Public and private real estate investments are both popular options for institutional and retail investors looking to generate passive income. In this article, we will explore several factors to consider when determining which type of investment is right for you. We will examine the relationship between Broadmark Realty Capital Inc. (“BRMK” or “Broadmark Realty”) (NYSE: BRMK), a publicly traded company, and Broadmark Private REIT, LLC (the “Private REIT”), in order to offer insight into differences in investment structure and style and present questions a potential investor may want to ask when performing due diligence on any investment. However, the structure of the Private REIT and Broadmark Realty may differ from other public and private REITs, and all investors should thoroughly research every investment in which they participate.
Publicly traded companies such as BRMK that have strong balance sheets can provide risk-mitigated dividends and potential for growth as part of an appropriately diversified portfolio. There are no investment minimums when purchasing publicly traded shares and anyone with liquid cash can invest. Privately traded companies such as the Private REIT can offer consistent monthly cash distributions and diversification from public markets but may have SEC-regulated investor requirements. The Private REIT can only accept investments from Qualified Purchasers, which are individuals with at least $5 million of investable assets or entities with at least $25 million of investable assets. There may also be investment minimums. The minimum investment in the Private REIT is $100,000.
The Private REIT invests in BRMK’s proven strategy of making first-position, short-term, personally guaranteed real estate loans to small and mid-size real estate developers. The Private REIT participates in each loan originated and managed by BRMK each month, and the Private REIT’s participation percentage is determined by the amount of cash each entity has available to lend. There is no cherry picking of loans by either entity.
Both vehicles have historically generated monthly income through BRMK’s lending strategy, but there are differences in how that income is determined. BRMK issues a dividend which is determined by the company’s board of directors and accounts for market conditions and other factors. The Private REIT pays a monthly cash distribution that is calculated by a formula outlined in its Confidential Private Placement Memorandum, providing investors with clear visibility into their participation in the income generated by loan fees and monthly interest.
Another difference between BRMK and the Private REIT is the method of valuation. The Private REIT offers preferred units at net asset value (NAV), which is calculated monthly and affected only by portfolio performance. BRMK’s share price is determined by the public market, changes daily, and may or may not reflect the underlying strength of the company. The Private REIT may be more attractive to investors whose main goals are income generation and who want to avoid daily market changes. However, the Private REIT may not be suitable to investors whose main goals are growth. BRMK’s publicly traded stock provides the potential for growth, but investors must be comfortable with daily fluctuations in value.
Yet another consideration is liquidity. BRMK stock is traded on the New York Stock Exchange and provides daily liquidity. Alternatively, an investment in the Private REIT provides near-term liquidity, but requires a one-year lockup of funds that can subsequently be withdrawn quarterly.
Investors who prefer daily liquidity and potential for growth in value while earning a dividend are likely suited to invest in publicly traded BRMK stock. Those who are primarily interested in income generation, do not require immediate liquidity and are either uncomfortable with or would like diversification from public market pressures would likely be better suited to invest in the Private REIT.
There are benefits and limitations to investing in both shares of a publicly traded company and in units of a private REIT. Regardless of how you choose to deploy your capital, we recommend performing your own due diligence to make sure that you have invested in a reputable company with a proven strategy and strong leadership that has investors’ best interests in mind.
Broadmark Private REIT Management, LLC (the “Manager”) provides this presentation to prospective investors on a confidential basis for informational and discussion purposes only. This presentation is not an offer to sell or a solicitation to buy preferred units of the Private REIT. We will only make any such offering to qualified purchasers through the Private REIT’s current Confidential Private Placement Memorandum (the “Memorandum”). The Private REIT’s preferred units may not be eligible for sale in some U.S. states or countries, nor are they suitable for all investors.
The Private REIT is a private real estate finance company that primarily participates in short-term, first deed of trust loans secured by real estate that are originated, underwritten and serviced by Broadmark Realty. The Private REIT’s allocations of income, fees, and other amounts from participating in Broadmark Realty’s loans will vary based on applicable participation percentages.
The Manager calculates the Private REIT’s Monthly Return based on based on cash distributed to investors from loan origination fees and other fee-based income, less expenses and reserves, divided by total paid in capital, as of the end of each month. The Manager has broad discretion to determine distributable cash on a monthly basis. Assets Under Management are based on total paid in capital, less any permanent capital losses from loan participations.
Certain Risks. Real estate lending is speculative and entails substantial risks. As a real estate finance company, the Private REIT’s revenue and net income is limited to interest and fees received from participations in Broadmark Realty’s loans. The Private REIT’s ability to invest in additional loan participations is limited by the cash available to lend from new capital contributed by investors on a monthly basis. An investment in the Private REIT is speculative, involves substantial risk, and is suitable only for investors who can bear the economic risk of the loss of part or all of their investment. There can be no assurance that the Private REIT will achieve its investment objective or avoid substantial losses. The Manager does not guarantee the return of an investment or the performance of the Private REIT. Please carefully review the Memorandum, including “Certain Risk Factors,” for a general description of certain risks potentially applicable to an investment in the Private REIT. In making a decision to invest in the Private REIT, potential subscribers must rely on their own legal, tax and financial advisors in reviewing the proposed offering.
Historical performance data of Broadmark Realty is provided for illustrative purposes only. References to Broadmark Realty include its consolidated subsidiaries after a business combination which occurred on November 2019, and refers to the Pyatt Broadmark Real Estate Lending Companies I-IV for all periods prior to that date. The Private REIT was recently organized and has a limited operating history of its own upon which prospective investors may base an evaluation of its performance. Any loan data or performance information presented for Broadmark Realty is not the past performance of the Private REIT, and is not indicative of possible future results of the Private REIT. There is no assurance nor should it be assumed that the future performance of the Private REIT will achieve results comparable to the past performance of Broadmark Realty. PAST PERFORMANCE IS NO INDICATION OF FUTURE RESULTS.
The impact of the COVID-19 pandemic and the measures implemented to contain the spread of the virus have had, and are expected to continue to have, a material adverse impact on the real estate lending business and results of operations of Broadmark Realty and the Private REIT, including the ability of borrowers to complete real estate projects and make timely payments of principal and interest on loans.
Certain Conflicts of Interest. Potential investors should be mindful of the important differences between Broadmark Realty and the Private REIT as outlined in the Memorandum. The Private REIT will largely be dependent on Broadmark Realty to source, negotiate, and originate mortgage loans, and to foreclose on defaulting borrowers. The success of the Private REIT is largely dependent on Broadmark Realty offering sufficient attractive loan participations, and Broadmark Realty could elect to offer a higher (or lower) participation interest in any loan for any reason, which could result in conflicts of interest. It is possible that the interests of Broadmark Realty will at times conflict with those of the Private REIT, which could negatively affect its performance. There is no guarantee that the Private REIT will achieve results that will allow it to pay a specified level of cash dividends or to increase the level of such dividends in the future similar to Broadmark Realty. The Manager may be delayed in reporting performance or other information relating to Broadmark Realty’s loan portfolio until after certain financial information has been publicly filed by Broadmark Realty. The Private REIT’s preferred units are subject to substantial restrictions on redemptions, including a one-year initial lock-up period and quarterly limit on the total amount redeemed, and are not eligible to be transferred or resold to the general public.
Vigilant Distributors, LLC, an SEC-registered broker-dealer and FINRA member, serves as placement agent with respect to the offer and sale of the Private REIT’s preferred units. The Manager has elected to pay Vigiliant Distributor’s fees for the initial year of the Private REIT’s operations. Certain of the Manager’s personnel are Vigilant Distributor-registered representatives who market the Private REIT’s preferred units. The Manager’s personnel are also employees of Broadmark Realty. Broadmark Realty has adopted a bonus policy for eligible employees based on various performance factors, including contributions to the growth of the Manager. The Private REIT and the Manager have engaged independent selling broker-dealers and web-based platforms to market the Private REIT’s preferred units. The Manager (not the Private REIT) pays platform fees and expenses, and also pays to any independent broker an upfront fee equal to 1.00% of a subscriber’s invested capital and, after the first anniversary thereof, an annual fee equal to 0.50% of the subscriber’s invested capital. Due to the compensation paid, these persons have a conflict of interest in recommending the Private REIT to potential investors.