Forget the talk about the real estate bubble bursting. With an average front-end load of 12.5% for many investors, the biggest obstacle to buying into a real estate investment trust has been the high cost of entry, but that may be changing with the launch of the Lightstone Value Plus Real Estate Investment Trust. Not only is there no front-end load, but the plan's sponsor is putting up the first $30 million of the $300 million offering and paying the legal fees, sales commissions, and offering costs to get the REIT off the ground.
"David Lichtenstein, [founder of Lightstone Group] wants to motivate people to invest side by side with him because he believes he can buy real estate at a good price," explains Ed Devereaux, president of Lightstone Securities, which is the REIT's distributor. "He's not buying cornerstone or trophy properties in downtown Manhattan."
Instead, the investments will primarily be a combination of office buildings, shopping centers, and apartment houses in suburban locations. Lichtenstein's goal is to buy properties below their replacement cost, make improvements, increase their value, and sell them for a profit in seven to 10 years.
Although Lightstone is putting up 10% of the fund's total, the company will not receive any returns until investors receive a cumulative 7% return first. Lightstone will then receive 30% of the proceeds until investors receive a 12% cumulative total return. This is Lightstone's initial REIT, although Devereaux anticipates that it will be the first in a series of offerings. Lightstone currently owns and manages more than 280 properties in 26 states.
"The mere fact that [Lichtenstein]'s made a commitment to underwrite the formulation costs is so very different," remarked Devereaux. "The rest of the people in the industry will take your money, charge you 10% to15%, and there's no assurance that you'll get any rate of return that's above what a bond would pay, particularly when they're buying trophy properties. He's really looking for value and he's looking at mid- to high-teens returns ultimately, but it's a seven to 10-year investment."