A real estate prospectus is a document provided by a publicly traded real estate fund to potential investors. The real estate prospectus gives investors details on their fund to help them make an informed decision on whether or not to make an investment, and what they should expect if they decide to do so.
In addition to being a tool used to inform investors, a real estate fund's prospectus is required by the Securities and Exchange Commission, commonly referred to as the SEC. The fund must file its prospectus with the SEC as part of the required registration process. After the prospectus is filed, there is a cooling-off period before the securities are actually available for sale.
A real estate prospectus is very similar to one issued by any other publicly traded company. This document is offered to investors by real estate funds while securing investors for their initial public offering, known as an initial public offering (IPO).
What is in a real estate prospectus?
A real estate prospectus is typically a very long and detailed document. While the exact details provided may vary from one company to another, certain sections are common among most real estate prospectuses.
The company overview gives the investor a summary of the fund. This summary will usually discuss the company's history, past performance, future plans, and growth expectations. The company overview will also talk about the types of real estate investments the fund makes and provide information on the founders.
This section of the prospectus will provide profiles on the fund's executive management team, generally including details on each executive's role in the company, their experience, and their qualifications. Most investors want to know about the people who will be managing their money.
A real estate fund will usually raise money in one of two ways:
- Equity: When the fund is selling equity shares, the investor receives partial ownership of the company, just like when an investor buys stocks in any other publicly-traded company.
- Debt: With a debt offering, the company issues bonds to its investors.
Use of proceeds
A real estate prospectus should explain to investors what the company will be using the money for and how it will help increase the fund's profit to be able to provide a return to the investors. There are a few ways the company may be using these investments:
- To purchase additional properties
- For real estate development projects
- To pay off existing debt
- For other operational expenses
The real estate prospectus will detail how much money they are raising, the number of securities being offered, and the offering price.
The offering details section will also tell investors what the expected return on investment, or ROI, will be and their distribution policy. Some funds may pay the investors as revenue is received, and others may pay the investors when a certain project is sold. The terms of payment will usually be determined by the type of project the company is raising capital for.
An investor will want to see how the company has performed in the past, what profits have been made, and their current financial picture. The real estate prospectus will likely list the assets the fund currently holds, the value of these assets, and the company's liabilities. Operational expenses should be listed here as well.
All investments carry some level of risk, and in order for an investor to make an informed decision on the real estate fund they want to invest in, the prospectus should explain the level of risk involved. An investor will usually weigh the expected ROI against the risk they are taking.
Most real estate prospectuses will also provide other details not listed here. The information provided will vary from one company to another, based on a number of factors.
Types of public real estate funds
Most real estate funds have their own investment strategy. A publicly-traded fund may not own or develop any of its own real estate. Instead, it may invest in other private or public funds. Other real estate funds own their own properties, which usually fall into a specific asset type.
A real estate mutual fund is just like any typical mutual fund except that they invest their money into other real estate securities, such as REITs. Many real estate mutual funds even invest in companies that are indirectly involved in real estate, such as suppliers of building materials and construction companies.
Real estate investment trusts, or REITs, primarily own and manage properties used to collect rental income. The profits from these properties are paid out to investors as dividends. Some REITs may specialize in multifamily properties, while others may invest in shopping centers or other types of commercial real estate.
A private placement is the process of a privately held real estate fund selling equity shares or debt to select investors. A private placement is different from an IPO because its securities aren't offered to the general public. A private placement typically raises capital from a much smaller group of investors than a public offering.
A private company can raise capital for real estate investment with fewer hurdles than a publicly-traded one, but they are still operating in a regulated market. There are various regulations with their own sets of rules that a privately held company can choose from to get investors. Each of these regulations will determine how much money the company can raise and who it can allow to invest in it.
Most publicly-traded funds have a relatively low barrier to entry. Any individual can usually buy as little as one share of a company or one unit in a mutual fund. Privately held funds usually have a minimum investment that can be tens of thousands, or even hundreds of thousands, of dollars.
Private funds can vary greatly in size. Some private REITs can be comparable in size to publicly-traded ones. Other funds may be organized by an individual investor or developer trying to raise funds for a single purchase or development.
Real estate crowdfunding
The JOBS Act was signed into law in 2012 and made it easier for small businesses to raise funds from investors. While the rules laid out in this act were made for all types of small businesses, real estate investors and developers have taken advantage of the simplified process to raise money for developments and purchases through crowdfunding.
While many of the rules made for crowdfunding make the fundraising process simpler, there are also more limits put in place on how a company can solicit investors and who it can accept investments from. However, since many of the real estate funds raising capital through these regulations have higher minimum investments, they are able to pool enough money with a smaller number of investors.
Real estate prospectus vs. offering memorandum
When a private real estate fund is raising money, it provides its potential investors with an offering memorandum instead of a real estate prospectus. While an offering memorandum normally lists a lot of the same details as a real estate prospectus, the key difference is that it is used in private placements instead of public offerings. Like with a prospectus in public offerings, federal securities laws set in place by the SEC require that companies raising private capital provide an offering memorandum to any potential investors.
A real estate offering memorandum will give investors an overview of the company, bios on its management team, financial history, investment strategy, deal terms, and risks. The offering memorandum gives potential investors the information they need to perform their due diligence on the fund before making an investment.
A real estate fund can be an ideal investment for an investor wanting to participate in the real estate market on a passive level. As you can see, there are a lot of options available for this type of investment, and a real estate prospectus or offering memorandum is an important document for helping investors make sound decisions on which options are best for them.