Risk management 101: Diversify
Investor: Common questions
What role does R2 play in a project? What kind of due diligence does R2 perform?
R2 tends to act in the capacity of a "capital partner" at the project level. For e.g., on the Development LPs, R2 will often work for several months with the developer to conceptualize the project, assess it's capital needs, define an appropriate legal structure and pref return for the investor etc. Unlike, a typical EMD, R2 will actively negotiate preferred terms on behalf of it's investors, will work on sourcing senior/mezz debt and ensure sufficient capital is available to get the project to it's completion. Ultimately, project sponsor i.e the developer is responsible for project completion but R2 acts as a second set of eyes on the project and gets compensated to do so.
We interview all of our sponsors in person and underwrite the deals fully after reviewing third party property reports like Appraisals, Building reports, Environmental reports etc. Property cash flow for last 3 years is also analysed along with future cash flow projections. We also review leases, perform property visits and do tenant background checks. Most of the deals on our platform have secured senior debt through one of Canada's major financial institutions (FI).
What kind of securities licensing do we have?
R2 is an Exempt Market Dealer in ON, AB, BC, MB, NS, QC & SK. After you create an account on our platform, we perform a verification of your investor status and grant access if we find that our investments are suitable for you.
What type of investments are available?
We offer followig types of investments:
- Private REITs
- Income producing property LPs
- Development project level LPs
Where should I invest?
Our portal offers a wide variety of curated deals that are diversified across geography and asset type: retail, office, industrial, apartments, mixed-use, student housing, seniors housing, self-storage, and more. We offer investment projects outside of Canada as well.
What is R2 process for selecting investments?
Our underwriting group conducts a detailed review of various projects that come across our desk. Typically, every investment R2 has an appraisal completed by an AACI who follows the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP), which establishes an independent opinion of value. Whenever possible the appraisal is completed by our valuation partner - Colliers. Our principals worked with Canada's largest Financial Institutions like BMO, RBC, CIBC, Sunlife etc in the past and have underwritten billions of dollars in real estate transactions. We use the similar rigour of underwriting on our projects; which includes a thorough rent roll review, cash flow stabilization, 3 year historical financial analysis, investigation and background checks into the sponsors, among other things to evaluate each project before it is listed.
What are the average investment amounts?
Depending on the project, our investment minimums range from $10k to $100k
How will I receive the payments remitted to investors?
Investors will receive monthly payments from the project sponsor automatically into their bank account. From there they can then move the funds anywhere they want. Our payment processor is a TSX listed public company that is fully compliant with PCI Level 1 Service Provider. This means that they have passed the most rigorous on-site security audits, full penetration and vulnerability testing and maintain a strict security regime to provide the highest level of security posture for the protection of our customers’ data and for their payment and card acceptance requirements
How can an Investor’s track their investments performance?
R2 provides the investor with a dynamic online dashboard to track how much and where their money is invested. Project updates written by the Sponsor are sent directly to your inbox for review and are also uploaded to your dashboard for safe keeping.
How long is the investment hold period and what is the exit?
Real Estate is always supposed to be a Fixed Term investment vehicle like Bonds and hence our investors typically hold the investment till maturity. The investment hold periods vary depending on the type of investment. Generally our investment time horizon is anywhere between 1-5 years. Exit is via sale, refinance or share buy back by the sponsors.
How do investors transfer and receive funds?
Funds are transferred electronically via strategic payment gateway partner or by ACH or by wire transfer. Investor’s funds are held in a trust account until the raise is complete. Once everything is finalized funds are transferred from the trust account to the sponsors account.
Investors will receive payments from the sponsor automatically into their bank account as per the subscription or loan agreements. This could be monthly, quarterly, annually and upon the disposition of the asset.
What is the difference between equity and debt investments?
Under an equity investment an investor will be a partner in the real estate and their ownership interest will be registered on title via a nominee/beneficial owner structure. This is done typically through either a preferred share or Limited Partner structure.
A limited partnership (LP) exists when two or more partners unite to jointly conduct a business in which one or more of the partners is liable only to the extent of the amount of money that partner has invested. Limited partners do not receive dividends, but enjoy direct access to the flow of income and expenses. The main advantage to this structure is that the owners are typically not liable for the debts of the company, do not have to provide loan guarantees and are generally also not responsible for capital calls.
Our access to Debt deals is typically achieved through MICs.
A mortgage investment corporation or MIC is an investment and lending company designed specifically for mortgage lending (primarily residential mortgage lending) in Canada. Owning shares in a mortgage investment corporation enables you to invest in a company which manages a diversified and secured pool of mortgages. Shares of a MIC are qualified investments under the Income Tax Act (Canada) for RDSPs, RRSPs, RRIFs, TFSAs, or RESPs
What happens if the Sponsor or the project goes into default?
In the event of default, there are several protection rights that are typically built into the Limited Partnership and Subscription documents that an investor is able to pursue legally in consultation with their counsel.
How do public REITs compare with LP investments, MICs or Private REITs?
Public REITs pose a similar equity risk as any other exchange traded stock. Volatility is part and parcel of REIT investing. Exchange traded REITs also have a very high platform cost that erodes the returns for the investors
Often times, public REITs provide little to no capital appreciation. Even though they pay dividends, REIT income is taxed, typically at a much higher rate than most dividends. Large part of a REIT's dividend is considered ordinary income, which is usually taxed at a higher rate. REITs are required to pay property taxes, which can make up as much as 25% of total operating expenses, reducing cash flows to shareholders.
There are many benefits of investing in MICs, Private REITs and LPs including protection from stock market volatility and tax efficiencies.
How long are the investment periods?
Debt investments range from 6 months to 3 years and equity investments typically range from 2 to 5 years.
What are the tax implications of investing?
Typically all profits and losses are flow through to the LP unit holders. Please consult with your accountant or tax advisor to determine the tax implications of any proposed investment.
How often will I receive distributions / payments?
Monthly or quarterly. These payments are called CoC (Cash on Cash) dividends. Beyond that a big chunk of the payback comes usually at the end. Together the overall return is referred to as IRR (Internal Rate of Return). For definitions of CoC and IRR we suggest visiting www.investopedia.com.