Real Estate Securities

Real estate development and management is a sector that requires large amounts of capital investment to function, whether in residential or commercial real estate markets. Investments to purchase and/or develop property are designed to generate income in the form of rent or proceeds of sale which can provide returns, and may take the form of a security to be regulated by the SEC and relevant government and non-government agencies. Securities are traditionally thought of as equity, shares, bonds, promissory notes, etc. However, real estate investments are considered securities as the U.S. Supreme Court ruled that an investment contract exists if: 1.) there is an investment of money or assets, 2.) expectation of profits from the investment, 3.) they belong to a common enterprise, and 4.) the profits are generated by an actor or entity outside of the investor’s control.

Types of Real Estate Securities Investments

The two most common real estate investment structures are the Limited Partnership and the Real Estate Investment Trust (REIT). In both scenarios, the fund/company manages the properties in their portfolio and provides investors with a return based upon the income derived from that portfolio. In a Limited Partnership, investors are usually restricted from transferring their interest, which can make exit difficult. REITs, on the other hand, are designed for investors to buy and sell their interest, and are both privately and publicly traded. In either case, the properties being managed are assets that secure the investor’s capital. This is significantly different from investing in most start-ups or service companies where the investor’s funds are typically used for operating expenses without a tangible asset to secure the investor’s capital.

Legal Issues with Real Estate Securities

Regardless of the structure, the managers of the property have fiduciary duties of loyalty, care, and disclosure to their investors. Avoiding issues relating to these duties and resolving them when they arise are key to a REITs long-term financial security. When someone brings an action in court concerning real estate, a Lis Pendens is filed in the county where the property is located. This filing alerts potential buyers that the property is subject to a litigation lien, which prevents a defendant from selling the property. Moving quickly is paramount when bringing an action against a real estate investment company because the company can sell their assets before the investor has a chance to bring the action, making collection on a judgment difficult.