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Opportunities in a Changing Market – Bridge Loans

As the nation continues its steady recovery from the COVID-19 pandemic, we find ourselves in a hyperactive housing market characterized by very low interest rates, skyrocketing demand and substantial lack of supply. Investors may wonder how to benefit from these unprecedented conditions in which returns and income are hard to find. Broadmark Realty Capital (NYSE: BRMK) has historically provided investors the opportunity to passively generate income from a risk mitigated portfolio of conservatively underwritten construction loans. In our previous article, The Stages of Construction Financing – Creating Value for Borrowers and Investors at Every Step, we discussed the value we provide to borrowers and investors at each step of the construction process, from purchase to completion. In this article we examine the stage of financing that happens after completion – the bridge loan.

What is a bridge loan?

Bridge loans are short-term, generally ranging from three to 24 months. Our experience in credit markets has shown us that interest rates on first position deed-of-trust bridge loans tend to be higher than those on permanent financing yet lower than those on construction loans.

Proceeds from a bridge loan are used to take the project from completion to the next stage, which is usually permanent financing or sale.  Operating expenses and general management of the property need to be paid during this time and a bridge loan can be a good solution.  Sometimes the borrower needs to “stabilize” a project – leasing units or making renovations to meet the underwriting guidelines of permanent lenders or obtain a higher price from a buyer.

A bridge loan can also allow a borrower to take advantage of opportunities in a fast-paced market, allowing them to complete the purchase of a property while waiting for traditional financing or proceeds from the sale of another project.

There are times that a bridge loan is used to repay an equity partner.  The cost of a bridge loan may be the same as the payout rate to an equity partner with the added advantage that the borrower can take back ownership of the project.

Bridge loans provide value to the borrower through the efficiency in which they are processed. They must be approved and funded quickly to bridge the gap between construction and permanent financing or sale.

What is the outlook for bridge loans?

Bridge loans have emerged as excellent options to aid builders and developers as they seek to expeditiously purchase, stabilize or reposition real estate projects.

There are few lenders that finance multiple stages of development, and borrowers can spend time and energy searching for reliable financing at each stage. As homebuilders and developers continue the rush to meet soaring housing demand, a lender that provides certainty of execution from start to finish is an attractive proposition to borrowers.

Bridge loans generally have a lower risk profile than construction loans because the collateral has usually been completed and may already be income generating. In some cases the lender can establish an escrow account for the rental payments generated by the property and capture that income in case of default.  In a low interest rate environment, where it is difficult for investors to find risk-mitigated investments that provide income, investing in bridge loans can be a good option.

As homebuilders and developers work to meet the huge demand for housing, there will likely continue to be a stock of finished properties that will require post-construction bridge financing.  An experienced lender with disciplined underwriting standards, an established infrastructure and a firm eye towards the future should be able to provide a vital service for quality borrowers and an attractive opportunity for investors.

The Stages of Construction Financing – Creating Value for Borrowers and Investors at Every Step

The Stages of Construction Financing – Creating Value for Borrowers and Investors at Every Step

Real estate projects are completed in stages, and each stage of the construction process can be financed separately.  In this article, we will explore the different stages of real estate development and how appropriate financing can add significant value at every stage.  Identifying these details is critical to understanding how Broadmark Realty Capital (“Broadmark”) (NYSE: BRMK) participates in the real estate construction process, as well as the significant market opportunity and demand that exist for our suite of products.

Broadmark is a real estate lender that specializes in financing for builders and developers who require quick closings and outside-the-box thinking.  Broadmark employs conservative underwriting guidelines to protect investor capital, and provides creative and flexible financing packages allowing borrowers to quickly capitalize on market opportunities.

Raw Land Acquisition

Raw land acquisition refers to the purchase of a plot of land that does not have the necessary permits or “entitlements” in place for construction.  Examples of raw land are an infill lot in a dense, urban location, or land in a suburban area that can be divided or “platted” into individual lots to build multiple structures.  Raw land can also include rural plots, although Broadmark typically does not lend against this type of asset.

A key factor in determining the risks of purchasing raw land is the marketability of the land and the completed project.  Some lenders consider themselves “land banks,” and specialize in funding the purchase of raw land before the profitability of a project is determined, adding to the risk associated with the loan.  Broadmark is not a “land bank”.

Broadmark will participate in raw land acquisition with certain requirements in place. Typically, this includes evidence of feasibility work and/or cross-collateralization of other properties.  A path to entitlement must be clear.  Broadmark will also consider the ability of the borrower to obtain financing for future stages of development.

Horizontal Development

Horizontal development refers to obtaining entitlements and adding infrastructure to prepare a piece of land for vertical construction. This can include finalizing permits, installing utilities or laying a concrete pad. Generally speaking, a horizontal development loan will include a combination of these elements.

A primary risk associated with horizontal development loans is overleveraging. Often, borrowers borrow too much against the land, leaving them without access to the capital that is required to move a project into its next phase (vertical construction). This can make it impossible for the borrower to refinance or secure a vertical construction loan without putting up a significant amount of additional equity.

Broadmark mitigates this risk and prevents disruption to the construction process by underwriting the vertical phase of construction along with the horizontal phase, ensuring there is enough equity for vertical construction without requiring the borrower to raise additional capital. This allows the borrower to refinance with another lender, if desired.  However, in many cases Broadmark will also lend on the project’s vertical construction phase.

Vertical Construction

The vertical construction phase entails the actual construction of the structure. It can involve a variety of asset types, including single-family homes, apartment buildings, townhomes or condominium complexes.

Broadmark holds back most of the loan for construction draws and releases funds after the scheduled portion of construction has been completed and verified by an inspector. If necessary, lien releases from sub-contractors can also be obtained.  In the case a borrower cannot complete construction, Broadmark has the funds, plans, clear title and expertise to complete the project. This minimizes risk for the lender and investors while providing the borrower with the funds needed at each stage of construction.

Post-Construction

Once a project is complete, and before its full profitability has been realized, financing is often needed for “stabilization”.  For an apartment building, this means having a certain percentage of units leased or occupied.  Stabilization is typically required to qualify a property for permanent financing that will carry it throughout its lifecycle.  The primary risk to the post-construction lender is realized if the borrower cannot lease the property and refinance, in which case the lender may take back a completed investment property.  Historically Broadmark has not financed these types of “bridge” loans but may consider originating more in the future.  Rates on these bridge loans tend to be lower, as the perceived risk of lending on a completed project is lower than lending on a project under construction.  However, these bridge loans represent an opportunity for Broadmark to provide borrowers with a complete suite of financing options from the start of the project through stabilization.

Conclusion

As we’ve demonstrated, providing financing at multiple stages of the development process is a critical component to Broadmark’s investment strategy. Our practices help borrowers advance their business plans successfully and efficiently, while protecting investors and generating risk-mitigated returns that meet their investment goals.

Letter from Jeffrey B. Pyatt

Dear Broadmark Private REIT Investors,

We would like to address the dip in returns in the Private REIT for the first quarter of this year.  First, rest assured, the portfolio is healthy.  There are no defaults in the Private REIT.  We continue to originate loans according to our conservative underwriting guidelines, which include a maximum 65% loan to value ratio, personal guarantees from every borrower, and third-party appraisals extensively reviewed by our team.  Protection of investor capital is our utmost priority.

As you know, returns in the Private REIT are determined by formula, are a simple revenue share between investors and management, and are separate from dividends issued by BRMK.  The primary factors that affect returns are the performance of the assets and the utilization of our capital.   The only asset that does not generate returns is cash.  While we work on deploying the cash available, we may not be able to accept additional investments in the near term.

We are in a highly competitive market, which has seen significant capital inflows over the past year.  Interest rates remain a at historic lows and new entrants as well as existing competitors are aggressively pursuing the attractive yields that construction lending can provide.  While we view this intense investor interest as a validation of our business model, heightened competition may drive increased variability in originations from month to month as we seek loans that fit our underwriting standards.

We are considering all options to retain our competitive edge in this changing market. Our investment and credit committees continue to review additional states in which to extend our lending activities.  We are also evaluating our pricing relative to project types and appropriate risk levels.  We hope to share updates with you in the near future.

Demand for housing still overwhelmingly exceeds supply and substantial opportunities in real estate lending remain.  The goal of the Broadmark Private REIT continues to be principal preservation and we will continue to underwrite each loan as we always have – with care and appreciative of the trust you have placed in us.  By remaining disciplined, we will continue to act as good stewards of investor capital.

As always, we thank you very much for your support.

Sincerely,

Jeffrey B. Pyatt

The Differences between Investing in a Publicly Traded REIT and a Private REIT

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.

 

IMPORTANT INFORMATION

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.

In a Yield-Starved Environment, Income-Oriented Investors Look to Alternatives

Real estate investment vehicles such as Broadmark Private REIT can provide stable income generation.

2020 has been uniquely difficult in a number of ways. When it comes to investing, this year has created much uncertainty pertaining to where and how to structure a portfolio that is capable of withstanding disruptions like those created by the COVID-19 pandemic.

However, even before the pandemic, we were in a historically low interest rate environment that made it tougher to find yield. Regardless of when a vaccine is developed, the Federal Reserve has indicated that interest rates will likely remain close to 0% for the next several years, leaving income-oriented investors to explore non-traditional asset classes as their typical sources of income – such as bonds – are unlikely to yield much in the near future.

The search for yield has led many investors and their financial advisors to take a closer look at alternatives. One such alternative that has a history of providing stable yield in low interest rate environments is real estate. This is one of the reasons why institutions such as pension funds and endowments have historically increased their allocations to the real estate asset class in prolonged periods of low rates.

When it comes to real estate investing, some of the most well-known vehicles include publicly traded REITs and private equity funds. Publicly traded REITs have the benefit of offering tax-efficient income streams that dovetail with the strategies of income-oriented investors. However, they are more susceptible to volatility in the public markets, and not all investors are open to this level of volatility.

Another option to consider is a private REIT, which can offer many of the same income-related benefits while insulating investors from public market volatility. However, not all private REITs are created equal, and it’s imperative to place your capital with a fund manager that has a sound strategy and a track record of generating attractive risk-adjusted returns. If you and your financial advisor are examining real estate to generate returns and diversify your portfolio, consider Broadmark Private REIT as an adjunct to or replacement for traditional high-yield investments.

Broadmark Private REIT’s investment objective is to provide attractive risk-adjusted returns primarily through the origination fees and income generated from Broadmark Realty Capital’s (NYSE: BRMK) conservatively underwritten loan portfolio. Broadmark Realty Capital makes first-position, personally guaranteed, maximum 65% loan-to-value loans without leverage to a variety of small and mid-size real estate projects.

As compared with the Merrill Lynch US High-Yield Index as of September 30 – which yielded 5.76% – Broadmark Private REIT targets an unlevered low double-digit yield. Between August 2010 and September 2019, which was the final period of reporting prior to Broadmark’s public offering, the company’s legacy funds generated annual returns in the 11% range, demonstrating the effectiveness of this strategy over time.

Importantly, Broadmark Realty Capital is primarily investing in residential construction in high-growth millennial- and tech-driven markets across 14 states and Washington, D.C.  The company is answering a real need, as the market for construction loans is extraordinarily fragmented with little institutional capital available for this type of lending.

Moreover, the current macroeconomic environment strongly supports home building. A recent Freddie Mac survey found that the U.S. has been underbuilding for well over a decade, with a cumulative deficit of around 2.5 million housing units. Combine that with shifting consumer preferences for single-family housing and a low interest rate environment spurring an unprecedented number of millennials to transition to homeownership, and the tailwinds supporting Broadmark Realty Capital’s lending strategy become even more compelling.

In today’s environment, finding yield is difficult but not impossible, and investors must carefully calculate the risks involved with alternatives. A well-constructed portfolio of real estate investments that directly correlates to positive macroeconomic trends can provide stable income generation as compared to more traditional income-focused investments.

 

IMPORTANT INFORMATION

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 Broadmark Private REIT, LLC (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 Capital Inc., a publicly-traded REIT (“Broadmark Realty,” Ticker: BRMK). 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.

Herald Investment Marketing, LLC (“HIM”), 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 HIM’s fees for the initial year of the Private REIT’s operations. Certain of the Manager’s personnel are HIM-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.