Risk management 101: Diversify
Investor: Common questions
What role does R2 play in a project? What kind of due diligence does R2 perform?
R2 acts in the capacity of a "capital partner" at the project level. R2 will 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). Canadian FI's are known to be very conservative real estate underwriters who perform rigourous underwriting of the property and sponsor.
Our investors should take comfort knowing the Sponsors have met these large institutional lenders due dilligence and underwriting standards.
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. Verification typically takes 24 hours. Once we have verified your status you will be able to view and invest in the real estate opportunities available on the platform at that time.
What type of investments are available?
R2 offers a wide range of debt and equity securities in real estate. For e.g., pref equity, LP units, JV, syndicated mortgages etc. Every investment is secured by the underlying real estate. You as an investor will be owning a beneficial interest in the entity that holds direct title to the property or as a lender with a charge aginst title. Through our platform you will be able to conduct all relevant due dilligence and analyze all of the security documents prior to making investments. This is a huge benefit compared to other unsecured investment vehicles in Real Estate like MICs, REITs and blind pools.
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 mantra is rigorous underwriting. Our Chief Investment Officer and his staff conducts an extremely detailed review of various projects that come across our desk. Only about 10% of those projects pass our stress testing. 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, TD etc in the past and have underwritten billions of dollars in real estate transactions. We use the same 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?
Retail Investors*: $50K to $150K
Institutional Investors: $1MM+
*Retail Investors include Accreited Investors, Eligible Investors, and Non-Eligible / Retail Investors as defined by National Instrument 45-108 and may be subject to annual investment limits. Please contact R2 to learn more.
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. The dashboard will also track how much you have earned on your investments.
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. Loans could range from 6 months to 5 years and equity investments could range from 3 – 10 years. Each investment is unique and the holding period will be presented in the due diligence materials.
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?
Equity financing is the borrowing of money and giving up of ownership. Under an equity investment an investor will be a partner in the business and their ownership interest will be registered on title. This is done typically through either a preferred share or Limited Partner structure.
Debt financing involves the borrowing of money and NOT giving up ownership. However, each debt instrument is fully registered on the underlying real estate security. Debt financing often comes with conditions or covenants in addition to having to pay interest and principal at specified dates which the investor of debt will receive. As an investor, your investment is secured by way of a registered charge on title.
What happens if the Sponsor or the project goes into default?
No investment is risk free. For e.g., if an investor holds shares of a company and it goes bankrupt, the shares are worthless. In the case of real estate there is always hard asset underneath the invesment. There always is value in that. The investors have voting rights through the LP agreement to force GP (Manager) to do things differently or in some cases even replace the GP. However, in the rare event that property values tumble because of macro economics or other reasons, the assets will be liquidated and capital will be distributed to stakeholders depending on their priority: senior debt goes first and then mezz debt and then pref equity and then common equity. Investing small amounts in multiple deals is the way to diversify risk.
Why are returns higher than what is typically available from the stock markets?
When large developers engage in development of land or purchase of value add property, they typically expect returns that are well north of 20% otherwise they are not interested in the project. Historically, private capital markets have been very inefficient making investing into such projects very tedious and cumbersome because there was no way for investors to access or connect with such property developers/owners to be part of their syndication. Technology is changing that now. We at R2 are now using the power of technology to make such investments available online for seamless execution. Investors can now co-invest with the project owner on a passive basis and enjoy similar returns.
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.