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Institutional Class RE Investing for the Rest of Us

When I find anything in the financial planning or investment management world that can be of value to my MOT brothers/sisters, I will try to share it. This article was written by a colleague of mine who has helped to build a very unique as well as desirable type of real estate investment that may mitigate the risk in any portfolio or serve as a consistent income producing asset. This is the asset class of real estate that Pensions, Endowments, and Taft-Hartley plans like to own, but many retail investors are not aware of.  “All Cash” or Debt Free Income properties bring a negative correlation with the equity markets with little or no risk to the investor. Unfortunately, there are not many ways for retail investors to participate. Baceline Investments out of Denver is one of those great little companies that flies under the radar, but can bring substantial value to your investment portfolio. Below is an article written by John Holman who is the Director of National Marketing for Baceline. This is a gem for the astute investor and worth learning about for the novice. Enjoy the read!

Debt-Free Income Properties: The Ultimate Alternative Investment
By John F Holman, Baceline Investments

The poor performance of traditional investments (stocks, bonds, and cash) over the past five to ten years has caused a renewed interest in alternative investments. Historically, the returns of alternative investments, due to their structure and the assets that they purchase, have had low correlation to the performance of traditional assets. Accordingly, they can deliver strong a return when traditional assets are under performing, thus creating a better, more balanced investment portfolio.

There is one alternative investment that has performed very well: Buying well-located, income-producing properties for cash, without paying any front-end fees to a sponsor. This approach ensures that the highest percentage of the funds is invested into the real estate. This debt-free structure should be considered the ultimate alternative investment for the following reasons.

For many years, insurance companies and many individual investors have purchased commercial properties for cash to maximize their income and minimize their investment risk. Purchasing a property for cash eliminates the expense of debt service, the risk of foreclosure on a debt instrument, and the income from the properties rents is maximized.
Depreciation deductions that investors receive will tax shelter a portion of the income. Therefore, on an after tax basis, an investor receives an income that is partially tax-free and partially taxable. Simply stated, an investor receives an income that is similar to owning both a tax-free bond and a taxable bond.

Owning income-producing properties free of debt also creates an investment that is the equivalent of a real estate backed bond. Often, corporations will issue bonds to purchase buildings and equipment to expand operations. The buildings and equipment are usually purchased for cash, and the operating income from the corporation is used to pay the interest payments on the bonds. Eventually, the corporation repays the principal amount of the bond to its investors, and the corporation keeps the real estate.

Buying debt-free income properties avoids the middleman, and allows investors to keep the real estate. The tenant leases on the property provide the security for the payment of income, similar to a corporation’s promise to make bond interest payments. Most importantly, the investors get to keep the potential capital appreciation from the sale of the real estate.
Investment Sponsors that buy debt-free income properties create an investment that is similar to a balanced account offered by traditional money managers. Money managers that offer balanced accounts to investors normally buy bonds for cash to produce income and stocks for cash for their capital appreciation potential. When income producing commercial real estate is purchased for cash, investors receive a bond like income and they have the potential for capital appreciation as a result of their real estate ownership.

Additionally, unlike a bond, the income from the properties can increase over time due to increased occupancy and increased rental rates. Such an increase in income not only increases the income to investors, but can also increase the value of the property and its capital appreciation potential.

One of the reasons for our recent financial market crisis was the use of financial engineering by Wall Street to create complicated investment products with little or no economic merit, except for generating huge fees for Wall Street. These products failed for many reasons including the investment structure and fees charged by their creators.

When an investment sponsor charges no front-end fees and buys well-located, income producing commercial real estate for cash, what occurs is the equivalent of reverse financial engineering. An investment is made that is similar to an individual buying a property themselves. The property is purchased for cash, producing income, tax benefits and capital appreciation potential.

Value managers, such as Warren Buffett, have historically bought companies with little or no debt, generating high positive cash flows from their operations. Debt-free income properties do the same thing. There are very few investment sponsors that currently offer such investments. Most real estate sponsors charge large front-end fees and use borrowing to acquire more real estate. There is nothing wrong with using a reasonable amount of leverage to acquire income-producing real estate, but there is a trade off. Income from property rents is reduced and investment risk is increased.

There is an inherent disadvantage to investors if a sponsor charges large front-end fees, since less of the investors money is invested into the real estate. Also, REIT’s that are currently paying dividends to investors from borrowing or new investment capital pose a real risk to investors since the distributions are not coming from property rents.

Will Rogers said, “I’m more concerned about the return of my capital, than the return on my capital!” Debt-free income properties are a solution to this problem and many others. Can you think of another alternative investment that has more features and benefits than debt free income properties?”

John F. Holman, MBA, JD, is the National Marketing Director for Baceline Investments, LLC., a real estate sponsor that offers debt free income properties through Regulation D Private Placements. He is currently a member of the Real Estate Investment Securities Association (REISA), and has previously been a member of the Investment Management Consultants Association (IMCA). He received his CFP from the College for Financial Planning, and his CIMA designation from the Wharton School of Business. He has had articles published by the Institute for Certified Investment Management Consultants, Senior Consultant Magazine and On Wall Street, including an article that was published in 1999 predicting the crash of the stock market in 2000 titled “The Emperor Has No Clothes”. He can be reached at jholman@bacelineinvestments.com or 303-250-3340. To learn more about Baceline Investments, visit www.bacelineinvestments.com.

About Daniel Rosenberg

Daniel Rosenberg is a 2nd generation financial advisor who graduated from the University of Georgia in 1986, and earned his MBA from the University of Miami in 1991, while working at his family's financial planning firm from 1986 through 1999. What differentiates Mr. Rosenberg from any other advisor you will have the opportunity to work with is his diverse background in the retail, wholesale, and institutional divisions of the financial services industry. In addition to providing traditional retail financial planning to thousands of individuals as well as the businesses they own (including law firms, hospitals, banks, chambers of commerce, and corporations of all sizes), he has acted as a consultant to and/or worked with over 5,000 financial advisors, brokers, planners, trust officers, and insurance agents throughout the country. He was very fortunate to have traveled with and learned from many of the Senior Portfolio Managers and their team of analysts, from some of the largest investment firms and insurance companies in the world. As a true "Industry Insider", Mr. Rosenberg has been involved with the entire "Life Cycle" (i.e., product creation, syndication, marketing, and finally the distribution of these products to financial advisors who would then sell them to their clients) of mutual funds, insurance products, private money management, REIT's, and Hedge Funds. This unique and broad experience in retail financial planning, wholesale territory development, and institutional investment management has provided Mr. Rosenberg with an unequaled depth and understanding of Investment Management and the "Life Planning" processes. Advisor Solutions is aptly named because Mr.Rosenberg has taken the"Best Practices" from the most successfull advisors in the country, as well as the "Institutional" investment management strategies (i.e., Ivy League Endowment Model) practiced by large corporations and endowments. He brings this wealth of wisdom to a private client practice in Colorado and Florida.

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