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Unformatted text preview: Real estate is the single largest component of wealth in our society. Because of its magnitude, it plays a key role in shaping the economic condition of individuals, families, and firms. Real estate has been estimated to represent approximately one-half of the worlds total economic wealth. 1 In addition, Real estate generates nearly a third of United States gross domestic product (GDP), creates jobs for nearly 9 million Americans, and is the source for 70 percent of local government revenues. 2 The total contribution of the housing sector alone approaches 20 percent of GDP. 3 Because of the significant influence of real estate on the nations economy, investors on Wall Street closely monitor real estate construction, construction permit activity, and real estate sales figures and they have observed that for a long time, the real estate market has shown considerably stable return rates compared with other investment markets such as the stock market, the bond market, or the option market. As a matter of fact, Kaiser (2004) says that real estate could perform an even stronger role as a fixed income substitute because real estate cap rates are remarkably stable, and real estate cash distribution incomes are remarkably reliable (p. 24). However, direct real estate investment requires investors to put a large amount of money into transactions, increasing liquidity risk and excluding smaller investors from participation. With this demand of the times, a new investment method in real estate was needed. Indeed, real estate syndication is an efficient way for many people to invest their portion of money into various types of real estate and provides a unique and affordable vehicle for them to become involved in a property development from a base level, bringing about satisfactory results for many investors. This paper is broadly organized in 1 Estimate by Ibbotson & Associates, 1991. 2 National Policy Agenda 2002 : Americas Real estate(Washington, DC : Real Estate Roundtable, 2002) 3 The State of the Nations Housing(Cambridge, MA: Joint Center for Housing Studies of Harvard University, 2002) two sections. One section introduces general concepts of real estate syndication, and the other section presents Real Estate Investment Trusts, REITs, as alternatives to stable investments, which are one of the most representative and attractive entities in real estate syndication. Real Estate Syndication It is said that a syndication is an association of individuals or other entities who join under an agreement for investment by Newson and Muse (1983), (p. 1). Additionally, Grissom (1986) says that basically syndications are concerned with the use of pooled funds to purchase real estate assets (p. 376). Grissom (1986) also says that the reasons why using pooled equity funds are that (1) institutional debt funds are too costly a financing option; (2) a pool allows individuals with limited capital and information to get involved in large real estate projects; (3) it allows such smaller investors to benefit...
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This note was uploaded on 02/24/2012 for the course BLAW 5330 taught by Professor Schweimer during the Spring '08 term at UT Arlington.
- Spring '08