Is there a way to get your money out? A Dutch Auction can be a viable option.
Real estate partnerships are generally illiquid. That reality can be frustrating for investors who are ready to cash-out.
Sometimes liquidity is desired by the investor. Regardless of the reason or circumstance, real estate partnerships historically have not offered an easy exit to a minority partners. Brit Properties has created a solution.
There are three main contributing reasons private partnerships have been illiquid. First, there is a lack of demand from any easily identifiable replacement partners. Second, it is difficult to determine the market value of real estate assets. Third, it can be complicated to transact.
Over the years, individual limited partners in syndicated real estate investments have inquired about ways to liquidate their holdings. Joel Friedland, a highly experienced syndicator, also known as a sponsor, with Brit Properties explains, “Until recently, we did not have a ready solution when partners wanted liquidity. Realizing a real need for such a solution, I began work on a strategy that could be equitable, both to departing partners, and incoming ones.
At dinner one night, a friend suggested a clever idea to Friedland. “Run a transparent Dutch Auction where you offer all 250 investors an exit ramp and all of them can decide whether to become a bidder to buy, a seller, or just stand pat.”
Ultimately, that’s exactly what Brit Properties set out to try. They contacted every single investor by email and explained the Dutch Auction concept and their options. Before Friedland’s firm could run the auction though, they first needed to educate their investors. Friedland says, “We had to explain to all our investors about how the price discovery mechanism occurs in a Dutch Auction. Each equity transfer is only set after receiving all bids. This process determines the highest price at which the full quantity of available partnership equity could be sold.”
Partners were reassured to learn that in Brit’s process, they would not have to commit to selling their interest until they learned the selling price. They were under no obligation to sell. Of course, if any partners chose not to sell, the remaining interests for sale might well receive a higher price – just like in any other market. When demand exceeds supply, the price goes up.
This process assured both buyers and sellers that they were getting the best price for their transaction. All the details were approved by our securities lawyer, Mark Roderick, in Philadelphia and our CPA’s.”
It worked! Friedland’s firm obtained a completed form from each potential buyer and seller. Throughout the entire process, the participating investors told Friedland, they believed that a sealed bid Dutch Auction, was fair.
Thirty investors exited—just under $2 million of membership interests traded hands. Twenty investors became buyers who wanted a larger share of the pie. Friedland added “in an effort to obtain the best possible price for the sellers, I invited several people outside the existing group to participate and three new investors made successful bids. The new investors now own pieces of our 20 industrial property portfolio.” Ultimately, the “strike price” for each transfer was finalized at a 20% to 30% discount to the estimated value and communicated to all the potential sellers. The sellers were then able to accept or reject the sales price. The transfers were completed and the sellers received their money.
While the process was easy and transparent for the limited partners, it wasn’t without complications for Friedland and his firm. Eric Schneider, a partner of Brit Properties said “none of the professionals working with us had ever heard of a Dutch Auction, nor had they ever seen a process like this one used in limited partnerships.” The attorneys and accountants had to go through considerable due-diligence to ensure that Brit was complying with security laws and that the process was fair to all involved.
The end result of Brit Properties’s efforts was a novel innovation in a real estate industry that hasn’t seen innovation like this before. For Brit Properties, the result is the creation of a liquidity tool that they can use again and again in the future.
Friedland explains “the buyers and sellers told us they appreciated our creative solution. This unique liquidity procedure could only work for a syndicator who is willing to fully disclose the facts regarding the status of their investments, as we did–which means sharing the facts about the challenges as well as the successes.”
It is likely that future Brit Properties offerings will include a Dutch Auction provision. Friedland and Schneider believe that this exit path will be an important feature of their new investment offerings. Eventually, other sponsors may also eventually consider this to be an appealing liquidity tool. That remains in the future. But for now, investors know at least one syndicator who has cracked that nut.