Real Estate

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.

 

 

 

 

Realty Mogul “MogulREIT I” Diligence Part 1

I’ll have to warn everyone up front that I am not a lawyer and I am not your lawyer so I would suggest digging into these documents if you would like to  have a deep understanding of what you are investing in.

If you are looking for a summary of what MogulREIT is and who is behind the company I would recommend listening to the interview of Jilliene Helman, the CEO of Realty Mogul, on Invest Like a Boss. In addition there is a FAQ type section in the “Offering Circular” that is worth reading.

Offering Circular

One of the main documents to review is found on the website the MogulREIT I, LLC offering section is the “Offering Circular” which you can also find on the SEC.gov website if you search EDGAR for the company filings. The offering is File No. 024-10583 initially dated January 12, 2017 with various amendments.

Here is a quick summary of the what the document is saying:

  1. This company (MogulREIT I, LLC or “MR”) that you will be investing in is an LLC that operates as a REIT that intends to initially raise $50,000,000 for $10 per share.
  2. MR intends to invest/hold (i) at least 55% of the value of the assets in commercial mortgage-related instruments such as mortgage loans, subordinated mortgage loans, mezzanine debt and participations (aka B-notes).
  3. The offering circular explains the various fees of the company and who receives those fees. This is something that I plan on reviewing more in depth but for now I will assume these are reasonable for this type of investment. See below for a little more detail of what I found here.
  4. Who can invest? This investment is open to all “Qualified Purchasers” which is either (i) an “accredited investor”, or (ii) all other investors so long as their investment in our common shares does not represent more than 10% or greater of their annual income or net worth.
  5. How or when can you sell you investment? This should be viewed as a long term investment which I would plan to hold longer than 3 years based on the lock up period of their share repurchases. This is not like a publicly traded stock that you can easily sell to other investors in fact you are not able to sell your shares if you have held the investment for less than 1 year. Between 1-3 years there are slight penalties for selling your shares and after 3 years there are no penalties. MR will repurchase up to 25% of their shares quarterly based on their Net Asset Value (“NAV”) which is an internally determined price of the share.

My main concerns are what are the normal concerns with any investment. At the end of the day you as an investor should always want to align incentives with the people who are managing your money and want to be sure the underlying investments are solid. One specific concern that I have over this investment is in relation to the fees that are being charged. Lets get started with those.

Summary of Fees

  1. Organization and Offering Fees – In one of the answers to “What Will you do with the proceeds from the offering?” the MR offering response is “We expect to use substantially all of the net proceeds from this offering (after paying or reimbursing organization and offering expenses) to invest in and manage a diverse portfolio…”. MR estimated amount of Organization and Offering Stage expenses are estimated to be $300,000 – $1,500,000 (or .6% – 3% of maximum capital they plan to raise). This becomes a major concern if only a small portion of the $50,000,000 that they intend to raise in capital is raised. For example if only $5,000,000 is raised and their organization and offering expenses are $1,000,000 then you automatically would lose 20% of your investment to these Organization Fees.
  2. Broker Sales Commission – This is the commission that the people who are selling the shares of the stock get for their services. This commission is 1.2% of the amount raised by the broker or $600,000 if the maximum amount of the offering is raised.
  3. Acquisition/ Origination Fee – Per their Summary of fees the Acquisition/Origination Fees are paid to RM Originator, Mogul Securities, or NCPS (a third party). The amount of the origination fee is usually 1-3% of the loan or equity capital that is being invested which can end up being a large amount of money. I am not sure if this is typical for a REIT but this could possibly incentivize the Realty Mogul platform to invest in shorter term investments and make more acquisitions in order to generate more fees.
  4. Asset Management Fee – A quarterly asset management fee is paid at an annualized rate of 1.00% in arrears based on the NAV at the end of each prior quarter. The total estimated amount per year assuming they leverage certain assets would be $625,000 annually (or 1.25%). The investor should be aware that they have more incentive to use leverage to increase the assets that they manage (which increases the risk of the investment) to generate higher fees.
  5. Servicing Fee – A half point (0.50%) of the principal balance and accrued interest of each loan will be paid to the loan manager/servicer.
  6. Special Servicing Fee – These are the fees that the management gets in case a deal goes bad since there is a lot more work to do if a loan is “non-performing”. In this case an additional special servicing fee shall be paid to the servicing company equal to a rate of 1.00% of the original value of a non-performing asset and any associated expenses incurred by the company. This makes sense to an extent but think about this – if they were to invest in a bad deal they would receive more fees to manage the asset (based on the original value of the asset nonetheless). This is somewhat concerning and isn’t exactly ideal for the individual investor.
  7. Other Operating Expenses – In addition to the other previously discussed fees there will be addition fees reimbursed to the Manager for the out-of-pocket expenses incurred. In other words these are the overhead fees. They do not give an estimate of the expenses or a maximum amount of the expenses so hopefully these are minimal but thats anyones guess.

Whew. That is a lot of different fees. Based on what I have reviewed it appears that for each $1,000 you invest you are going to pay 4%-5% in fees in the first year ($40-$50) and after the first year that you will be paying 3% ($30) in fees per year. These fees might increase if a deal is in default/non-performing and the fees are not based on performance. The fees are paid from the money generated by the investments so they must then generate investment returns of 10%-11% returns from the investments in order to pay the investor a 8% dividend.

While some of the fees are higher than what an investor would prefer the bottom line is that managing real estate involves a lot of legal and administrative work in order to do it correctly so if you want to have a truly passive real estate investment you will have to accept there will be fees involved.

RealtyMogul – Intro

After setting up an account with RealtyMogul.com I plan to walk through some of the investment options that are offered on the investment platform and then eventually invest in one (or more) of the options that are offered. I’d like to get into some of the detail on the investments as I review the choices that some other investors might or might not typically review so you can have an idea of the major risks involved while I provide details of my investment experiences. Upon initially logging in and briefly reviewing I see there are two main choices to invest in:

First, there is the “MogulREIT I” which is an online Real Estate Investment Trust (REIT) designed for diversification and equity appreciation. The MogulREIT I investment has a minimum investment of $1,000 and it pays monthly distributions of 8.00%. One of the major benefits of investing in the REIT is that the minimum investment needed to invest is much less than the individual investments and you have the added benefit of diversification since the REIT invests in numerous different real estate projects at the same time.

Second, these are the individual real estate investment opportunities that are available to be invested in (as of this post).

Investment Type Property Type Location Term Minimum Investment
Equity Multifamily Jeffersontown, KY 7 Years $15,000
Equity Multifamily Baltimore, MD 5 Years $15,000
Equity Retail Various States (Portfolio) 7-10 Years $25,000