The Advantages of Curated Marketplaces
There are a number of real estate investment marketplaces out there, but there are significant differences in how many of those marketplaces are operated. Some of them simply refer investors over to a sponsoring real estate company, while others (like Varuna) offer “curation” pre-review services that are designed to filter out some less desirable investment opportunities. How do these differ from each other?
Do It Yourself Isn’t Always the Best Approach
Some marketplaces simply describe, and refer investors directly to, the offerings of sponsoring real estate companies. With these marketplaces, there may sometimes be lesser investor fees, but there are also no services being provided. Investors are pretty much on their own, and have little direction as to the underlying fundamentals of an investment or its basic attractiveness. Industry professionals reviewing these sites are often taken aback at the forecasting assumptions utilized and the promises being made. Investors are thus entirely on their own in making their investment decisions, without the advantage of a professional critical eye having first been cast on the opportunity.
In addition, investors in some sites may be required to work directly with the sponsoring real estate companies on the several investments that they may be participating in. These sponsors may all have differing degrees of experience in dealing with investors, and their manner of delivering investment updates and tax returns can be similar all over the map. This means that these investors will need to monitor any number of differing investments with various sponsors. It also means that if issues arise with a particular sponsor, the investors will need to deal with such issues themselves, directly. Welcome to asset management!
How Marketplaces Can Work for You
Curated marketplaces, on the contrary, first review investment opportunities and screen out those that it itself deems undesirable, or at least not sufficiently attractive. This is a pretty key service for most investors, who may appreciate being able to pick and choose among different investment opportunities but who do not have the time or resources to spend on full underwriting (risk analysis) of those opportunities.
Varuna undertakes a number of tasks designed to make an investor’s choices somewhat more straightforward:
Evaluation of the Sponsor.
Sponsor quality can be a “leading indicator” of a worthy investment opportunity. A sponsor’s prior experience is critical in deciding whether the project meets our standards for listing on the platform. Varuna typically checks a sponsor’s track record of previous real estate projects, its familiarity with the local region in which the current project is located, and the results of background and credit checks of the sponsor’s principal executives.
General Evaluation of the Asset.
Attractive risk-adjusted returns can certainly be found in development or value-add real estate opportunities – but not all such investments are alike. A certain level of due diligence is key to assessing the risks associated with a particular property. Varuna typically considers the asset type (whether a multifamily apartment building, industrial center, retail shopping center, student housing, office building, hotel, or self-storage facility); analyzes the proposed business plan; evaluates the projects risk-adjusted return potential; reviews the tenant profiles; assesses the structure and leverage (indebtedness) associated with the project; and the nature of the sponsor’s own co-investment in the project (its “skin in the game”).
Specific Underwriting of the Project.
Varuna then does a deeper level of risk analysis, using our in-house data and team of experienced real estate professionals. We reconstruct all financial modeling ourselves – often utilizing more conservative assumptions than the sponsor – to stress-test the possible outcomes and assess the project’s probability of success. We review the legal terms of the transaction and negotiate on behalf of investors in view of potential risks, and in some situations may allow us to take more forceful steps in the event that capital risk significantly heightens.
Compliance Measures with our Broker-Dealer.
Many of the above-described steps are reviewed by North Capital Private Securities Corporation, a registered broker-dealer and a member of FINRA / SIPC. North Capital is experienced in the private investment industry and has Series 24 registered supervisory principals review our work, performs its own background and bad actor checks, and confirms that the information presented to investors is fair, balanced and discloses the applicable risks.
Curated Marketplaces Also Help Sponsors
Varuna is focused on the projects of prominent developers, which is reflected in the way that we structure our investments.
Rather than simply referring over hundreds of investors to a sponsor, we pool all of our investors into a special-purpose entity (usually an LLC or series LLC) that then subscribes into a sponsor’s property-holding company. With this structure, a sponsoring development company only has one “investor” to deal with – the Varuna pooled investor entity. Varuna passes along all of the investor communications, and manages distributions and tax preparation for our individual investors. Sponsoring development companies just send us a single distribution, and a single Schedule K-1; we then provide the pro rata distributions and generate individual tax reports for all of our investors. Developers’ lives just became much simpler!
Curated Marketplaces Add Value All Around
Varuna and other curated marketplaces can, by virtue of the value that they bring to a financing transaction and the structures they utilize, bring a much larger capital pool to real estate developers than they may be accustomed to – because we’re providing investors with real estate investment opportunities they previously may not have had access to. Investors are also reassured that some preliminary “vetting” of opportunities has occurred by a team of real estate professionals. It’s a win-win for everyone!
Neither Varuna Technology, Inc. nor North Capital Private Securities Corporation, as institutions, advise on any personal income tax requirements or issues. Use of any information from this article is for general information only and does not represent personal tax advice, either express or implied. Readers are encouraged to seek professional tax advice for personal income tax questions and assistance.
