CRE Roles: Aren't certain roles more important than others? (Newsletter Issue 2)

TLDR: There are 4 main categories of CRE roles, with subcategories in each. I define the 4 categories, and explain why no one group gets to claim MVP status.  The brain can't live without the heart, the lungs without the brain, etc.

Aren't certain roles more important in commercial real estate than other roles?

Let's dismantle the ego in the various categories within commercial real estate ("CRE"), once and for all.

Since starting my career in finance and CRE in the early 2000s, I have witnessed 4 main categories of roles jockey for "MVP" in CRE. This behavior includes subgroups within each category vying for higher importance within the category itself!

Today, we put this ego to bed for good, and discuss why no one category exists without the others.

The 4 main categories of roles in CRE are:

Direct Owners

Capital Providers

Matchmakers

Service Providers

In one woman's humble opinion, the CRE Industry is a perfect example of symbiosis. Direct Owners cannot exist long-term without different types of Capital Providers. Matchmakers cannot exist without Direct Owners. No new buildings can be built without Service Providers.

The system relies on all its parts, like the body relies on all its organs.

Category #1: Direct Owners

Let's define the Direct Owner category as those who directly make the final decisions for the CRE property itself and collect the cash flow (ongoing or capital gains) from a CRE property.

The role of the Direct Owner in the symbiotic industry that is CRE is to be closest to the CRE property itself. These are the shepherds, if you will, tending to their flock of real assets, or their lone asset.

Subcategories of Direct Owners

The Direct Owner can be a public company, in the case of a publicly-traded REIT, or private company, in the case of a family owner, a real estate private equity group, a real estate syndicate, or other non-public, non-traded entity that purchases CRE assets directly.

The Direct Owner can make decisions with one individual signing off, as a family unit with various family members signing off, or as a group of unrelated individuals who have created an entity to own real estate together. There may also be silent individuals who are part of the Direct Owner, such as limited partners who "ride along as passengers" in the ownership vehicle but who are not making decisions. There are many ways to legally structure the property ownership entity for tax purposes, which I'll leave to the attorneys and accountants to describe best.

In the last 30 years, the popularity of groups of unrelated individuals creating an entity to own real estate together is a Direct Owner structure has grown tremendously.

No one can say which of these subcategories is the best subcategory, because there is no prize for winning that which isn't a contest! The subcategories are different approaches to directly owning CRE properties, each with its own features.

Category #2: Capital Providers

For those of you unfamiliar with CRE, this is where the industry gets even more interesting. There is a delicious "layer cake" of capital possible in CRE.

Let's define the Capital Provider as the category that structures any form of capital supported by the CRE property, outside of the Direct Owner.

The role of the Capital Provider in the symbiotic CRE industry is to provide funding anytime the Direct Owner does not intend to use 100% of their own funds to support the CRE property. The Capital Providers can provide this funding in different structures, for example as a loan to the CRE property, or as a structure with equity-features and/or debt-features, like preferred equity, mezzanine debt or whole loans.

Stay with me... I'll keep it as simple as possible!

Subcategories of Capital Providers

In the world of Capital Providers, you have two major food groups, those who provide equity-feature capital and those who provide debt or debt-feature capital.

In the last few years the lines of Capital Providers have blurred even more, so I'm going to take a crack at making this simple, starting with debt capital.

Most of us are familiar with loans, which are your standard form of CRE debt capital. Loans can be sourced from public providers, like banks and government sponsored entities, or from private providers, like hard money lenders, soft money lenders, or even private individuals.

Creative structures have emerged, including debt fund whole loans which are typically a combination of a loan and a mezzanine position.  You will see mezzanine loans and preferred equity capital as well, which occasionally blur in features ("Is this more debt-like or more equity-like?").  We love our creativity when it comes to structuring capital!

The Capital Providers include real estate private equity funds, real estate debt funds, private credit funds, pension funds, banks, government-sponsored entities, and other private lenders as mentioned above.

While various Capital Providers would like to win a trophy for most creative structuring, each of the Capital Providers fills a niche and carries unique features. There are no winners, there are only many different wrappers and flavors.  Tons of choices, how fun!

Category #3: Matchmakers

When individuals think about residential real estate, they often think of residential real estate agents. Matchmakers in CRE include similar "agents", but instead they are know as brokers and fundraisers.

We'll define the Matchmaker as the individual who connects everyone in the industry to facilitate a buy or sell, and for their work receives a fee. 

As a Direct Owner, you may not transact often in a buy or sell of your whole CRE properties. You also may not transact often in buying or selling of capital interests in CRE properties. The Matchmakers' role is to know better than anyone the interested parties on both sides of a CRE transaction, so that the Direct Owner can focus on running its CRE properties.

Subcategories of Matchmakers

In the keep it simple theme, you have two main categories of matchmakers, known as brokers and fundraisers.

Brokers can sell buildings on behalf of others, help identify and buy buildings on behalf of others and also help sell interests in your buildings or help identify new capital for your buildings. Brokers can work at the asset level and the capital level.

Fundraisers are typically individuals who place CRE equity capital with investors and may be operating under Securities' Laws. Note that there is some "gray space" overlap with fundraisers and brokers at the equity capital level. Judgment free zone here; I'm not a securities' attorney so my rough simple explanation will do.  Chat with an attorney for more granularity.

Individuals in these spaces develop relationships and large networks. And they are an important part of the symbiotic CRE industry, for Direct Owners and Capital Providers.

Category #4: Service Providers

This category is so large it is difficult to summarize. Let's touch on the biggest subcategories here after we define the service providers.

Service Providers in CRE are all of the individuals that surround the Direct Owners, Capital Providers and Matchmakers, and who are typically compensated with a fee for their services.

Some of the larger service providers include capital advisory, development & construction services, accounting, legal, leasing services, and property management.

Occasionally you will find vertically integrated companies that have some services "in house," like Direct Owners who own construction services and property management services companies. That said, Service Providers are a necessary category themselves.

Subcategories of Service Providers

I've mentioned some of the Service Providers above and I'll group them here into two main subcategories: building services and business advisory services.

All CRE real properties must be created, managed, maintained, renovated and at times, demolished in the cases of functional or economic obsolescence. Building services providers are the primary care physician of the real asset itself.

To maintain the business of CRE and to protect tenants, owners and investors, business advisory services including legal, accounting, and capital advisory are essential.

Without Service Providers in CRE, we'd find Direct Owners, Capital Providers, and Matchmakers with real asset and business operations messes.

Ending the Fight for MVPs in CRE: A summary

It's incredible the evolution of the CRE industry in the last 30 years.

As the CRE pie grows, new subcategories are constantly created.  Crowdfunding for CRE popped up in the last ~10 years as a new fundraising avenue, for example.

Let's now recognize the important symbiotic relationship between all of these categories and subcategories.

These are all essential roles that create incredible value for the other roles within the CRE industry.

Collaboration for the win.

Would you like to offer suggestions on this newsletter, or do you have topics you'd love me to cover?

Contact me to let me know.