Broadstone Real Estate Revamps Fund Offerings as Fed Relaxes Rules Under New JOBS Act Increasing Number of Investors Permitted in Private Offerings
Broadstone Real Estate, a property and asset management firm that sponsors two private REITs and manages commercial and residential properties in 27 states, wasted no time jumping on new relaxed federal rules that went into effect this week for raising investment funds.
The Rochester, NY-based company became the first real estate firm to take advantage of the latest provision to go into effect from the Jumpstart Our Business Startups Act (or 'JOBS Act') signed into law by President Obama in April 2012 that could spur tens of billions of dollars of additional invement into commercial real estate
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The provision of the Act that took effect this week increased the maximum number of investors permitted to invest in private offerings and gives private firms much greater flexibility to raise capital needed to fund their growth while still remaining private.
For the first time, private offerings of shares to accredited investors can now be advertised publicly, allowing greater transparency for private investments. The new JOBS Act made this happen by lifting the ban on general solicitations under what are known as 'Reg D' offerings required by the Securities and Exchnage Commission.
Since admitting its first outside shareholders at the end of 2007, Broadstone Net Lease (BNL), one of the firm's private REITs, has continued to attract new investors, primarily by word of mouth, through its Reg D offering. It now has approximately 700 shareholders that have invested more than $320 million.
"On the surface, you would think that attracting so many new investors would be good news. However, prior to the JOBS Act, our success caused challenges," said Amy Tait, chairman, CEO and co-founder of Broadstone. "Under previous securities laws, we would have been deemed (to be a) public (company) once we reached 500 shareholders. We didn't want to cross that threshold without first also gaining enough critical mass to justify the costs of running a public company. Ideally, we wanted at least to double in size again before considering a public offering."
According to Chris Czarnecki, Broadstone's CFO, "In the REIT industry, it is generally understood that the critical mass needed for a public REIT to trade efficiently is now at least $1 billion of market capitalization, preferably higher."
Last year, with 400 exisiting shareholders and only 100 available slots remaining for private investors, Broadstone had to turn away many potential investors to keep its status as a private firm.
"BNL was in the awkward position of getting too big to stay private, yet it was still too small to effectively be public. We were stuck in the middle," Czarnecki said.
Under the provisions of the new JOBS Act, BNL now has a much longer runway to remain private -- it can admit up to 2,000 shareholders instead of only 500.
Consequently, BNL has dropped its minimum investment from $500,000 to $250,000, and has since admitted approximately 300 new investors, with many taking advantage of the lower minimum amount.
Broadstone also launched its second private REIT, Broadtree Homes (BTH), earlier this year focusing on the new single family home rental sector. With a minimum investment of just $50,000, BTH offers a much-lower entry point for potential investors.
Broadtree Homes buys, renovates and rents homes in Palm Beach County, FL, and in the suburban areas outside of Rochester, NY, and Minneapolis. It had raised more than $10 million from about 62 investors as of Monday.
Also effective with the Reg D changes this week, private equity funds, hedge funds and other private companies (real estate or otherwise) such as Broadstone are no longer required to limit access to information to "accredited" investors as defined by SEC standards. As a result, Broadstone is now able to provide much more information to both current and prospective investors on its website and company representatives are free to discuss their offerings more openly and even run advertisements.
"By allowing investors and their financial advisors to more efficiently learn about our REITs and invest directly, there is less cost involved in raising equity capital (as a private firm) than there would be through more traditional public distribution formats. This translates into higher returns available to be paid out to our shareholders," Tait said.
Private firms, however, will still only be able to accept investment subscriptions from accredited investors under the new regulations. Also, the new regulations require additional steps to verify an investor's financial status. Accredited investors generally must have a net worth of at least $1 million, excluding their home, and/or at least $300,000 of annual income.
This provision of the JOBS Act is expected to provide a huge boost to fundraising efforts by private firms. According to analysis by the SEC, capital raised through Regulation D offerings last year totaled $903 billion, with $20 billion of that specifically marked for commercial real estate investing, plus billions more raised for private equity pools that invested in real estate and separate funds that invested in hotel, retail and restaurant operations. Private equity funds reported raising $489 billion.
In analyzing what changes to expect from the relaxed rules, the SEC projected a 20% increase in such Reg D filings.
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