They'll take a loss on their equity invested because the cost of continuing to feed the mortgage payments until they could lease the space is greater. Likely that they'd never generate enough rent even if full to meet debt obligations, so in that case you just basically hand the keys back and let the bank figure out what to do with it.
Having toured this building in '21, it's going to take a long time before the occupancy is high enough to cover any debt service.
Outskirts of core office location in Portland, terrible access, delivered the building right before COVID. Just a bad outcome and really unfortunate timing.
My understanding is that even the disaster loans will still require collateral and personal guarantees. Unsure if they're waiving or changing those rules or plan to.
Disaster loans have been around long before COVID-19.
Again, this is different than the Paycheck Protection section of the CARES Act which covers 2.5X of the average monthly payroll from 2019 that is subject to loan forgiveness and does not require personal guarantees or collateral.
Close - but Bob in your example also has to improve the basis of whatever he buys by 100% within a 30 month period. So that could be a major renovation of the house, building another unit on the property, scraping and rebuilding etc.
Unfortunately it's not as easy as parking money and riding off into the tax free sunset. As I mentioned down thread, we should hopefully have the first set of regs from Treasury even as soon as tomorrow which will clarify a lot of the loose ends as written in the initial legislation.
Some of what we're waiting to see is whether or not that basis improvement includes the land value or if you can split that out. If the home Bob purchases for $300k is on a lot worth $250k, does he have to spend the full $300k to improve it, or just $50k to improve the basis of the structure?
Lots of details to still work out but hopefully we'll know more shortly.
What irks me about this article is its sole narrative on billionaires helping billionaires. Nowhere in the regs does it say that somebody with a $100 gain couldn't invest that into a project.
Granted there are other regulatory issues that will limit a lot of this activity to accredited investors (via Reg D private placements), but OZ regs have nothing to do with a persons net worth or income.
As other posters have commented, the benefits are three fold - deferring your gain until the end of 2026, a 10% step up in basis on the gain if you hold for 5 years, an additional 5% step up if you hold for a full 7 years, and an exemption on tax for the appreciation of the assets you've invested in if you hold them for 10 years.
The benefit is for investing capital gains into OZ's, not necessarily from selling assets that are in existing OZ's. So if you had a gain on your house (beyond the homeowner exclusion) you could potentially invest the remainder of that gain into an OZ project and get those benefits.
There are all sorts of stipulations you need to follow to qualify however - not all of which are fully in place yet from Treasury. We should be getting the first version of the regs as soon as tomorrow (imminent we've heard from folks in DC) and then we'll know more. Things like having to improve the basis of whatever you invest in by 100% within a 30 month period exist, so you can't just buy something in an OZ and park it, you have to actually do some improvement to what you purchase.
We do a podcast on the fundamentals of real estate and this is the best of those episodes plus a bunch of other educational content we've put together.
Let us know your thoughts! If there's anything specific you'd want us to cover shoot me a note.
How are you guys assessing the lookthrough in that case? If an entity is formed for the sole purpose of investing in your fund, I believe those investors count towards your limit.
This certainly won't win Marc any friends in the "non-SV" private equity shops and will certainly cause many to question his motives.
However, what has happened over the last several years to the credit of PG/YC [1], Naval/Nivi @AngelList/Venture Hacks et al is to create a much more transparent and founder friendly fundraising environment here in SV. With transparency comes accountability and reputations can quickly spread both for the good and bad.
The "culture" of fundraising in SV is one with more open communication of how investors behave. Word spreads quickly in the valley and kudos to Marc for raising the flag on what have most likely been firsthand experiences with such issues. Not many individual founders/companies are in positions to see broad market behavior over a broad data set like a16z portfolio companies.
So what's the downside of taking a "sky-high valuation" and then getting re-traded after you've told other, potentially better firms w/lower valuations, that you're going into exclusive negotiations? I see the options as follows: 1) non-SV investor holds their word, does confirmatory DD and company ends up executing a great deal at terms better than other firms or; 2) said investor comes back and re-trades any number of terms (valuation, control, preferences, board seats etc) and company feels stuck thereby having to take the now worse deal or; 3) investor re-trades and company walks. Result #1 is potentially great, #2 could be a pretty bad deal but in the end company has the capital, and #3 could be a killer - company is now damaged goods and has to come back to other firms, tail between the legs asking for another shot.
This happens all the time in the investment real estate world where I came from and I see a ton of parallels here. Oftentimes there is a full marketing process that ends in a best and final bidding process. A buyer is selected based on the terms/price/timing of their offer and they begin their DD process. Buyers that behave and honor the terms with only material changes coming due to material issues uncovered in DD earn great reputations and their offers are usually considered first from the seller's perspective. Buyers that go into contract and come back with ridiculous re-trades very quickly reach the bottom of the pack going forward on all future deals. So as a seller, you either take the now far inferior deal, or walk from the lesser deal and chance going back out to market as damaged goods. Not a good situation.
Again, sure there are some self-serving motives in Marc bringing this issue up, but as a founder of a company leading our fundraising, I certainly appreciate being aware of all the issues currently in the market. As fickle and at times irrational fundraising can be for startups, the more knowledge we can arm ourselves with the better.
This. The initial funding is by no means the reason to participate in YC - it should have zero impact on any company's decision making process. It is a bonus that takes some pressure off in the short term to allow you to focus on absolute execution.
Build something awesome and you'll have a good shot at getting funding with or without YC. There are many other benefits to the program beyond the up front money.
Founder of RealCrowd here - thanks for the comments. We're focused only on commercial assets now that produce stable cash flow - think of a starbucks or an office building in SoMa that has consistent monthly income from rental payments. Homes should be viewed as shelter, not as a primary vehicle to create wealth.
It will be very interesting to see where the JOBS Act goes and how we can incorporate pure crowdfunding into our platform. Bringing access to this class of investment is what we're after and we're really excited to do so!
It's a no-brainer for anybody that's been in the event management space. The problem is you're so bogged down in running the events you don't have time to take a step back and innovate - which is probably true of most industries.
Great team and awesome product, excited to see where they go!
Advertising of the offerings will be opened up to all, but there will still be restrictions on allowing only accredited investors to participate.
The broader crowdfunding portion of the JOBS Act will hopefully be put in place towards the end of this year/first part of next (if the stars align...). There will still be some restrictions on income/amounts you can invest, but that will truly open up opportunities like we've never seen.
What you describe above is more of a "rewards" based kickstarter model, where there may not necessarily be actual "equity ownership" of the projects. In that case, you can do that today!
I think we're seeing the beginnings of the industry shifting closer to your model above. We're only limited to accredited investors due to SEC regulations that are (slowly) changing - true "crowdfunding" is on the horizon.
Thanks for the questions, a big part of our role is to handle exactly what you describe above. Making sure that the operating partner/developer is acting as they should! We have provisions in our documents to remove them if they're not behaving.
As far as competing with larger RE fund managers, our focus initially is on deals that require $2MM-$10MM of equity, below where the big institutions will look (>$10MM typically), but beyond where most operators can raise on their own.
Accredited investors must meet one of the following criteria:
-a minimum net worth of $1,000,000 (excluding primary residence)
-annual income of $200,000 for the prior two years and anticipation of the same in the current year if filing individually
-annual income of $300,000 for the prior two years and anticipation of the same going forward if filing jointly
For now, we're limited to accredited investors only, but as the JOBS act continues to roll out, we'll see how the SEC/FINRA craft their rules and hopefully open it up to all investors.
At the end of the day, both are viable investment alternatives, right? REITs provide liquidity, but you pay for that liquidity through lower returns and less control over those investments.
Our structure provides you the control to choose which assets you invest in, can provide substantially higher cash returns than REIT yields and allows the investor control over where they put their money.
In addition, our structure requires a substantial amount of money co-invested by the real estate operator so their interests are financially aligned to maximize the value of that asset as well. The better the asset performs, the better we all do.