “MogulREIT I” Diligence Part 2

In order to understand if MogulREIT I is a good investment you should understand what they intend to invest in. According to the prospectus they will hold commercial real estate debt, mezzanine, and equity related investments with and objective to achieve consistent and increasing cash distributions supported by recurring payments from investments in debt and equity and capital gains driven by appreciation in equity. The planned breakout would look something like this:

  • at least 55% of the total value of assets in commercial mortgage related instruments
  • at least 45% of the total value of more of the assets in equity and preferred equity

Some additional “rules” regarding the investments include:

  • no hotels, raw land, new construction
  • no investments in markets that are heavily dependent on single economic drivers (oil towns)
  • only invest in projects back by established real estate companies
  • target debt investments that will pay an effective interest rate of at least 7% and equity investments should generate funds from operations in an amount equal to at least 7% of the amount invested.
  • first lien mortgages can be leveraged up to 70% of cost or 70% of the fair value of the assets. this results in portfolio-wide leverage of 0-25% of the greater of cost or fair value of the total assets. In other words if $50,000,000 is raised (and fully invested) then up to $12,500,000 can be borrowed from another bank or investor in order to increase the returns that are received.

These sound like decent parameters for commercial real estate investments although they give the manager a lot of leeway when it comes to investment options and the leverage that is used. Ultimately you have to trust that the manager and the people making the investment decisions are smart and level headed people that are going to make good decisions for your money. So what would make these people make better decisions with the investor’s money? If they put their own money on the line of course! Luckily the amount that the major decision makers have invested is disclosed in the due diligence documentation and as of April 12, 2017 none of the executed officers of RealtyMogul who are managing the investments for the funds are invested in MogulReit I. To me this is a major red flag and is very concerning. Once I can find the updated financials for 2017 I’ll take a look. In the meantime an updated summary of the current investments is located here.

 

 

 

 

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